§ 64.1 — Lack of Adequate Protection
Revised: May 24, 2004
The quid pro quo for a Chapter 13 debtor’s possession and use of estate property before confirmation is the lienholder’s right to demand adequate protection of its collateral.1 Lack of adequate protection is the one cause for relief from the stay specifically enumerated in § 362(d)(1). It has been said that an unconfirmed plan, even one that proposes to make significant payments to a secured claim holder, is not alone adequate protection.2 However, the commencement of payments by a Chapter 13 debtor to the trustee or directly to a creditor before confirmation consistent with the proposed plan is probably the most common form of adequate protection in Chapter 13 cases.3 Although it is rare in Chapter 13 cases, a substantial equity cushion—value in the collateral in excess of the amount owed to the secured claim holder—can constitute adequate protection and preclude relief from the stay.4
Under § 362(g), when a motion for relief from the stay alleges a lack of adequate protection, the creditor has the burden of proof with respect to the debtor’s equity in the collateral, but the debtor has the burden of proof “on all other issues.”5 Typically, this assignment of the burden of proof requires the creditor to first come forward with evidence with respect to the value of its collateral and the amount of its debt. When there is no evidence from which the court can determine whether there is equity, relief from the stay based on lack of adequate protection is not appropriate.6
Many circumstances constitute lack of adequate protection: the debtor is continuing to use collateral without making periodic payments;7 insurance has lapsed;8 the debtor is not properly maintaining or protecting the property; other liens or claims are eating into the creditor’s interest in the collateral.9 If collateral is not insured or is depreciating, the secured claim holder is entitled to some relief. The request for relief from the stay will at least force the debtor to insure the car and may require the debtor to make payments to the trustee10 or to the secured claim holder pending confirmation. In response to a motion for relief from the stay or for adequate protection, the debtor has the burden to offer adequate protection and to prove that the protection offered is adequate; failure to do so typically results in relief from the stay.11 If the request for relief from the stay is denied conditioned that the debtor provide some form of adequate protection, and if that adequate protection fails, the creditor may assert an administrative expense and may claim superpriority rights against the debtor.12
The 1994 amendments to § 363(e) recognize that lessors of personal property can demand adequate protection as a condition to the Chapter 13 debtor’s use of leased property before confirmation.13 The lessor’s adequate protection right in § 363(e) is limited “to the exclusion of such property being subject to an order to grant relief from the stay under § 362.”14 Though awkwardly worded, this exception puts the lessor of personal property to a choice in Chapter 13 cases—adequate protection as a condition to the debtor’s use of leased property or relief from the stay, presumably based on lack of adequate protection. Proving the adequacy of protection at the hearing on a lessor’s motion for relief from the stay could be really interesting when the rental property involved is used furniture or appliances.15
Most motions for relief from the stay based on lack of adequate protection are resolved by agreed orders between the debtor and the lienholder. It is common for negotiated orders to condition continuation of the stay that adequate protection be provided in a clearly specified form such as periodic payments, insurance or a substitute lien on other property. Often such negotiated orders provide for automatic relief from the stay if a specified condition fails and sometimes include provisions for prospective relief from the stay if the current Chapter 13 case fails.16
1 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation and 67.2 [ Adequate Protection Rights ] § 57.2 Adequate Protection Rights.
2 See Hooper v. United States (In re Hooper), 152 B.R. 309 (Bankr. D. Colo. 1993) (Proposed Chapter 13 plan calling for payment of the IRS claim fails to adequately protect the security interest held by the IRS as the result of a prepetition levy on the debtor’s wages.). Accord In re Stienes, 285 B.R. 360 (Bankr. D.N.J. 2002) (Cause for stay relief to permit setoff of prepetition tax refund against prepetition tax liability that payments through the plan over time are not adequate protection for the immediate use of the tax refund.); In re Madden, 274 B.R. 551 (Bankr. M.D. Fla. 2001) (Mechanic’s lienholder with prebankruptcy judgment has a continuing lien and is entitled to relief from the automatic stay unless Chapter 13 debtor furnishes adequate protection.); In re Zeoli, 249 B.R. 61, 64–65 (Bankr. S.D.N.Y. 2000) (Cause for relief from the stay that debtors did not offer or make adequate protection payments with respect to an undersecured car loan notwithstanding that plan proposed to cram down car lender. “These facts—collateral worth less than the debt which it secures, continuing erosion in the value of the collateral and debtors without the assets, income or inclination to provide ‘adequate protection’—present an archetype of ‘cause’ for relief from stay under Section 362(d)(1). . . . [T]he debtors have not made any payment to the Bank since November 1999 and apparently do not intend to do so unless and until their cram down plan is confirmed, thereby placing the entire risk of loss on the Bank. The debtor’s failure to tender any adequate protection conflicts with the statute, Section 362(d)(1), and is particularly unacceptable where the debtor controls and continues to use and depreciate the collateral . . . . Assuming in this case, without deciding, that the debtors would be entitled to confirm a plan which would cram down the Bank’s car loan, that putative entitlement does not override the Bank’s right to relief from the stay. To the contrary, Section 362(d) may operate to render an otherwise confirmable plan unconfirmable by lifting the stay to allow a creditor to foreclose on property that is essential to the debtor’s plan. The primacy of Section 362(d) over a debtor’s prospective right to confirm a plan is manifest . . . . In this case the Bank and the debtors extended credit and incurred a debt which was improvident for both because the amount of the loan probably exceeded the value of the vehicle from the outset. But bad judgment cannot be invoked as a sword or a shield by either the Bank or the debtors.”); In re Ennis, 178 B.R. 177 (Bankr. W.D. Mo. 1995) (Relief from the stay for cause is appropriate where former spouse has a lien on the debtor’s entitlement to an inheritance and the debtor has not offered adequate protection for the use of the inheritance to fund the proposed plan.); In re Olson, 175 B.R. 30, 33 (Bankr. D. Neb. 1994) (IRS is entitled to relief from the stay after confirmation to set off debtors’ tax refund against prepetition taxes where debtors are not able to provide adequate protection for the IRS’s interest in the tax refund. “By establishing its right of setoff, the IRS has made a prima facie showing of ‘cause’ for relief from stay. . . . The debtors did not submit any evidence at the hearing that they could provide the IRS with additional adequate protection of the collateral. . . . If the debtors are going to use the $299 for ordinary living expenses, the debtors must offer new collateral or make cash payments to the IRS equal to the diminution in the value of the collateral as the debtors spend the money. The debtors’ argument that the plan payments will pay the IRS’s claim in full and therefore constitutes adequate protection of the IRS’s setoff right is without merit.”); In re Hinckley, 40 B.R. 679 (Bankr. D. Utah 1984).
3 See below in this section, and see § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation. See, e.g., In re Rogers, 239 B.R. 883 (Bankr. E.D. Tex. 1999) (On car lender’s motion for relief from the stay in a district that delays confirmation, stay is conditioned that the debtor maintain insurance, that plan provide that one-half of the payments to the trustee between the filing and confirmation go to secured claim holders ahead of administrative expenses and that in the event of conversion or dismissal, secured claim holders get funds held by trustee ahead of debtor’s right to return under § 1326(a)(2).); In re Self, 239 B.R. 877 (Bankr. E.D. Tex. 1999) (In contrast to In re Rogers, 239 B.R. 883 (Bankr. E.D. Tex. 1999), lender failed to prove that truck was at unusual risk for depreciation or that debtor was unreasonably likely to convert or dismiss; accordingly, maintaining insurance and making payments to trustee adequately protected the lender without the special conditions required in Rogers.).
4 See In re Olick, 221 B.R. 146, 161 (Bankr. E.D. Pa. 1998) (Mortgage holder with lien on commercial and residential property is not entitled to relief from the stay for cause because it is the holder of an oversecured claim that is adequately protected by insurance on the property and by “sufficient equity cushions.”); In re Parks, 193 B.R. 361, 366–67 (Bankr. N.D. Ala. 1995) (No cause for relief from stay where mortgage holder is oversecured and debtors propose to cure defaults within a reasonable time consistent with § 1322(b)(5). “Debtors’ proposal adequately protects the Movant’s interest. The Movant is oversecured. . . . Mr. Parks has been employed at the same business for 31 years. He testified that he no longer participates in certain extracurricular activities. The Debtors regularly pay their chapter 13 plan payments through a payroll deduction plan. . . . The Parks have the ability to propose a modification that will cure the default in their mortgage . . . . The Parks should be given that opportunity.”); In re Bellinger, 179 B.R. 220, 222 (Bankr. D. Idaho 1995) (Substantial equity in real property precludes relief from the stay based on postpetition and postconfirmation defaults. Debtor’s real property was worth $60,000. The amount due under the mortgage including arrearage was approximately $40,000. The debtor was delinquent on seven prepetition payments and six postpetition payments. In response to debtor’s motion to modify the plan to cure postpetition defaults, mortgage company moved for relief from the stay. Stay relief was denied because mortgage company “failed to show the debtor has no equity in the property.”); In re Novak, 121 B.R. 18 (Bankr. W.D. Mo. 1990) (When there is overwhelming value in an asset, bankruptcy court will be extremely reluctant to lift the stay to allow foreclosure. Debtor purchased 7,000-square-foot house for $248,000 in 1983. Debtor currently owes $114,000. Creditor is adequately protected.); In re Heath, 79 B.R. 616 (Bankr. E.D. Pa. 1987) (Cause not found for stay relief, notwithstanding debtor’s failure to make postpetition mortgage payments for 22 months, when mortgage holder had 39% equity cushion.). But see In re Jones, 189 B.R. 13 (Bankr. E.D. Okla. 1995) (Failure to make regular mortgage payments after the petition and allowing insurance to lapse are cause for stay relief notwithstanding that the property appears to have equity.); In re Hamm, 157 B.R. 137, 140–41 (Bankr. E.D. Mo. 1993) (Notwithstanding equity in the debtor’s real property, court grants relief from the stay where the interests of mortgage holders “are not adequately protected because this is the Debtor’s third Chapter 13 case, and because the Debtor has again failed to submit a repayment plan that is capable of being confirmed.”).
5 11 U.S.C. § 362(g)(2).
6 See, e.g., In re Harrington, 282 B.R. 637, 639 (Bankr. S.D. Ohio 2002) (Bank failed to establish prima facie case of lack of adequate protection with respect to a Kenworth tractor because the bank never filed a proof of claim and presented no testimony, and “the debtor showed that the lease payments were, in fact, made according to the chapter 13 trustee’s records . . . . The debtor also produced evidence of an insurance policy on the tractor.”); In re Howery, 275 B.R. 852, 854 (Bankr. S.D. Ohio 2002) (Motion for relief from stay based on lack of adequate protection fails because bank offered no evidence of any decline in the value of its collateral. “Only if Provident Bank establishes a prima facie case does the burden shift to the debtor to produce evidence showing that Provident Bank is adequately protected. . . . While Provident Bank arguably established that it was owed a debt by the debtor and possessed a valid mortgage securing this debt, it did not present any evidence during its case-in-chief that the property was declining in value.”).
7 See, e.g., In re Hyde, 227 B.R. 170 (Bankr. W.D. Ark. 1998) (Cause for relief from stay that debtor failed to make required payments to the Chapter 13 trustee and thus car lender whose claim is to be paid through the plan is not adequately protected.).
8 See In re Kowalsky, 235 B.R. 590, 596 (Bankr. E.D. Tex. 1999) (Lack of adequate protection that debtor allowed uninsured, teenage son to drive car before the petition; debtor must “eliminate the risk to the Movant either by taking measures to insure that the vehicle is never operated by their son or by obtaining insurance coverage in the event that he drives the vehicle.”); In re Jones, 189 B.R. 13 (Bankr. E.D. Okla. 1995) (Failure to maintain casualty insurance is “a threat of a decline in the value of the property” justifying relief from the stay.).
9 See, e.g., In re Rosen, 208 B.R. 345, 356–57 (D.N.J. 1997) (Cause for relief from the stay that the debtor stopped paying real estate taxes while battling an undersecured mortgage holder over cram down. “[A] lack of adequate protection arose, in part, because Debtor was not paying real estate taxes . . . . [T]here was no equity.”); In re McPherson, 225 B.R. 203 (Bankr. D. Idaho 1998) (Cause for relief from the stay to junior mortgage holder that there is no equity in the property, the passage of time is eating into the second mortgage, budget is so tight that adequate protection of the second mortgage holder is difficult or not possible.).
10 See GMAC v. Johnson (In re Johnson), 145 B.R. 108, 114 (Bankr. S.D. Ga. 1992) (Between filing and confirmation, debtor provides adequate protection to each secured claim holder “by making preconfirmation payments to the Chapter 13 trustee.”); In re Holly, 109 B.R. 524 (Bankr. S.D. Ga. 1989) (Debtor can provide adequate protection to each secured claim holder before confirmation by making payments to the Chapter 13 trustee.).
11 See, e.g., In re Ledis, 259 B.R. 472, 476 (D. Mass. 2001) (Ex-spouse with perfected security interest in debtor’s veterinary practice is entitled to relief from the stay because “[a]side from the Debtor’s denial in his opposition to Hein’s § 362(d) motion that Heins is not adequately protected, the Debtor has not otherwise refuted Heins’ claim for relief. . . . [T]he Debtor made no attempt to persuade the Court he has in some way adequately protected Heins’ security interest, the Court must find the Debtor has failed to meet his burden of proof.”); In re Zeoli, 249 B.R. 61, 64 (Bankr. S.D.N.Y. 2000) (Cause for relief from the stay that debtors did not offer or make adequate protection payments with respect to an undersecured car loan. “The debtor’s failure to tender any adequate protection conflicts with the statute, Section 362(d)(1).”).
12 See § 297.1 [ Failed Adequate Protection ] § 136.12 Failed Adequate Protection before BAPCPA. See, e.g., Grundy Nat’l Bank v. Rife, 876 F.2d 361 (4th Cir. 1989) (On unusual facts, bank is entitled to administrative expense claim when the debtor used the creditor’s automobiles for nine months without making payments required by the plan and the creditor was not allowed relief from the stay to liquidate its collateral. The court also allowed the bank interest on the revenues it would have received had the debtor timely made payments under the plan.); GMAC v. Johnson (In re Johnson), 145 B.R. 108, 114 (Bankr. S.D. Ga. 1992) (“If at confirmation the court determines a secured creditor’s collateral is worth less at confirmation than its value on the date the bankruptcy petition was filed, that is, if after the fact the protection provided the secured party through plan payments proves to be inadequate, the creditor is entitled to a priority expense claim, a ‘superpriority’ payable ahead of all other administrative expense claims, to the extent of the failure of adequate protection.”), rev’d, 165 B.R. 524 (S.D. Ga. 1994). Compare In re Severson, 53 B.R. 8 (Bankr. D. Or. 1985) (Section 507(b) does not allow administrative priority or superpriority when adequate protection fails because creditor failed to demonstrate actual, necessary expenses of preserving the estate between the petition and the confirmation order.).
13 11 U.S.C. § 363(e), discussed in §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation, 56.1 [ Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts ] § 51.3 Assume, Reject or Assign Leases, Rental Agreements and Executory Contracts and 67.2 [ Adequate Protection Rights ] § 57.2 Adequate Protection Rights.
14 11 U.S.C. § 363(e).
15 The debtor will have the burden of proof. See 11 U.S.C. § 362(g)(2). The debtor may have to promise to keep the cats off the couch.
16 See § 82.1 [ Prospective, In Rem and Automatic Relief from Stay ] § 64.3 Prospective, In Rem and Automatic Relief from Stay.