Adequate Protection, The Undersecured Creditor


Sid Diamond, Esq.
El Paso, TX

This article is a primer on adequate protection of an undersecured creditor, whose claim is secured by depreciating property, from the beginning of a reor­ganization through confirmation. Assume there are no cash collateral or financing issues. The goal of adequate protection in this context is an allowed se­cured claim equal to the value of the collateral at each key valuation date, and an allowed secured claim equal to the value of the collateral at confirmation.

An unsecured creditor is entitled to be protected (compensated), during the period that the bankruptcy stay is imposed, typically in the form of monthly cash payments equal to the estimated monthly deprecia­tion, pursuant to 11 U.S.C. § 361(1). The undersecured creditor is not entitled to receive any additional compensation, directly or indirectly. United Sav. Ass’n of Texas v. Timbers Of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988); In re Reddington/Sunarrow, Ltd. P’ship, 119 B.R. 809 (Bankr. D.N.M. 1990).

There are six provisions of the Bankruptcy Code that affect the process of providing adequate protec­tion. At the most basic, a creditor is an entity having a claim against the debtor that arose at the time of or before the order for relief. 11 U.S.C. § 101(10)(A). Although not without some controversy, upon objec­tion to a claim, the amount of a claim is determined as of the petition date. 11 U.S.C. § 502(b). Section 362 provides for the stay, and gives the bases for re­lief from the stay, including lack of adequate protec­tion. The value of an undersecured creditor’s interest in property is determined pursuant to 11 U.S.C. § 506(a), and upon such determination its claim is divided into a secured claim equal to the value of that interest and an unsecured claim for the difference. If adequate protection is ordered and the protection af­forded fails, the court may, pursuant to 11 U.S.C. § 361(3), grant to the creditor, a priority administra­tive expense claim under 11 U.S.C. § 503(b)(1) which becomes a super priority administrative claim, pur­suant to 11 U.S.C. § 507(b), by making the claim pay­able before all other administrative expense claims. Confirmation of plans, pursuant to 11 U.S.C. §§ 1129(b)(2), 1225(a)(5) and 1325(a)(5), is affected by adequate protection considerations in a variety of ways. [See Norton Bankr. L. & Prac. 2d § 35:3.]

The process of obtaining adequate protection is begun by the creditor filing a motion requesting relief from stay or adequate protection. There is ample authority that neglect to seek adequate protection by motion in advance of confirmation is fatal to any claims for adequate protection later. The alle­gations necessary to raise the issue of adequate protection are simple:

The property that is the subject of this motion and which secures the obligation due the Mo­vant from the debtor has declined in value since the petition date due to the debtor’s use and will continue to decline in value. The debtor has nei­ther provided adequate protection nor offered to provide adequate protection to Movant. The lack of adequate protection is cause to termi­nate the stay to allow Movant to exercise its state law remedies. Alternatively Movant re­quests that the court order the Debtor to pro­vide adequate protection to Movant and condition the continuation of the stay upon the timely payment by the debtor.

At the hearing on the motion, the court will deter­mine the right to adequate protection, based upon: (i) The date at which the property will be valued; (ii) the value of the property at that date; (iii) the decline in value or depreciation that has occurred and will oc­cur in the future; and (iv) the date at which adequate protection payments will commence.

Pursuant to 11 U.S.C. § 506(a), the court must de­termine the value of the property and divide the creditor’s claim into a secured claim equal to the value of the property and an unsecured claim for the bal­ance. The date at which the value of the property is first determined and from which payments begin can have a substantial impact on the creditor’s claim and the total amount of adequate protection payments that it will receive during the case. The date is subject to a variety of interpretations, the most commonly utilized are: (i) The petition date; (2) the date the motion is filed; and (3) the date of the hearing.

The petition date appears to be the majority view. Orix Credit Alliance, Inc. v. Delta Res., Inc. (In re Delta Res., Inc.), 54 F.3d 722 (Hlth Cir.), cert. de­nied, 576 U.S. 980 (1995); In re Duval Manor Assocs., 191 B.R. 622 (Bank. E.D. Pa. 1996); In re Carson, 190 B.R. 917, 929 (Bankr. N.D. Ala. 1995); In re Addison Props. Ltd. P’ship, 185 B.R. 766 (Bankr. N.D. Ill. 1995); In re Thomas, 177 B.R. 750 (Bankr. S.D. Ga. 1995); In re Johnson, 165 B.R. 524 (Bankr. S.D. Ga. 1994); In re Dynaco Corp., 162 B.R. 389, 395 (Bankr. D.N.H 1993); In re Reddington/Sunarrow, Ltd. P’ship, 119 B.R. 809 (Bankr. D.N.M. 1990); In re Ritz-Carlton of D.C., Inc., 98 B.R. 170 (Bankr. S.D.N.Y. 1989); In re Weyland, 63 B.R. 854 (Bank. E.D. Wis. 1986); In re Johnson, 471 B.R. 204 (Bankr. W.D. Wis. 1985); In re Datair Sys. Corp., 42 B.R. 241 (Bankr. N.D. Ill. 1984); In re Sun Valley Ranches, Inc., 38 B.A. 595 (Bankr. D. Idaho 1984); In re Ausherman, 34 B.R. 393 (Bankr. N.D. Ill. 1983); In re Born, 10 B.R. 43 (Bankr. S.D. Tex. 1981).

The following cases utilize the date a motion is filed as the date to value the collateral. In re Best Prods. Co., 138 B.R. 155, 157 (Bankr. S.D.N.Y. 1992); In re Continental Airlines, Inc., 146 B.R. 535, 540 (Bankr. D. Del. 1992); In re Landing Assocs., Ltd., 122 B.R. 288 (Bankr. W.D. Tex. 1990) (established the concept and the term “snap shot valu­ation”); In re Wilson, 70 B.R. 46 (Bankr. N.D. Ind. 1987); In re Haiflich, 63 B.R. 314, 316 (Bankr. N.D. Ind. 1986); In re Hinckley, 40 B.R. 679, 681-82 (Bankr. D. Utah 1984). One of the justifications for using the date the motion is filed is that it encourages a secured creditor to act promptly. Another is that the creditor is not entitled to adequate protection until it is requested by the filing of an appropriate motion.

The failure of a creditor to act promptly may ad­versely effect the amount of the creditor’s allowed secured claim and the amount of adequate protection that the creditor is afforded. A creditor that waits sev­eral months before filing a motion requesting relief creates an awkward situation. If the court establishes value as of the petition date, it is faced with the pros­pect of ordering catch up adequate protection pay­ments that the debtor may not be able to make or that would otherwise adversely affect the reorganization. To avoid this problem, some courts time valuation as of the date the motion is filed which in turn reduces the amount of the allowed claim and the amount of adequate protection payments afforded during the pendency of the case. In re Adams, 2 B.R. 313 (Bankr. M.D. Fla. 1980).

Valuation is integral to obtaining adequate protec­tion. “In order to determine whether there is a need for adequate protection, and if so, the extent to which adequate protection is required, valuation of the col­lateral is required, both to determine the extent of the creditor’s interest subject to protection and to deter­mine the extent to which that interest has declined or will decline in value.” Eugene R. Wedoff, The Valua­tion of Collateral In Bankruptcy: A Framework (1999) (unpublished manuscript available from American Bankruptcy Institute).

Section 506(a) provides that value is determined in light of the purpose of the valuation and the in­tended disposition or use of the property. If the prop­erty is to be retained, it is valued at replacement value for confirmation purposes. Associates Commercial Corp. v. Rash, 520 U.S. 953, 117 S. Ct. 1879, 1882, 138 L. Ed. 2d 148 (1997), does not necessarily man­date the same valuation in the adequate protection context, according to a number of courts, nor does it establish the methodology to be utilized to arrive at that value. What replacement value means at an ad­equate protection hearing is the subject of numerous articles and opinions. Among the valuation method­ologies in the cases reported since Rash are: (i) Re­tail value; (ii) average between retail and wholesale values; (iii) market value; and (iv) the flexible or case­by-case approach.

The claims of an undersecured creditor having been established for adequate protection purposes, the issue then arises whether the claims are fixed for all purposes without further valuation, for ex­ample, at confirmation. There is much disagreement on this issue.

The reported decisions reveal a variety of ap­proaches to valuation and adequate protection, among them: (i) single valuation; (ii) dual valuation; (iii) continuous valuation; and (iv) snapshot valuation. This article addresses two of these methods, single valua­tion and dual valuation.

The single valuation method not only establishes the value of the property, it also fixes the allowed se­cured, and the allowed unsecured claim for all pur­poses. The collateral is valued, typically as of the petition date, and at confirmation the adequate pro­tection payments are subtracted from that value to establish the amount of the allowed secured claim which must be paid under the confirmed plan.

Under the dual valuation method the value of the property is determined at two points in time. It is first determined early in the case for the purpose of pro­viding adequate protection. It is then valued again at confirmation. While the courts and secondary mate­rials discuss a second valuation as if it actually oc­curs, it has been my experience that it does not happen unless the creditor demands it.

Some opinions discuss a second valuation at con­firmation as if different results are Being to be ob­tained because one hearing was conducted for the purpose of adequate protection and the other at con­firmation-as if there was no linkage between the two valuations. This makes little sense. The only justifi­cation for any separate valuation methodology or dif­ference in outcome would be if the intended use or disposition of the property changed and the change would require a different result.

If the creditor has sought and obtained adequate protection against a decline in value due to deprecia­tion and if the protection afforded the creditor matched the decline in value, a second valuation would pro­duce a value equal to the first valuation, less the ad­equate protection paid to the creditor. Inasmuch as all of the reported cases, when considering confirma­tion, apply adequate protection payments made to an undersecured creditor to its allowed secured claim, it serves no purpose to do the math again. The only con­text in which a second valuation is going to come up is upon the complaint of the creditor that believes the adequate protection payments were inadequate and it wants a super priority administrative expense claim, or to have confirmation denied.

In a great number of valuation/adequate protec­tion cases the issue is not so clearly the value of the property itself or even adequate protection payments to protect against a decline in value. Rather, there is a battle over the pot of cash that has developed since the petition, for example, from rents generated by anapartment complex. The argument then is whether the cash is part of the property. In this situation, value must be determined more than once because the value of the collateral is a moving target between filing and confirmation.

In the context of property, depreciating over a fixed economic life, that the debtor seeks to retain, none of the multiple valuation approaches makes much sense, especially after Rash. An initial valuation of claims for adequate protection purposes should not differ from valuation of claims at confirmation, after the application of adequate protection payments, because the standard should be the same.

The following examples illustrate how different valuation dates impact adequate protection and the amount of secured debt that must be dealt with at con­firmation.



November 15, 2000 – The Filing Date

Amount due Creditor $600,000.00
Debtor’s estimate of value of equipment $400,000.00
Creditor’s estimate of value of equipment $458,300.00


December 19, 2000
Creditor Files Motion For Relief From Stay Or
Alternatively Adequate Protection; Hearing On January 5, 2001

Monthly Adequate Protection Payment Ordered,

Beginning January 2001                                                            $20,000.00

Motion To Determine Secured Status Held In March 2001 Determination of Value As Of The Filing Date

Allowed Secured Claim                                                             $429,150.00

Allowed Unsecured Claim                                                         $170,850.00

Confirmation In February 2002
Amount of allowed secured claim $429,150.00
Less Adequate Protection Paymentsthrough February 2002 $280,000.00
Amount of allowed secured claim on effective date $149,150.00
Amount of allowed unsecured claim on effective date $170,850.00


The Effect At Confirmation Of Valuation

As Of The Date The Motion For Relief From Stay Is Filed

Amount of allowed secured claim $409,150.00
Less Adequate Protection Paymentsthrough February 2002 $260,000.00
Amount of allowed secured claim on effective date $149,150.00
Amount of allowed unsecured claim on effective date $190,850.00


The Effect At Confirmation Of Valuation

As Of The Date The Hearing On The Motion For Relief From Stay Is Heard.

Amount of allowed secured claim $389,150.00
Less Adequate Protection Paymentsthrough February 2002 $250,000.00
Amount of allowed secured claim on effective date $149,150.00
Amount of allowed unsecured claim on effective date $210,850.00


When adequate protection is confined to compensating an undersecured creditor for depreciation there ap­pears to be little, if any, justification for not using the single valuation method and determining value and fixing claims of an undersecured creditor as of the petition date.

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