17 Apr Equity Cushion Standard for Adequate Protection
Secured creditors of a debtor in bankruptcy are entitled to adequate protection against erosion in their collateral value. Debtors’ attorneys often argue that adequate protection exists by pointing to a so-called “equity cushions.” An equity cushion exists when the debtor has sufficient equity in the collateral to protect against its depreciation and the accrual of interest and charges. What constitutes a sufficient cushion is usually left up to the discretion of the Bankruptcy Court. However, the United States District Court for the District of Rhode Island recently reversed a Bankruptcy Court decision that had determined that a four percent cushion was sufficient. In Bank Rhode Island v. Pawtuxet Valley Prescription & Surgical Center, Inc., 2008 WL 1727580 (D.R.I. 2008) the Court held that a four percent cushion was insufficient as a matter of law. Surveying the case law, the Court stated that it could find no case holding that an equity cushion of less than ten percent was sufficient. This decision provides useful guidance by quantifying a concept usually only dealt with in general terms.
Nicholas Ortiz, Boston Bankruptcy Attorney
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