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In re Craddock-Terry Shoe Corp

    Brief Fact Summary. Lincoln National Life Insurance Company and Westinghouse Credit Corporation, (collectively, “Plaintiffs”), move to lift the automatic stay imposed by section 362(a) of the Bankruptcy Code or provide Plaintiffs adequate protection for certain collateral in which they have a security interest.

    Synopsis of Rule of Law. Equity is the value the amount by which the value of the collateral exceeds the debt it secures. Adequate protection for a secured creditor means that the benefit to be protected is the value obtainable from the most commercially reasonable disposition of the collateral within the context of foreclosure proceedings and protection is to be afforded from the date of the stay petition.

    Facts. Plaintiffs loaned Craddock-Terry Shoe Corp., (Defendant), $9,000,000 retaining a security interest in the mailing list, customer list, catalogues and four trademarks, (collateral). Defendant filed for Chapter 11 bankruptcy. Concerned that the value of their collateral may be seriously declining, Plaintiffs filed their motion to lift the automatic stay. Plaintiffs presented evidence that the collateral had decreased in value from $8.7 million to $5.7 million.
    Defendant presented evidence showing that the fair market value of the collateral had been $700.000 at the date the petition had been filed and $300,000 at the date of the hearing. Defendant showed that the intrinsic value of the collateral had not been irreparably harmed. Defendant showed that by selling the bulk of the company’s assets, the company would revitalize the collateral as well as the company.
    Defendant claims that the collateral is necessary to achieve effective reorganization. Defendant offers replacement liens in all its remaining assets, which are worth in excess of $2 million not including $7 million in accounts receivable.

    Issue.
    Whether the automatic stay should be lifted because Defendant does not have equity in the property and such property is not necessary to an effective reorganization.

    Whether Plaintiffs are entitled to relief under section 362(d)(1) because Defendant cannot provide adequate protection for their interest in the collateral.

    Held.
    No. The automatic stay should not be lifted because although Defendant does not have equity in the property, such property is necessary to an effective reorganization.

    No. Plaintiffs are not entitled to relief under section 362(d)(1) because Defendant can provide adequate protection for their interest in the collateral.


    Discussion.
    Here, both parties value the collateral below the debt it secures. Therefore Defendant holds no equity in the collateral. Each party agrees that if the debtor can possibly reorganize, this collateral is essential to survival. There is no basis for a conclusion that this reorganization is no longer in prospect. Therefore the court finds that the automatic stay will not be lifted due to section 362(d)(1).

    Plaintiffs are not entitled to relief under section 362(d)(1) because Defendant can provide adequate protection for their interest in the collateral. The benefit to be protected is the value obtainable from the most commercially reasonable disposition of the collateral within the context of foreclosure proceedings. In this case the collateral’s worth is basically as an intangible. The value is far greater to Defendant than anyone else. Defendant demonstrated that the fair market value. Plaintiffs should be protected from the decrease in value of the property resulting from the stay in its entirety and therefore form the date of the petition. This will prevent creditors from rushing to the courthouse as soon as they learn of a debtor’s petition in order to ensure they obtain adequate protection from as early a date as possible. Here, that value is $700,000. The stay will remain in effect and the court orders Defendant to perfect a valid security interest in its remaining assets in wh
    ich the estate has an aggregate equity of no less than this amount.


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