Alliance Well Service, LLC

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
Alliance Well Service, LLC, 	No. 16-10078-t11
Debtor.
MEMORANDUM OPINION
Before the Court is J.S. Ward & Son’s (“JS Ward’s”) motion for relief from the automatic
stay or alternatively for adequate protection, filed February 24, 2016 (the “Motion”). At a March
3, 2016 hearing the Court ordered the Debtor to begin making adequate protection payments to JS
Ward. 	The sole remaining issue is whether JS Ward should receive “retroactive” adequate
protection payments from the petition date. The Court concludes that JS Ward’s right to adequate
protection of its secured claim began to accrue the date it filed the Motion, rather than the petition
date.
I. 	BACKGROUND1
Debtor, which filed this bankruptcy case on January 19, 2016, provides oil drilling services
to its customers. Debtor’s bankruptcy schedules2 list expensive oil-field equipment, including oil
1 At the final hearing on March 30, 2016, the parties requested that the Court rule based on the oral
and written arguments presented. These findings are limited to the ruling on the Motion. Some
background facts come from the Motion. These facts are consistent with findings stipulated to by
the parties in a subsequent order, doc. 91.
2 	In making these findings, the Court took judicial notice of the docket. See St. Louis Baptist
Temple, Inc. v. Fed. Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir. 1979) (holding that a court
may sua sponte take judicial notice of its docket); LeBlanc v. Salem (In re Mailman Steam Carpet
Cleaning Corp.), 196 F.3d 1, 8 (1st Cir. 1999) (citing Fed. R. Evid. 201 and concluding that “[t]he
bankruptcy court appropriately took judicial notice of its own docket”); In re Quade, 496 B.R.
520, 524 (Bankr. N.D. Ill. 2013), affirmed, 498 B.R. 852 (N.D. Ill. 2013) (a “bankruptcy court [is
authorized] ... to take judicial notice of its own docket”).
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rigs and derricks, trucks, trailers, a forklift, and an ATV. 	Debtor is required by its lenders and
others to keep its equipment insured and to carry liability insurance.
In August, 2015 Debtor bought a one-year commercial insurance package from Travelers
Insurance Company for $134,042. JS Ward was the Debtor’s insurance agent in the transaction.
Rather than pay the entire premium at once, Debtor signed a premium finance contract with JS
Ward, under which JS Ward paid the premium and Debtor agreed to repay JS Ward the financed
amount, with interest, over six months. Debtor granted JS Ward a security interest in the unearned
insurance premium.
In December, 2015 Debtor bought additional auto and equipment insurance and combined
the existing premium financing arrangement with the premium for the new insurance policies. JS
Ward was again the insurance agent and the insurance premium financer.3 The agreement included
provisions granting JS Ward a security interest in the unearned premium and the right to cancel
the policies and collect the unearned premium in the event of default. The amount owed under the
new agreement was $124,672.80.4
Debtor’s first payment to JS Ward under the new agreement was due January 15, 2016.
Debtor did not make did not make the payment, instead filing this case four days later. 	Debtor
also defaulted on the February 15, 2016 payment.
JS Ward filed the Motion on February 24, 2016, asking for stay relief so it could cancel the
insurance policies and receive the unearned premium. 	On March 3, 2016, the Court held a
3 JS Ward sold its rights and obligations under the premium financing agreement to Western Bank
of Artesia. 	However, the sales contract provided that Western Bank had the right to sell the
contract back to JS Ward if Debtor defaulted under the contract. When debtor defaulted, Western
Bank exercised this right and JS Ward repurchased the premium financing agreement, which it
now owns.
4 This includes $122,480.06 for the insurance premiums, and $2,192.74 in financing charges. The
additional insurance was provided by Falls Lake National.
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preliminary hearing and ordered that, to avoid stay relief, the Debtor must begin making adequate
protection payments to JS Ward of $571.66 per day.
At a final hearing on March 30, 2016, the Court heard oral argument concerning the date
JS Ward’s right to adequate protection arose. JS Ward argued it was entitled to adequate protection
from the petition date. Debtor objected and urged that JS Ward’s right to adequate protection did
not begin to accrue until the Court held a preliminary hearing on the Motion.
II. 	DISCUSSION
A. 	Adequate Protection.
The following sections of 11 U.S.C. § 101 et seq.5 deal with adequate protection of a
secured creditor’s lien:
Section 	Language
361 	When adequate protection is required under section 362, 363, or 364 of this title
of an interest of an entity in property, such adequate protection may be provided
by –
(1) requiring the trustee to make a cash payment or periodic cash payments to
such entity, to the extent that the stay under section 362 of this title, [or] use, sale
or lease under section 363 of this title… results in a decrease in the value of such
entity’s interest in such property.
362(d) 	On request of a party in interest and after notice and a hearing, the court shall
grant relief from the stay provided under subsection (a) of this section, such as
by terminating, annulling, modifying, or conditioning such stay—(1) for cause,
including the lack of adequate protection of an interest in property of such party
in interest . . . .
363(c)(1) 	If the business of the debtor is authorized to be operated under section 721, 1108,
1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee
may . . . use property of the estate in the ordinary course of business without
notice or a hearing.
363(e) 	Notwithstanding any other provision of this section, at any time, on request of an
entity that has an interest in property used, sold, or leased, or proposed to be used,
sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit
or condition such use, sale, or lease as is necessary to provide adequate protection
of such interest.
5 All statutory references are to the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the “Code”).
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The legislative history of § 361 includes the following commentary:
[the specified means] of providing adequate protection . . . rely . . . on the value of
the protected entity’s interest in the property involved. The section does not specify
how the value is to be determined, nor does it specify when it is to be determined.
These matters are left to case-by-case interpretation and development. 	It is
expected that the court will apply the concept in light of facts of each case and
general equitable principles. It is not intended that the courts will develop a hard
and fast rule that will apply in every case. The time and method of valuation is not
specified precisely, in order to avoid that result.
H.R. Rep. No. 95-595, 95th Cong., 1st Sess., p. 339 (1977). 	Although no date is specified, the
legislative history makes clear that, once a secured creditor’s right to adequate protection arises,
its collateral must be valued as of that date and the debtor must compensate the creditor for any
subsequent decline.
B. 	When Does the Right to Adequate Protection Arise?
The Code does not say when a secured creditor’s right to adequate protection begins. Faced
with this silence, courts have adopted one of three dates: the petition date; the stay relief/adequate
protection motion filing date (“motion date”); and the date a secured creditor could have exercised
its state court remedies.
1. 	The Petition Date. 	A line of cases from the 1980s holds that a secured
creditor’s right to adequate protection begins on the petition date, regardless of when the creditor
takes action to obtain adequate protection or stay relief. See, e.g., Metropolitan Life Ins. v. Monroe
Park, 17 B.R. 934, 939 (D. Del. 1982); In re Datair Systems Corp., 42 B.R. 241, 243 (Bankr. N.D.
Ill. 1984); In re Ritz-Carlton of D.C., Inc., 98 B.R. 170, 173 (S.D.N.Y. 1989); In re Craddock-
Terry Shoe Corp., 98 B.R. 250, 255-56 (Bankr. W.D. Va. 1988); In re Pine Lake Village Apartment
Co., 19 B.R. 819, 825 (Bankr. S.D.N.Y. 1982); In re Autotrain Corp., 9 B.R. 159, 166 (Bankr.
D.D.C. 1981) (citing a 1980 edition of Collier for proposition that the value of a secured claim
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should be established at case commencement);6 In re U.S. Repeating Arms. Co., 67 B.R. 990, 999
(Bankr. D. Conn. 1986) (quoting Autotrain, including the citation to the early version of Collier).
These courts reason that the automatic stay, which arises on the petition date, prevents a
secured creditor from realizing on its collateral and thus, for declining-value collateral, causes a
“decrease in the value of such entity’s interest in such property.” See, e.g., Craddock-Terry Shoe,
98 B.R. at 255. The courts therefore conclude that the petition date is the proper date to value a
secured creditor’s collateral. The Craddock-Terry Shoe court also was concerned that denying the
right to adequate protection until secured creditors take action would result in a “rush to the
courthouse” at the outset of a bankruptcy case, when debtors expect a “breathing space.” Id.
2. 	Motion Date. The majority view and the pronounced trend in the case law
is that a creditor’s right to adequate protection begins on the motion date. 	See, e.g., TranSouth
Financial Corp v. Sharon (In re Sharon), 234 B.R. 676, 684 (6th Cir. BAP 1999); In re Big3D,
Inc., 438 B.R. 214, 232-33 (9th Cir. BAP 2010) (in a concurring opinion, Chief Judge Pappas
stated “over time, there has been a pronounced shift away from the rule announced in the early
cases that emphasized the date of filing the bankruptcy petition as the starting point for payments.
Clearly, the bulk of the cases decided since about 1990 favor beginning adequate protection
payment at the time relief is requested by the creditor.”); In re Best Prods. Co., Inc., 138 B.R. 155,
157 (Bankr. S.D.N.Y. 1992); In re Roberts, 63 B.R. 372, 381 (Bankr. E.D. Mich. 1986); In re 300
Washington Street LLC, 528 B.R. 534, 552 n. 10 (Bankr. E.D.N.Y. 2015) (citing and following
Best Products); In re Continental Airlines, Inc., 146 B.R. 536, 539-40 (Bankr. D. Del. 1992)
6 The current Collier acknowledges the split in the case law but states “[i]n general, however,
because the burden is on the secured party to request protection, a valuation at the time protection
is sought will often be most consistent with the Code scheme.” 	3 Collier on Bankruptcy ¶
362.07[3][b][vi] (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
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(same); In re Waverly Textile Processing, Inc., 214 B.R. 476, 479 (Bankr. E.D. Va. 1997); In re
Farmer, 257 B.R. 556, 561 (Bankr. D. Mont. 2000); Agency Servs. v. Keck, 1999 WL 199595, *2
(N.D. Ill.); In re Walter, 199 B.R. 390 (Bankr. C.D. Ill. 1996); In re Cason, 190 B.R. 917 (Bankr.
N.D. Ala. 1995); In re Barrett, 149 B.R. 494 (Bankr. N.D. Ohio 1993).
These cases point to the language in §§ 362(d) and 363(e) that place the burden on creditors
to take protective action. 	See, e.g., Best Products, 138 B.R. at 158 (citing cases holding that
Congress put the burden on secured creditors to obtain adequate protection). They also argue that
the secured creditor should face the risk of decline, as it is “best able to anticipate the problem and
protect its rights.” See In re Adams, 2 B.R. 313, 314 (Bankr. M.D. Fla. 1980) (secured creditor
should not be allowed to sit back and through inaction compel unsecured creditors to pay for any
deficiency that may arise). 	Finally, some courts adopt a waiver theory, i.e., that while secured
creditors may be entitled to adequate protection from the petition date, they waive their right to
any protection until they file a stay relief/adequate protection motion. See In re Vista Marketing
Group, Ltd., 548 B.R. 502, 522 (Bankr. N.D. Ill. 2016) (“If a secured creditor … fails to… request
adequate protection, they risk waiving their right to such protection.”); In re T.A. Brinkoetter &
Sons, Inc., 2012 WL 1865485 (Bankr. C.D. Ill.) (waiver is implicit in the cases holding that a
secured creditor’s right to adequate protection does not arise until it files a motion).
3. 	State Law Remedies Date. 	Finally, a few cases hold that adequate
protection payments should not be awarded until the later of the motion date or the date the creditor
could have, absent the automatic stay, exercised its state law remedies. The leading case for this
proposition is In re Ahlers, 794 F.2d 388 (8th Cir. 1986), rev’d on other grounds, 485 U.S. 197
(1988). In Ahlers the Eighth Circuit stated:
Accordingly, in fashioning adequate protection payments, the bankruptcy court
must determine the date when the creditor, absent the filing of a bankruptcy
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petition, could have taken possession of the collateral under state law and could
have sold it to a third party, the amount that the creditor would have realized at this
sale, and the creditor’s expected return upon investment.
. . . .
If . . . . the secured creditor has not commenced foreclosure proceedings prior to
the filing of the bankruptcy petition, the start date [for adequate protection
payments] should be the date that the creditor moves for adequate protection in the
bankruptcy court. 	To the appropriate date, the bankruptcy court should add the
usual foreclosure delays associated with the particular collateral involved.
794 F.2d at 395-96. See also In re Deico Electronics, Inc., 139 B.R. 945, 947 (9th Cir. BAP 1992)
(adequate protection analysis requires the court to first determine when the creditor would have
obtained its state law remedies had bankruptcy not intervened, and determine the value of the
collateral as of that date); In re Dupell, 235 B.R. 783, 789 (Bankr. E.D. Pa. 1999); In re Glinz, 69
B.R. 916, 920 (Bankr. D.N.D. 1987).
4. 	The Court Adopts the Motion Date. 	The Court holds that, in most cases,
the motion date is the date a secured creditor’s right to adequate protection arises. There are good
arguments for using the petition date or the state law remedies date, but the Court concludes that
the motion date is better for a number of reasons.
First, the motion date is consistent with the language in §§ 362 and 363, which place the
burden of action on the secured creditor. See 3 Collier on Bankruptcy ¶ 361.02[3] (“The text of
the Bankruptcy Code seems to support the view that protection is provided only from the date of
the request.”); Id. at ¶ 362.07[3][b][vi] (“[B]ecause the burden is on the secured party to request
protection, a valuation at the time protection is sought will often be most consistent with the Code
scheme.”); Best Products, 138 B.R. at 157 (“Section 363(e) provides that “on request” the court
“shall prohibit or condition” the use, sale or lease of the collateral as is necessary to provide
adequate protection. 	These phrases suggest that a secured creditor is entitled to adequate
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protection only upon motion and only prospectively from the time such protection is sought”); In
re Waverly Textile Processing, Inc., 214 B.R. 476, 479 (Bankr. E.D. Va. 1997) (“[T]he language
‘on request’ in § 363(e) strongly suggests that a secured creditor is entitled to adequate protection
only upon a motion and prospectively from the time protection is sought.”); In re Sharon, 234 B.R.
676, 684 (6th Cir. BAP 1999) (“Entitlement to adequate protection… with respect to all property
of the estate other than cash collateral is triggered by a creditors’ request to the bankruptcy court.”);
In re Robinson, 225 B.R. 228, 233 (Bankr. N.D. Okla. 1998).
Second, requiring creditors to request relief serves an important function of giving a debtor
notice that they must choose to either keep the property and pay adequate protection, or surrender
the property. In re Best Products, 138 B.R. at 158.
Third, using the motion date protects the debtor and unsecured creditors. 	Imposing
retroactive adequate protection would interfere with a debtor’s right to use non-cash collateral
without conditions until a request is made by the secured party. It would be unduly burdensome
on the estate if harsh “retroactive” adequate protection payments were required without prior
notice. Id. at 158; In re Continental Airlines, 146 B.R. 536, 540 (Bankr. D. Del. 1992).
Fourth, using the state court remedies date could involve the court in a difficult fact-finding
to determine when a creditor could have exercised its state court remedies and realized on its
collateral. For example, the Court might have to take evidence on how quickly a particular state
court might hear a matter, the average time to complete a foreclosure, and similar facts that are
hard to find with accuracy and vary from judge to judge and district to district.
Fifth, using the state court remedies date forces the creditor to risk waiting twice the time
it should. 	For example, if a court were to find that it would take a secured creditor six months
from the motion date to realize on its collateral, it would allow a debtor six months before starting
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adequate protection payments. 	But what if the debtor did not make any payments after the six
month delay? The creditor then would have to obtain stay relief and begin to exercise its state law
remedies. The result would be a 12-month delay, double what it should be. See In re Roberts, 63
B.R 372, 381 (Bankr. E.D. Mich. 1986) (criticizing the state court remedies date for this reason
and illustrating the problem with a hypothetical like the one above).
Fixing the beginning of the adequate protection period to the motion date is simple,
practical, consistent with the Code, and fair to both sides. The Court therefore holds that, absent
unusual circumstances, when ruling on §§361, 362, and/or 363 adequate protection issues the
Court will use the motion date as the first date on which a secured party’s right to adequate
protection may arise.
C. 	JS Ward is Entitled to Adequate Protection Payments Accruing On February 24,
2016.
There are no unusual circumstances in this case. The Court therefore holds that JS Ward’s
right to adequate protection began to accrue on February 24, 2016, when it filed the Motion.
III. 	CONCLUSION
JS Ward is entitled to adequate protection payments of $571.66 per day7 beginning on
February 24, 2016.
A separate order awarding adequate protection will be entered.
______________________________
Honorable David T. Thuma
United States Bankruptcy Judge
7 The collateral (the unearned insurance premium) apparently is declining in value by $571.66 per
day, as set forth in the Court’s Order Granting Adequate Protection Payments to J.S. Ward & Son,
entered April 14, 2016, doc. 91.
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Entered: June 15, 2016
Copies to:
Nancy Cusack
P.O. Box 2068
Santa Fe, NM 87504
William Davis
6709 Academy Rd. NE, Ste. A
Albuquerque, NM 87109
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