Revco D.S., Inc., In re, s. 89-3488
| Citation | 901 F.2d 1359 |
| Decision Date | 27 April 1990 |
| Docket Number | Nos. 89-3488,89-3489,s. 89-3488 |
| Parties | 22 Collier Bankr.Cas.2d 1263, 20 Bankr.Ct.Dec. 716, Bankr. L. Rep. P 73,345 In re REVCO D.S., INC., et al., Debtors. NEW YORK LIFE INSURANCE CO., Plaintiff-Appellant, v. REVCO D.S., INC., et al., Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Joseph Patchan, Baker & Hostetler, Cleveland, for debtor.
L. Stewart Hastings, Gallagher, Sharp, Fulton & Norman, Cleveland, Richard Lieb (argued), Kronish, Lieb, Weiner & Hellman, New York City, for plaintiff-appellant.
Thomas R. Lucchesi, Joseph Patchan, John Silas Hopkins, III, Baker & Hostetler, Cleveland, Ohio, Robert J. White (argued), Evan M. Jones, O'Melveny & Myers, Los Angeles, Cal., Patrick A. Murphy, J. Craig Gilliland, Murphy, Weir & Butler, San Francisco, Cal., Joshua L. Berger, Eric A. Schaffer, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., Roger J. Stevenson, Roetzel & Andress, Akron, Ohio, Stuart Hertzberg, Pepper, Hamilton & Scheetz, Detroit, Mich., Brad E. Scheler, Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendants-appellees.
Before WELLFORD and GUY, Circuit Judges, and HULL, * Chief District Judge.
This appeal arises out of an order by the bankruptcy court approving a debtor-in-possession financing arrangement proposed by Revco D.S., Inc. ("Revco"), 1 and a group of lenders, including Wells Fargo Bank, N.A., and Marine Midland Bank, N.A. (collectively, the "Banks"). Pursuant to the financing arrangement, the Banks agreed to lend up to $145 million to Revco. In turn, pursuant to section 364 of the Bankruptcy Code, the Banks received superpriority liens on Revco's assets senior to the liens of certain pre-petition creditors, including appellee Mellon Bank, N.A., as indenture trustee. Under the financing arrangement, Revco also proposed to use "cash collateral" as defined in section 363. To provide adequate protection to the Banks which were pre-petition secured creditors, Revco proposed to make periodic cash payments to the Banks in an amount equal to the interest on the pre-petition debt.
After a hearing on the matter, the bankruptcy court entered an order approving the financing arrangement, the use of cash collateral, and the protection proposal of Revco. New York Life Insurance Company and New York Life Insurance and Annuity Corporation (together, "NYLIC"), holders of preferred stock, appealed to the district court, contending that the bankruptcy court erred in approving Revco's payment of interest on the pre-petition secured debt. The district court dismissed NYLIC's appeal because NYLIC failed to obtain a stay pending appeal as required by section 364(e). NYLIC contends in this subsequent appeal that the district court erred in dismissing its appeal from the order of the bankruptcy court.
Revco is a wholly-owned subsidiary of ANAC Holding Corporation ("ANAC"). Revco and its subsidiaries operate approximately 2000 retail drug stores in 28 states. NYLIC owns $75 million of preferred stock in ANAC. NYLIC appeals from an order entered by the bankruptcy court on August 24, 1988, approving an agreement for debtor-in-possession financing and adequate protection. In particular, NYLIC challenges the authorization of periodic payments of interest on very substantial pre-petition indebtedness.
Pursuant to an indenture (the "Indenture") dated as of August 15, 1985, as amended, between Revco and Mellon Bank, Mellon became the trustee for the holders of 11 3/4% sinking fund debentures issued by Revco in the aggregate principal amount of $125 million.
Pursuant to certain loan agreements (the "Credit Agreements") entered into in 1986 between the Banks and Revco, the Banks agreed to lend money to Revco. 2 ANAC, on behalf of Revco, guaranteed the performance of these Credit Agreements. To secure the indebtedness arising under the Credit Agreements, Revco granted the Banks security interests in and liens and mortgages upon substantially all of Revco's property and other assets.
In accordance with certain requirements of the Indenture, the security interest and liens and mortgages upon the collateral granted to the Banks were conveyed in trust to secure the obligations to the Banks arising under the Credit Agreements and the obligations to the indenture trustee, on an equal and ratable basis. It is undisputed that the debt owed to the Banks and indenture trustee is fully secured.
On July 28, 1988, Revco filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. After filing the petition in bankruptcy, Revco was faced with a dilemma prompted by the forthcoming holiday season, its major sales period. As a result of the Banks' liens, all of Revco's cash in Chapter 11 constituted "cash collateral" of the Banks, and thus Revco could not use its cash without the Banks' consent or a court order. See 11 U.S.C. Sec. 363(c)(2). Moreover, Revco was unable to obtain credit from its trade creditors, most of whom placed it on a cash-on-delivery or cash-in-advance basis. Without cash or new credit, Revco could neither rebuild its extremely low inventories for the critical Christmas sales period nor replenish its pharmaceutical departments.
Revco, therefore, sought debtor-in-possession financing from several lenders. Revco, however, was unable to obtain unsecured credit on any terms and several lenders refused to consider a proposal without time to study Revco's situation. Revco also was unable to obtain adequate credit secured by security interests or liens junior to the existing security interests or by liens on the few remaining unencumbered properties of the estate. Because Revco's principal assets were subject to the liens and security interests of the Banks and the indenture trustee, all of the proposals received by Revco for debtor-in-possession financing contemplated the granting of a superpriority lien under section 364(d) of the Bankruptcy Code.
Revco concluded that the best financing terms were offered by Wells Fargo Bank and Marine Midland Bank (the "DIP Lenders"). 3 Revco and the DIP Lenders bargained at arms' length over the terms and conditions of an agreement entitled "Stipulation and Agreement Regarding Debtor-in-Possession Financing, Use of Cash Collateral and Adequate Protection" (the "Stipulation"). This agreement provided for the extension of credit on terms that were more favorable than Revco could have obtained from any other source. Under the Stipulation, the DIP Lenders agreed to provide Revco with $145 million in post-petition credit and to allow Revco to use existing cash collateral in the course of its Chapter 11 operations. Pursuant to the Stipulation, Revco agreed to grant a superpriority lien to the DIP Lenders senior to the lien of the Banks and indenture trustee. (Their former debt was therefore also subordinated). The Stipulation also allowed Revco to grant a pari passu first priority lien to secure post-petition trade credit as inducement for trade creditors to extend credit.
Revco recognized, and the indenture trustee noted, that pursuant to section 363 it could not use cash collateral unless the Banks and indenture trustee consented or unless the court authorized such use and provided "adequate protection" to the Banks and the indenture trustee. The indenture To provide adequate protection to the Banks and the indenture trustee, Revco proposed to make periodic payments equal to the contractual interest accruing on Revco's pre-petition obligations to the Banks under the Credit Agreements and to the indenture trustee under the Indenture. This proposal avoided the possibility of higher default interest under the terms of the preexisting security agreement.
trustee also noted that pursuant to section 364(d)(1) Revco could not grant a superpriority lien to the DIP Lenders unless the court authorized such a lien and provided "adequate protection" to the Banks and the indenture trustee as existing secured creditors. See 11 U.S.C. Sec. 364(d)(1).
Revco filed a motion requesting the bankruptcy court to enter an order approving the Stipulation within a week of filing its bankruptcy petition. NYLIC, as owner of preferred stock, objected to the Stipulation, and particularly to Revco's proposal to pay accruing interest to the Banks and indenture trustee as "adequate protection."
The final hearing on the motion to approve the Stipulation was not scheduled until after the appointment of official creditors' committees pursuant to Section 1102 of the Bankruptcy Code. The committees obtained counsel, reviewed the Stipulation and discussed it with Revco and the Banks. Within a month of the bankruptcy filing, the bankruptcy court held a hearing to review the Stipulation and NYLIC's objection to the Stipulation. Representatives of both creditors' committees appeared at the hearing and supported the Stipulation, as did Revco's common stockholders. NYLIC was the sole objector.
NYLIC supported Revco's obtaining the loan but it objected to the fact that the Banks were to be paid prepetition interest under the Credit Agreements. The bankruptcy court approved the Stipulation and specifically decided that the payment of accruing interest was appropriate as adequate protection. 4
With respect to the challenged periodic interest payments, the bankruptcy court received evidence that the Banks' leasehold collateral was declining and would continue to decline in value. The bankruptcy court found that the Banks were entitled to adequate protection payments because the Stipulation permitted Revco to use the Banks' cash collateral. Because Revco could only obtain post-petition credit by granting a lien superior to the Banks' preexisting liens, the bankruptcy court found that section 364(d)(1) of the Bankruptcy Code required Revco to provide the Banks with adequate protection. As Revco was in such financial condition that it could not provide...
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