Commercial Law World - Issue 1, 2018 - 24
collateral.14 The premise is that the debtor will receive
"breathing room" to reorganize, while the present value
of a creditor's interests are protected throughout the
reorganization.15 Adequate protection is rooted in the
Fifth Amendment's protection of a secured creditor's
property interests, and equally based on the policy
ground that a secured creditor is entitled to the benefit
of its bargain.16
Section 361 sets out three non-exclusive ways that a
debtor can provide adequate protection to a creditor.17
Adequate protection under § 361(1) can be based on
periodic cash payments by the estate to the extent of
a decrease in value of the secured creditor's interest
in the property.18 Adequate protection under § 361(2)
can be based on giving the creditor an additional
or replacement lien on property for the amount the
collateral's decrease in value.19 This protection is
significant because §552 of the Bankruptcy Code
terminates a receivables lien on the petition date.20 The
third method of adequate protection specially identified
in § 361(3) gives the parties and courts flexibility by
allowing other relief that will ensure the creditor realizes
the value of its interest in the collateral.21 This flexible
approach permits courts to adopt new methods of
financing and formulate appropriate protection under
the circumstances of each case.
Not permitted as adequate protection, however, is
providing the creditor with an administrative expense
claim under § 503(b)(1). Section 361 provides in relevant
part as follows:
When adequate protection is required under
section 362, 363, or 364 of this title of an interest
of an entity in property, such adequate protection
may be provided by-
(3) granting such other relief, other than
entitling such entity to compensation
allowable under section 503(b)(1) of this title
as an administrative expense.22
11 U.S.C. § 361.
Bank of N.Y. Trust Co. NA v. Pacific Lumber Co. (In re Scopac), 624
F.3d 274, 282 (5th Cir. 2010).
E.g., In re Panther Mountain Land Development, LLC, 438 BR 169,
189-90 (Bankr. ED Ark. 2010); In re Jug End In The Berkshires, Inc.,
46 B.R. 892, 899 (Bankr. D. Mass. 1985).
11 U.S.C. § 361.
11 U.S.C. § 361(1).
11 U.S.C. § 361(2).
11 U.S.C. §552.
11 U.S.C. § 361(3).
11 U.S.C. § 361.
24 COMMERCIAL LAW WORLD
This statute means that "adequate protection
may not be awarded solely through the grant of an
administrative expense claim under § 503(b)(1)(A)."23
At first blush, § 361(3)'s language prohibition on
granting an administrative expense claim as adequate
protection appears to be in direct conflict with § 507(b),
which allows it. In fact, a § 507(b) requires that the
creditor obtain an administrative priority claim under
§ 503(b). The courts have reconciled these seemingly
incompatible Code provisions by finding that § 361(3)'s
prohibition on allowing an administrative claim as
adequate protection only applies initially, while § 507(b)
steps in later after the collateral has declined in value.24
Said another way, "whereas adequate protection shields
the creditor in the first instance from impairment in the
value of his 'interest in property,' the superpriority was
intended to recapture value unexpectedly lost during the
course of a case."25
Most courts hold that the first element of a §
507(b) claim can only be satisfied when the adequate
protection was affirmatively granted pursuant to an
order entered by the court.26 Accordingly, a request for
a superpriority administrative claim will be disallowed
when the secured creditor fails to file a motion for stay
relief or obtains adequate protection based on an "equity
cushion" in the collateral.27 Limiting superpriority
administrative claims to those creditors to whom
adequate protection is specially granted by court
order ensures that creditors are encouraged to take
on additional risk and limits the number of creditors
promised superpriority status.28 For example, the Tenth
Circuit held the debtor and creditor could agree that
an administrative claim would be part of the adequate
protection, so long as such ex parte adequate protection
Volvo Commer. Fin. L.L.C. the Ams. v. Gasel Transp. Lines, Inc. (In re
Gasel Transp. Lines, Inc.), 326 B.R. 683, 691-692 (B.A.P. 6th Cir. 2005)
(J. Gregg Concurring).
Bonapfel v. Nalley Motor Trucks (In re Carpet Ctr. Leasing Co., Inc.),
991 F.2d 682, 685 (11th Cir. 1993), amended, reh'g., en banc, denied, 4
F.3d 940 (11th Cir. 1993), and cert. denied. 127 L.Ed. 2d 388, 114 S.Ct.
1069, U.S. (1994).
In re Callister, 15 B.R. 521, 528 (Bankr. D. Utah 1981), appeal
dismissed, 673 F.2d 305 (10th Cir. 1982).
E.g., In re J.F.K. Acquisitions Group, 166 B.R. 207, 212 (Bankr.
E.D.N.Y. 1994); In re James B. Downing & Co., 94 B.R. 515, 520
(Bankr. N.D. Ill. 1988).
In re Falwell Excavating Company, Inc., 47 B.R. 217 (Bankr. W.D.Va.
1985). Vincent Prop., Inc. v. Five Star Partners, L.P. (In re Five Star
Partners, L.P.), 193 B.R. 603, 608-609 Bankr. N.D. Ga. 1996).
Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 867 (4th Cir. 1994).
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