Bankruptcy Forms: Filing Bankruptcy Chapter 7 Bankruptcy Software Chapter 13

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TITLE 11–BANKRUPTCY

CHAPTER 3–CASE ADMINISTRATION

Sub Chapter IV –Administrative Powers

Sec. 361. Adequate protection

    When adequate protection is required under section 362, 363, or 364 
of this title of an interest of an entity in property, such adequate 
protection may be provided by--
        (1) requiring the trustee to make a cash payment or periodic 
    cash payments to such entity, to the extent that the stay under 
    section 362 of this title, use, sale, or lease under section 363 of 
    this title, or any grant of a lien under section 364 of this title 
    results in a decrease in the value of such entity's interest in such 
    property;
        (2) providing to such entity an additional or replacement lien 
    to the extent that such stay, use, sale, lease, or grant results in 
    a decrease in the value of such entity's interest in such property; 
    or
        (3) granting such other relief, other than entitling such entity 
    to compensation allowable under section 503(b)(1) of this title as 
    an administrative expense, as will result in the realization by such 
    entity of the indubitable equivalent of such entity's interest in 
    such property.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2569; Pub. L. 98-353, title III, 
Sec. 440, July 10, 1984, 98 Stat. 370.)


                      Historical and Revision Notes

                         legislative statements

    Section 361 of the House amendment represents a compromise between 
H.R. 8200 as passed by the House and the Senate amendment regarding the 
issue of ``adequate protection'' of a secured party. The House amendment 
deletes the provision found in section 361(3) of H.R. 8200 as passed by 
the House. It would have permitted adequate protection to be provided by 
giving the secured party an administrative expense regarding any 
decrease in the value of such party's collateral. In every case there is 
the uncertainty that the estate will have sufficient property to pay 
administrative expenses in full.
    Section 361(4) of H.R. 8200 as passed by the House is modified in 
section 361(3) of the House amendment to indicate that the court may 
grant other forms of adequate protection, other than an administrative 
expense, which will result in the realization by the secured creditor of 
the indubitable equivalent of the creditor's interest in property. In 
the special instance where there is a reserve fund maintained under the 
security agreement, such as in the typical bondholder case, indubitable 
equivalent means that the bondholders would be entitled to be protected 
as to the reserve fund, in addition to the regular payments needed to 
service the debt. Adequate protection of an interest of an entity in 
property is intended to protect a creditor's allowed secured claim. To 
the extent the protection proves to be inadequate after the fact, the 
creditor is entitled to a first priority administrative expense under 
section 503(b).
    In the special case of a creditor who has elected application of 
creditor making an election under section 1111(b)(2), that creditor is 
entitled to adequate protection of the creditor's interest in property 
to the extent of the value of the collateral not to the extent of the 
creditor's allowed secured claim, which is inflated to cover a 
deficiency as a result of such election.


                        senate report no. 95-989

    Sections 362, 363, and 364 require, in certain circumstances, that 
the court determine in noticed hearings whether the interest of a 
secured creditor or co-owner of property with the debtor is adequately 
protected in connection with the sale or use of property. The interests 
of which the court may provide protection in the ways described in this 
section include equitable as well as legal interests. For example, a 
right to enforce a pledge and a right to recover property delivered to a 
debtor under a consignment agreement or an agreement of sale or return 
are interests that may be entitled to protection. This section specifies 
means by which adequate protection may be provided but, to avoid placing 
the court in an administrative role, does not require the court to 
provide it. Instead, the trustee or debtor in possession or the creditor 
will provide or propose a protection method. If the party that is 
affected by the proposed action objects, the court will determine 
whether the protection provided is adequate. The purpose of this section 
is to illustrate means by which it may be provided and to define the 
limits of the concept.
    The concept of adequate protection is derived from the fifth 
amendment protection of property interests as enunciated by the Supreme 
Court. See Wright v. Union Central Life Ins. Co., 311 U.S. 273 (1940); 
Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935).
    The automatic stay also provides creditor protection. Without it, 
certain creditors would be able to pursue their own remedies against the 
debtor's property. Those who acted first would obtain payment of the 
claims in preference to and to the detriment of other creditors. 
Bankruptcy is designed to provide an orderly liquidation procedure under 
which all creditors are treated equally. A race of diligence by 
creditors for the debtor's assets prevents that.
    Subsection (a) defines the scope of the automatic stay, by listing 
the acts that are stayed by the commencement of the case. The 
commencement or continuation, including the issuance of process, of a 
judicial, administrative or other proceeding against the debtor that was 
or could have been commenced before the commencement of the bankruptcy 
case is stayed under paragraph (1). The scope of this paragraph is 
broad. All proceedings are stayed, including arbitration, 
administrative, and judicial proceedings. Proceeding in this sense 
encompasses civil actions and all proceedings even if they are not 
before governmental tribunals.
    The stay is not permanent. There is adequate provision for relief 
from the stay elsewhere in the section. However, it is important that 
the trustee have an opportunity to inventory the debtor's position 
before proceeding with the administration of the case. Undoubtedly the 
court will lift the stay for proceedings before specialized or 
nongovernmental tribunals to allow those proceedings to come to a 
conclusion. Any party desiring to enforce an order in such a proceeding 
would thereafter have to come before the bankruptcy court to collect 
assets. Nevertheless, it will often be more appropriate to permit 
proceedings to continue in their place of origin, when no great 
prejudice to the bankruptcy estate would result, in order to leave the 
parties to their chosen forum and to relieve the bankruptcy court from 
many duties that may be handled elsewhere.
    Paragraph (2) stays the enforcement, against the debtor or against 
property of the estate, of a judgment obtained before the commencement 
of the bankruptcy case. Thus, execution and levy against the debtors' 
prepetition property are stayed, and attempts to collect a judgment from 
the debtor personally are stayed.
    Paragraph (3) stays any act to obtain possession of property of the 
estate (that is, property of the debtor as of the date of the filing of 
the petition) or property from the estate (property over which the 
estate has control or possession). The purpose of this provision is to 
prevent dismemberment of the estate. Liquidation must proceed in an 
orderly fashion. Any distribution of property must be by the trustee 
after he has had an opportunity to familiarize himself with the various 
rights and interests involved and with the property available for 
distribution.
    Paragraph (4) stays lien creation against property of the estate. 
Thus, taking possession to perfect a lien or obtaining court process is 
prohibited. To permit lien creation after bankruptcy would give certain 
creditors preferential treatment by making them secured instead of 
unsecured.
    Paragraph (5) stays any act to create or enforce a lien against 
property of the debtor, that is, most property that is acquired after 
the date of the filing of the petition, property that is exempted, or 
property that does not pass to the estate, to the extent that the lien 
secures a prepetition claim. Again, to permit postbankruptcy lien 
creation or enforcement would permit certain creditors to receive 
preferential treatment. It may also circumvent the debtors' discharge.
    Paragraph (6) prevents creditors from attempting in any way to 
collect a prepetition debt. Creditors in consumer cases occasionally 
telephone debtors to encourage repayment in spite of bankruptcy. 
Inexperienced, frightened, or ill-counseled debtors may succumb to 
suggestions to repay notwithstanding their bankruptcy. This provision 
prevents evasion of the purpose of the bankruptcy laws by sophisticated 
creditors.
    Paragraph (7) stays setoffs of mutual debts and credits between the 
debtor and creditors. As with all other paragraphs of subsection (a), 
this paragraph does not affect the right of creditors. It simply stays 
its enforcement pending an orderly examination of the debtor's and 
creditors' rights.
    Subsection (b) lists seven exceptions to the automatic stay. The 
effect of an exception is not to make the action immune from injunction.
    The court has ample other powers to stay actions not covered by the 
automatic stay. Section 105, of proposed title 11, derived from 
Bankruptcy Act Sec. 2a(15) [section 11(a)(15) of former title 11], 
grants the power to issue orders necessary or appropriate to carry out 
the provisions of title 11. The district court and the bankruptcy court 
as its adjunct have all the traditional injunctive powers of a court of 
equity, 28 U.S.C. Secs. 151 and 164 as proposed in S. 2266, Sec. 201, 
and 28 U.S.C. Sec. 1334, as proposed in S. 2266, Sec. 216. Stays or 
injunctions issued under these other sections will not be automatic upon 
the commencement of the case, but will be granted or issued under the 
usual rules for the issuance of injunctions. By excepting an act or 
action from the automatic stay, the bill simply requires that the 
trustee move the court into action, rather than requiring the stayed 
party to request relief from the stay. There are some actions, 
enumerated in the exceptions, that generally should not be stayed 
automatically upon the commencement of the case, for reasons of either 
policy or practicality. Thus, the court will have to determine on a 
case-by-case basis whether a particular action which may be harming the 
estate should be stayed.
    With respect to stays issued under other powers, or the application 
of the automatic stay, to governmental actions, this section and the 
other sections mentioned are intended to be an express waiver of 
sovereign immunity of the Federal Government, and an assertion of the 
bankruptcy power over State governments under the supremacy clause 
notwithstanding a State's sovereign immunity.
    The first exception is of criminal proceedings against the debtor. 
The bankruptcy laws are not a haven for criminal offenders, but are 
designed to give relief from financial overextension. Thus, criminal 
actions and proceedings may proceed in spite of bankruptcy.
    Paragraph (2) excepts from the stay the collection of alimony, 
maintenance or support from property that is not property of the estate. 
This will include property acquired after the commencement of the case, 
exempted property, and property that does not pass to the estate. The 
automatic stay is one means of protecting the debtor's discharge. 
Alimony, maintenance and support obligations are excepted from 
discharge. Staying collection of them, when not to the detriment of 
other creditors (because the collection effort is against property that 
is not property of the estate) does not further that goal. Moreover, it 
could lead to hardship on the part of the protected spouse or children.
    Paragraph (3) excepts any act to perfect an interest in property to 
the extent that the trustee's rights and powers are limited under 
section 546(a) of the bankruptcy code. That section permits postpetition 
perfection of certain liens to be effective against the trustee. If the 
act of perfection, such as filing, were stayed, the section would be 
nullified.
    Paragraph (4) excepts commencement or continuation of actions and 
proceedings by governmental units to enforce police or regulatory 
powers. Thus, where a governmental unit is suing a debtor to prevent or 
stop violation of fraud, environmental protection, consumer protection, 
safety, or similar police or regulatory laws, or attempting to fix 
damages for violation of such a law, the action or proceeding is not 
stayed under the automatic stay.
    Paragraph (5) makes clear that the exception extends to permit an 
injunction and enforcement of an injunction, and to permit the entry of 
a money judgment, but does not extend to permit enforcement of a money 
judgment. Since the assets of the debtor are in the possession and 
control of the bankruptcy court, and since they constitute a fund out of 
which all creditors are entitled to share, enforcement by a governmental 
unit of a money judgment would give it preferential treatment to the 
detriment of all other creditors.
    Paragraph (6) excepts the setoff of any mutual debt and claim for 
commodity transactions.
    Paragraph (7) excepts actions by the Secretary of Housing and Urban 
Development to foreclose or take possession in a case of a loan insured 
under the National Housing Act [12 U.S.C. 1701 et seq.]. A general 
exception for such loans is found in current sections 263 and 517 
[sections 663 and 917 of former title 11], the exception allowed by this 
paragraph is much more limited.
    Subsection (c) of section 362 specifies the duration of the 
automatic stay. Paragraph (1) terminates a stay of an act against 
property of the estate when the property ceases to be property of the 
estate, such as by sale, abandonment, or exemption. It does not 
terminate the stay against property of the debtor if the property leaves 
the estate and goes to the debtor. Paragraph (2) terminates the stay of 
any other act on the earliest of the time the case is closed, the time 
the case is dismissed, or the time a discharge is granted or denied 
(unless the debtor is a corporation or partnership in a chapter 7 case).
    Subsection (c) governs automatic termination of the stay. 
Subsections (d) through (g) govern termination of the stay by the court 
on the request of a party in interest.
    Subsection (d) requires the court, upon motion of a party in 
interest, to grant relief from the stay for cause, such as by 
terminating, annulling, modifying, or conditioning the stay. The lack of 
adequate protection of an interest in property is one cause for relief, 
but is not the only cause. Other causes might include the lack of any 
connection with or interference with the pending bankruptcy case. 
Generally, proceedings in which the debtor is a fiduciary, or involving 
postpetition activities of the debtor, need not be stayed because they 
bear no relationship to the purpose of the automatic stay, which is 
protection of the debtor and his estate from his creditors.
    Upon the court's finding that the debtor has no equity in the 
property subject to the stay and that the property is not necessary to 
an effective reorganization of the debtor, the subsection requires the 
court grant relief from the stay. To aid in this determination, 
guidelines are established where the property subject to the stay is 
real property. An exception to ``the necessary to an effective 
reorganization'' requirement is made for real property on which no 
business is being conducted other than operating the real property and 
activities incident thereto. The intent of this exception is to reach 
the single-asset apartment type cases which involve primarily tax-
shelter investments and for which the bankruptcy laws have provided a 
too facile method to relay conditions, but not the operating shopping 
center and hotel cases where attempts at reorganization should be 
permitted. Property in which the debtor has equity but which is not 
necessary to an effective reorganization of the debtor should be sold 
under section 363. Hearings under this subsection are given calendar 
priority to ensure that court congestion will not unduly prejudice the 
rights of creditors who may be obviously entitled to relief from the 
operation of the automatic stay.
    Subsection (e) provides protection that is not always available 
under present law. The subsection sets a time certain within which the 
bankruptcy court must rule on the adequacy of protection provided for 
the secured creditor's interest. If the court does not rule within 30 
days from a request by motion for relief from the stay, the stay is 
automatically terminated with respect to the property in question. To 
accommodate more complex cases, the subsection permits the court to make 
a preliminary ruling after a preliminary hearing. After a preliminary 
hearing, the court may continue the stay only if there is a reasonable 
likelihood that the party opposing relief from the stay will prevail at 
the final hearing. Because the stay is essentially an injunction, the 
three stages of the stay may be analogized to the three stages of an 
injunction. The filing of the petition which gives rise to the automatic 
stay is similar to a temporary restraining order. The preliminary 
hearing is similar to the hearing on a preliminary injunction, and the 
final hearing and order are similar to the hearing and issuance or 
denial of a permanent injunction. The main difference lies in which 
party must bring the issue before the court. While in the injunction 
setting, the party seeking the injunction must prosecute the action, in 
proceeding for relief from the automatic stay, the enjoined party must 
move. The difference does not, however, shift the burden of proof. 
Subsection (g) leaves that burden on the party opposing relief from the 
stay (that is, on the party seeking continuance of the injunction) on 
the issue of adequate protection and existence of an equity. It is not, 
however, intended to be confined strictly to the constitutional 
requirement. This section and the concept of adequate protection are 
based as much on policy grounds as on constitutional grounds. Secured 
creditors should not be deprived of the benefit of their bargain. There 
may be situations in bankruptcy where giving a secured creditor an 
absolute right to his bargain may be impossible or seriously detrimental 
to the policy of the bankruptcy laws. Thus, this section recognizes the 
availability of alternate means of protecting a secured creditor's 
interest where such steps are a necessary part of the rehabilitative 
process. Though the creditor might not be able to retain his lien upon 
the specific collateral held at the time of filing, the purpose of the 
section is to insure that the secured creditor receives the value for 
which he bargained.
    The section specifies two exclusive means of providing adequate 
protection, both of which may require an approximate determination of 
the value of the protected entity's interest in the property involved. 
The section does not specify how value is to be determined, nor does it 
specify when it is to be determined. These matters are left to case-by-
case interpretation and development. In light of the restrictive 
approach of the section to the availability of means of providing 
adequate protection, this flexibility is important to permit the courts 
to adapt to varying circumstances and changing modes of financing.
    Neither is it expected that the courts will construe the term value 
to mean, in every case, forced sale liquidation value or full going 
concern value. There is wide latitude between those two extremes 
although forced sale liquidation value will be a minimum.
    In any particular case, especially a reorganization case, the 
determination of which entity should be entitled to the difference 
between the going concern value and the liquidation value must be based 
on equitable considerations arising from the facts of the case. Finally, 
the determination of value is binding only for the purposes of the 
specific hearing and is not to have a res judicata effect.
    The first method of adequate protection outlined is the making of 
cash payments to compensate for the expected decrease in value of the 
opposing entity's interest. This provision is derived from In re Bermec 
Corporation, 445 F.2d 367 (2d Cir. 1971), though in that case it is not 
clear whether the payments offered were adequate to compensate the 
secured creditors for their loss. The use of periodic payments may be 
appropriate where, for example, the property in question is depreciating 
at a relatively fixed rate. The periodic payments would be to compensate 
for the depreciation and might, but need not necessarily, be in the same 
amount as payments due on the secured obligation.
    The second method is the fixing of an additional or replacement lien 
on other property of the debtor to the extent of the decrease in value 
or actual consumption of the property involved. The purpose of this 
method is to provide the protected entity with an alternative means of 
realizing the value of the original property, if it should decline 
during the case, by granting an interest in additional property from 
whose value the entity may realize its loss. This is consistent with the 
view expressed in Wright v. Union Central Life Ins. Co., 311 U.S. 273 
(1940), where the Court suggested that it was the value of the secured 
creditor's collateral, and not necessarily his rights in specific 
collateral, that was entitled to protection.
    The section makes no provision for the granting of an administrative 
priority as a method of providing adequate protection to an entity as 
was suggested in In re Yale Express System, Inc., 384 F.2d 990 (2d Cir. 
1967), because such protection is too uncertain to be meaningful.


                         house report no. 95-595

    The section specifies four means of providing adequate protection. 
They are neither exclusive nor exhaustive. They all rely, however, on 
the value of the protected entity's interest in the property involved. 
The section does not specify how value is to be determined, nor does it 
specify when it is to be determined. These matters are left to case-by-
case interpretation and development. It is expected that the courts will 
apply the concept in light of facts of each case and general equitable 
principles. It is not intended that the courts will develop a hard and 
fast rule that will apply in every case. The time and method of 
valuation is not specified precisely, in order to avoid that result. 
There are an infinite number of variations possible in dealings between 
debtors and creditors, the law is continually developing, and new ideas 
are continually being implemented in this field. The flexibility is 
important to permit the courts to adapt to varying circumstances and 
changing modes of financing.
    Neither is it expected that the courts will construe the term value 
to mean, in every case, forced sale liquidation value or full going 
concern value. There is wide latitude between those two extremes. In any 
particular case, especially a reorganization case, the determination of 
which entity should be entitled to the difference between the going 
concern value and the liquidation value must be based on equitable 
considerations based on the facts of the case. It will frequently be 
based on negotiation between the parties. Only if they cannot agree will 
the court become involved.
    The first method of adequate protection specified is periodic cash 
payments by the estate, to the extent of a decrease in value of the 
opposing entity's interest in the property involved. This provision is 
derived from In re Yale Express, Inc., 384 F.2d 990 (2d Cir. 1967) 
(though in that case it is not clear whether the payments required were 
adequate to compensate the secured creditors for their loss). The use of 
periodic payments may be appropriate, where for example, the property in 
question is depreciating at a relatively fixed rate. The periodic 
payments would be to compensate for the depreciation.
    The second method is the provision of an additional or replacement 
lien on other property to the extent of the decrease in value of the 
property involved. The purpose of this method is to provide the 
protected entity with a means of realizing the value of the original 
property, if it should decline during the case, by granting an interest 
in additional property from whose value the entity may realize its loss.
    The third method is the granting of an administrative expense 
priority to the protected entity to the extent of his loss. This method, 
more than the others, requires a prediction as to whether the 
unencumbered assets that will remain if the case if converted from 
reorganization to liquidation will be sufficient to pay the protected 
entity in full. It is clearly the most risky, from the entity's 
perspective, and should be used only when there is relative certainty 
that administrative expenses will be able to be paid in full in the 
event of liquidation.
    The fourth [enacted as third] method gives the parties and the 
courts flexibility by allowing such other relief as will result in the 
realization by the protected entity of the value of its interest in the 
property involved. Under this provision, the courts will be able to 
adapt to new methods of financing and to formulate protection that is 
appropriate to the circumstances of the case if none of the other 
methods would accomplish the desired result. For example, another form 
of adequate protection might be the guarantee by a third party outside 
the judicial process of compensation for any loss incurred in the case. 
Adequate protection might also, in some circumstances, be provided by 
permitting a secured creditor to bid in his claim at the sale of the 
property and to offset the claim against the price bid in.
    The paragraph also defines, more clearly than the others, the 
general concept of adequate protection, by requiring such relief as will 
result in the realization of value. It is the general category, and as 
such, is defined by the concept involved rather than any particular 
method of adequate protection.


                               Amendments

    1984--Par. (1). Pub. L. 98-353 inserted ``a cash payment or'' after 
``make''.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 901, 1205 of this title.



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