## Facts

- William S. Callister and Gloria K. Callister filed a Chapter 11 case for a trucking business and later converted to Chapter 7.
- Ingersoll-Rand Financial Corporation held a security interest in three tractors and two trailers used in the business.
- The secured debt was stipulated at $106,248, and the collateral value was stipulated at $129,000.
- After the secured creditor sought relief from the automatic stay, the parties stipulated to an adequate-protection arrangement: monthly payments of $1,232 beginning February 1, 1981, and maintenance of required “all-risk” insurance on the equipment.
- The debtor made only two payments, defaulted as of May 1, 1981, and the stay was lifted on June 5, 1981.
- During the case, collateral value fell due to depreciation, market decline, equipment being out of service, and the destruction by fire of a tractor that was not properly insured.
- After conversion, estate professionals sought payment of administrative fees; the secured creditor objected, asserting a § 507(b) superpriority claim based on the shortfall between its secured claim and the diminished collateral value.

## Issues

1. Whether a secured creditor is entitled to a superpriority administrative claim under 11 U.S.C. § 507(b) when previously ordered adequate protection proves insufficient and the creditor suffers a collateral-value shortfall.
2. Whether, and to what extent, the shortfall must be shown to be caused by continuation of the stay or estate use of collateral rather than by other risks (e.g., casualty loss, market decline) and creditor conduct.
3. Whether a § 507(b) superpriority claim should displace other administrative expenses, including professional compensation, without equitable limitation.

## Decision

- The court held that § 507(b) can grant a secured creditor a superpriority administrative claim when court-approved adequate protection under §§ 361, 362, or 363 later proves inadequate and the creditor suffers an actual diminution in the value of its interest in the collateral.
- The court limited any § 507(b) superpriority to the portion of the loss the creditor proved and that was fairly attributable to the stay or court-authorized use of the collateral.
- The court required consideration of causation, creditor conduct, and equitable distribution concerns; § 507(b) was not applied as an automatic mechanism to eliminate payment of other administrative claims.
- Applying these limits, the court recognized a superpriority claim in principle but constrained its scope so that reasonable administrative compensation could still be paid.

## Legal Principles

- A § 507(b) superpriority arises only after (1) adequate protection has been provided under §§ 361, 362, or 363, (2) that protection later proves inadequate, and (3) the creditor establishes an actual loss in value of its collateral interest.
- The creditor bears the burden to show the amount of diminution and that the loss is causally linked to the stay or the estate’s use, sale, or lease of the collateral.
- § 507(b) does not shift every adverse economic event to the estate; losses stemming from non-bankruptcy risks, or from the creditor’s failure to enforce or monitor contractual protections (such as insurance requirements), may limit recovery.
- Even though § 507(b) uses mandatory priority language, bankruptcy courts may limit superpriority claims based on causation and equitable allocation to avoid distorting the administrative priority scheme.

## Conclusion

The court interpreted § 507(b) to protect secured creditors when judicially approved adequate protection fails, but confined superpriority to proven, bankruptcy-caused declines in collateral value and applied equitable limits to prevent a secured creditor’s shortfall from automatically consuming all administrative funds.


In re Callister, 15 B.R. 521 (Bankr. D. Utah 1981)