762 F.2d 1303 (5th Cir. 1985), 84-2565, Richmond Leasing Co. v. Capital Bank, N.A.

Docket Nº:84-2565
Citation:762 F.2d 1303
Party Name:RICHMOND LEASING CO., and General Electric Credit Corp., Plaintiffs-Appellees, v. CAPITAL BANK, N.A., etc. and Chemical Bank & Chemcredit, Inc., Defendants-Appellants.
Case Date:June 17, 1985
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1303

762 F.2d 1303 (5th Cir. 1985)

RICHMOND LEASING CO., and General Electric Credit Corp.,



CAPITAL BANK, N.A., etc. and Chemical Bank & Chemcredit,

Inc., Defendants-Appellants.

No. 84-2565

United States Court of Appeals, Fifth Circuit

June 17, 1985

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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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.


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

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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

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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...

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