The Supreme Court ruled unanimously yesterday that creditors barred by bankruptcy law from seizing a debtor's property have no right to be reimbursed while being deprived of that collateral.
The ruling in a Texas case especially hurts so-called "secured creditors" who loan money on the guarantee they will take possession of something owned by the debtor if a default occurs.
When a debtor seeks protection of assets under federal bankruptcy law, seizure of that property is delayed. Yesterday's ruling means creditors generally are not entitled to periodic cash payments or any other kind of relief during the delay.
The ruling is a defeat for the United Savings Association of Texas, which in 1982 loaned $4.1 million to a Houston apartment developer, Timbers of Inwood Forest Associates Inc.
An apartment project owned by Timbers served as loan collateral.
Timbers filed for reorganization under federal bankruptcy law in 1985, and an "automatic stay" was issued freezing the transfer of any of Timbers' assets.
United Savings sought to have the stay lifted so it could take possession of the apartment project, contending that its interest in the project was not getting "adequate protection."
The bank said it could have reinvested the $4.3 million Timbers still owed in principal and interest and earn $42,500 a month in interest.
The 5th U.S. Circuit Court of Appeals ruled that the bank is entitled only to the fixed amount of the collateral property, which is increasing slightly in value, and not to the interest the bank loan might produce if invested elsewhere.
Yesterday's decision upheld the appeals court ruling.