On December 18, 1981, Center Wholesale, Inc., (Center) a building materials dealer, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On the same day, Center sent notice by Mailgram1 to its ten largest creditors of a hearing on December 22, 1981, before the bankruptcy court for approval of a stipulation Center had entered into with Union Bank, Center's secured lender.

Owens-Corning Fiberglas Corporation (Owens-Corning), Center's largest creditor, received the mailgram on December 21, 1981, the day before the hearing. Owens-Corning states that it was unable to send counsel to the hearing, although one of its regional credit managers did attend.

At the end of the hearing, Bankruptcy Judge King signed a Cash Collateral Order (CCO) incorporating the terms of the stipulation. The CCO accomplished two basic goals:

(1) pursuant to 11 U.S.C. Sec. 364(d),2 the CCO permitted Center to borrow additional funds from Union Bank in exchange for granting the Bank a senior lien on all of Center's pre-petition and post-petition property, and

(2) pursuant to 11 U.S.C. Sec. 363(c),3 the CCO permitted Center to use its cash collateral4 to make payments to Union Bank, thereby gradually reducing Center's indebtedness to the Bank.

At the date of filing the Chapter 11 petition, Union Bank had a senior lien on all of Center's inventory5 and Owens-Corning had a junior lien on Center's Owens-Corning inventory.6 The CCO stated that "[t]he parties believe that [the CCO] does not affect the rights of any other lienholder," and that Center "ratifies and affirms the validity, perfection and enforceability of all liens, security interests and encumbrances heretofore granted by [Center] to [Union Bank] without prejudice to the rights of any other party." (Emphasis added.) Despite this clear language, Owens-Corning argues that the CCO did affect its security interest in Center's Owens-Corning inventory and proceeds.

Owens-Corning asserts that, on the date of filing, Center owed Union Bank $990,000; that Center owed Owens-Corning $1,400,000; that the collateral subject to Union Bank's lien (all of Center's inventory, including the Owens-Corning inventory) was worth $6,313,278; and that the portion of the collateral subject to Owens-Corning's lien (Center's Owens-Corning inventory) was worth $1,214,303.

Center's Inventory:   Other Goods   Owens-Corning       Total
                                        Goods
Value of Collateral:  $5,098,975 k $1,214.303 =    $6,313,278
First Lienor
    (amt. of debt):    Bank--($990,000) - Bank
Second Lienor
    (amt. of debt):    --           Owens-Corning
                                    ($1,400,000)

Owens-Corning argues that the CCO improperly authorized Center to use the proceeds from the sale of Owens-Corning inventory (worth $1,214,303) to satisfy not only the Bank's senior lien in the amount of $990,000, but also the additional debt incurred under the CCO. Based on the above allegations, Owens-Corning argues that the CCO thereby granted the Bank a senior lien on the portion of the inventory on which Owens-Corning previously was the sole lienor, i.e., $224,303 ($1,214,303 minus $990,000) worth of Center's Owens-Corning inventory, effectively extinguishing Owens-Corning's rights in the property.

On December 24, 1981, Center mailed to all of its creditors notice of a hearing on January 14, 1982, before Judge King "to consider the debtor's application for approval of the continued effectiveness of a certain financing agreement between the debtor and Union Bank, the debtor's general lender." (Emphasis added.) Six days later, Center mailed the creditors a copy of the CCO.

Judge King held the hearing on January 14 to allow creditors who had not received notice of the December 22 hearing to express opposition to the CCO. Counsel for Owens-Corning attended the hearing and moved for a continuance on the ground that he had not had sufficient time to review the CCO. Judge King denied the motion for a continuance because he concluded that the CCO was a final order, subject to attack only by a Fed.R.Civ.P. 60(b) motion:

As I read this order: there is an order. There is nothing that seems to provide for a continued hearing. The notice says that there is to be an application for approval, but really it has already been approved. So, I think that the options that are open to creditors if they are unhappy are to take advantage of remedies provided in the approved stipulation; and if they feel that the approval was improvident or improper, then perhaps they can proceed under Rule 60(b) of the Federal Rules of Civil Procedure; but aside from that, I see nothing that can be done today, or any reason to set it for a future hearing.

On April 26, 1982, Owens-Corning filed a complaint against Center and Union Bank seeking reclamation of goods, declaration of a security interest, adequate protection of that interest, and related remedies. Pursuant to the procedure in the Northern District of California, this adversary proceeding was assigned to Judge Rainville, a bankruptcy judge different from the one presiding over the chapter proceeding (Judge King).

Center filed a motion for partial summary judgment in the adversary proceeding. On March 3, 1983, Judge Rainville entered a Corrected Amended Opinion and Order, granting Center's motion for summary judgment in large part, but also holding that:

Owens-Corning Fiberglas Corporation does have a perfected lien as to the value of any Owens-Corning Corporation inventory and proceeds thereof in possession of Center Wholesale, Inc. as of the commencement of the chapter 11 case on December, 1981, less the amount of Union's senior security interest on December, 1981, and less the amount of Owens-Corning Fiberglas Corporation's inventory and proceeds paid to Union pursuant to the court's cash collateral order dated December, 1981.

(Emphasis added.)

Owens-Corning appealed Judge Rainville's Opinion and Order to the District Court. On November 13, 1984, U.S. District Judge Conti affirmed Judge Rainville's Corrected Amended Opinion and Order, holding that Owens-Corning did have a valid security interest in Center's Owens-Corning inventory, but that the CCO properly permitted Center to use that inventory to pay off the Bank.

On June 15, 1983, approximately three months after Judge Rainville issued his Corrected Amended Opinion and Order, Owens-Corning brought a Rule 60(b) motion in the chapter proceeding before Judge King, alleging surprise, change of circumstances, and voidness, and seeking modification of the CCO to marshal liens as between Owens-Corning and the Bank.

Judge King held a hearing and entered an order denying Owens-Corning's Rule 60(b) motion on the grounds that it was untimely and that the requested relief would prejudice the estate. Owens-Corning appealed to the district court, but the district court entered an order denying appeal and affirming the bankruptcy court. Owens-Corning then appealed to this court.

I. Whether and to what extent Owens-Corning had property rights that were affected by the CCO.

II. Whether Owens-Corning's Rule 60(b)(4) motion was timely.

III. Whether Center's notice of the hearing to approve the CCO satisfied due process.

In Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982), the Supreme Court invalidated the trial court jurisdiction accorded bankruptcy judges by the Bankruptcy Reform Act of 1978.7 To prevent undue disruption, the Court held that the Marathon decision would not apply to judgments entered by bankruptcy judges before October 4, 1982. Id. at 88, 102 S.Ct. at 2880. The Court later extended this stay to December 24, 1982. 459 U.S. 813, 103 S. Ct. 200, 74 L. Ed. 2d 60 (1982). In light of Marathon, we have held that a Bankruptcy Appellate Panel (BAP) may decide only those bankruptcy appeals involving judgments entered before the stay expired on December 24, 1982. In re Burley, 738 F.2d 981, 984 (9th Cir.1984).8 Judgments and orders entered by bankruptcy judges after that date under the Emergency Rule9 are not appealable to the BAP.10 Id.

Burley 's significance on the standard of review is its effect on prior Ninth Circuit cases discussing this court's review of BAP decisions. Because the district court replaced the BAP as the intermediate court in this case,11 our determinations as to the appropriate standards for reviewing BAP decisions should apply when we review the district court's decision as well.12

We have consistently held that because this court is in as good a position as the BAP to review the findings of a bankruptcy judge, we independently review the bankruptcy judge's decision without deferring to the BAP's decision. See, e.g., In re Mellor, 734 F.2d 1396, 1399 (9th Cir.1984); In re Comer, 723 F.2d 737, 739 (9th Cir.1984); In re Bialac, 712 F.2d 426, 429 (9th Cir.1983). Similarly, because we are in as good a position as was the district court to review Judge King's denial of Owens-Corning's Rule 60(b) motion, we review that decision de novo.

Whether Owens-Corning had property rights and to what extent those rights were affected by the CCO involve questions of fact that we review under the clearly erroneous standard. See id. However, because Judge King never made these crucial findings, we must remand to permit him to adopt Judge Rainville's findings, if any, under the doctrine of collateral estoppel,13 or make the findings himself.

The remaining issues--whether Owens-Corning can avail itself of the doctrine of marshaling to create or enlarge its property rights, whether Owens-Corning's Rule 60(b) motion was timely, and whether the mailgram notice satisfied due process--involve questions of law that we review de novo. See id.

I. Whether and to what extent Owens-Corning had property rights affected by the CCO.

A. Valuation of Center's Owens-Corning Inventory.

The Fifth Amendment provides that no person shall "be deprived of life, liberty, or property, without due process of law." To have standing to bring a Rule 60(b) motion challenging the CCO on due process grounds, Owens-Corning must show that it had property rights affected by the CCO.

Judge King did not address the factual question whether Owens-Corning had property rights in the collateral Center used to pay off its debt to Union Bank pursuant to the CCO. In a separate adversary action, Judge Rainville did determine that Owens-Corning had a "perfected lien as to the value of any Owens-Corning Corporation inventory and proceeds thereof in possession of Center Wholesale, Inc. as of the commencement of the chapter 11 case on December, 1981, less the amount of Union's senior security interest on December, 1981 ...." But Judge Rainville's Amended Opinion and Order does not contain a valuation of Owens-Corning's claim on the date of filing or the amount of Owens-Corning inventory used to pay off Union Bank after that date. In the July 15, 1983, hearing before Judge King, counsel for Owens-Corning indicated that valuation was an issue before Judge Rainville, but that he had not yet ruled on it.14

For the purposes of the following discussion, we will assume that Owens-Corning had a valid junior security interest and that Owens-Corning's valuation of Center's inventory is correct. This would give Owens-Corning a valid security interest in the portion of Owens-Corning inventory (allegedly worth $224,303) that exceeds the $990,000 debt Center owed Union Bank. On remand, Judge King may be able, under the doctrine of collateral estoppel, to adopt Judge Rainville's findings, if any, as to valuation; otherwise, he should make valuation findings himself.

B. Marshaling.

Owens-Corning argued before the bankruptcy and district courts that it was entitled under California law15 to request a marshaling of assets, requiring Union Bank to satisfy its claim out of the assets on which Owens-Corning did not have a lien before the Bank could turn to Center's Owens-Corning inventory for satisfaction. In other words, Owens-Corning asserts that it had a valid property right in all of Center's Owens-Corning inventory, even that part ($990,000 worth) in which Union Bank had a senior lien. We disagree.

Section 544 of the Bankruptcy Code, the "strongarm clause," vests the trustee or debtor in possession16 with all of

the rights and powers of ... a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained a judicial lien, whether or not such a creditor exists ....

11 U.S.C. Sec. 544(a)(1) (1982).

In its position as a judicial lien creditor under section 544, Center objected to Owens-Corning's request for marshaling on the ground that it would do "injustice to third persons," namely the estate. Cal.Civ.Code Sec. 3433. If Union Bank used collateral other than Center's Owens-Corning inventory to satisfy Union's claim, permitting Owens-Corning exclusively to use the Owens-Corning inventory to satisfy Owens-Corning's claim, there would be $990,000 less in assets in the estate to divide up among the unsecured creditors than if the Bank used the Owens-Corning inventory and thereby foreclosed Owens-Corning's ability to use that portion ($990,000 worth) of the collateral to satisfy its debt.17 Judge King agreed "with the suggestion by the debtor [in possession] that there would be prejudice to the debtor [in possession], and also to the unsecured creditors, if this marshaling approach were to be taken long after the initial order was entered." He therefore denied Owens-Corning's Rule 60(b) motion in part because marshaling would be inappropriate and prejudice the estate.

In In re Forester, 529 F.2d 310 (9th Cir.1976), we concluded in an alternate holding that, under the Bankruptcy Act of 1968,18 the trustee19 of a bankrupt estate could not block a request for marshaling made by a junior secured creditor to a senior secured creditor. Id. at 316-17.

However, after Forester was decided, the California courts clarified the rights of a judicial lien creditor in Shedoudy v. Beverly Surgical Supply Co., 100 Cal. App. 3d 730, 161 Cal. Rptr. 164 (1980). In holding that a judgment creditor is entitled to a marshaling order, Shedoudy implied that such a creditor is also entitled to block a marshaling order prejudicing his interest.

Because the validity, nature, and effect of liens are governed by the law of the state where the property is located, and because California law after Shedoudy gives judicial lien creditors, such as the debtor in possession under Sec. 544, the power to block a marshaling order, we hold as a matter of law that Center has standing to block Owens-Corning's request for marshaling.20 Otherwise, Owens-Corning would be able to take advantage of collateral for which it never bargained, namely, $990,000 worth of Center's inventory other than Owens-Corning goods, to the detriment of the general unsecured creditors. Our holding, therefore, limits Owens-Corning's property rights to the portion of Center's Owens-Corning inventory that exceeds in value Union Bank's senior lien, namely, $224,303 worth of Owens-Corning goods under the alleged facts.

II. Whether Owens-Corning's Rule 60(b)(4) motion was timely.

Owens-Corning brought a motion under Fed.R.Civ.P. 60(b)(4), which provides that "[o]n motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: ... (4) the judgment is void." The rule requires that a 60(b)(4) motion "be made within a reasonable time," but if a judgment is void, a motion to set it aside may be brought at any time. See 11 C. Wright & A. Miller, Federal Practice and Procedure Sec. 2862 at 197 (1973) and cases cited therein. Moreover, a void judgment cannot acquire validity because of laches on the part of the judgment debtor (Owens-Corning in this case). Id. Therefore, Owens-Corning's delay in bringing its Rule 60(b)(4) motion is irrelevant and the motion was timely.

III. Whether Center's notice of the hearing to approve the CCO satisfied due process.

As noted above, Owens-Corning is appealing the bankruptcy and district courts' denial of its Rule 60(b) motion on voidness grounds. A judgment is not void merely because it is erroneous. It is void only if the court that rendered judgment lacked jurisdiction of the subject matter, or of the parties, or if the court acted in a manner inconsistent with due process of law. See 11 C. Wright & A. Miller, Federal Practice and Procedure Sec. 2862 at 198-200 (1973) and cases cited therein.

Owens-Corning alleges that Center provided insufficient notice of the hearing in which Judge King approved the CCO and deprived Owens-Corning of due process of law. We have previously acknowledged that a judgment may be set aside on voidness grounds under Rule 60(b)(4) for a violation of the due process clause of the Fifth Amendment. Winhoven v. United States, 201 F.2d 174, 175 (9th Cir.1952).

The Supreme Court set forth the due process requirements for notice in Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 70 S. Ct. 652, 94 L. Ed. 865 (1950):

An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and to afford them an opportunity to present their objections. The notice must be of such nature as reasonably to convey the required information ... and it must afford a reasonable time for those interested to make their appearance.

Id. at 314, 70 S.Ct. at 657 (citations omitted).

The Court later explained that "[t]he purpose of notice under the Due Process Clause is to apprise the affected individual of, and permit adequate preparation for, an impending 'hearing.' " Memphis Light, Gas & Water Division v. Craft, 436 U.S. 1, 14, 98 S. Ct. 1554, 1563, 56 L. Ed. 2d 30 (1978) (footnote omitted). Owens-Corning claims that Center's mailgram notice, received one day before the hearing, came too late and provided insufficient information to permit Owens-Corning adequately to prepare and present its objections. We agree.

In reaching our conclusion that the notice Center provided did not fulfill the due process requirements of timeliness and specificity, we examine the notice's adequacy in light of the Bankruptcy Code's statutory requirements, safeguards, and remedies. We recognize, of course, that Owens-Corning must prove a constitutional, not merely statutory, violation to succeed on its Rule 60(b)(4) motion. Yet, because the adequacy of notice depends upon the factual context in which it is given, we need to examine its timeliness and specificity in light of the Bankruptcy Code provisions governing Center's actions under the CCO. See 11 U.S.C. Secs. 102(1)(A), 363(c)(3) & 364(d)(1).

The Code contains specific provisions concerning the type of notice required when the debtor in possession wishes to use its cash collateral (Sec. 363(c)(2) ) or to borrow additional funds after the date of filing (Sec. 364(d) ).

Concerning the use of cash collateral, section 363(c)(2) states that "[t]he trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless--... (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section." 11 U.S.C. Sec. 363(c)(2) (emphasis added). Section 363(c)(3) further provides that "[a]ny hearing under paragraph (2)(B) of this subsection ... shall be scheduled in accordance with the needs of the debtor.... The court shall act promptly on any request for authorization under paragraph (2)(B) of this subsection." 11 U.S.C. Sec. 363(c)(3) (emphasis added).

Concerning the obtaining of credit, section 364(d)(1) provides that "[t]he court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien ..." 11 U.S.C. Sec. 364(d)(1) (emphasis added).

The Code's rules of construction define the phrase "after notice and a hearing" to mean "after such notice as is appropriate in the particular circumstances ...." 11 U.S.C. Sec. 102(1)(A) (emphasis added).

Reviewing the facts as Owens-Corning alleges them to be and as Judge Rainville's Amended Opinion suggests they are, we conclude that Judge King's issuance of the CCO as a final order21 on such short notice, viz., one day, was inappropriate in the circumstances and violated the requirements of the Due Process Clause.

At the time the stipulation was approved, the bankruptcy judge and all interested parties, including Owens-Corning, had no reason to think that the CCO would affect Owens-Corning's security interest. The CCO provided that "[t]he liens granted to [Union Bank] herein shall be senior to all other liens, security interests and encumbrances which may hereafter be created in favor of third parties," implying that the liens would be junior to liens that Center had previously granted creditors like Owens-Corning. (Emphasis added.) Moreover, the CCO explicitly stated that "[t]he parties believe that this Stipulation does not affect the rights of any other lienholder " and that Center "ratifies and affirms the validity, perfection and enforceability of all liens, security interests and encumbrances heretofore granted by the Debtor to [Union Bank] without prejudice to the rights of any other party." (Emphasis added.)

The CCO did provide that Center would "turn all said collections and all cash sale proceeds over to [Union Bank], and [Union Bank] shall apply said receipts to the Loan, until payment in full of all amounts owing to [Union Bank] by [Center]." But it was not until Judge Rainville found that Owens-Corning had a perfected lien in Center's Owens-Corning inventory and that the CCO authorized Center to erode that security interest by selling off the inventory and paying the proceeds to Union Bank, that it became clear that the CCO affected Owens-Corning's security interest. Judge Rainville's decision prompted Owens-Corning to move under Rule 60(b) for modification of the CCO to force Union Bank to marshal its assets.

The bankruptcy and district courts did not want to overturn the CCO because (1) the parties had proceeded to carry it out and make business arrangements based on their belief that the CCO was final, and (2) Owens-Corning's request for marshaling was inappropriate since it would work to the detriment of the unsecured creditors.

Yet, to the extent the CCO permitted Center to foreclose Owens-Corning's security interest in the portion of Center's Owens-Corning inventory that exceeded in value Center's original debt to Union Bank, the CCO violated section 364(d) of the Bankruptcy Code, requiring the debtor in possession to provide adequate protection of a secured creditor's interest.

Section 364(d) permits the debtor in possession to incur debt secured by a senior lien only if the debtor demonstrates that it "is unable to obtain such credit otherwise" and that "there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted." 11 U.S.C. Sec. 364(d)(1) (emphasis added). Adequate protection is defined in section 361 to include "providing ... an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity's interest in such property ...." 11 U.S.C. Sec. 361(2).

Because the CCO authorized Center to use proceeds from the inventory on which Owens-Corning was the sole lienor to pay off Center's new debts to Union Bank, the CCO effectively granted the Bank a senior lien in that inventory. Under the provisions of section 364(d), Center was therefore required to prove that it was adequately protecting Owens-Corning's interest. In this case, the protection probably would have consisted of granting Owens-Corning a replacement lien in other Center property. See 11 U.S.C. Sec. 361(2).

Neither the mailgram nor the stipulation put Judge King or Owens-Corning on notice that Owens-Corning's security interest would be affected. Particularly in light of the fact that the stipulation stated that it did "not affect the rights of any other lienholder," Owens-Corning's receipt the day before the hearing of notice that Center "will grant to Union Bank a lien upon all of its assets to secure all indebtedness to Union Bank" was insufficient to alert Owens-Corning that it should immediately require Center to provide it with the adequate protection to which it was entitled under the Code. We therefore find that the one-day notice violated the requirements of the Due Process Clause because the notice was insufficient to permit Owens-Corning to adequately prepare for the impending hearing in which Judge King approved the CCO. See Memphis Light, Gas & Water Division, 436 U.S. at 14, 98 S.Ct. at 1562.22

If the debtor in possession (Center) fails to provide adequate protection of a creditor's security interest, section 507(b) offers an equitable solution. It directs the bankruptcy court to grant the injured creditor a "superpriority,"23 entitling the creditor to be paid ahead of all other creditors with administrative expense claims:

(b) If the [debtor in possession], 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 allowable under such subsection.

11 U.S.C. Sec. 507(b).

Our holding that the CCO is void to the extent it permitted Center to foreclose Owens-Corning's security interest in the portion of Center's Owens-Corning inventory that exceeded in value Union Bank's senior lien does not, therefore, require that Owens-Corning be placed in the precise position it would have occupied had Judge King never approved the CCO.24 We suggest that the bankruptcy court consider granting Owens-Corning a superpriority under section 507(b). This would protect its interest without disturbing the myriad of transactions that have occurred in reliance on the CCO.

REVERSED and REMANDED for further proceedings in accordance with this opinion.