11 U.S.C. § 361 — Adequate protection

Page 73 TITLE 11—BANKRUPTCY § 361 garding the claiming or disposing of patient records. (2) If, after providing the notification under paragraph (1), patient records are not claimed during the 365-day period described under that paragraph, the trustee shall mail, by certified mail, at the end of such 365-day period a writ- ten request to each appropriate Federal agen- cy to request permission from that agency to deposit the patient records with that agency, except that no Federal agency is required to accept patient records under this paragraph. (3) If, following the 365-day period described in paragraph (2) and after providing the notifi- cation under paragraph (1), patient records are not claimed by a patient or insurance pro- vider, or request is not granted by a Federal agency to deposit such records with that agen- cy, the trustee shall destroy those records by— (A) if the records are written, shredding or burning the records; or (B) if the records are magnetic, optical, or other electronic records, by otherwise de- stroying those records so that those records cannot be retrieved. (Added Pub. L. 109–8, title XI, § 1102(a), Apr. 20, 2005, 119 Stat. 189.) Statutory Notes and Related Subsidiaries EFFECTIVE DATE Section effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Pub. L. 109–8, set out as an Effective Date of 2005 Amendment note under section 101 of this title. SUBCHAPTER IV—ADMINISTRATIVE POWERS § 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 protec- tion may be provided by— (1) requiring the trustee to make a cash pay- ment or periodic cash payments to such enti- ty, to the extent that the stay under section 362 of this title, use, sale, or lease under sec- tion 363 of this title, or any grant of a lien under section 364 of this title results in a de- crease 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 en- titling such entity to compensation allowable under section 503(b)(1) of this title as an ad- ministrative expense, as will result in the re- alization 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, § 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 ‘‘ade- quate 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 per- mitted 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 ade- quate protection, other than an administrative ex- pense, which will result in the realization by the se- cured 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 se- curity agreement, such as in the typical bondholder case, indubitable equivalent means that the bond- holders would be entitled to be protected as to the re- serve 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 credi- tor’s allowed secured claim. To the extent the protec- tion 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 ap- plication of creditor making an election under section 1111(b)(2), that creditor is entitled to adequate protec- tion 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 cir- cumstances, that the court determine in noticed hear- ings whether the interest of a secured creditor or co- owner of property with the debtor is adequately pro- tected in connection with the sale or use of property. The interests of which the court may provide protec- tion in the ways described in this section include equi- table as well as legal interests. For example, a right to enforce a pledge and a right to recover property deliv- ered 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 af- fected by the proposed action objects, the court will de- termine 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 com- Page 74 TITLE 11—BANKRUPTCY § 361 mencement of the case. The commencement or con- tinuation, including the issuance of process, of a judi- cial, 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 arbitra- tion, administrative, and judicial proceedings. Pro- ceeding 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 provi- sion for relief from the stay elsewhere in the section. However, it is important that the trustee have an op- portunity to inventory the debtor’s position before pro- ceeding with the administration of the case. Undoubt- edly 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 ap- propriate to permit proceedings to continue in their place of origin, when no great prejudice to the bank- ruptcy 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 col- lect 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 op- portunity 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 peti- tion, property that is exempted, or property that does not pass to the estate, to the extent that the lien se- cures a prepetition claim. Again, to permit postbankruptcy lien creation or enforcement would permit certain creditors to receive preferential treat- ment. It may also circumvent the debtors’ discharge. Paragraph (6) prevents creditors from attempting in any way to collect a prepetition debt. Creditors in con- sumer cases occasionally telephone debtors to encour- age repayment in spite of bankruptcy. Inexperienced, frightened, or ill-counseled debtors may succumb to suggestions to repay notwithstanding their bank- ruptcy. This provision prevents evasion of the purpose of the bankruptcy laws by sophisticated creditors. Paragraph (7) stays setoffs of mutual debts and cred- its 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 enforce- ment pending an orderly examination of the debtor’s and creditors’ rights. Subsection (b) lists seven exceptions to the auto- matic 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 § 2a(15) [section 11(a)(15) of former title 11], grants the power to issue orders necessary or appropriate to carry out the provi- sions 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. §§ 151 and 164 as proposed in S. 2266, § 201, and 28 U.S.C. § 1334, as pro- posed in S. 2266, § 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 injunc- tions. By excepting an act or action from the auto- matic 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 gen- erally 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 im- munity of the Federal Government, and an assertion of the bankruptcy power over State governments under the supremacy clause notwithstanding a State’s sov- ereign 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, exempt- ed property, and property that does not pass to the es- tate. The automatic stay is one means of protecting the debtor’s discharge. Alimony, maintenance and sup- port obligations are excepted from discharge. Staying collection of them, when not to the detriment of other creditors (because the collection effort is against prop- erty 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 bank- ruptcy code. That section permits postpetition perfec- tion 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 continu- ation 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 injunc- tion, 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 pos- session and control of the bankruptcy court, and since they constitute a fund out of which all creditors are en- titled 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 Na- tional Housing Act [12 U.S.C. 1701 et seq.]. A general ex- ception for such loans is found in current sections 263 and 517 [sections 663 and 917 of former title 11], the ex- ception allowed by this paragraph is much more lim- ited. Page 75 TITLE 11—BANKRUPTCY § 361 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 dis- missed, 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 inter- est. 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 pend- ing bankruptcy case. Generally, proceedings in which the debtor is a fiduciary, or involving postpetition ac- tivities 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 eq- uity 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 nec- essary 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 shop- ping center and hotel cases where attempts at reorga- nization should be permitted. Property in which the debtor has equity but which is not necessary to an ef- fective 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 com- plex 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 hear- ing 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 det- rimental 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 re- tain 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 pro- viding adequate protection, both of which may require an approximate determination of the value of the pro- tected 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 de- velopment. In light of the restrictive approach of the section to the availability of means of providing ade- quate 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 liq- uidation 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 enti- tled 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. Fi- nally, 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 ex- pected decrease in value of the opposing entity’s inter- est. This provision is derived from In re Bermec Corpora- tion, 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 inter- est 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 ade- quate protection to an entity as was suggested in In re Yale Express System, Inc., 384 F.2d 990 (2d Cir. 1967), be- cause such protection is too uncertain to be meaning- ful. Page 76 TITLE 11—BANKRUPTCY § 362 HOUSE REPORT NO. 95–595 The section specifies four means of providing ade- quate protection. They are neither exclusive nor ex- haustive. 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 deter- mined, 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 gen- eral 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 deal- ings between debtors and creditors, the law is contin- ually 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 liq- uidation value or full going concern value. There is wide latitude between those two extremes. In any par- ticular case, especially a reorganization case, the de- termination of which entity should be entitled to the difference between the going concern value and the liq- uidation value must be based on equitable consider- ations 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 re- quired were adequate to compensate the secured credi- tors 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 de- preciation. 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 pur- pose of this method is to provide the protected entity with a means of realizing the value of the original prop- erty, 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 administra- tive expense priority to the protected entity to the ex- tent of his loss. This method, more than the others, re- quires a prediction as to whether the unencumbered as- sets that will remain if the case if converted from reor- ganization 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 ex- penses will be able to be paid in full in the event of liq- uidation. The fourth [enacted as third] method gives the par- ties 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 in- volved. 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 ade- quate 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 per- mitting 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. Editorial Notes AMENDMENTS 1984—Par. (1). Pub. L. 98–353 inserted ‘‘a cash payment or’’ after ‘‘make’’. Statutory Notes and Related Subsidiaries 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. § 362. Automatic stay (a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protec- tion Act of 1970, operates as a stay, applicable to all entities, of— (1) the commencement or continuation, in- cluding the issuance or employment of proc- ess, of a judicial, administrative, or other ac- tion or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bank- ruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title. (b) The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay— (1) under subsection (a) of this section, of the commencement or continuation of a crimi- nal action or proceeding against the debtor;