Timing Is Everything Determining the Date for Valuing Collateral

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Jul/Aug 1998

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There is no clear consensus on the date to be used by bankruptcy courts for valuing collateral for purposes of adequate protection or relief from the automatic stay. The Supreme Court has not ruled on this specific issue. However, it ruled in United Savings Ass'n v. Timbers or Inwood Forest Assocs. Ltd.¹ that undersecured creditors were not entitled to interest on the collateral as compensation for the delay caused by the automatic stay.² Nevertheless, the specific question regarding the date on which to value the collateral for adequate protection of secured creditors was never addressed in the opinion. Bankruptcy courts seem willing to borrow extra-jurisdictional law when it comes to making the determination of the valuation date, with even a few courts relying on Collier on Bankruptcy.

Survey of Cases by Circuit

1. First Circuit

In In re Dynaco Corp.,³ the court held that "the date on which the bank indicated that it would not consent to any further use of the cash collateral and stated it would oppose the debtor's request for further cash collateral usage" is the valuation date for the baseline level for adequate protection purposes rather than the date on which the debtor filed for protection.

2. Second Circuit

In the case of In re Best Products Co. Inc.,⁴ the court found that, in the absence of controlling precedent, the appropriate view is that adequate protection may only be awarded from the date the movants seek relief. The Best Products case deviated from In re Ritz-Carlton of D.C. Inc.,⁵ which found that the general rule is that, for adequate protection purposes, the date of filing of the bankruptcy petition is the date on which to value the collateral.

Although not exactly on point, in the case of In re Craner,⁶ in determining the value of an undersecured claim, the court stated that:

[w]hile the valuation of the subject collateral and the amount of the secured and unsecured claims may vary throughout the pendency of the case, the total value of the claim's allowed amount is generally determined as of the date of the filing. See §502. "Moreover, it is §506(a) that provides guidance for the valuation of an interest in property of the estate for purposes of determining adequate protection in the contents of §§361 through 364."⁷

3. Third Circuit

The Delaware bankruptcy court followed Best Products in the determination of the date of valuation. In In re Continental Airlines Inc.,⁸ responding to the creditor's motion for adequate protection payments based on the theory that the collateral had dropped in value post-petition, the court held that the value of the secured claim in aircraft and related equipment is the date the adequate protection motion was filed.

However, in a more recent case, In re Duval Manor Assocs.,⁹ a Pennsylvania bankruptcy court adopted the reasoning set forth in In re Addison Properties Ltd.¹⁰ Partnership. The court in Addison Properties used the "dual valuation method," which provides that for "purposes of adequate protection, the claim of the secured creditor is fixed as of the date of filing." The collateral is later revalued at confirmation, so that adjustments are made for any payments made by the debtor and for any appreciation in the value of the underlying collateral that increases the secured claim.

4. Fifth Circuit

In a motion to modify the automatic stay on foreclosure of property in a chapter 11 case, the court in the case of In re Born¹¹ stated that:

[f]or the purposes of adequate protection, the rights of the parties are fixed as of the time of the filing of the petition for relief. The very heart of the concept of adequate protection is to assure the secured creditor that as the bankruptcy procedures unfold he will not be faced with a decrease in the value of his collateral...It therefore follows that until the rights of the secured party can be finally and absolutely fixed during the course of the proceedings he is entitled to adequate protection of his interest as it existed at the time of filing.

5. Sixth Circuit

Although not exactly on point, a Michigan bankruptcy court in In re Kain¹² indicated that the secured creditor of non-cash collateral would be entitled to adequate protection on the date he filed for such protection. The court cited cases that value the collateral from the date the adequate protection petition had been filed.

6. Seventh Circuit

The bankruptcy courts in the Seventh Circuit have dealt with the issue of valuation dates on several occasions and with conflicting results. Some early Illinois cases held that the date of the filing for bankruptcy is the date of valuation. Later, the Haiflich court in Indiana held that the date of the motion for adequate protection should be used as the appropriate valuation date.¹³ In 1995, the Addison Properties court proposed a "dual valuation" scheme, using the date of filing for bankruptcy as an initial valuation date for adequate protection and the valuation on confirmation of the plan for other purposes.¹⁴

In re Haiflich¹⁵ is one of the leading cases on the question of valuation dates, and courts in the First, Third and Eleventh circuits have followed Haiflich. In this case, the debtors filed for chapter 11 in September 1984 and the bank filed a motion for adequate protection in November 1984.¹⁶ After hearings to determine valuation of the collateral and evaluating the advantages and disadvantages of various valuation dates, the court determined that the date the adequate protection motion is filed is the date on which valuation should be made. In its discussion of the problem, the court stated:

If the court were to follow the bank's argument and use the date the bankruptcy petition was filed, the court can conceive of instances where the debtor could suffer a hardship. For example, a creditor may fail to request adequate protection for months, or even years, after the bankruptcy petition has been filed, and during the period the property could be depreciating. The creditor could then file a motion for adequate protection, seeking a large cash payment for its depreciation loss...Such a burden may seriously hinder the reorganization...On the other hand, if the court were to use the value as of the hearing date for purposes of an adequate protection order, as suggested by the debtor, this could result in harm to the creditor. A debtor could delay the hearing by requesting continuances in order to insure that a slightly oversecured creditor would become undersecured in the interval. Moreover, a crowded court docket may prevent an immediate hearing on the creditor's request.¹⁷

Conversely, cases from Illinois and Wisconsin hold that the date of filing the bankruptcy petition was the appropriate valuation date.¹⁸ As discussed above, the Addison Properties case advocates a dual valuation method.

7. Eighth Circuit

In determining when the debtor would be required to make adequate protection payments, the Eighth Circuit fashioned a different solution to the valuation date dilemma, choosing the date on which the creditor would have foreclosed if not for the bankruptcy proceeding. In the case of In re Ahlers,¹⁹ a farm bankruptcy case, the court determined that the secured creditor should be granted adequate protection in the form of interest payments. The court reasoned that:

[t]o the extent that the debtor can, by filing a bankruptcy petition, preclude or delay a secured creditor from exercising this right and reinvesting the liquidation proceeds, the creditor has been deprived of this benefit of its bargain. Thus, adequate protection payments in the form of interest are designed to insure that the secured creditor receives the benefit of its bargain by placing it in essentially the position it would have been in absent the filing of a bankruptcy petition. (Citations omitted.) Accordingly, in fashioning adequate protection payments, the bankruptcy court must determine the date when the creditor, absent the filing of a bankruptcy petition, could have taken possession of the collateral under state law and could have sold it to a third party, the amount that the credit would have realized at this sale, and the creditor's expected return upon reinvestment.²⁰

This reasoning was followed in the case of In re Blackford Farms Inc.,²¹ In re Glinz²² and In re Asbridge.²³ In 1988, in Norwest Bank Worthington v. Ahlers,²⁴ the U.S. Supreme Court reversed In re Ahlers on different grounds.

8. Tenth Circuit

The In re Hinckley²⁵ court held that the creditor was not entitled to compensation for depreciation that occurred prior to its filing for adequate protection. Instead, the court stated that the creditor was entitled to adequate protection from the date of its motion for adequate protection.²⁶ Apparently, the court believed that to allow the creditors to relate their adequate protection motions back to the commencement of the case would only encourage creditors to wait until the eve of confirmation to make their motions.²⁷

However, a New Mexico bankruptcy court, in the case of In re Redding/Sunarrow Ltd. Partnership,²⁸ found that for purposes of valuing the secured claim under §361, the appropriate date was the date of the filing of the petition. The court relied on Timbers to conclude that the secured creditor should be protected from the date of the filing since the amount of the claim was also determined at that time.

9. Eleventh Circuit

Like the Seventh Circuit, the Eleventh Circuit has also been home to conflicting case law on what the appropriate date for adequate protection valuation should be. Although it has not directly addressed the issue, in In re Delta Resources Inc.,²⁹ the Eleventh Circuit commented in dicta that "[o]rdinarily, the matter of adequate protection is determined at or near the inception of the bankruptcy case." This language can be interpreted to mean that the date of bankruptcy filing should be used for valuation in adequate protection contexts. In at least two cases, Georgia bankruptcy courts have held that the valuation date for adequate protection purposes is the date of the filing for bankruptcy. In In re Johnson,³⁰ the court remarked that:

[t]he date on which the bankruptcy petition is filed and the order for relief is entered is the watershed date of a bankruptcy proceeding. As of this date, creditors' rights are fixed (as much as possible), the bankruptcy estate is created, and the value of the debtor's exemptions is determined...[T]he scheme of chapter 13 rehabilitation for the debtor and preservation of the constitutionally protected, bargained for rights of secured creditors is best served by valuing the collateral as of the date of filing.³¹

The Alabama bankruptcy courts have taken a different approach from the Georgia courts. In the case of In re Kennedy,³² in discussing the valuation of secured claims, the court reasoned that:

[a]dequate protection prevents loss to secured creditors during a case by requiring debtors to pay secured creditors for depreciation of their collateral prior to confirmation. If secured creditors' secured claims were fixed at filing, there would be no need for these payments—the creditor would automatically receive that value in a plan or liquidation.

In the case of In re Cason,33 the court rejected the Addison Properties court's dual valuation method and supported a "continuous valuation" method. The court held that "under this approach, the proper time for valuation of collateral for adequate protection purposes is the date the motion for adequate protection is sought."

Conclusion

Based on the trend in the case law, the dual valuation scheme appears to be the most logical and equitable valuation scheme available. This valuation scheme provides that collateral be valued (a) as of the filing of the bankruptcy petition with respect to whether a creditor's interest has been adequately protected and (b) as of the confirmation date for purposes of plan confirmation. Under this approach, the interests of the secured creditor, the debtor and the preservation of the bankruptcy estate are all adequately protected without one party obtaining an unfair disadvantage or windfall to the detriment of the other two competing interests.