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. Radford, U. The automatic stay also provides creditor protection. 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. 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. 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. 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.
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. 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. The district court and the bankruptcy court as its adjunct have all the traditional injunctive powers of a court of equity, 28 U. The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise.
If the intended sale or use is outside the ordinary course of its business, the debtor must obtain permission from the court. A debtor in possession may not use "cash collateral" without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected.
Section defines "cash collateral" as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest.
It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor's security interest. When "cash collateral" is used spent , the secured creditors are entitled to receive additional protection under section of the Bankruptcy Code.
The debtor in possession must file a motion requesting an order from the court authorizing the use of the cash collateral. Pending consent of the secured creditor or court authorization for the debtor in possession's use of cash collateral, the debtor in possession must segregate and account for all cash collateral in its possession. A party with an interest in property being used by the debtor may request that the court prohibit or condition this use to the extent necessary to provide "adequate protection" to the creditor.
Adequate protection may be required to protect the value of the creditor's interest in the property being used by the debtor in possession. This is especially important when there is a decrease in value of the property. For example, if a lender has an interest in accounts receivable it may receive a replacement lien on post-petition receivables. If a lender seeks to foreclose on its collateral during the Chapter 11 bankruptcy, it must obtain Court approval for terminating the automatic stay.
Section d 2 provides more specific requirements for terminating the stay. The stay shall be terminated if: A the debtor does not have any equity in the property securing the debt; and B such property is not necessary for a reorganization of the debtor.
If you have questions about how a Chapter 11 filing may impact your business, please contact Garry Graber Lawyer Directory. Call us at 1 Certain creditors are entitled to receive payments before the court confirms approves your Chapter 13 bankruptcy repayment plan.
Chapter 13 Adequate Protection Payments When you file for Chapter 13 bankruptcy, the court might not confirm approve your repayment plan for many months. How Adequate Protection Payments Work in Chapter 13 Each bankruptcy court handles adequate protection payments differently. Get Professional Help. Zip Code. How It Works Briefly tell us about your case Provide your contact information Choose attorneys to contact you. Talk to a Bankruptcy Lawyer Need professional help?
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