People's Capital & Leasing Corp. v. Big3D, Inc. (In Re Big3D, Inc.)

PAPPAS, BAP Chief Judge, with whom JURY, Bankruptcy Judge, joins,

concurring:

We agree with our colleagues that the decision of the bankruptcy court denying *231secured creditor PCLC “retroactive” adequate protection payments should be affirmed. However, we should not sustain this result merely because it was an appropriate exercise of judicial discretion by the bankruptcy court as this Panel authorized in In re Deico. Instead, we should affirm because the bankruptcy court’s holding is compelled by both the terms of the Bankruptcy Code and important pragmatic considerations. In doing so, we would align this Panel with the clear trend in the case law and establish a bright-line rule that adequate protection is not available to a secured creditor for any decline in the value of collateral occurring during a bankruptcy case prior to the filing of an appropriate request for such relief.

I.

Deico instructs debtors, creditors and bankruptcy courts that adequate protection payments by a chapter 11 debtor to a secured creditor, intended by the Bankruptcy Code to compensate the creditor for only those losses occasioned by the bankruptcy, are required for only that period of time after the creditor would have exercised its state court remedies had there been no bankruptcy filing. However, in fashioning an adequate protection remedy, Deico grants the bankruptcy court broad discretion in fixing the beginning date, the amount, and the frequency of adequate protection payments. In re Deico Elects., 139 B.R. at 947. While this pronouncement seems clear enough, to the extent it allows bankruptcy, courts to award “retroactive” adequate protection to secured creditors, it conflicts with the Bankruptcy Code. Moreover, in practice, application of the Deico rule is unworkable. Strong evidence of the practical difficulties of applying Deico is evident in this case, where both the debtor and secured creditor point to different parts of the Deico opinion to support their positions.

In particular, creditor PCLC cites to Deico for the proposition that “adequate protection analysis requires the bankruptcy court to first determine when the creditor would have obtained its state law remedies had bankruptcy not intervened.” PCLC’s Open. Br. at 13, quoting In re Deico Elects., 139 B.R. at 947. From this premise, PCLC argues that, because it obtained its state law remedies (i.e., a state court writ of possession to recover its collateral) before the filing of the petition, the bankruptcy court should have awarded it adequate protection payments from and after the petition date.15

In contrast, debtor Big3D attempts to focus the Panel on a different snippet from Deico, where the Panel appears to condition its ruling: “Presumably, [the point when the creditor would have obtained its state law remedies absent bankruptcy] will be after the creditor first seeks relief.” Big3D’s Br. at 14, citing In re Deico Elects., 139 B.R. at 947 (emphasis added). Relying upon this statement, Big3D insists that Deico supports its argument that adequate protection may only be awarded to a secured creditor from and after the time *232the motion for adequate protection is filed.16

Therefore, while both PCLC and Big3D agreed that the beginning point for an award of adequate protection is the point when the creditor would have obtained its state law remedies absent bankruptcy, they disagreed when that point occurred in this case. In attempting to resolve the disagreement, the bankruptcy court perceptively notes the fundamental flaw in Deico’s approach to this issue: “Deico did not address what ‘nonbankruptcy remedies’ should control.” Memorandum Decision at 7. And this deficiency in Deico is a problem for both parties. PCLC’s argument fails since it is simply unclear in Deico which state law remedies control and whether those remedies need only to have been initiated by the creditor, or must have been completed, to justify an award of adequate protection. Big3D’s argument is likewise infirm in that Deico gives no clear reason for the presumption that the starting point for determining adequate protection payments will be after the creditor flies its motion for relief. Because our opinion was unclear, the bankruptcy court concluded that, under Deico, it should fix the terms of the adequate protection award, based on “the circumstances of the case and the sound exercise of that discretion.” Memorandum Decision at 7, citing In re Deico Electrs., 139 B.R. at 947. Exercising this discretion, the bankruptcy court decided, correctly in our view, that PCLC was not entitled to retroactive adequate protection.

We agree that the bankruptcy court did not abuse the discretion granted it by Dei-co. However, we would conclude that the purported “rule” announced in Deico regarding the point in time from which adequate protection may be calculated is so problematic in its application that it should be abandoned. This is because it is one thing to tell the bankruptcy court that it has discretion to make an adequate protection determination based upon the facts of each case. It is quite another, and unacceptable in our view, to provide no effective guidance to the parties or bankruptcy courts concerning how to select that date.

II.

As the majority opinion thoughtfully explains, a review of the case law concerning the timing of adequate protection awards shows, over time, there has been a pronounced shift away from the rule an*233nounced in the early cases that emphasized the date of filing the bankruptcy petition as the starting point for payments. Clearly, the bulk of the cases decided since about 1990 favor beginning adequate protection payments at the time relief is requested by the creditor.

One particularly cogent discussion of the adequate protection payment timing issue is found in In re Best Prods. Co., Inc., 138 B.R. 155 (Bankr.S.D.N.Y.1992), aff'd 149 B.R. 346 (S.D.N.Y.1992). In adopting the modern rule, the bankruptcy court in Best Prods, first noted, as did the bankruptcy court in this appeal, that § 363(e) expressly provides that the bankruptcy court “shall prohibit or condition” the chapter 11 debtor’s use of non-cash collateral without adequate protection only “on request of an entity that has an interest in the property....” Id. at 156. This requirement — • that a secured creditor must first ask for protection of its interest in non-cash collateral — is consistent with the provisions of § 363(c)(1), which permit a chapter 11 debtor to use property of the estate in the ordinary course of its business without providing adequate protection. The only exception to this rule is found in § 363(c)(2), which restricts a debtor’s use of cash collateral without the secured creditor’s consent or a court order. Id. Even then, under § 363(c)(2)(B), court permission to use a creditor’s cash collateral will be granted “in accordance with the provisions of this section!,]” that is, if the secured creditor’s interest is adequately protected. Simply put, the Bankruptcy Code makes clear that, except as to cash collateral, a chapter 11 debtor need not provide adequate protection payments to a secured creditor for the use of collateral until the secured creditor requests such relief.

In addition to discussing the Bankruptcy Code, the bankruptcy court in Best Prods. also pointed out the hardship which may result to a debtor if a secured creditor waits until the eve of confirmation of the debtor’s proposed reorganization plan to file a request for retroactive adequate protection payments. According to the court, this tactic would subject the debtor to “sizeable ‘makeup’ payments.” Id., quoting Ahlers, 794 F.2d at 396 n. 6 and citing Grundy Nat’l Bank, 754 F.2d at 1441. Indeed, it is likely that few reorganizing chapter 11 debtors have the ability to “make up” substantial amounts of adequate protection payments.17

Finally, the bankruptcy court concluded that the filing of a stay relief or adequate protection motion by a creditor gives the debtor unmistakable notice that it “must decide what it should do with the collateral. The debtor is given the option to surrender the property to the entity that has made the request, and avoid providing adequate protection, or provide adequate protection to such entity for the debtor’s continued use of the collateral.” Id. at 158. As a practical matter, then, a chapter 11 debtor should be able to assume that, absent a request by the secured creditor, it may use collateral without payments to the creditor pending confirmation of a plan.

While acknowledging a division in the case law about the starting date for adequate protection payments, the leading bankruptcy law treatise also endorses the position taken by the more recent decisions. See 3 Collier on Bankruptcy ¶ 361.02[3], 361-7 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed., 2010)(stating that “[t]he text of the Bankruptcy Code seems to support the view *234that protection is provided only from the date of the request....” and that “[i]t would seem contrary to the policy of providing a breathing spell for the debtor and an opportunity to reorganize if the [bankruptcy] court were to require protection against the ... value decline that had already occurred as a condition to further continuation of the automatic stay or further continued use by the estate of the collateral.... ”).

In addition, the only other BAP to consider the issue has opted for a bright-line rule. It noted:

“The Bankruptcy Code nowhere puts the responsibility on the debtor to initiate a consideration of adequate protection of a creditor’s noncash collateral.” In re Robinson, 225 B.R. 228, 233 (Bankr.N.D.Okla.1998) (quoting First State Bank v. Advisory Info. & Management Sys., Inc. (In re Advisory Info. & Management Sys., Inc.), 50 B.R. 627, 630 (Bankr.M.D.Tenn.1985)). Entitlement to adequate protection in the first instance with respect to all property of the estate other than cash collateral is triggered by a creditor’s request to the bankruptcy court and “if you don’t ask for it, you won’t get it.” Id. (quoting In re Kain, 86 B.R. 506, 512 (Bankr. W.D.Mich.1988)).

TranSouth Financial Corp. v. Sharon (In re Sharon), 234 B.R. 676, 684 (6th Cir. BAP 1999).

As can be seen, courts and commentators alike favor using the date of filing of the creditor’s motion as the starting date for adequate protection payments.

III.

The Panel’s precedent is flawed. We should modify the rule announced in In re Deico by holding that adequate protection payments are available to a secured creditor only from and after the date of filing of its motion. The provisions of § 363 of the Bankruptcy Code contemplate the application of this bright-line rule by specifying that adequate protection payments may not be ordered by the bankruptcy court until a secured creditor files a “request.” Moreover, the case law since Deico supports a bright-line rule. As is seen in this case, the Deico opinion is subject to varying interpretations and is frequently unworkable in practice. In contrast, a bright-line rule will be easily applied by debtors, creditors and bankruptcy courts. While a bankruptcy court has discretion to fashion the other features of an adequate protection award based upon the facts of each case, a clear rule prohibiting adequate protection payments before a motion is filed will encourage secured creditors that contend collateral is declining in value to bring the issue promptly to the bankruptcy court. If the creditor’s proof shows it is correct, adequate protection payments can be ordered “going forward,” thereby avoiding the potential prejudice to a reorganizing debtor occasioned by large, retroactive, “makeup” awards.

Through this appeal, the Panel enjoys a rare opportunity to correct one of its precedents. While caution is in order when considering a change to established precedent, as the Supreme Court has instructed, this Panel may properly revisit earlier holdings for “prudential and pragmatic considerations.... ” Planned Parenthood v. Casey, 505 U.S. 833, 854, 112 S.Ct. 2791, 120 L.Ed.2d 674 (1992). Both the Bankruptcy Code and pragmatic reasons require that we do so in this case.

. Of course, the bankruptcy court declined PCLC's request for retroactive adequate protection in this case. As the majority notes, while several courts have read Deico to require adequate protection for a secured creditor after the point it would have obtained its state law remedies absent bankruptcy protection, significantly, none of those courts awarded adequate protection starting with the petition date. First Commonwealth Bank v. Onasni Prop. Group, LLC (In re Onasni Prop. Group, LLC), 425 B.R. 237, 242 (Bankr. W.D.Pa.2010); In re Dulgerian, 2008 WL 220523, at *5 (Bankr.E.D.Pa.2008); In re Dupell, 235 B.R. 783, 789 (Bankr.E.D.Pa.1999); and In re Continental Airlines, 146 B.R. 536, 539 (Bankr.D.Del.1992).

. Big3D argues in the alternative that, even if Deico does not compel this holding, that based upon other case law, the Panel should adopt a bright-line rule prohibiting retroactive adequate protection. Big3D’s Br. at 7-13. To consider this argument, and whether Deico should be modified, the Panel decided to hear and decide this appeal en banc. 9th Cir. BAP R. 8012-2(a),(d)(2) (providing that a majority of the members of the Panel may vote to hear an appeal en banc "when there is a challenge to an existing precedent of the Panel.”). While we disagree with the majority’s rejection of Big3D's arguments on the merits, we certainly agree with the Panel's decision to sit en banc. Unlike the other concurring opinion, we do not believe that en banc review is only proper when the Panel acts to correct an "unjust or untoward result.” It is certainly proper for the Panel to hear and decide an appeal en banc even when, after doing so, it concludes prior precedent need not be modified. In other words, en banc review is appropriate to address the propriety of the rule of law applied by the bankruptcy court, not just the outcome of the case. This approach is consistent with the guidance provided by the Ninth Circuit to the Panel prior to its adoption of its en banc rule: “[w]hen the panel believes that one of its precedents is wrongly decided or otherwise deserves reconsideration, the goal of judicial efficiency may be best served by allowing the BAP itself to overrule its own precedent.” Saddleback Community Church v. El Toro Materials Company, Inc. (In re El Toro Materials Company, Inc.), 504 F.3d 978, 982 n. 7 (2007) (emphasis added).

. Even the Panel in Deico recognized that a bankruptcy court’s order that a debtor pay a “lump sum of past due adequate protection could suffocate a debtor otherwise able to reorganize.” 139 B.R. at 947.