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For an oversecured creditor, a creditor with collateral that has a greater value than the amount of the creditor’s allowed secured claim, case law has established that the existence of an equity cushion may, in and of itself, constitute adequate protection, provided that the equity cushion is “sufficient in amount to protect the secured creditor from post-petition depreciation of the value of its interest in the collateral.”  See, In re Big Dog II, LLC, 602 B.R. 64, 70 (Bankr.N.D.Fla.2019).  An equity cushion has been defined as “the value in the property above the amount owed to the creditor with a secured claim, that will shield that interest from loss due to any decrease in value of the property during the time the automatic stay remains in effect.”  In re Mellor, 734 F.2d 1396, 1400 n.2 (9th Cir.1984).  To decide whether a secured creditor is adequately protected by an equity cushion in its collateral, the court must compare the equity cushion to the value of the collateral, not to the moving creditor’s claim.  See, In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293 (Bankr.D.Del.2011).

In determining whether an equity cushion constitutes adequate protection, courts consider (i) the amount of time that has passed since the debtor filed its petition for relief, (ii) the success of the debtor’s post-petition operations and (iii) evidence regarding the stability of property values.  This analysis is done on a case-by-case basis. Thus, in In re Panther Mountain Land Development, 438 B.R. 169, 191 (Bankr.E.D.Ark.2010), the court noted that there is no minimum percentage that must exist before a claim of adequate protection can comfortably rest on an equity cushion.  Instead, the court stated that even “the most microscopic equity cushion” could be sufficient “if the chances of jeopardizing the creditor’s interest were also de minimis.”

While the amount of equity necessary to protect a creditor is resolved by the unique facts of each case, trends are now evident.  For example, courts generally hold that an equity cushion of less than 10% is insufficient to constitute adequate protection. See, In re Castle Ranch of Ramona, Inc., 3 .B.R. 45 (Bankr.S.D.Cal.1980) (8.6% is inadequate); In re Tucker, 5 B.R. 180, 12 (Bankr.S.D.N.Y .1980) (7.4% inadequate); In re McGowan, 6 B.R. 241 (Bankr.E.D.Pa.1980) (10% is inadequate); In re LeMay, 18 B.R. 659 (Bankr.D.Mass .1982) (7% inadequate); Ukrainian Sav. and Loan Ass’n v. Trident Corp., 22 B.R. 491 (E.D.Pa.1982) (10% is inadequate); In re Jug End in the Berkshires, Inc., 46 B.R. 892 (Bankr.D.Mass.1985) (8.5% is insufficient); In re Liona Corp., N.V., 68 B.R. 761 (Bankr.E.D.Pa.1987) (8.9% is inadequate); In re Franklin Indus. Complex, Inc., 386 B.R. 5 (Bankr.N.D.N.Y.2008) (“[a] 4% equity cushion typically is not taken to constitute adequate protection.”); and In re JER/Jameson Mezz Borrower II, LLC, 461 B.R. 293 (Bankr.D.Del.2011) (9% equity cushion is not sufficient to constitute adequate protection alone).

On the other hand, an equity cushion of 20% or more has been generally held to constitute adequate protection.  See, In re Lake Tahoe Land Co., Inc., 5 B.R. 34, 37 (Bankr.Nev.1980) (40% to 50% required); In re San Clemente Estates, 5 8.R. 605 (Bankr.S.D.Cal.1980) (65% is adequate); In re Ritz Theaters, Inc., 68 B.R. 256 (Bankr.M.D.Fla.1986) (38% is adequate); In re Dunes Casino Hotel, 69 B.R. 784 (Bankr.D.N.J.1986) (30% is adequate); and In re Nashua Trust Co., 73 B.R. 423 (Bankr.D.N.J.1987) (50% adequate).  “[T]he case law is divided on whether a cushion of 12% to 20% constitutes adequate protection.”  Big Dog II, 602 B.R. at 70.

Unfortunately, the courts are in disagreement as to how to measure an equity cushion.  As was noted above, the amount of an equity cushion is a function both of the value of the subject collateral and the amount of the oversecured creditor’s claim.  In terms of valuing the collateral, there is little concurrence as to whether the property should be measured on a “going concern” basis, “fair market value” basis.  Matter of QPL Components, Inc., 20 B.R. 342 (Bankr.E.D.N.Y.1982) (going concern value); In re Sharon Steel Corp., 159 B.R. 165 (Bankr.W.D.Pa.1993) (liquidation value); and In re Phoenix Steel Corp., 39 B.R. 218 (D.Del.1984) (mean of liquidation value and going concern value).  Obviously, employment of a “liquidation” value in lieu of a “going concern” value will diminish the cushion.

When determining whether an equity cushion is sufficient to adequately protect the creditor, the courts look to protect the net-economic benefit the creditor can recover upon a post-default disposition of its collateral.  In addition to the value of the creditor’s claim the courts take into consideration the costs and expenses incident to the maintenance, protection, and disposition of the collateral.  Thus, in In re McLaughlin, 415 B.R. 23 (Bankr.D.N.H.2009), the lender had an equity cushion of a little over 10.5%.  However, the court found this amount to be inadequate, noting that this figure did not take into account taxes, costs, and other fees associated with selling the property, as well as the accrual of interest to the lender under Section 506(b). Id. at 26.

In Big Dog II, 602 B.R. 64, the court determined that the debtor had an equity cushion of 3.62%.  It then determined that this equity cushion was insufficient to provide the lender with adequate protection.  In doing so, the court focused on testimony that (i) the roof of the encumbered property needed repairing, (ii) there was a sinkhole in the parking lot that needed to be addressed, (iii) four of the twelve air conditioning units on site needed to be serviced or replaced, and (iv) quarterly sales and property taxes had not been timely paid, which threaten the lender’s status as a priority lien holder.  It further noted that the debtor needed to use current rental income to do required maintenance, had no maintenance reserve fund and that the members of the debtor were having to cover the payment shortfall on the Note.  Thus, the court questioned the debtor’s ability to properly fund the regular maintenance of the Property going forward. Id. at 71.

Matthew T. Gensburg
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