The Federal Reserve reports that delinquency rates on agricultural loans are up from .78% in the 3rd Q 2015 to 1.53% in 2nd Q 2017. Likewise, default rates on C&I loans are up from .90% in the 3rd Q 2015 to 1.35% in the 2nd Q 2017. Due to the increase in delinquencies, Equipment Financers are experiencing an uptick in borrower bankruptcy filings. More than ever, lenders with a security interest in equipment (hereinafter referred to as “Equipment Lenders”) need to be cognizant of their rights as secured creditors in bankruptcy and retain counsel to safeguard these rights.
Generally, secured Equipment Lenders will be able to seek relief from the Bankruptcy Stay to recover equipment in a Chapter 7 Bankruptcy Case under 11 U.S.C. § 362(d), or its debt will be reaffirmed. This article will, therefore, focus on rights of an Equipment Lender when its borrower files a Chapter 13, 11 or 12 Bankruptcy Case.
Rights of a Secured Equipment Lender in Chapter 13, 11 and 12 Bankruptcy Cases
Valuation of an Equipment Lender’s Secured Creditor’s Claim
Equipment Lenders are entitled to an allowed secured claim to the extent of the value of their collateral under 11 U.S.C. § 506. The rest of the Equipment Lender’s claim will be treated as an unsecured claim in the bankruptcy case. Replacement value, not liquidated value, is the appropriate basis for valuation of an allowed secured claim according to the U.S. Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997). Replacement value is the price the debtor would pay to replace the collateral in a market available to the debtor.
Treatment of Secured Claims in Chapter 13, 11 and 12 Bankruptcy Cases
Under 11 U.S.C. § 1325(a)(5), 11 U.S.C. § 1129(a)(7) and 11 U.S.C. § 1225(a)(5), an Equipment Lender must either accept the Chapter 13, 11 or 12 Plan, or the Plan must: (i) provide for the secured creditor to retain its lien on the collateral; and (ii) payments to the secured creditor must total the value of the collateral on the petition date, plus an appropriate rate of interest.
Interest paid on a secured claim in bankruptcy is set according to a formula approach of prime plus a risk factor. Till v. SCS Credit Corp., 541 U.S. 465 (2004.). The plan may also provide for surrender of an Equipment Lender’s collateral and treatment of any difference after sale thereof as an unsecured claim.
Both prior to confirmation of a Chapter 13, 11 or Chapter 12 Plan and after confirmation thereof, an Equipment Lender is entitled to adequate protection of its interest in its collateral. Relief from the bankruptcy stay to allow the Equipment Lender to repossess its collateral may be granted under 11 U.S.C. § 362(d) for cause, including lack of adequate protection. The Debtor must make cash payments during the bankruptcy and after confirmation in an amount sufficient to compensate for depreciation of the equipment. 11 U.S.C. § 361(1). Lack of insurance on equipment can also result in lack of adequate protection for an Equipment Lender. In addition to cash payments, adequate protection may be provided by replacement liens, an equity cushion in the collateral, or granting other relief. 11 U.S.C. § 361(2) and (3); 11 U.S.C. § 1205.
In sum, an Equipment Lender is entitled to be paid the value of its collateral, plus interest under a Chapter 13, 12 or 11 plan. It is also entitled both during the bankruptcy case and after confirmation to adequate protection payments sufficient to keep pace with depreciation of its equipment. In order to preserve these rights, however, it is imperative that an Equipment Lender retain bankruptcy counsel to (i) file a proof of claim; (ii) insure that its secured claim is allowed for the full value of its collateral; and (iii) insure that it receives sufficient adequate protection and interest payment under any plan proposed by the debtor in bankruptcy.