IN RE AGRI-RESEARCH PRODUCTION MANAGEMENT CO., (Bankr.D.Wyo. 1994)

PETER McNIFF, United States Bankruptcy Judge.

A "Motion for Approval of Stipulation and Agreement Regarding Adequate Protection Between Debtor and Ford Motor Credit Company" is before the court. An objection to the motion was filed by the United States Trustee. Subsequently the United States Trustee, the debtor in possession, and the Ford Motor Credit Company filed a "Stipulation for Approval of Stipulation and Agreement Regarding Adequate Protection Between Debtor and Ford Motor Credit Company." That stipulation amends the original agreement to remove a provision which binds any subsequently appointed trustee to its terms. Despite the stipulated change to the agreement, and for the reasons stated in this order, approval of the agreement for adequate protection is denied.

The court has reviewed the adequate protection agreement and finds that it contains several provisions which are unacceptable under the Bankruptcy Code. The agreement should be examined in light of several basic principles regarding adequate protection.

Adequate protection, as described by 11 U.S.C. § 361, may be offered or required under certain circumstances. For example, adequate protection may be warranted when the trustee or chapter 11 debtor in possession opposes relief from the automatic stay imposed by section 362. Adequate protection may also be appropriate when, under section 363(e), a debtor in possession intends to use property of the estate. In those and other situations, a secured creditor has a right to be adequately protected from a decrease in the value of its interest in the property until confirmation of a plan of reorganization. United Savings Assoc. of Texas v. Timbers of Inwood Forest, Ltd., 484 U.S. 365, 372-373 (1988).

Most courts have held that the presence of an equity margin, within which post petition interest and costs can continue to accrue, adequately protects a secured creditor. In re Kost, 102 B.R. 829, 831 (D.Wyo. 1989). Whether a secured creditor with a deteriorating equity cushion can demonstrate a lack of adequate protection on that basis alone is a disputed question, especially since the decision in Timbers. In re James River Associates, 148 B.R. 790, 796 (Bankr.E.D.Va. 1992). However, other forms of adequate protection, such as direct payments and replacement liens, are warranted by an actual decline in value of the secured creditor's interest in the property. In re Lane, 108 B.R. 6 (Bankr.D.Mass. 1989).

An undersecured creditor whose collateral is not actually depreciating in value cannot receive adequate protection and cannot receive post petition interest on its debt under the guise of adequate protection. Timbers, 484 U.S. at 372-373; In re Reddington/Sun Arrow Ltd. Partnership, 119 B.R. 809, 813 (Bankr.D.N.M. 1990). And, because of their very nature, adequate protection payments made to a creditor must be applied to the principal amount owed on the claim. In re Jenkins, 99 B.R. 949, 952 (Bankr. W. D. Mo. 1988).

In this case, the debtor in possession is offering adequate protection in the form of cash payments so that it may continue to retain and use certain farm equipment. Those payments may be warranted on some of the equipment. However, application of the foregoing principles to the agreement before the court, leads this court to the inescapable conclusion that this agreement between Agri-Research and Ford Motor Credit cannot be approved as presently filed.

Specifically, approval is denied because:

1. The agreement allows the repossession of one (1) item of collateral, a Ford tractor/loader model 655C, without appropriate notice to all parties in interest;

2. The agreement provides no factual information pertaining to the amounts by which the value of the collateral may be declining, or at what rate. Thus, it is unclear whether adequate protection is even necessary;

3. The parties provide for one (1) quarterly payment which is intended to compensate the creditor for a lack of adequate protection in four (4) pieces of collateral securing two (2) obligations. One (1) of the obligations is undersecured, but in the other the estate has equity. Thus, the amount of the intended payment has no apparent relationship to the actual need, if any, for adequate protection;

4. The parties have not agreed to apply all adequate protection payments to the principal amount of the obligations; and

5. The court will not approve an agreement which binds the debtor to a specific treatment of this creditor under a plan of reorganization, a provision which may be imprudent in light of changed circumstances at the time of confirmation, or which may adversely affect the interests of other creditors in the case.

Finally, and more generally, the court will not approve an adequate protection agreement which is in reality an attempt to cure a default under the terms of the loan agreements, which purports to bind any subsequently appointed trustee, which allows repossession of the collateral on default without notice and hearing on a motion to modify the automatic stay, or which provides so called adequate protection payments for a period following confirmation of a plan or conversion of the case to another chapter.

For the foregoing reasons, approval of the agreement presently before the court is denied.