Adequate Protection: Snoozing May Not Mean Losing…in the Ninth Circuit

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Contributed by Elisa Lemmer

When it comes to obtaining adequate protection, most practitioners believe the old adage, “you snooze, you lose” applies – that is, adequate protection is only available from the time it is requested.  That still holds true for jurisdictions such as Delaware and New York, but a recent decision by the United States Bankruptcy Appellate Panel of the Ninth Circuit has reaffirmed that, at least in the Ninth Circuit, that is not necessarily the case.

In People’s Capital and Leasing Corp v. Big3D, Inc. (In re Big3D, Inc.), BAP. No. EC-09-1292 (B.A.P 9th Cir. Oct. 6, 2010), People’s Capital and Leasing Corporation appealed from the bankruptcy court’s decision holding that People’s Capital was not entitled to adequate protection for the decline in value of equipment it had leased to the debtor, Big3D.  People’s Capital had sought adequate protection six months after Big3D filed its chapter 11 case, but had argued that it was entitled to adequate protection from the petition date.  In support of its motion, People’s Capital cited Paccom Leasing Corp. v. Deico Elects., Inc. (In re Deico Elects, Inc.), 139 B.R. 945 (B.A.P 9th Cir. 1992), for the proposition that adequate protection could be available to a creditor based on when the creditor could have obtained its state court remedies against the debtor in the absence of the debtor’s bankruptcy.  Because People’s Capital had obtained a state court writ of possession shortly prior to the petition date, it argued that it should receive adequate protection payments from the petition date.

The bankruptcy court held that People’s Capital had not overcome its burden of proving its entitlement to retroactive adequate protection and rejected People’s Capital’s argument that Deico required adequate protection from the petition date, holding instead that Deico granted the court broad discretion in determining when adequate protection payments could begin.  Based on the specific facts before it (including findings made by the bankruptcy court concerning the nature of the decline in value of the equipment at issue and People’s Capital’s failure to file its request for adequate protection within a reasonable period of time from the point at which it contended adequate protection payments should have begun), the bankruptcy court declined to award People’s Capital retroactive adequate protection.

The BAP affirmed the bankruptcy court’s decision on appeal finding that the bankruptcy court had not abused its discretion.  Although the case presented the BAP with an opportunity to overrule Deico and instead follow the majority rule, as requested by the debtor, that adequate protection may not be awarded for any period prior to the time it is requested, the BAP reaffirmed the continuing vitality of Deico within the Ninth Circuit.  The BAP acknowledged that courts in New York, Delaware, Illinois, Montana, and Ohio (among others) have held that adequate protection is only available from the time it has been requested, but it declined to adopt those holdings as a bright line rule.  It reasoned, instead, that if Congress had intended to impose a temporal limit on adequate protection, it would have expressly provided that in section 361 of the Bankruptcy Code (which defines “adequate protection”).  Based on this, the BAP agreed with the Deico court in holding that the timing, among other things, for commencing adequate protection payments is flexible and subject to the court’s discretion.

Under Big3D, could a creditor wait until almost the end of a debtor’s case and successfully obtain retroactive adequate protection?  In New York and Delaware, it clearly cannot.  In California and other courts within the Ninth Circuit, the creditor probably cannot, as a practical matter.  The BAP’s unwillingness to establish a bright line rule preventing retroactive adequate protection, however, at least leaves open that possibility within the Ninth Circuit.