Snowshoe Co., Inc., In re, INGERSOLL-RAND

Decision Date08 May 1986
Docket NumberINGERSOLL-RAND,85-1822 and 85-1973,Nos. 85-1821,s. 85-1821
Citation789 F.2d 1085
PartiesBankr. L. Rep. P 71,146 In re SNOWSHOE COMPANY, INC., Debtor. (Three Cases). Michael L. BRAY, Trustee, Appellee, v. SHENANDOAH FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellant, and Ingersoll-Rand Financial Credit Corporation; Monongahela Power Company; Charleston Linen Service; Precision Pump, Inc.; Ford Motor Credit Company; John Deere Industrial Equipment Company; Snowshoe Summit Development Company; Miscellaneous Creditors; Haven Homes, Inc.; Bowles, McDavid, Graff & Love Law Firm; Mountain State Telephone Company; Remond, Anderson & Rice, Inc.; Community Bank and Trust, National Association; Charleston National Bank; Hungry Hare, Inc. and Slope Shops, Inc., Defendants. (Two Cases). Michael L. BRAY, Trustee, Appellee, v.FINANCIAL CREDIT CORPORATION, Appellant, and Shenandoah Federal Savings and Loan Assocation; Monongahela Power Company; Charleston Linen Service; Precision Pump, Inc.; Ford Motor Credit Company; John Deere Industrial Equipment Company; Snowshoe Summit Development Company; Miscellaneous Creditors; Haven Homes, Inc.; Bowles, McDavid, Graff & Love Law Firm; Mountain State Telephone Company; Remond Anderson & Rice, Inc.; Community Bank and Trust, National Association; Charleston National Bank; Hungry Hare, Inc. and Slope Shops, Inc., Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

Lawrence A. Katz (Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Washington, D.C., on brief), for appellant Shenandoah Federal Sav. and Loan Ass'n.

(James W. Martin, Jr., Bridgeport, W.Va., on brief), for appellant Ingersoll-Rand Financial Credit Corp.

Michael L. Bray (Steptoe & Johnson, Clarksburg, W.Va., on brief), for appellee.

Before HALL, PHILLIPS and MURNAGHAN, Circuit Judges.

K.K. HALL, Circuit Judge:

Shenandoah Federal Savings and Loan Association ("Shenandoah"), the principal creditor in a Chapter 7 bankruptcy proceeding, appeals from two orders of the district court that have been consolidated for purposes of this appeal. The district court permitted the trustee in bankruptcy to obtain additional credit by granting a senior lien on property of the estate pursuant to 11 U.S.C. Sec. 364(d) and to sell certain obsolete or surplus property free of any existing liens. Shenandoah contends that these actions left its interest in the estate without "adequate protection" as required by 11 U.S.C. Sec. 364(d). We disagree and affirm the decisions below.

I.

The Chapter 7 bankruptcy debtor, the Snowshoe Company ("Snowshoe"), is the principal owner of the Snowshoe Ski Resort located in Pocahontas County, West Virginia. Historically plagued with financial problems, Snowshoe is currently in its fourth bankruptcy proceeding. Only the last two proceedings are relevant to this appeal.

In July of 1982, Snowshoe borrowed $10 million from Shenandoah to finance improvements to the resort, pay off other indebtedness, and contribute to working capital. In August, 1982, Snowshoe borrowed an additional $1.75 million from Shenandoah to fund construction of a conference center at the resort. The loans to Snowshoe were secured by a first lien on Snowshoe's real and personal property, subject only to a prior lien held by Charleston National Bank and certain purchase money liens on equipment and machinery of the resort.

In April, 1984, Shenandoah declared both of its prior loans in default. Facing a foreclosure as a result of the defaults, Snowshoe filed a petition for relief under Chapter 11 of the bankruptcy code listing liabilities of $13,515,545.85.

Several months after the bankruptcy petition was filed, a number of creditors, including Shenandoah, moved for the appointment of a trustee to manage the resort. A hearing was held before Judge John A. Kamlowsky, United States Bankruptcy Court for the Northern District of West Virginia, to determine whether the appointment of a trustee was appropriate.

During the hearing considerable dispute arose concerning the fair market value of the assets of Snowshoe. Various estimates or appraisals were offered ranging from $14.65 million to $31 million. The bankruptcy court concluded that the fair market value of the resort was substantially in excess of $19 million. In support of this conclusion, the court noted that in 1983, John N. Taylor, then Executive Vice-President of Shenandoah, had offered to purchase the resort for $2,000,000 in cash and the assumption of liabilities estimated to be between $15 and $17 million.

The amount actually owed by the debtor to Shenandoah was also contested at the hearing. Snowshoe contended that a substantial portion of its indebtedness to Shenandoah was subject to setoff in an unliquidated amount resulting from alleged fraudulent acts by Shenandoah. A separate action by Snowshoe asserting these claims is currently pending before the district court. The bankruptcy court ultimately determined that the number and seriousness of the issues existing between Shenandoah and Snowshoe required that resolution be sought outside the restraints of a proceeding in bankruptcy. The court, by order dated February 19, 1985, dismissed the Chapter 11 petition sua sponte. The order included Judge Kamlowsky's findings on the value of the resort.

Snowshoe then filed a new Chapter 11 petition on March 15, 1985. Judge Kamlowsky subsequently recused himself and on May 24, 1985, Judge Robert Maxwell of the United States District Court for the Northern District of West Virginia, converted the case to proceedings under Chapter 7 of the Bankruptcy Code. Michael L. Bray, appellee in this appeal, was appointed interim trustee.

At the time of his appointment, the trustee was directed by the district court to report whether continued operation of the debtor's business was feasible. On June 17, 1985, the trustee reported that the resort would lose from 50% to 90% of its fair market value if it ceased operations. The trustee further stated that an additional $1.5 to $2 million would be necessary to fund the operation for the coming ski season. Shenandoah did not dispute the trustee's conclusion that the resort's value would suffer a severe diminution if it failed to operate.

The trustee subsequently filed an application to incur debt secured by a senior lien on the property of the estate pursuant to 11 U.S.C. Sec. 364. 1 In support of his application, the trustee asserted that the existing value of the estate provided adequate protection for Shenandoah's interest. He further maintained that, based upon his analysis of the resort's operational history, he believed that the loan would be repaid by March, 1986. Shenandoah opposed the application. After a hearing, the district court concluded, as required by the statute, that the trustee was unable to obtain credit without granting a senior lien and that adequate protection existed to guarantee the existing lienholders the "indubitable equivalent" of their interests. The court, therefore, granted the trustee's application 2 and subsequently granted a second application to sell surplus and obsolete equipment free of any creditor interest.

Shenandoah appeals.

II.

On appeal, Shenandoah contends that (1) the trustee's efforts to obtain additional loans were insufficient to establish that credit was not available without granting the senior lien, and (2) the district court erred in concluding that adequate protection existed with respect to both the superpriority loan and the sale of surplus property. We see no merit in either of these contentions.

The record clearly indicates that the trustee contacted other financial institutions in the immediate geographic area and was unsuccessful. The statute imposes no duty to seek credit from every possible lender before concluding that such credit is unavailable. This is particularly true when, as the court determined here, time is of the essence in an effort to preserve a vulnerable seasonal enterprise. The district court found that the trustee had demonstrated by a good faith effort that credit was not available without the senior lien. We see no error in that determination.

Our conclusion is not undermined by Shenandoah's suggestion on appeal that it stood ready to lend the additional funds without requiring the senior lien. It is clear from the record that Shenandoah's offer was conditioned upon the trustee's acknowledgement of both the validity of Shenandoah's claimed pre-petition lien and of the amount of its claimed pre-petition debt. Both of these factors are in dispute and, indeed, are the subject of ongoing litigation. We conclude that neither the trustee nor the court was required to consider this conditional offer as an indication that credit was available without the senior lien.

III.

The question of whether Shenandoah's interest in the debtor's property was adequately protected from the consequences of the superpriority loan and the sale of surplus property is a more complex issue but one that we find was also properly resolved by the district court. The Code states in section 361(3) that adequate protection may be provided by assuring a creditor of the "indubitable equivalent" of its interest in the estate. Although there is contrary authority in bankruptcy law, 3 we conclude that a judicial determination of such adequate protection is a question of fact rooted in measurements of value and the credibility of witnesses. See In re Martin, 761 F.2d 472 (8th Cir.1985); In re Ruggiere Chrysler-Plymouth, Inc., 727 F.2d 1017 (11th Cir.1984). Therefore, unless the district court's conclusion was "clearly erroneous," its decision that Shenandoah was adequately protected must be affirmed. Anderson v. Bessemer City, N.C., --- U.S. ----, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).

Shenandoah seeks to avoid this rigorous standard of review by arguing that the district court committed an error of law when it held that...

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