On Aug. 24, 2012, Judge Robert Jones for the U.S. Bankruptcy Court for the Northern District of Texas held in In re Geijsel1 that adequate protection payments paid out of a debtor’s cash collateral must be applied against a secured creditor’s principal amount and thus not reduce that creditor’s secured claim if such payments are deemed unnecessary. The Geijsel decision is significant because, in endorsing the “addition view,” the court held that an undersecured creditor can be elevated to oversecured status through the use of cash collateral to make adequate protection payments. The decision, while encouraging for secured creditors, could significantly inhibit a debtor’s ability to satisfy its other creditors’ claims because it provides secured creditors with an entitlement to post-petition interest and fees when they would otherwise be ineligible.
Statutory Background
Although the Bankruptcy Code affords debtors with breathing room to restructure their businesses during a bankruptcy case, there are limits to the flexibility afforded by such breathing room. The code also provides a broad array of protections for the interests of secured creditors. Most importantly, the Bankruptcy Code insulates creditors from the diminution in the value of their collateral or from the sale or use of their collateral by requiring a debtor to provide adequate protection. Pursuant to §§362 and 363, a debtor may use, sell, or lease collateral if it provides adequate protection of a secured creditor’s interest, which may be in the form of “cash payment[s] or periodic cash payments.”2
