In the trial of this case, the Bankruptcy Court found that the creditor was not adequately protected because 1) its equity cushion was deteriorating as interest accrued, 2) real estate taxes were delinquent, 3) the creditor had not received payments on the note for numerous months and 4) the priming lien necessary for the debtor to reorganize would further deteriorate the creditor's security position.
On appeal to the District Court the debtor argued that the Bankruptcy Court erred in its finding that the creditor's equity cushion was deteriorating due to the accumulation of unpaid interest. The District Court opined that under the "equity cushion" theory if a debtor has equity in a property sufficient to shield the creditor from either the declining value of the collateral or an increase in the claim from accrual of interest or expenses, then the creditor is protected. The District Court ruled that the Bankruptcy Court's conclusion that the creditor was inadequately protected because of the deterioration of its equity cushion from accumulating interest was not in error. The District Court noted that although several courts had previously rejected the equity cushion theory, it did not need to decide the merits of the equity cushion theory since the Bankruptcy Court found that there were other sufficient justifications for finding a lack of adequate protection. These are detailed in the following paragraphs:
First, the Bankruptcy Court found that the real estate taxes were delinquent for two tax years in a total amount of $264,624. The District Court ruled that the failure to pay real estate taxes may constitute a basis for finding lack of adequate protection.
Second, the Bankruptcy Court found that there was a lack of payments to the creditor for several months, including, no payments since the bankruptcy petition. The District Court ruled that a continued failure to make monthly payments under loan documents can constitute cause for granting relief from the automatic stay. The District Court ruled that there was no error in granting relief from the automatic stay for failure to make payments.
Third, the Bankruptcy Court found that the creditor's security position would be deteriorated by the proposed priming lien which the debtor needed to reorganize. Given the lack of an equity cushion and the speculative nature of the repayment plan, the District Court ruled that there was no error in granting relief from the automatic stay because of the deterioration of the creditor's security position due to the priming loan.
In conclusion, the District Court concluded that the Bankruptcy Court did not err in granting the creditor's motion for relief from the automatic stay. The Bankruptcy Court properly found that the diminishing equity cushion, the delinquent real estate taxes, the lack of payments on the note for several months, and the deterioration of the creditor's security position under the priming lien constitute, both independently and together, a lack of adequate protection for the creditor.
On appeal to the District Court the debtor argued that the Bankruptcy Court erred in its finding that the creditor's equity cushion was deteriorating due to the accumulation of unpaid interest. The District Court opined that under the "equity cushion" theory if a debtor has equity in a property sufficient to shield the creditor from either the declining value of the collateral or an increase in the claim from accrual of interest or expenses, then the creditor is protected. The District Court ruled that the Bankruptcy Court's conclusion that the creditor was inadequately protected because of the deterioration of its equity cushion from accumulating interest was not in error. The District Court noted that although several courts had previously rejected the equity cushion theory, it did not need to decide the merits of the equity cushion theory since the Bankruptcy Court found that there were other sufficient justifications for finding a lack of adequate protection. These are detailed in the following paragraphs:
First, the Bankruptcy Court found that the real estate taxes were delinquent for two tax years in a total amount of $264,624. The District Court ruled that the failure to pay real estate taxes may constitute a basis for finding lack of adequate protection.
Second, the Bankruptcy Court found that there was a lack of payments to the creditor for several months, including, no payments since the bankruptcy petition. The District Court ruled that a continued failure to make monthly payments under loan documents can constitute cause for granting relief from the automatic stay. The District Court ruled that there was no error in granting relief from the automatic stay for failure to make payments.
Third, the Bankruptcy Court found that the creditor's security position would be deteriorated by the proposed priming lien which the debtor needed to reorganize. Given the lack of an equity cushion and the speculative nature of the repayment plan, the District Court ruled that there was no error in granting relief from the automatic stay because of the deterioration of the creditor's security position due to the priming loan.
In conclusion, the District Court concluded that the Bankruptcy Court did not err in granting the creditor's motion for relief from the automatic stay. The Bankruptcy Court properly found that the diminishing equity cushion, the delinquent real estate taxes, the lack of payments on the note for several months, and the deterioration of the creditor's security position under the priming lien constitute, both independently and together, a lack of adequate protection for the creditor.
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