Armstrong v. Norwest Bank, Minneapolis, N.A., 91-1613

• Decision Date: 19 May 1992
• Docket Number: No. 91-1613,91-1613
• Citation: 964 F.2d 797
• Parties: Bankr. L. Rep. P 74,616 Phillip D. ARMSTRONG, Trustee of the Bankruptcy Estate of Kye Trout, Jr., Appellant, v. NORWEST BANK, MINNEAPOLIS, N.A., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 797

964 F.2d 797

Bankr. L. Rep. P 74,616

Phillip D. ARMSTRONG, Trustee of the Bankruptcy Estate of Kye Trout, Jr., Appellant, v. NORWEST BANK, MINNEAPOLIS, N.A., Appellee.

No. 91-1613.

United States Court of Appeals,

Eighth Circuit.

Submitted Feb. 10, 1992.

Decided May 19, 1992.

Phillip D. Armstrong, Minot, N.D., argued, pro se.

Christian C. Onsager, Denver, Colo., argued (Christian C. Onsager and Margaret M. McNamara, on the brief), for appellee.

Before ARNOLD, Chief Judge, MAGILL, Circuit Judge, and LARSON, ^* Senior District Judge.

LARSON, Senior District Judge.

I.

Phillip D. Armstrong is Trustee for the bankruptcy estate of Kye Trout, Jr. Trout was engaged in the business of developing oil and gas properties. When Trout filed a Chapter 11 bankruptcy petition in January of 1987, Norwest Bank was his primary secured creditor, holding properly perfected mortgages and security agreements, and assignments of production, in twenty-six of Trout's properties. Trout was indebted to Norwest for a sum in excess of five million dollars.

After his Chapter 11 filing, Trout was prohibited from using proceeds from the sale of the oil and gas to operate his business without Norwest's consent, as the proceeds constituted cash collateral. To allow Trout's reorganization effort to go forward, Norwest and Trout entered into two stipulations on April 1, 1987, agreeing to Trout's interim use of the cash collateral. The First Stipulation allowed Trout to use a substantial portion of the cash collateral under certain conditions, and confirmed Norwest's lien in the oil and gas properties and their proceeds. The purpose of the First Stipulation was to allow the use of cash collateral until approval of the longer term Ongoing Stipulation. The First Stipulation was approved by the bankruptcy court ex parte on April 10, 1987. The bankruptcy court expressly stated that the stipulation was binding on all parties, including any later appointed Trustee.

Although not necessary under the Bankruptcy Code, Trout, with notice to his creditors, moved for approval of the Ongoing Stipulation. The Court approved the Ongoing Stipulation by Order dated May 6, 1987, after hearing on the same date. The Ongoing Stipulation also confirmed Norwest's pre-existing liens, but did not otherwise grant Norwest any new liens or special priority.

The Ongoing Stipulation, due to expire in August of 1987, was extended by the court upon the motion of both parties. Since extension of the Ongoing Stipulation simply maintained the status quo, the court approved it ex parte. Again, Norwest gained no additional privileges as a result of the extension, but merely retained the rights it already possessed as a result of its prepetition mortgages and security interests.

By November of 1987, Norwest had discovered that Trout was diverting funds from the cash collateral, in violation of the Ongoing Stipulation. After negotiations which extended from December of 1987 through January of 1988, the parties entered into a third stipulation on February 1, 1988. The Third Stipulation granted Norwest an additional lien on new post-petition collateral, primarily Trout's interest in a California partnership known as "Rolling Hills Ranch," in order to adequately protect Norwest for Trout's continued use of the cash collateral. In turn, Norwest consented to the use of an increased amount of cash collateral so reorganization could still be attempted. Trout moved for approval of the Third Stipulation in April of 1988 and gave notice to all of his creditors. A number of creditors objected and, as a result, a United States Magistrate designated by the district court to hear bankruptcy matters pending reappointment of a bankruptcy judge, held a hearing. At the hearing, the magistrate approved the Third Stipulation with several minor modifications and entered an Order on July 11, 1988.

The Third Stipulation required Trout to submit and obtain approval of a plan for selling his herd of Arabian horses, and file and confirm a plan of reorganization by September 30, 1988. Trout's failure to obtain confirmation would constitute default, in which event Norwest could apply all cash collateral to its claim. No plan was confirmed or even filed by September 30, 1988. Moreover, in July of 1988, significant discrepancies surfaced as to the existence of the horse herd, and it became apparent to Norwest that Trout was not depositing all cash collateral, as required by the stipulation. Norwest considered Trout to be in default, and refused to allow use of cash collateral after June 30, 1988. On October 1, 1988, the bankruptcy court refused Trout's request to enforce the Third Stipulation against Norwest.

In December of 1988, on the bases that Norwest had acted unconscionably and that the Third Stipulation had been impermissibly approved by a magistrate, Trout moved to set aside the entire Third Stipulation ab initio, and thereby void Norwest's lien on any post-petition collateral. ("Post-petition collateral" here refers to the new collateral granted to Norwest under the Third Stipulation.) Ultimately, the district court determined that the magistrate's actions were jurisdictionally sound, and remanded the balance of the motion to the bankruptcy court with instructions to hold a de novo hearing on approval of the Third Stipulation. In the interim, Trout withdrew all challenges except the issue of jurisdiction, which was appealed to the circuit court of appeals. This court held that the magistrate's approval of the stipulation was jurisdictionally infirm and remanded the stipulation to the bankruptcy court. On April 28, 1989, the bankruptcy court gave notice of hearing to all creditors to "finally lay this entire matter to rest." On June 13, 1989, the bankruptcy court heard the objections of various parties, Trout, and the Creditor's Committee. On June 22, 1989, the bankruptcy court approved the Third Stipulation nunc pro tunc.

Trout filed an appeal of the bankruptcy court's June 22, 1989, Order approving the stipulation. During the pendency of the appeal, Trout's Chapter 11 case was converted to a Chapter 7 liquidation and Armstrong was appointed as Trustee. The Trustee continued the appeal before the district court. The district court affirmed the Order of the bankruptcy court on November 1, 1989, and upheld the validity of the Third Stipulation. No further appeal was taken.

In January of 1990, the Trustee initiated an adversary proceeding before the bankruptcy court against Norwest to determine the amount of Norwest's lien in post-petition collateral, and the Trustee yet again challenged the validity of the Third Stipulation. The bankruptcy court determined that the Third Stipulation was a binding contract and that the Trustee was bound by the stipulation to the same extent as the predecessor debtor-in-possession. The bankruptcy court also refused to entertain the Trustee's argument, on the basis of res judicata, that Norwest had breached the terms of the stipulation. In addition, the court rejected the Trustee's due process arguments regarding the Third Stipulation, noting both the May, 1988, and June, 1989 hearings which were held "to finally lay this matter to rest." Thus, the court granted Norwest partial summary judgment and determined that the sole issue to be resolved at trial was to reconcile the amount of cash collateral consumed by Trout with the value of the post-petition collateral against which Norwest held a lien. The Trustee nonetheless persisted at trial in his arguments that the Third Stipulation was invalid and also, for the first time, claimed that the ex parte approvals of the First Stipulation and the extension of the Ongoing Stipulation limited Norwest's lien. Further, after trial, the Trustee raised the argument for the first time that, under the Third Stipulation, he was entitled to any amounts over $500,000 derived from the post-petition collateral. At trial, the bankruptcy court refused to entertain this attempt to argue new issues as untimely, and otherwise upheld Norwest's lien in the post-petition collateral.

The Trustee then appealed to the district court, ¹ arguing lack of due process (under 11 U.S.C. §§ 363 and 364) with regard to all three of the stipulations, limitation of Norwest's priority claim status, and limitation of the amount of its lien (under due process requirements of 11 U.S.C. § 364) to funds advanced after final court approval of the Third Stipulation. The Trustee also argued that the bankruptcy court erred in deeming the ranch lien to be for adequate protection. In the alternative, the Trustee argued that the Third Stipulation specifies that fifty percent of the money derived from the sale of the ranch is to be paid to the Trustee.

By Order dated January 30, 1991, the district court affirmed the bankruptcy court's decision. The district court found that the Trustee was bound by the three stipulations, that due process requirements had been satisfied and that the requirements and limitations of 11 U.S.C. § 364 were inapplicable to the stipulations. In addition, the district court held that the bankruptcy court's finding that the agreements were for the purpose of adequate protection was not clearly erroneous and was...