## Facts

- Secured creditors loaned Craddock-Terry Shoe Corporation about $9 million, secured by Hill Brothers division intangibles, including customer mailing lists, catalogs, and trademarks.
- The debtor filed Chapter 11 owing the secured creditors about $9.6 million.
- Creditors asserted the collateral, especially the mailing list, was declining in value during the case and sought relief from the automatic stay or, alternatively, adequate protection.
- The parties offered conflicting valuations: creditors’ expert valued the collateral in the millions with a large postpetition decline; the debtor’s expert valued it under $1 million with a smaller decline.
- The debtor was selling other assets and using proceeds to rehabilitate the Hill Brothers business, contending the collateral was essential to a feasible reorganization.
- The debtor offered replacement liens in remaining assets (stated to exceed $2 million) and in approximately $7 million of accounts receivable.

## Issues

1. Whether relief from the automatic stay was required under 11 U.S.C. § 362(d)(2) because the debtor lacked equity in the collateral and the collateral was not necessary to an effective reorganization.
2. Whether relief from the automatic stay was required under 11 U.S.C. § 362(d)(1) “for cause” based on an alleged lack of adequate protection against postpetition decline in the collateral’s value.

## Decision

- The court denied relief under § 362(d)(2).
- The court found the debtor had no equity in the collateral because all credible valuations placed collateral value below the secured debt.
- The court nonetheless found the collateral necessary to an effective reorganization because it was central to the mail-order business and reorganization remained realistically possible.
- The court denied relief under § 362(d)(1).
- The court held the secured creditors’ interests were adequately protected, relying on the debtor’s offer of replacement liens and additional collateral, and the reorganization efforts directed at preserving value.
- The automatic stay remained in effect.

## Legal Principles

- For § 362(d)(2), “equity” is the amount by which collateral value exceeds the debt it secures; absence of equity alone does not warrant stay relief if the property is necessary to an effective reorganization.
- Under § 362(d)(2), the movant must establish both lack of equity and that the property is not necessary to an effective reorganization.
- Adequate protection protects the value of the secured creditor’s interest in collateral, measured from the time stay protection applies, and is directed to guarding against postpetition depreciation.
- Adequate protection focuses on the value obtainable from a commercially reasonable disposition of the collateral in a foreclosure context, not assurance of payment of the full debt amount.
- Replacement liens and additional collateral can constitute adequate protection sufficient to defeat a stay-relief motion under § 362(d)(1).

## Conclusion

The bankruptcy court refused to lift the automatic stay because, despite the debtor’s lack of equity in the secured intangibles, those assets were essential to a plausible reorganization, and the secured creditors’ interests were adequately protected by replacement liens and additional collateral offered by the debtor.


In re Craddock-Terry Shoe Corp., 98 B.R. 250 (Bankr. W.D. Va. 1988)