Daily Development for
Monday, September 25, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKRUPTCY; ADEQUATE PROTECTION; "EQUITY CUSHION:" Bankruptcy Court may order adequate protection payments equal to the amount of monthly depreciation in collateral value for an oversecured creditor. However, it is error to order that the creditor also receive monthly interest, so as to protect the creditor's "equity cushion." In re Delta Resources, Inc., 54 F.3d 722 (11th Cir. 1995)

The leading Supreme Court authority, United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, requires that the "value of such creditor's interest in" property of the estate be maintained during the case. As an oversecured creditor, the creditor was entitled to accrue interest. But, of course, the interest accruals resulted in a gradual erosion of the creditor's "cushion." The creditor argued that the bankruptcy court, in order to assure continued adequate protection, should have ordered interest payments to the creditor out of other assets of the estate. The court here refuses to provide protection of the interest at that level.

According to the Eleventh Circuit, the creditor does not have a protectable "interest in" the equity cushion--the real estate value which exceeds the amount of its lien. Bankruptcy Code section 506(b) permits the accrual of interest so long as an equity cushion exists; it does not require that a creditor oversecured at the beginning of the case be assured of interest accruals so long as the case is pending.

Comment: Of course, this can mean that whatever equity cushion the creditor enjoys will quickly erode to nothingness as interest accrues. On the other hand, the Bankruptcy Act generally does not guarantee the creditor post-petition all of the rights that it enjoyed pre-petition, only the preservation of any rights it had at the moment of filing.

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