## Facts

- A bank loaned the debtors $1,000,000 at 10.463% interest, secured by a first deed of trust on the debtors’ Santa Monica condominium residence.
- The debtors defaulted on monthly payments and later filed a Chapter 11 petition.
- The bankruptcy court denied stay relief and ordered “adequate protection” payments of $7,000 per month; the debtors paid $98,000 total before plan confirmation.
- After an evidentiary hearing, the court valued the collateral at $850,000 as of the petition period; the bank’s total claim was $1,012,700.71.
- The bank made a § 1111(b)(2) election to have its claim treated as fully secured for plan purposes.
- At confirmation, the court found the collateral value did not decline between petition and confirmation and credited the $98,000 payments against the $850,000 allowed secured claim, reducing it to $752,000.
- The residence was also used as the debtors’ business office and was found necessary for an effective reorganization.

## Issues

1. Whether the bankruptcy court properly applied the creditor’s § 1111(b)(2) election in confirming the Chapter 11 plan.
2. Whether the court erred by crediting postpetition, preconfirmation adequate protection payments to reduce the allowed secured claim rather than reducing any deficiency component.

## Decision

- The Bankruptcy Appellate Panel affirmed the confirmation order.
- The court held the § 1111(b)(2) election was properly applied and did not alter the collateral-valuation framework used to determine the allowed secured claim.
- The court held the $98,000 in adequate protection payments were properly credited to reduce the allowed secured claim from $850,000 to $752,000 where the collateral did not depreciate.

## Legal Principles

- Under § 506(a), an undersecured creditor’s secured claim is limited to the value of the collateral, with any balance treated as unsecured absent a contrary statutory treatment.
- A § 1111(b)(2) election affects plan treatment by requiring the claim to be treated as fully secured for purposes of plan payments, but it does not change the collateral’s valuation or the secured-claim ceiling tied to that value.
- Adequate protection under § 361 is intended to protect against diminution in the value of the secured creditor’s collateral interest during the case.
- When collateral value does not decline during the postpetition, preconfirmation period, adequate protection payments may be credited against (and thus reduce) the allowed secured claim tied to the collateral’s value.

## Conclusion

The appellate panel upheld confirmation of the Chapter 11 plan, holding that a creditor’s § 1111(b)(2) election did not prevent the bankruptcy court from applying adequate protection payments to reduce the allowed secured claim where the collateral’s value remained unchanged through confirmation.


First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284 (B.A.P. 9th Cir. 1998)