Richmond Leasing Co. v. Capital Bank, N.A.

• Decision Date: 17 June 1985
• Docket Number: No. 84-2565,84-2565
• Citation: 762 F.2d 1303
• Parties: 12 Collier Bankr.Cas.2d 1202, Bankr. L. Rep. P 70,593 RICHMOND LEASING CO., and General Electric Credit Corp., Plaintiffs-Appellees, v. CAPITAL BANK, N.A., etc. and Chemical Bank & Chemcredit, Inc., Defendants-Appellants. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1303

762 F.2d 1303

12 Collier Bankr.Cas.2d 1202, Bankr. L. Rep. P 70,593

RICHMOND LEASING CO., and General Electric Credit Corp. Plaintiffs-Appellees, v. CAPITAL BANK, N.A., etc. and Chemical Bank & Chemcredit Inc., Defendants-Appellants.

No. 84-2565

Summary Calendar.

United States Court of Appeals Fifth Circuit.

June 17, 1985.

Winstead, McGuire, Sechrest & Minick, Jay J. Madrid, Dallas, Tex., for defendants-appellants.

Zalkin, Rodin & Goodman, Henry L. Goodman, Andrew D. Gottfried, New York City, for Chemical Bank & Chemcredit.

Sheinfeld, Maley & Kay, Myron M. Sheinfeld, John P. Melko, Houston, for Richmond Leasing.

Gilpin, Maynard, Parsons, Pohl & Bennett, David M. Lacey, Houston, Tex., for General Elec.

Appeals from the United States District Court for the Southern District of Texas.

Before GEE, JOHNSON and DAVIS, Circuit Judges.

PER CURIAM:

In this Chapter 11 bankruptcy reorganization, the appellants, bank creditors of the debtor in possession, Richmond Leasing Company (RLC), challenge the district court's affirmance of the bankruptcy court's approval of RLC's decision to assume an amended lease under Sec. 365 of the Bankruptcy Code. ¹ We conclude that the district court did not err in approving the assumption of the lease as a valid business judgment of the debtor, and thus we affirm.

The debtor in possession, RLC, is in the business of leasing railroad cars. It is a wholly-owned subsidiary of Richmond Tank Car (RTC), which manufactures railroad cars. The lease that forms the subject matter of this appeal is part of a larger transaction in which RLC and its parent corporation, RTC, both played a part. RTC manufactured and sold 402 railroad cars to General Electric Credit Corporation (GECC). GECC in turn leased the railroad cars back to RTC's subsidiary, RLC, for a twenty-year term. Under the lease agreement between GECC and RLC, dated June 1, 1982, RLC agreed to pay GECC approximately $1.8 million every six months, beginning on June 30, 1983. RLC also granted GECC a security interest in RLC's subleases of the cars to third parties. There was some suggestion at the hearing that GECC may have paid RTC a premium price for the cars and RLC may in turn have leased them from GECC at a premium. The 402 cars covered by the lease make up less than ten percent of RLC's inventory.

On January 7, 1983, before the first payment was due under this lease, RLC filed its petition in bankruptcy. In April 1983, RLC and GECC offered for court approval a renegotiated lease that RLC proposed to assume. Under the amended lease, GECC agreed to waive existing defaults in the lease ² and to reduce the rent due under the lease through 1986 to quarterly payments of $500,000 or 85% of the gross quarterly revenues generated by the 402 cars, whichever was less; however, the quarterly payments were not to average less than $400,000 for two consecutive quarters. From 1986 through 2002, the quarterly payments were to increase to $937,500. In exchange, RTC agreed to issue preferred stock to GECC periodically, and GECC placed restrictions upon RTC's ability to encumber its property, buy stock, make loans, guarantee obligations, dilute its stock, dispose of its fixed assets at less than fair market value, lease property, merge with or be purchased by another company, or dispose of its receivables out of the ordinary course of business, without GECC's consent. The amended lease designates RTC's violation of these restrictions as an event of default. RTC's bankruptcy is an event of default under both the original and the amended leases.

After a hearing, the bankruptcy court approved the joint application of RLC and GECC for authority to amend and assume the lease. The court's order provided that the automatic stay imposed by 11 U.S.C. Sec. 362 would be lifted automatically in the event of RLC's default, after GECC notified the court and all parties in interest. On appeal from the bankruptcy court, the district court affirmed the bankruptcy court's approval of the assumption of the lease.

The bank creditors raise several points in their appeal to this Court. We shall consider those points in turn.

The Standard of Review

The bank creditors argue that the district court improperly applied a "clearly erroneous" standard in its review of the bankruptcy court's findings of ultimate facts and conclusions of law. Specifically, the bank creditors maintain that the district court reviewed under the clearly erroneous standard the bankruptcy court's decisions regarding the correctness of RLC's business judgment in assuming the amended lease, whether RLC had provided adequate assurance of performance, whether the amended lease implemented a sub rosa reorganization, and whether the assumption of the lease with some amendment favorable to GECC complied with Sec. 365. We have examined the district court's memorandum and order carefully, and we disagree. It is quite clear that the district court applied the appropriate de novo standard of review to the legal questions whether the amended lease implemented a sub rosa reorganization and whether the assumption of the amended lease complied with the standards set forth in Sec. 365.

Moreover, assuming that the district court applied a "clearly erroneous" standard when it reviewed the bankruptcy court's decisions on business judgment and adequate assurance, ³ we conclude that the disputes involving those issues centered on contested facts. ⁴ No one denies that if RLC can generate sufficient income from GECC's cars and from its unencumbered assets to meet the payments on the amended lease, then the lease represents a valid exercise of RLC's business judgment and RLC has offered adequate assurance of performance. The various financial experts and company officers who testified at the hearing on the application to assume the lease differed in the inferences they drew from RLC's accounting data, upon the accuracy of which all agreed.

Were we entirely without guidance on the application of the "clearly erroneous" standard in this situation, we would adopt that standard in deference to the bankruptcy court's experience and expertise in resolving disputes between financial expert witnesses. In deciding this issue, however, we also have the benefit of the Supreme Court's decision in Anderson v. City of Bessemer City, --- U.S. ----, ----, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985), holding that an appellate court must review a finding of fact under the "clearly erroneous" standard of Rule 52(a) of the Federal Rules of Civil Procedure, ⁵ even when the lower court's findings of fact "do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts." --- U.S. at ----, 105 S.Ct. at 1512 (emphasis added). The Court explained:

The rationale for deference to the original finder of fact is not limited to the superiority of the trial judge's position to make determinations of credibility. The trial judge's major role is the determination of fact, and with experience in fulfilling that role comes expertise. Duplication of the trial judge's efforts in the court of appeals would very likely contribute only negligibly to the accuracy of fact determination at a huge cost in diversion of judicial resources. In addition, the parties to a case on appeal have already been forced to concentrate their energies and resources on persuading the trial judge that their account of the facts is the correct one; requiring them to persuade three more judges at the appellate level is requiring too much.

Id. ⁶

Rule 8013 of the Bankruptcy Rules, which we apply here, mandates the application of the "clearly erroneous" standard of review to the bankruptcy court's findings of fact. Its language tracks that of Rule 52(a) of the Federal Rules of Civil Procedure almost verbatim. The Anderson reasoning is thus equally compelling in this case.

RLC's Exercise of Business Judgment and Adequate Assurance of Future Performance

The bank creditors invite us to overturn the district court's holding that the bankruptcy court did not clearly err when it found that RLC's assumption of the amended lease was a proper exercise of its business judgment. The bank creditors urge us to hold that the business judgment question, as a mixed question of law and fact, is subject to de novo review. We have noted above that the decision whether assumption of the lease represented a proper exercise of business judgment depended entirely upon resolution of a factual dispute as to whether RLC could generate sufficient revenues in the future to cover its obligations under the lease. The parties did not dispute the legal standard to be applied in Sec. 365 cases, nor could they. It is well established that "the question whether a lease should be rejected ... is one of business judgment." Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 550, 63 S.Ct. 727, 742, 87 L.Ed. 959 (1943). See also Matter of Minges, 602 F.2d 38, 42-43 (2d Cir.1979). "As long as assumption of a lease appears to enhance a debtor's estate, court approval of a debtor-in-possession's decision to assume the lease should only be withheld if the debtor's judgment is clearly erroneous, too speculative, or contrary to the provisions of the Bankruptcy Code...." Allied Technology, Inc. v. R.B. Brunemann & Sons, 25 B.R. 484, 495 (Bankr.S.D.Ohio 1982).

The parties did not dispute whether doubts about RLC's financial stability had achieved a critical mass sufficient to render RLC's assuming the lease an improper exercise of business judgment; instead they disputed whether the doubts about RLC's financial status were justified. Thus this issue is properly considered under the "clearly erroneous" standard of review. The bankruptcy court heard extensive testimony on direct examination and cross-examination of financial experts and company officers. It was called upon to determine...