The general rule in bankruptcy is that administrative expenses, generally defined as the necessary costs and expenses of preserving property of the estate, are paid from the debtor's bankruptcy estate.However, Section 506(c) of the Bankruptcy Code provides an exception to this general rule, stating that[t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property. Under this section, a party may charge a secured creditor with the administrative expenses associated with the secured creditor's collateral if three elements are satisfied:The expenditures were necessary;The amounts expended were reasonable; andThe secured creditor benefited from the expenses. According to the U.S. Bankruptcy Court for the Southern District of Florida's 2006 ruling in In re: Hughes, this is typically allowed "when [fees and expenses are] incurred primarily for the benefit of the secured creditor or when the secured creditor has caused or consented to the expense." The U.S. Court of Appeals for the Fifth Circui

ution in the value of their collateral after the petition date and before the bankruptcy court approved a sale of the debtors' business as a going concern. In ESL Investments, Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53 (2d Cir. 2022), the Second Circuit held that, given the uncertainty surrounding the retail debtors' fate at the time they filed for bankruptcy, the bankruptcy court did not err in valuing inventory collateral at its "net orderly liquidation value," rather than book value, going-out-of-business sale value, or forced liquidation value. The Second Circuit also found no fault with the bankruptcy court's decision to value non-borrowing base inventory at zero and to ascribe full face value to undrawn letters of credit where, among other things, the junior lenders failed to meet their evidentiary burden of suggesting a reasonable alternative.Valuation of Collateral in BankruptcyWhether a claim is secured or unsecured is determined in accordance with section 506(a) of the Bankruptcy Code. Section 506(a)(1) provides that a secured creditor's claim is "a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property … and is an unsecured claim to the extent that the value of such creditor's interest … is less than the amount of such allowed claim." The provision goes on to mandate that "[s]uch value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property."The extent to which a claim is secured, therefore, turns on the valuation of the collateral. Section 506(a) is silent, however, as to the specific valuation method that a court should employ. As noted by the U.S. Court of Appeals for the Third Circuit in In re Heritage Highgate, Inc., 679 F.3d 132 (3d Cir. 2012), the legislative history of section 506(a) suggests that Congress's silence on this point was intentional, to enable bankruptcy courts to "choose the standard that best fits the circumstances of a particu

The Bankruptcy Code contemplates the valuation of a secured creditor’s collateral for a variety of purposes at different stages of a bankruptcy case. While title 11 of the United States Code (the “Bankruptcy Code”) does not define “value” or determine precisely when to value a secured creditor’s collateral, section 506(a) of the Bankruptcy Code provides some guidance: “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”Indeed, the notion that value of a debtor’s interest in property becomes fixed at any given time including on the date that the bankruptcy case is filed is too narrow of a reading of the Bankruptcy Code. As section 506(a) provides, bankruptcy courts must look to the purpose the valuation and the proposed disposition or use of the property to be valued.

An oversecured creditor can recover default interest where the sole default trigger was the borrower’s bankruptcy filing after considering all relevant equitable considerations.TAKEAWAYSWhile Bankruptcy Code section 506(b) expressly authorizes oversecured lenders to recover postpetition interest, it is silent about the applicable rate and the significance, if any, of debtor solvency.Because section 506(b) did not change law existing when the Bankruptcy Code was enacted in 1978, courts look to pre-Code law for guidance, including Supreme Court authority barring lenders of insolvent debtors from recovering postpetition interest at the contract default rate even if the lenders are oversecured.Despite Supreme Court precedent and other persuasive authorities arguably to the contrary, oversecured lenders to insolvent debtors may recover postpetition interest at the default rate (even where the sole trigger for the default rate is the bankruptcy filing), if the spread between the default and non-default rate is not punitive or inequitable and the lender has not acted in bad faith.Whether and on what terms postpetition interest can be collected is a heavily debated and hot topic. The term “postpetition interest

Comcast advocated for the effective date of the Plan to be the valuation date, while the Teams argued for the petition date, relying upon In re Stembridge, 394 F.3d 383 (5th Cir. 2004). Under 11 U.S.C. § 506(a)(1), the value of a secured claim “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” Here, the sale transaction was being implemented through the Plan.

The debtor moved to void the second mortgage under § 506 of the Bankrupcty Code, which provides, “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 U.S.C. § 506(d). The U.S. Bankruptcy Court for the Middle District of Florida allowed the debtor to “strip off” (or void) the second mortgage.

Under Section 506(a), “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” 11 U.S.C. § 506(a)(1). Under Section 506(d), “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”

If Congress, in enacting the Bankruptcy Code, had wanted to disallow claims for post-petition attorneys' fees, the logical place for it to have done so was surely in 11 U.S.C. § 502(b) [‘Allowance of claims or interests']. Moreover, 11 U.S.C. § 506(b) does not distinguish between pre-petition and post-petition attorneys' fees. Thus, if 11 U.S.C. § 506(b) is read as an additional ground for objecting to claims, arguably, an unsecured creditor would be prohibited from including its pre-petition attorneys' fees in its claim as well as its postpetition fees.

First Southern commenced foreclosure proceedings, which were stayed before completion by the commencement of Sunnyslope’s Chapter 11 case. During the case, Sunnyslope proposed a cramdown plan where it would retain the complex and provide that First Southern’s debt would be treated as secured “to the extent of the value of such creditor's interest” in the collateral, in accordance with 11 U.S.C. § 506(a)(1). This led to a dispute as to how to value First Southern’s collateral (the apartment complex).

79 paid to the secured creditor.2 Because the payment did not fully satisfy the secured creditor’s claim for post-petition interest, costs and fees, the secured creditor filed a motion in the bankruptcy court requesting a superpriority administrative expense pursuant to 11 U.S.C. § 507(b) and alternatively, a motion to recover post-petition interest, costs and fees pursuant to 11 U.S.C. § 506(b). Court Rulings The bankruptcy court denied both motions.