## Facts

- On October 17, 1975, American Kitchen Foods, Inc. (AKF) filed a Chapter 11 petition after operating food-processing facilities in Maine.
- AKF’s ongoing operations depended on cash generated by selling inventory and collecting accounts receivable to pay operating expenses.
- Chemical Bank and First Pennsylvania Bank, N.A. (the creditors) held security interests in AKF’s inventory and accounts receivable.
- After the filing, AKF sought a court order authorizing it to continue converting the creditors’ collateral (inventory and receivables) into cash in the ordinary course of business.
- AKF argued the court should value the collateral using a going-concern standard because AKF remained commercially viable and the collateral’s value was forecasted not to decline if operations continued.
- AKF presented evidence that, under normal market conditions, its products could be sold at an average markup of about one-third over cost, producing returns above forced-sale recovery levels.
- The creditors objected and urged a forced-sale (liquidation) valuation approach, contending that under forced-sale values the collateral would be worth less than the amount of their liens, making continued conversion improper absent additional protection.
- The dispute centered on the valuation standard to apply when deciding whether secured creditors were adequately protected while the debtor continued using and converting collateral during reorganization.

## Issues

1. When a Chapter 11 debtor seeks authority to continue selling inventory and collecting receivables that are subject to secured creditors’ liens, should the court value that collateral on a going-concern (ordinary-course) basis rather than a forced-sale basis?
2. Using the appropriate valuation approach, were the secured creditors adequately protected so that AKF could continue converting inventory and receivables into cash to fund operations?

## Decision

- The court used a going-concern valuation approach in evaluating the inventory and accounts receivable in light of AKF’s proposed continued operation.
- Applying that valuation, the court determined the creditors’ interests were adequately protected in the circumstances presented.
- The court authorized AKF to continue converting inventory and accounts receivable into cash in the ordinary course as requested.

## Legal Principles

- Collateral valuation in reorganization is tied to the intended use or disposition of the property; when the debtor proposes continued business operations, valuation may be based on ordinary-course realization rather than hypothetical liquidation proceeds.
- Adequate protection focuses on whether the secured creditor faces a decline in the value of its collateral interest from the debtor’s continued use or conversion of the collateral.
- Evidence that ordinary-course sales are expected to produce materially higher returns than forced-sale recovery, and that collateral value is not expected to drop during continued operations, can support a finding of adequate protection for secured lenders.

## Conclusion

In re American Kitchen Foods, Inc. addressed whether a Chapter 11 debtor could keep operating by converting inventory and receivables (subject to bank liens) into cash. Faced with competing valuation standards, the court valued the collateral on a going-concern basis consistent with continued operations and, on that record, found the secured creditors adequately protected and permitted AKF’s continued cash conversion of the collateral.


In Re American Kitchen Foods, Inc., 1976 Bankr. LEXIS 6 (1976)