A secured lender is not entitled to a superpriority claim to cover interest, fees and costs incurred after filing, according to a May 9 opinion by District Judge Louise W. Flanagan of New Bern, N.C.
A secured lender had a claim for about $1.3 million in principal and interest owing on the filing date of the chapter 11 petition. The collateral was worth several times the amount of the claim.
From adequate protection payments received during chapter 11 and liquidation of the collateral after conversion to chapter 7, the lender recovered the full principal amount of the claim plus accrued interest as of the filing date. There was money left over, but not enough to cover all post-petition interest, costs and attorneys’ fees.
Arguing that adequate protection granted by the court during chapter 11 turned out to be inadequate, the lender filed a motion seeking a superpriority administrative claim to cover the remainder of its post-petition interest, costs and attorneys’ fees. The bankruptcy court denied the motion.
Based on the Fourth Circuit’s distillation of the elements of a claim under Section 507(b), Judge Flanagan upheld the lower court and ruled that there was no right to a superpriority administrative claim “because [the lender’s] adequate protection payments were not inadequate.”
The judge’s conclusion about the adequacy of the adequate protection payments was based on the Supreme Court’s concept of value of a secured claim in Timbers of Inwood. She held that the “value” to be protected is the “lesser of the value of the collateral or the principal debt and matured interest owed to the creditor as of the petition date.”
In concluding there was no right to a superpriority claim, Judge Flanagan made three holdings: (1) The adequate protection payments were not inadequate because the lender recovered all its petition date principal and interest; (2) even if adequate protection payments were insufficient, the lender had not proven that the decline in value resulted from use of the collateral; and (3) the lender was not entitled to a superpriority claim to cover the decline in the value of the collateral that occurred after conversion to chapter 7.
Even if adequate protection payments were meant to cover post-petition interest and expenses, Judge Flanagan faulted the lender for failing to prove that the collateral had declined in value by the conversion date.