USCA1 Opinion
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
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No. 95-1623
BAYBANK-MIDDLESEX,
Appellant,
v.
RALAR DISTRIBUTORS, INC., ET AL.,
Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Michael A. Ponsor, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Bownes, Senior Circuit Judge,
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and Stahl, Circuit Judge.
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Charles R. Bennett, Jr., with whom Kevin J. Simard and Riemer &
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Braunstein, were on brief for appellant.
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Christopher W. Parker, with whom Rudolph F. DeFelice, McDermott,
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Will & Emery, Paul R. Salvage, Susan L. Burns, and Bacon & Wilson,
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were on brief for appellees.
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November 7, 1995
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STAHL, Circuit Judge. Following its unsuccessful
STAHL, Circuit Judge.
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intermediate appeal to the district court, Baybank-Middlesex
("Baybank") again challenges the bankruptcy court's
disallowance of its claim for postpetition interest and
attorney fees under its loan agreement with the Chapter 11
debtors, Ralar Distributors, Inc. and its parent corporation
Halmar Distributors, Inc. (collectively "Ralar"). Baybank
recovered in full its loan principal and all accrued
prepetition interest; only postpetition interest and fees are
now at issue. Notwithstanding the fact that Baybank
ultimately recovered its prepetition claim in full, the
bankruptcy court found that Baybank had been undersecured and
thus was not entitled to postpetition fees and interest; in
so ruling, the court relied on its finding at a hearing held
shortly after the commencement of the case that Baybank was
"under water."
The bankruptcy court also rejected Baybank's argument that
Ralar's failure to adequately protect Baybank's collateral
entitled Baybank to a "superpriority" administrative expense
claim for the postpetition interest and fees. The district
court affirmed, and we now affirm the district court.
I.
I.
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BACKGROUND
BACKGROUND
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On October 16, 1989, Ralar, a wholesale distributor
of household and hardware items, filed a voluntary petition
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for relief under Chapter 11 of the Bankruptcy Code. At that
time, Ralar owed Baybank approximately $10 million, secured
by all of Ralar's assets.
Shortly after the Chapter 11 filing, Ralar (as
debtor in possession) and Baybank reached an impasse in
negotiations concerning Ralar's use of cash collateral and
inventory during the pendency of the Chapter 11 proceeding.
Baybank ultimately refused to extend further credit to Ralar
or to allow Ralar to use Baybank's collateral, prompting
Ralar to move for a bankruptcy court order allowing it to use
the collateral. Over the next four months, the bankruptcy
court held a series of "cash collateral hearings," at which
Baybank objected to the continued use of its collateral and
sought immediate foreclosure. At the first hearing, Baybank
and Ralar reached a stipulation allowing Ralar to use cash
collateral. At three subsequent hearings, the bankruptcy
court issued orders allowing Ralar to continue its operations
using the collateral despite Baybank's objection, finding
that Baybank's interests were adequately protected because
Ralar's continued sales of inventory to its customers would
yield a higher net return than Baybank could realize if it
foreclosed. At the second cash collateral hearing, the
bankruptcy court found that Baybank was "under water"
(undersecured), but that Ralar's operating plan was not
likely to put Baybank further under water.
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After four months of operation under bankruptcy
court orders allowing Ralar to use the collateral, the court
ultimately found that Ralar's plan of inventory reduction was
no longer protecting Baybank's interests. Thus, in March
1990 it granted Baybank relief from the automatic stay,
permitting Baybank to foreclose on Ralar's assets.
Payments Ralar made to Baybank during its
postpetition operations combined with the proceeds of the
foreclosure were sufficient to repay all of Baybank's loan
principal, all accrued prepetition interest, and an
unspecified amount of postpetition interest. Subsequent to
the foreclosure, Baybank filed a proof of claim for $2.2
million, comprised entirely of Baybank's unsecured
postpetition interest, attorney fees, and collection costs,
which Ralar was obligated to pay Baybank under the
preexisting loan agreement. Because Baybank already had
liquidated all of Ralar's assets, this claim was unsecured.
However, Baybank sought to recover the postpetition interest
and fees as a so-called "superpriority" administrative
expense claim under 11 U.S.C. 507(b), arguing that if its
collateral had been adequately protected, the foreclosure
proceeds would have been sufficient to cover the claimed
postpetition interest and fees.
The bankruptcy court disallowed the claim in its
entirety, ruling that (1) Baybank was an undersecured
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creditor and therefore was not entitled to recover
postpetition interest and fees under 11 U.S.C. 506(c), (2)
Baybank failed to demonstrate a failure of adequate
protection, and (3) Baybank was not entitled to a
superpriority claim under 11 U.S.C. 507(b) even if Ralar
had failed to provide adequate protection of Baybank's
interest in the collateral. The district court affirmed the
bankruptcy court's factual finding that Baybank was
undersecured and found as a matter of law that Baybank was
not entitled to postpetition interest and fees nor to a
superpriority claim for failure of adequate protection.
II.
II.
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DISCUSSION
DISCUSSION
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A. Standard of Review
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We review challenged rulings of law by the
bankruptcy court and the district court de novo, while
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contested findings of fact by the bankruptcy court are
reviewed only for clear error. See Western Auto Supply Co.
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v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d
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714, 719-20 n.8 (1st Cir. 1994). We are free to affirm a
district court's ruling on any ground supported in the record
even if the issue was not pleaded, tried, or otherwise
referred to in the proceedings below. Levy v. Federal
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Deposit Ins. Corp., 7 F.3d 1054, 1056 (1st Cir. 1993).
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B. Postpetition Interest and Fees
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Baybank sought postpetition interest, attorney
fees, and collection costs that it claimed it was entitled to
charge Ralar under the terms of the loan agreement. Under
the Bankruptcy Code, only "oversecured" creditors are
entitled to receive postpetition interest and loan-related
fees and costs. 11 U.S.C. 506(b);1 United Sav. Ass'n of
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Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S.
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365, 372 (1988). A creditor is oversecured when the value of
its collateral exceeds the amount of its claim; postpetition
interest and fees are allowable only to the extent of that
oversecurity. See Timbers of Inwood Forest, 484 U.S. at 372.
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At the second cash collateral hearing, the
bankruptcy judge made these factual findings:
It seems clear, at least I certainly
find, that a liquidation of this
inventory at this point, if the bank, as
sought, were permitted to foreclosure
[sic], that a liquidation only through
bulk sales would produce a disaster for
all, and certainly for the bank . . . .
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1. 11 U.S.C. 506(b) provides in relevant part:
To the extent that an allowed secured
claim is secured by property the value of
which . . . is greater than the amount of
such claim, there shall be allowed to the
holder of such claim, interest on such
claim, and any reasonable fees, costs, or
charges provided for under the agreement
under which such claim arose.
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Both secured parties,2 I find, are
now under water. The question is, the
debtor's proposal, is it likely to put
them further under water. And I find
that it is not likely, it is not likely
that the debtor's proposal will put the
secured parties further under water.3
"Under water" in the context of security interests means
undersecured, i.e., the value of the collateral is less than
the amount of the debt. Webster's Third New International
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Dictionary 2491 (1986). Thus, at a fully litigated, two-day
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evidentiary hearing held just two weeks after the
commencement of bankruptcy, the bankruptcy judge found in no
uncertain terms that Baybank was an undersecured creditor.4
Baybank argues that the bankruptcy judge's finding
that Baybank was undersecured was obiter dictum, not a
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factual finding, and that the courts below erred in using
that dictum to disallow its claim for postpetition interest
and fees. We disagree. The bankruptcy judge stated clearly
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2. There was another secured creditor, junior to Baybank,
also seeking relief from the stay because of lack of adequate
protection; only Baybank is a party to this appeal.
3. Because much of Ralar's inventory was seasonal, the
bankruptcy judge determined that a forced liquidation by
Baybank would yield less than Ralar's plan to continue sales
and use the proceeds to purchase new in-season inventory. We
assume that the judge's prediction proved to be correct; that
would explain why Baybank recovered all its principal and
prepetition interest in spite of the judge's finding that,
based on liquidation value, Baybank was "under water."
4. There has been no suggestion, nor is it plausible on this
record, that Baybank was oversecured at the time of filing
but that the collateral value eroded substantially in the two
weeks between filing and the November 1 hearing.
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that he was making a finding, and there was good reason to
make that finding in that context.
At the hearing where the bankruptcy judge found
that Baybank was "under water," the precise issue to be
decided was whether Baybank was adequately protected against
erosion in collateral value, as required by 11 U.S.C.
363(e). The parties presented evidence on the effect
Ralar's use of cash collateral would likely have on the value
of Baybank's collateral. In making the adequate protection
determination, it was entirely logical for the judge to
consider the value of the collateral relative to the amount
of the debt owed Baybank. Indeed, we think it would be odd
not to determine collateral value in an adequate protection
hearing. A sufficient equity cushion is itself a recognized
form of adequate protection, thus collateral valuation is a
logical step in making an adequate protection determination.
See, e.g., First Agric. Bank v. Jug End in the Berkshires, 46
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B.R. 892, 899 (Bankr. D. Mass. 1985) ("The classic protection
for a secured debt justifying continuation of the stay is the
existence of an `equity cushion.'"). We conclude that the
bankruptcy judge's finding that Baybank was undersecured was
not dictum, but a factual finding made as part of an adequate
protection determination. Baybank has not shown that finding
to be clearly erroneous.
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Baybank also makes this related argument: a
finding that a creditor is adequately protected, made at a
hearing early in a Chapter 11 case, cannot be binding at a
later hearing to determine whether that protection ultimately
proved inadequate. If such a finding were binding, the
argument goes, then a court that once found protection to be
adequate could never later find that the protection had
failed, and section 507(b), which provides a "superpriority"
claim where adequate protection fails, would be rendered a
nullity. We agree with that argument, as far as it goes, but
it falls short in this appeal. We find that Baybank's appeal
is foreclosed by the bankruptcy court's finding at the cash
collateral hearing that Baybank was undersecured, not its
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finding that Baybank was adequately protected. We need not
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determine whether there was a failure of adequate protection
because (1) Baybank, as an undersecured creditor, is not
entitled to postpetition interest and fees under 506(b)5
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5. Baybank might have argued, but did not, that even a valid
finding as to collateral value made at an adequate protection
hearing has no res judicata effect when valuations are to be
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made for other purposes at later proceedings. See, e.g., In
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re Richardson, 97 B.R. 161, 162 (Bankr. W.D.N.Y. 1989)
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(valuation of creditor's collateral made for one purpose is
not res judicata as to later valuation in same bankruptcy
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case for different purposes). Instead, Baybank avoided the
res judicata issue by arguing that "The issue before this
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Court is not the value of Baybank's collateral. The material
issue is whether or not the Bankruptcy Court's adequate
protection order failed. . . . Thus, the valuation issue is
not material to this appeal." We will not consider
potentially applicable arguments that are not squarely
presented in a party's appellate brief. See, e.g., United
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and (2) Ralar's use of the collateral caused no harm or loss
to Baybank that could give rise to a claim under 507(b), as
we explain further below.
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States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (appellate
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arguments not presented "squarely and distinctly" are deemed
waived).
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C. Baybank's Claim for Failure of Adequate Protection
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Baybank asserts that Ralar's use of the collateral
eroded its value, constituting an allowable claim entitled to
superpriority under 11 U.S.C. 507(b).6 The basis for
Baybank's claim is that it "suffered a loss" due to Ralar's
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use of the collateral; most of its brief focuses, however,
not on the nature or extent of that claimed loss, but on how
such a loss can become an allowable superpriority claim under
507(b). Baybank has failed to present a plausible argument
on the threshold issue of whether in fact it suffered a loss,
given that it recovered its prepetition claim in full.
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6. 11 U.S.C. 507(b) provides:
If the trustee, under section 362, 363,
or 364 of this title, provides adequate
protection of the interest of a holder of
a claim secured by a lien on property of
the debtor and if, notwithstanding such
protection, such creditor has a claim
allowable under subsection (a)(1) of this
section arising from the stay of action
against such property under section 362
of this title, from the use, sale, or
lease of such property under section 363
of this title, or from the granting of a
lien under section 364(d) of this title,
then such creditor's claim under such
subsection shall have priority over every
other claim under such subsection.
A "claim allowable under subsection (a)(1) of this section"
is, by further cross-reference, an "administrative expense[]
allowed under section 503(b)." See 11 U.S.C. 507(a)(1).
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The relevant part of 503(b) allows as administrative
expenses "the actual, necessary costs and expenses of
preserving the estate." See 11 U.S.C. 503(b).
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The logical structure of Baybank's argument is: (1)
Ralar's unprofitable operations using Baybank's collateral
resulted in an erosion in the total value of collateral
securing Baybank's loan; (2) if the collateral had not been
so eroded, the collateral value would have exceeded the debt
owed Baybank, and as an oversecured creditor it would have
been eligible for postpetition interest and fees under
506(c); (3) thus, Ralar's use of the collateral caused
Baybank to suffer a loss to the extent of the postpetition
interest and fees it would have recovered had there been no
erosion in collateral value, and that loss is a "claim . . .
arising from the stay of action against [its collateral]" as
provided in 507(b); (4) Ralar's use of the collateral and
therefore the resultant "loss" to Baybank were "actual,
necessary costs and expenses of preserving the estate" which
qualify as an administrative claim under 503(b); and, (5)
the erosion in collateral value resulted from a failure of
adequate protection, thus entitling Baybank to receive a
507(b) "superpriority" for its 503(b) administrative
expense claim. This fascinating argument has led the parties
and two courts through a complex maze of ambiguous statutory
provisions and opaque, inconsistent case law. We decline the
invitation to enter the labyrinth ourselves, believing that
we need go no further than its threshold.
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Because we find no error in the bankruptcy judge's
factual finding that Baybank was undersecured, we conclude
that Baybank had no entitlement to postpetition interest and
fees and thus suffered no loss that might give rise to a
claim under 503(b) and 507(b). Put differently, even if
there was somehow a failure of adequate protection (a
question we do not reach), Baybank has no claim "arising from
the stay of action", see 507(b), because it recovered its
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prepetition claim in full; as an undersecured creditor it is
entitled to no more. On the contrary, it appears (as the
bankruptcy judge concluded) that Ralar's use of the
collateral benefitted Baybank, allowing it to recover its
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prepetition claim in full in spite of its being undersecured
at the start of the Chapter 11 case. In any event, it simply
is not necessary to address whether there was a failure of
adequate protection where an undersecured creditor ultimately
recovers its prepetition claim in full. We conclude that
Ralar's use of Baybank's collateral caused no loss to
Baybank, therefore Baybank has no claim under 503(b) and
507(b).
III.
III.
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CONCLUSION
CONCLUSION
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For the reasons articulated above, we affirm the
district court's judgment.
Affirmed. Costs to the appellees.
Affirmed. Costs to the appellees.
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