Notes on 11 U.S.C. § 361 : US Code - Notes

Search Notes on 11 U.S.C. § 361 : US Code - Notes

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2569; Pub. L. 98-353, title
III, Sec. 440, July 10, 1984, 98 Stat. 370.)
HISTORICAL AND REVISION NOTES
LEGISLATIVE STATEMENTS
Section 361 of the House amendment represents a compromise
between H.R. 8200 as passed by the House and the Senate amendment
regarding the issue of "adequate protection" of a secured party.
The House amendment deletes the provision found in section 361(3)
of H.R. 8200 as passed by the House. It would have permitted
adequate protection to be provided by giving the secured party an
administrative expense regarding any decrease in the value of such
party's collateral. In every case there is the uncertainty that the
estate will have sufficient property to pay administrative expenses
in full.
Section 361(4) of H.R. 8200 as passed by the House is modified in
section 361(3) of the House amendment to indicate that the court
may grant other forms of adequate protection, other than an
administrative expense, which will result in the realization by the
secured creditor of the indubitable equivalent of the creditor's
interest in property. In the special instance where there is a
reserve fund maintained under the security agreement, such as in
the typical bondholder case, indubitable equivalent means that the
bondholders would be entitled to be protected as to the reserve
fund, in addition to the regular payments needed to service the
debt. Adequate protection of an interest of an entity in property
is intended to protect a creditor's allowed secured claim. To the
extent the protection proves to be inadequate after the fact, the
creditor is entitled to a first priority administrative expense
under section 503(b).
In the special case of a creditor who has elected application of
creditor making an election under section 1111(b)(2), that creditor
is entitled to adequate protection of the creditor's interest in
property to the extent of the value of the collateral not to the
extent of the creditor's allowed secured claim, which is inflated
to cover a deficiency as a result of such election.
SENATE REPORT NO. 95-989
Sections 362, 363, and 364 require, in certain circumstances,
that the court determine in noticed hearings whether the interest
of a secured creditor or co-owner of property with the debtor is
adequately protected in connection with the sale or use of
property. The interests of which the court may provide protection
in the ways described in this section include equitable as well as
legal interests. For example, a right to enforce a pledge and a
right to recover property delivered to a debtor under a consignment
agreement or an agreement of sale or return are interests that may
be entitled to protection. This section specifies means by which
adequate protection may be provided but, to avoid placing the court
in an administrative role, does not require the court to provide
it. Instead, the trustee or debtor in possession or the creditor
will provide or propose a protection method. If the party that is
affected by the proposed action objects, the court will determine
whether the protection provided is adequate. The purpose of this
section is to illustrate means by which it may be provided and to
define the limits of the concept.
The concept of adequate protection is derived from the fifth
amendment protection of property interests as enunciated by the
Supreme Court. See Wright v. Union Central Life Ins. Co., 311 U.S.
273 (1940); Louisville Joint Stock Land Bank v. Radford, 295 U.S.
555 (1935).
The automatic stay also provides creditor protection. Without it,
certain creditors would be able to pursue their own remedies
against the debtor's property. Those who acted first would obtain
payment of the claims in preference to and to the detriment of
other creditors. Bankruptcy is designed to provide an orderly
liquidation procedure under which all creditors are treated
equally. A race of diligence by creditors for the debtor's assets
prevents that.
Subsection (a) defines the scope of the automatic stay, by
listing the acts that are stayed by the commencement of the case.
The commencement or continuation, including the issuance of
process, of a judicial, administrative or other proceeding against
the debtor that was or could have been commenced before the
commencement of the bankruptcy case is stayed under paragraph (1).
The scope of this paragraph is broad. All proceedings are stayed,
including arbitration, administrative, and judicial proceedings.
Proceeding in this sense encompasses civil actions and all
proceedings even if they are not before governmental tribunals.
The stay is not permanent. There is adequate provision for relief
from the stay elsewhere in the section. However, it is important
that the trustee have an opportunity to inventory the debtor's
position before proceeding with the administration of the case.
Undoubtedly the court will lift the stay for proceedings before
specialized or nongovernmental tribunals to allow those proceedings
to come to a conclusion. Any party desiring to enforce an order in
such a proceeding would thereafter have to come before the
bankruptcy court to collect assets. Nevertheless, it will often be
more appropriate to permit proceedings to continue in their place
of origin, when no great prejudice to the bankruptcy estate would
result, in order to leave the parties to their chosen forum and to
relieve the bankruptcy court from many duties that may be handled
elsewhere.
Paragraph (2) stays the enforcement, against the debtor or
against property of the estate, of a judgment obtained before the
commencement of the bankruptcy case. Thus, execution and levy
against the debtors' prepetition property are stayed, and attempts
to collect a judgment from the debtor personally are stayed.
Paragraph (3) stays any act to obtain possession of property of
the estate (that is, property of the debtor as of the date of the
filing of the petition) or property from the estate (property over
which the estate has control or possession). The purpose of this
provision is to prevent dismemberment of the estate. Liquidation
must proceed in an orderly fashion. Any distribution of property
must be by the trustee after he has had an opportunity to
familiarize himself with the various rights and interests involved
and with the property available for distribution.
Paragraph (4) stays lien creation against property of the estate.
Thus, taking possession to perfect a lien or obtaining court
process is prohibited. To permit lien creation after bankruptcy
would give certain creditors preferential treatment by making them
secured instead of unsecured.
Paragraph (5) stays any act to create or enforce a lien against
property of the debtor, that is, most property that is acquired
after the date of the filing of the petition, property that is
exempted, or property that does not pass to the estate, to the
extent that the lien secures a prepetition claim. Again, to permit
postbankruptcy lien creation or enforcement would permit certain
creditors to receive preferential treatment. It may also circumvent
the debtors' discharge.
Paragraph (6) prevents creditors from attempting in any way to
collect a prepetition debt. Creditors in consumer cases
occasionally telephone debtors to encourage repayment in spite of
bankruptcy. Inexperienced, frightened, or ill-counseled debtors may
succumb to suggestions to repay notwithstanding their bankruptcy.
This provision prevents evasion of the purpose of the bankruptcy
laws by sophisticated creditors.
Paragraph (7) stays setoffs of mutual debts and credits between
the debtor and creditors. As with all other paragraphs of
subsection (a), this paragraph does not affect the right of
creditors. It simply stays its enforcement pending an orderly
examination of the debtor's and creditors' rights.
Subsection (b) lists seven exceptions to the automatic stay. The
effect of an exception is not to make the action immune from
injunction.
The court has ample other powers to stay actions not covered by
the automatic stay. Section 105, of proposed title 11, derived from
Bankruptcy Act Sec. 2a(15) [section 11(a)(15) of former title 11],
grants the power to issue orders necessary or appropriate to carry
out the provisions of title 11. The district court and the
bankruptcy court as its adjunct have all the traditional injunctive
powers of a court of equity, 28 U.S.C. Secs. 151 and 164 as
proposed in S. 2266, Sec. 201, and 28 U.S.C. Sec. 1334, as proposed
in S. 2266, Sec. 216. Stays or injunctions issued under these other
sections will not be automatic upon the commencement of the case,
but will be granted or issued under the usual rules for the
issuance of injunctions. By excepting an act or action from the
automatic stay, the bill simply requires that the trustee move the
court into action, rather than requiring the stayed party to
request relief from the stay. There are some actions, enumerated in
the exceptions, that generally should not be stayed automatically
upon the commencement of the case, for reasons of either policy or
practicality. Thus, the court will have to determine on a case-by-
case basis whether a particular action which may be harming the
estate should be stayed.
With respect to stays issued under other powers, or the
application of the automatic stay, to governmental actions, this
section and the other sections mentioned are intended to be an
express waiver of sovereign immunity of the Federal Government, and
an assertion of the bankruptcy power over State governments under
the supremacy clause notwithstanding a State's sovereign immunity.
The first exception is of criminal proceedings against the
debtor. The bankruptcy laws are not a haven for criminal offenders,
but are designed to give relief from financial overextension. Thus,
criminal actions and proceedings may proceed in spite of
bankruptcy.
Paragraph (2) excepts from the stay the collection of alimony,
maintenance or support from property that is not property of the
estate. This will include property acquired after the commencement
of the case, exempted property, and property that does not pass to
the estate. The automatic stay is one means of protecting the
debtor's discharge. Alimony, maintenance and support obligations
are excepted from discharge. Staying collection of them, when not
to the detriment of other creditors (because the collection effort
is against property that is not property of the estate) does not
further that goal. Moreover, it could lead to hardship on the part
of the protected spouse or children.
Paragraph (3) excepts any act to perfect an interest in property
to the extent that the trustee's rights and powers are limited
under section 546(a) of the bankruptcy code. That section permits
postpetition perfection of certain liens to be effective against
the trustee. If the act of perfection, such as filing, were stayed,
the section would be nullified.
Paragraph (4) excepts commencement or continuation of actions and
proceedings by governmental units to enforce police or regulatory
powers. Thus, where a governmental unit is suing a debtor to
prevent or stop violation of fraud, environmental protection,
consumer protection, safety, or similar police or regulatory laws,
or attempting to fix damages for violation of such a law, the
action or proceeding is not stayed under the automatic stay.
Paragraph (5) makes clear that the exception extends to permit an
injunction and enforcement of an injunction, and to permit the
entry of a money judgment, but does not extend to permit
enforcement of a money judgment. Since the assets of the debtor are
in the possession and control of the bankruptcy court, and since
they constitute a fund out of which all creditors are entitled to
share, enforcement by a governmental unit of a money judgment would
give it preferential treatment to the detriment of all other
creditors.
Paragraph (6) excepts the setoff of any mutual debt and claim for
commodity transactions.
Paragraph (7) excepts actions by the Secretary of Housing and
Urban Development to foreclose or take possession in a case of a
loan insured under the National Housing Act [12 U.S.C. 1701 et
seq.]. A general exception for such loans is found in current
sections 263 and 517 [sections 663 and 917 of former title 11], the
exception allowed by this paragraph is much more limited.
Subsection (c) of section 362 specifies the duration of the
automatic stay. Paragraph (1) terminates a stay of an act against
property of the estate when the property ceases to be property of
the estate, such as by sale, abandonment, or exemption. It does not
terminate the stay against property of the debtor if the property
leaves the estate and goes to the debtor. Paragraph (2) terminates
the stay of any other act on the earliest of the time the case is
closed, the time the case is dismissed, or the time a discharge is
granted or denied (unless the debtor is a corporation or
partnership in a chapter 7 case).
Subsection (c) governs automatic termination of the stay.
Subsections (d) through (g) govern termination of the stay by the
court on the request of a party in interest.
Subsection (d) requires the court, upon motion of a party in
interest, to grant relief from the stay for cause, such as by
terminating, annulling, modifying, or conditioning the stay. The
lack of adequate protection of an interest in property is one cause
for relief, but is not the only cause. Other causes might include
the lack of any connection with or interference with the pending
bankruptcy case. Generally, proceedings in which the debtor is a
fiduciary, or involving postpetition activities of the debtor, need
not be stayed because they bear no relationship to the purpose of
the automatic stay, which is protection of the debtor and his
estate from his creditors.
Upon the court's finding that the debtor has no equity in the
property subject to the stay and that the property is not necessary
to an effective reorganization of the debtor, the subsection
requires the court grant relief from the stay. To aid in this
determination, guidelines are established where the property
subject to the stay is real property. An exception to "the
necessary to an effective reorganization" requirement is made for
real property on which no business is being conducted other than
operating the real property and activities incident thereto. The
intent of this exception is to reach the single-asset apartment
type cases which involve primarily tax-shelter investments and for
which the bankruptcy laws have provided a too facile method to
relay conditions, but not the operating shopping center and hotel
cases where attempts at reorganization should be permitted.
Property in which the debtor has equity but which is not necessary
to an effective reorganization of the debtor should be sold under
section 363. Hearings under this subsection are given calendar
priority to ensure that court congestion will not unduly prejudice
the rights of creditors who may be obviously entitled to relief
from the operation of the automatic stay.
Subsection (e) provides protection that is not always available
under present law. The subsection sets a time certain within which
the bankruptcy court must rule on the adequacy of protection
provided for the secured creditor's interest. If the court does not
rule within 30 days from a request by motion for relief from the
stay, the stay is automatically terminated with respect to the
property in question. To accommodate more complex cases, the
subsection permits the court to make a preliminary ruling after a
preliminary hearing. After a preliminary hearing, the court may
continue the stay only if there is a reasonable likelihood that the
party opposing relief from the stay will prevail at the final
hearing. Because the stay is essentially an injunction, the three
stages of the stay may be analogized to the three stages of an
injunction. The filing of the petition which gives rise to the
automatic stay is similar to a temporary restraining order. The
preliminary hearing is similar to the hearing on a preliminary
injunction, and the final hearing and order are similar to the
hearing and issuance or denial of a permanent injunction. The main
difference lies in which party must bring the issue before the
court. While in the injunction setting, the party seeking the
injunction must prosecute the action, in proceeding for relief from
the automatic stay, the enjoined party must move. The difference
does not, however, shift the burden of proof. Subsection (g) leaves
that burden on the party opposing relief from the stay (that is, on
the party seeking continuance of the injunction) on the issue of
adequate protection and existence of an equity. It is not, however,
intended to be confined strictly to the constitutional requirement.
This section and the concept of adequate protection are based as
much on policy grounds as on constitutional grounds. Secured
creditors should not be deprived of the benefit of their bargain.
There may be situations in bankruptcy where giving a secured
creditor an absolute right to his bargain may be impossible or
seriously detrimental to the policy of the bankruptcy laws. Thus,
this section recognizes the availability of alternate means of
protecting a secured creditor's interest where such steps are a
necessary part of the rehabilitative process. Though the creditor
might not be able to retain his lien upon the specific collateral
held at the time of filing, the purpose of the section is to insure
that the secured creditor receives the value for which he
bargained.
The section specifies two exclusive means of providing adequate
protection, both of which may require an approximate determination
of the value of the protected entity's interest in the property
involved. The section does not specify how value is to be
determined, nor does it specify when it is to be determined. These
matters are left to case-by-case interpretation and development. In
light of the restrictive approach of the section to the
availability of means of providing adequate protection, this
flexibility is important to permit the courts to adapt to varying
circumstances and changing modes of financing.
Neither is it expected that the courts will construe the term
value to mean, in every case, forced sale liquidation value or full
going concern value. There is wide latitude between those two
extremes although forced sale liquidation value will be a minimum.
In any particular case, especially a reorganization case, the
determination of which entity should be entitled to the difference
between the going concern value and the liquidation value must be
based on equitable considerations arising from the facts of the
case. Finally, the determination of value is binding only for the
purposes of the specific hearing and is not to have a res judicata
effect.
The first method of adequate protection outlined is the making of
cash payments to compensate for the expected decrease in value of
the opposing entity's interest. This provision is derived from In
re Bermec Corporation, 445 F.2d 367 (2d Cir. 1971), though in that
case it is not clear whether the payments offered were adequate to
compensate the secured creditors for their loss. The use of
periodic payments may be appropriate where, for example, the
property in question is depreciating at a relatively fixed rate.
The periodic payments would be to compensate for the depreciation
and might, but need not necessarily, be in the same amount as
payments due on the secured obligation.
The second method is the fixing of an additional or replacement
lien on other property of the debtor to the extent of the decrease
in value or actual consumption of the property involved. The
purpose of this method is to provide the protected entity with an
alternative means of realizing the value of the original property,
if it should decline during the case, by granting an interest in
additional property from whose value the entity may realize its
loss. This is consistent with the view expressed in Wright v. Union
Central Life Ins. Co., 311 U.S. 273 (1940), where the Court
suggested that it was the value of the secured creditor's
collateral, and not necessarily his rights in specific collateral,
that was entitled to protection.
The section makes no provision for the granting of an
administrative priority as a method of providing adequate
protection to an entity as was suggested in In re Yale Express
System, Inc., 384 F.2d 990 (2d Cir. 1967), because such protection
is too uncertain to be meaningful.
HOUSE REPORT NO. 95-595
The section specifies four means of providing adequate
protection. They are neither exclusive nor exhaustive. They all
rely, however, on the value of the protected entity's interest in
the property involved. The section does not specify how value is to
be determined, nor does it specify when it is to be determined.
These matters are left to case-by-case interpretation and
development. It is expected that the courts will apply the concept
in light of facts of each case and general equitable principles. It
is not intended that the courts will develop a hard and fast rule
that will apply in every case. The time and method of valuation is
not specified precisely, in order to avoid that result. There are
an infinite number of variations possible in dealings between
debtors and creditors, the law is continually developing, and new
ideas are continually being implemented in this field. The
flexibility is important to permit the courts to adapt to varying
circumstances and changing modes of financing.
Neither is it expected that the courts will construe the term
value to mean, in every case, forced sale liquidation value or full
going concern value. There is wide latitude between those two
extremes. In any particular case, especially a reorganization case,
the determination of which entity should be entitled to the
difference between the going concern value and the liquidation
value must be based on equitable considerations based on the facts
of the case. It will frequently be based on negotiation between the
parties. Only if they cannot agree will the court become involved.
The first method of adequate protection specified is periodic
cash payments by the estate, to the extent of a decrease in value
of the opposing entity's interest in the property involved. This
provision is derived from In re Yale Express, Inc., 384 F.2d 990
(2d Cir. 1967) (though in that case it is not clear whether the
payments required were adequate to compensate the secured creditors
for their loss). The use of periodic payments may be appropriate,
where for example, the property in question is depreciating at a
relatively fixed rate. The periodic payments would be to compensate
for the depreciation.
The second method is the provision of an additional or
replacement lien on other property to the extent of the decrease in
value of the property involved. The purpose of this method is to
provide the protected entity with a means of realizing the value of
the original property, if it should decline during the case, by
granting an interest in additional property from whose value the
entity may realize its loss.
The third method is the granting of an administrative expense
priority to the protected entity to the extent of his loss. This
method, more than the others, requires a prediction as to whether
the unencumbered assets that will remain if the case if converted
from reorganization to liquidation will be sufficient to pay the
protected entity in full. It is clearly the most risky, from the
entity's perspective, and should be used only when there is
relative certainty that administrative expenses will be able to be
paid in full in the event of liquidation.
The fourth [enacted as third] method gives the parties and the
courts flexibility by allowing such other relief as will result in
the realization by the protected entity of the value of its
interest in the property involved. Under this provision, the courts
will be able to adapt to new methods of financing and to formulate
protection that is appropriate to the circumstances of the case if
none of the other methods would accomplish the desired result. For
example, another form of adequate protection might be the guarantee
by a third party outside the judicial process of compensation for
any loss incurred in the case. Adequate protection might also, in
some circumstances, be provided by permitting a secured creditor to
bid in his claim at the sale of the property and to offset the
claim against the price bid in.
The paragraph also defines, more clearly than the others, the
general concept of adequate protection, by requiring such relief as
will result in the realization of value. It is the general
category, and as such, is defined by the concept involved rather
than any particular method of adequate protection.
AMENDMENTS
1984 - Par. (1). Pub. L. 98-353 inserted "a cash payment or"
after "make".
EFFECTIVE DATE OF 1984 AMENDMENT
Amendment by Pub. L. 98-353 effective with respect to cases filed
90 days after July 10, 1984, see section 552(a) of Pub. L. 98-353,
set out as a note under section 101 of this title.