Motion for Relief From Stay: 5 Arguments Secured Creditors Make

The clock in a stay relief motion runs for the creditor. Under 11 U.S.C. 362(e)(1), the stay of an act against estate property "is terminated with respect to the party in interest making such request" thirty days after the request, unless the court holds a hearing and orders it continued. A debtor that does nothing loses by default, and a debtor that does something must do it inside a month.

Most secured creditors make some version of the same five arguments. They are not equally strong, and the statute does not treat them equally.

1. The Collateral Is Losing Value and Nothing Protects the Loss

Section 362(d)(1) requires relief "for cause, including the lack of adequate protection of an interest in property of such party in interest." It is the argument an equipment lender makes when the trucks are aging, the argument a bank makes when inventory is being sold and not replaced, and the argument any secured party makes first because it has the most statutory support.

Section 361 lists the answers a debtor may give. Adequate protection may take the form of "a cash payment or periodic cash payments" to the extent the stay causes "a decrease in the value of such entity's interest in such property," an "additional or replacement lien," or other relief yielding "the indubitable equivalent" of what the creditor holds (other than a mere administrative claim).

What the creditor is protected against was settled in United Savings Association of Texas v. Timbers of Inwood Forest Associates, decided January 20, 1988. The Court held that "[u]ndersecured creditors are not entitled to compensation under § 362(d)(1) for the delay caused by the automatic stay in foreclosing on their collateral." The interest protected is the value of the collateral, not the time value of the money the creditor could have had by selling it on the day of filing.

The creditor is owed what the collateral was worth. It is not owed what the collateral would have earned had it been sold.

So the fight is about depreciation. You show the court the collateral is holding its value, or you pay for the part that is not.

For a funder that advanced cash against future card sales, this argument presupposes a secured interest in something, usually receivables or deposit accounts under a UCC filing. Whether a given funder has one, and whether the receipts it claims are cash collateral, depends on its contract and its filings, and the argument cannot begin until that question is answered.

2. The Debtor Has No Equity and the Property Is Not Needed

Section 362(d)(2) requires relief from a stay of an act against property if "(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization." Both elements are required, and section 362(g) divides the proof: "the party requesting such relief has the burden of proof on the issue of the debtor's equity in property," and "the party opposing such relief has the burden of proof on all other issues."

The second element is where cases are decided, and the Timbers Court gave it content that has governed since, holding that the debtor must show more than that the property would be needed if a reorganization were to occur somehow, and must instead show "that the property is essential for an effective reorganization that is in prospect," which the Court equated with "a reasonable possibility of a successful reorganization within a reasonable time," a formula that turns a motion about a single piece of collateral into an early referendum on whether the entire case can succeed, conducted before the debtor has filed a plan and sometimes before its schedules are complete.

Most of what happens in a small chapter 11 is decided by whether the court believes the business has a future, and the stay motion is often the first place it is asked to say so.

The Court also observed that "[t]he cases are numerous in which § 362(d)(2) relief has been provided within less than a year from the filing of the bankruptcy petition." A debtor whose only answer is that it needs more time has not answered.

3. The Case Was Not Filed in Good Faith

Cause is not limited to adequate protection. In In re Sonnax Industries, the Second Circuit quoted the treatise language that "[i]n extreme cases a finding that the bankruptcy case was not commenced in good faith has been used as a basis for vacating or annuling the automatic stay."

Thirty days is a short time in which to prove a debtor's motive, so the argument is built from the calendar and the creditor list: a petition that arrived on the eve of a foreclosure sale or a trial, a case with few creditors besides the movant, and little business left to reorganize. The argument is serious when it succeeds. It succeeds in extreme cases, which is the court's own word.

Sonnax also set the order of proof. "Section 362(d)(1) requires an initial showing of cause by the movant," and "[i]f the movant fails to make an initial showing of cause, however, the court should deny relief without requiring any showing from the debtor."

4. The Dispute Belongs in Another Court

A creditor already in litigation often asks only to finish it. Sonnax adopted twelve factors for deciding whether a case should proceed elsewhere, among them "whether relief would result in a partial or complete resolution of the issues," "whether a specialized tribunal with the necessary expertise has been established to hear the cause of action," "whether litigation in another forum would prejudice the interests of other creditors," "whether the parties are ready for trial in the other proceeding," and "impact of the stay on the parties and the balance of harms." The decision is left to the bankruptcy judge's discretion.

Relief of this kind usually lets the creditor liquidate its claim. It does not, without more, let the creditor collect.

5. The Property Is Single Asset Real Estate, or the Filing Was a Scheme

Section 362(d)(3) gives a creditor secured by single asset real estate relief unless, within 90 days after relief is ordered in the case, or 30 days after the court determines the debtor is subject to the paragraph, whichever is later, the debtor files a plan with "a reasonable possibility of being confirmed within a reasonable time" or begins monthly interest payments. An operating business with real activity on the premises is usually outside the definition, which excludes property on which substantial business is conducted beyond operating the real estate itself. Section 362(d)(4) adds in rem relief against real property where the filing was part of a scheme involving an unauthorized transfer or multiple filings.

What the Order Does, and When

An order granting relief does not take effect at once. Bankruptcy Rule 4001(a)(4) provides that, "[u]nless the court orders otherwise," such an order "is stayed for 14 days after it is entered." For true emergencies, section 362(f) allows relief "with or without a hearing" when an interest will suffer "irreparable damage" before a hearing can be held.

None of these arguments can be made against a business that has not filed, and none of the answers can be given by anyone other than bankruptcy counsel. Delancey Street has no role in a stay motion; not a law firm, it does not appear in bankruptcy court. What it offers instead is a confidential review, free of charge, aimed at the question that comes earlier, whether a funder or lender balance might be resolved by agreement before a petition makes sense, with independently licensed counsel engaged where the issues turn legal. A business whose secured lender has already set a sale date may need the petition and the thirty-day clock more than any negotiation.

The motion is where a secured creditor tests whether the case is real. A debtor that has a plan, a value, and a witness will usually find the clock less frightening than it first appeared.