Skip to Content

Knowledge

Banking Bulletin: Do Adequate Protection Payments Augment Secured Creditors’ Collateral Value?

12/12/2013

In two separate Chapter 11 cases, Courts addressed the issue of how to account for the proceeds of collateral paid to the Secured Creditor post-petition. In the Oregon case of In re Charles A. Grogan and Sarah A. Grogan, the proposed plan required the Debtor, an operator of a Christmas tree farm, to pay the entirety of lender Harvest Capital Company’s (“Harvest”) claim since Harvest was a fully secured creditor.1 In an effort to determine what the final, full amount of Harvest’s secured claim would be, the Court “require[d] an evaluation of Harvest’s collateral,” which “yield[ed] a total collateral value of $7,259,232.00.”2

During the case, Harvest had asked the court for “adequate protection”3 in the form of periodic cash payments. The Court, under 11 U.S.C. § 361(i), allowed Harvest to collect $648,000.00 in adequate protection payments from the proceeds of the pre-petition tree inventory collateral to ensure that the value of its collateral was not diminished while the bankruptcy went forward.

Subsequently, the Debtor argued that it was entitled to a credit in the amount of $648,000 on Harvest’s total secured claim amount to account for the adequate protection payments. The court addressed whether “payments made from post-petition cash collateral [should] be credited against the amount of the actual secured claim” under § 552(b). This section provides that the security interest of a Creditor that is secured by proceeds from the Secured Property extends to such proceeds acquired after the case commences.4 Ultimately the Court decided that the payments made to Harvest should “not be [deducted from the total secured claim], because § 552(b) operates to augment Harvest’s security interest with such cash proceeds.”5

The Court reasoned that, “if Harvest had not moved for ‘adequate protection’ and Debtors had simply segregated and banked the $648,000.00, that sum would serve as additional collateral to the above $7,259,232.00 in property.”6 In other words, the cash should be treated “as a paydown of the actual secured claim that had correlatively increased by each dollar received post-petition, thereby resulting in a ‘wash.’”7 The Court further stated that “no further credit against other collateral values [would be] appropriate.”8

The Debtors attempted to argue that § 552(b) should not apply to the present case where the proceeds arose from pre-petition inventory (trees), and that § 552(b) should only apply to cash collateral generated by actual rents, not from proceeds of inventory like Christmas trees.9 However, the Court noted, “the key to the analysis [to § 552(b)] is not the source of the post-petition cash collateral, but rather whether it is subject to §552(b).”10 Since Harvest’s lien on proceeds of collateral was preserved beyond the commencement of the Bankruptcy case by § 552(b), “payment of adequate protection from what is already cash collateral should not be deducted from the collateral remaining.”11

Another case from the Bankruptcy Court for the Northern District of Iowa, In Re Civic Partners Sioux City, LLC, examined the issue again, this time in the context of a bank holding a mortgage and assignment of rents for a commercial real estate developer’s urban revitalization project. In that case, the Court considered whether “the payments reduced the Bank’s [secured portion of its] claim, [thereby reducing] the amount Civic must pay in full to the Bank in the Plan.”12 “If the payments did not reduce the Bank’s secured claim, there is no such reduction in what [debtor] must pay.”13

While the Court in Civic did not cite or reference Grogan, it nevertheless came to the same conclusion that “the Bank’s post-petition security interest in rents under § 552(b) was adding to its collateral, not reducing it.”14

Similarly to the debtors in Grogan, the debtors in Civic argued “that all post-petition payments it made to the Bank should be subtracted first from the Bank’s secured claim.”15 They argued that the secured portion of a Creditor’s claim “is fixed, and cannot increase after the petition is filed.”16 Under this logic, any “post-petition payments should be applied first to reduce the amount of the secured claim.”17

However, the Civic Court disagreed and sided with the Creditor Bank, ruling that “payments from rents should not reduce the secured portion of a creditor’s claim … because of the creditor’s separate security interest in those rents.”18

Based on these rulings and the cases on which they rely, it appears that most jurisdictions consider it not only “clear majority trend” but also the “better reasoned approach” to allow post-petition rental payments to augment the amount of a Creditor’s secured claim.19 Secured Creditors should take note that they are entitled to the full amount of their collateral value plus any post-petition adequate protection payments received that are the proceeds of collateral under § 552(b).


 1 See 11 U.S.C. § 1129; See 11 U.S.C. § 1111(b).
 2 In re Grogan, BR 11-65409-FRA11, memorandum op. at 5 (Bankr. D. Or. Sept. 10, 2013)
 3 Id.
 4 Id.
 5 Id. (citing In re Geijsel, 480 B.R. 238, 265-268 (Bankr. N.D. Tex. 2012) and In re Arden Properties, Inc., 248 B.R. 164, 169-170 (Bankr. D. Ariz. 2000)).
 6 Id. (emphasis in original) (citing Liberty Nat’l Enters. V. Ambanc La Mesa Ltd. Pshp. (In re Ambanc La Mesa Ltd. P’ship.), 115 F.3d 650, 654 (9th Cir. BAP 1998).
 7 Id.
 8 Id.
 9 Id. at 6.
10 Id. (emphasis added)
11 Id., citing In re Geijsel, 480 B.R. at 265-268.
12 In re Civic Partners Sioux City, LLC, BR 11-00829, Order at p. 60 (Bankr. N.D. Iowa Oct. 7, 2013)
13 Id.
14 Id. at 55; citing In re Kalian, 169 B.R. 503 (Bankr. D.R.I. 1994).
15 Id. at 56.
16 Id.
17 Id.
18 Id. at 55.
19 Id. at 58, citing In re Old Colony, LLC, 476 B.R. 1, 26-28 (Bankr. D. Mass. 2012).