Baybank-Middlesex v. Ralar Distributors, Inc.

• Decision Date: 02 October 1995
• Docket Number: A,No. 95-1623,BAYBANK-MIDDLESE,95-1623
• Citation: 69 F.3d 1200
• Parties: , Bankr. L. Rep. P 76,685 ppellant, v. RALAR DISTRIBUTORS, INC., et al., Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1200

69 F.3d 1200

28 Bankr.Ct.Dec. 197, Bankr. L. Rep. P 76,685

BAYBANK-MIDDLESEX, Appellant, v. RALAR DISTRIBUTORS, INC., et al., Appellees.

No. 95-1623.

United States Court of Appeals First Circuit.

Heard Oct. 2, 1995.

Decided Nov. 7, 1995.

Charles R. Bennett, Jr., Boston, MA, with whom Kevin J. Simard and Riemer & Braunstein, were on brief, for appellant.

Christopher W. Parker, Boston, MA, with whom Rudolph F. DeFelice, McDermott, Will & Emery, New York City, Paul R. Salvage, Susan L. Burns, and Bacon & Wilson, Springfield, MA, were on brief, for appellees.

Before TORRUELLA, Chief Judge, BOWNES, Senior Circuit Judge, and STAHL, Circuit Judge.

STAHL, Circuit Judge.

Following its unsuccessful intermediate appeal to the district court, Baybank-Middlesex ("Baybank") again challenges the bankruptcy court's disallowance of its claim for postpetition interest and attorney fees under its loan agreement with the Chapter 11 debtors, Ralar Distributors, Inc. and its parent corporation Halmar Distributors, Inc. (collectively "Ralar"). Baybank recovered in full its loan principal and all accrued prepetition interest; only postpetition interest and fees are now at issue. Notwithstanding the fact that Baybank ultimately recovered its prepetition claim in full, the bankruptcy court found that Baybank had been undersecured and thus was not entitled to postpetition fees and interest; in so ruling, the court relied on its finding at a hearing held shortly after the commencement of the case that Baybank was "under water." The bankruptcy court also rejected Baybank's argument that Ralar's failure to adequately protect Baybank's collateral entitled Baybank to a "superpriority" administrative expense claim for the postpetition interest and fees. The district court affirmed, and we now affirm the district court.

I. BACKGROUND

On October 16, 1989, Ralar, a wholesale distributor of household and hardware items, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. At that time, Ralar owed Baybank approximately $10 million, secured by all of Ralar's assets.

Shortly after the Chapter 11 filing, Ralar (as debtor in possession) and Baybank reached an impasse in negotiations concerning Ralar's use of cash collateral and inventory during the pendency of the Chapter 11 proceeding. Baybank ultimately refused to extend further credit to Ralar or to allow Ralar to use Baybank's collateral, prompting Ralar to move for a bankruptcy court order allowing it to use the collateral. Over the next four months, the bankruptcy court held a series of "cash collateral hearings," at which Baybank objected to the continued use of its collateral and sought immediate foreclosure. At the first hearing, Baybank and Ralar reached a stipulation allowing Ralar to use cash collateral. At three subsequent hearings, the bankruptcy court issued orders allowing Ralar to continue its operations using the collateral despite Baybank's objection, finding that Baybank's interests were adequately protected because Ralar's continued sales of inventory to its customers would yield a higher net return than Baybank could realize if it foreclosed. At the second cash collateral hearing, the bankruptcy court found that Baybank was "under water" (undersecured), but that Ralar's operating plan was not likely to put Baybank further under water.

After four months of operation under bankruptcy court orders allowing Ralar to Payments Ralar made to Baybank during its postpetition operations combined with the proceeds of the foreclosure were sufficient to repay all of Baybank's loan principal, all accrued prepetition interest, and an unspecified amount of postpetition interest. Subsequent to the foreclosure, Baybank filed a proof of claim for $2.2 million, comprised entirely of Baybank's unsecured postpetition interest, attorney fees, and collection costs, which Ralar was obligated to pay Baybank under the preexisting loan agreement. Because Baybank already had liquidated all of Ralar's assets, this claim was unsecured. However, Baybank sought to recover the postpetition interest and fees as a so-called "superpriority" administrative expense claim under 11 U.S.C. Sec. 507(b), arguing that if its collateral had been adequately protected, the foreclosure proceeds would have been sufficient to cover the claimed postpetition interest and fees.

use the collateral, the court ultimately found that Ralar's plan of inventory reduction was no longer protecting Baybank's interests. Thus, in March 1990 it granted Baybank relief from the automatic stay, permitting Baybank to foreclose on Ralar's assets.

The bankruptcy court disallowed the claim in its entirety, ruling that (1) Baybank was an undersecured creditor and therefore was not entitled to recover postpetition interest and fees under 11 U.S.C. Sec. 506(c), (2) Baybank failed to demonstrate a failure of adequate protection, and (3) Baybank was not entitled to a superpriority claim under 11 U.S.C. Sec. 507(b) even if Ralar had failed to provide adequate protection of Baybank's interest in the collateral. The district court affirmed the bankruptcy court's factual finding that Baybank was undersecured and found as a matter of law that Baybank was not entitled to postpetition interest and fees nor to a superpriority claim for failure of adequate protection.

II. DISCUSSION

A. Standard of Review

We review challenged rulings of law by the bankruptcy court and the district court de novo, while contested findings of fact by the bankruptcy court are reviewed only for clear error. See Western Auto Supply Co. v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 719-20 n. 8 (1st Cir.1994). We are free to affirm a district court's ruling on any ground supported in the record even if the issue was not pleaded, tried, or otherwise referred to in the proceedings below. Levy v. Federal Deposit Ins. Corp., 7 F.3d 1054, 1056 (1st Cir.1993).

B. Postpetition Interest and Fees

Baybank sought postpetition interest, attorney fees, and collection costs that it claimed it was entitled to charge Ralar under the terms of the loan agreement. Under the Bankruptcy Code, only "oversecured" creditors are entitled to receive postpetition interest and loan-related fees and costs. 11 U.S.C. Sec. 506(b); ¹ United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372, 108 S.Ct. 626, 630-31, 98 L.Ed.2d 740 (1988). A creditor is oversecured when the value of its collateral exceeds the amount of its claim; postpetition interest and fees are allowable only to the extent of that oversecurity. See Timbers of Inwood Forest, 484 U.S. at 372, 108 S.Ct. at 630-31.

At the second cash collateral hearing, the bankruptcy judge made these factual findings:

It seems clear, at least I certainly find, that a liquidation of this inventory at this point, if the bank, as sought, were permitted to foreclosure [sic], that a liquidation only through bulk sales would produce a disaster for all, and certainly for the bank....

Both secured parties, ² I find, are now under water. The question is, the debtor's "Under water" in the context of security interests means undersecured, i.e., the value of the collateral is less than the amount of the debt. Webster's Third New International Dictionary 2491 (1986). Thus, at a fully litigated, two-day evidentiary hearing held just two weeks after the commencement of bankruptcy, the bankruptcy judge found in no uncertain terms that Baybank was an undersecured creditor. ⁴

proposal, is it likely to put them further under water. And I find that it is not likely, it is not likely that the debtor's proposal will put the secured parties further under water. ³

Baybank argues that the bankruptcy judge's finding that Baybank was undersecured was obiter dictum, not a factual finding, and that the courts below erred in using that dictum to disallow its claim for postpetition interest and fees. We disagree. The bankruptcy judge stated clearly that he was making a finding, and there was good reason to make that finding in that context.

At the hearing where the bankruptcy judge found that Baybank was "under water," the precise issue to be decided was whether Baybank was adequately protected against erosion in collateral value, as required by 11 U.S.C. Sec. 363(e). The parties presented evidence on the effect Ralar's use of cash collateral would likely have on the value of Baybank's collateral. In making the adequate protection determination, it was entirely logical for the judge to consider the value of the collateral relative to the amount of the debt owed Baybank. Indeed, we think it would be odd not to determine collateral value in an adequate protection hearing. A sufficient equity cushion is itself a recognized form of adequate protection, thus collateral valuation is a logical step in making an adequate protection determination. See, e.g., First Agric. Bank v. Jug End in the Berkshires, 46 B.R. 892, 899 (Bankr.D.Mass.1985) ("The classic protection for a secured debt justifying continuation of the stay is the existence of an 'equity cushion.' "). We conclude that the bankruptcy judge's finding that Baybank was undersecured was not dictum, but a factual finding made as part of an adequate protection determination. Baybank has not shown that finding to be clearly erroneous.

Baybank also makes this related argument: a finding that a creditor is adequately protected, made at a hearing early in a Chapter 11 case, cannot be binding at a later hearing to determine whether that protection ultimately proved inadequate. If such a finding were binding, the argument goes, then a court that once found protection to be adequate could never later find that the protection had failed, and section 507(b), which provides a "superpriority" claim where adequate protection fails, would be rendered a nullity. We agree with that argument, as far as it goes, but it falls short in this appeal. We find that...