Blehm Land & Cattle Co., In re, 87-1317

• Citation: 859 F.2d 137
• Decision Date: 29 September 1988
• Docket Number: No. 87-1317,87-1317
• Parties: 19 Collier Bankr.Cas.2d 933 In re BLEHM LAND & CATTLE COMPANY, Debtor. TRAVELERS INSURANCE COMPANY, Creditor-Appellant, v. AMERICAN AGCREDIT CORP., Creditor-Appellee, M.E. Koontz, Trustee-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 137

859 F.2d 137

19 Collier Bankr.Cas.2d 933

In re BLEHM LAND & CATTLE COMPANY, Debtor.

TRAVELERS INSURANCE COMPANY, Creditor-Appellant, v. AMERICAN AGCREDIT CORP., Creditor-Appellee, M.E. Koontz, Trustee-Appellee.

No. 87-1317.

United States Court of Appeals, Tenth Circuit.

Sept. 29, 1988.

Elizabeth J. Greenberg (Peter J. Lucas, with her, on the brief), of Sherman & Howard, Denver, Colo., for creditor-appellee.

Garry Appel (Gregory L. Williams and Jane E. Frey, on the brief), of Rothgerber, Appel, Powers & Johnson, Denver, Colo., for creditor-appellant.

Before ANDERSON and BALDOCK, Circuit Judges, and BURCIAGA, District Judge. ^*

PER CURIAM.

This case is an appeal from an order of the district court affirming the bankruptcy court's denial of the appellant's application for a superpriority administrative expense under 11 U.S.C. Sec. 507(b) (1982). The appellant contends that the district and bankruptcy courts erred by holding that it was not entitled to such a superpriority expense because it failed to obtain court approval of the Memorandum of Agreement out of which the expense arose, because the agreement constituted a compromise or settlement for which court approval was necessary, and because it violated the provisions of Sec. 361(3) of the Bankruptcy Code. We find the appellant's arguments persuasive, and we reverse and remand this case for findings in accordance herewith.

The facts of this case are fully set out in the district court's decision at 71 B.R. 818 (D.Colo.1987). In this decision, the district court concurred with the bankruptcy judge's ruling that the Memorandum of Agreement, entered into by the appellant, Travelers Insurance Company, and the trustee for the debtor, M.E. Koontz, was an agreement to provide adequate protection to Travelers in the form of periodic cash payments. In exchange, Travelers agreed to permit the trustee to use certain property out of the ordinary course of business, which was secured by Travelers' first deed of trust. Because it was an adequate protection agreement, the district court ruled that Travelers and the trustee were required to obtain court approval of the agreement to comply with the due process requirements of notice and hearing pursuant to 11 U.S.C. Secs. 362(d), 363(b), and 364(b). Id. at 823.

The district court also concurred with the bankruptcy court's conclusion that the Memorandum of Agreement constituted a compromise or settlement of a claim, and that, under Bankruptcy Rule 9019(a), such settlement agreements may only be approved by the court after notice and a hearing. Id. It therefore affirmed the bankruptcy court's denial of Travelers' application for a superpriority administrative expense, concluding that the court was not bound to recognize the validity of the agreement due to Travelers' and the trustee's failure to comply with proper procedure for court approval. The court further concluded that, even if the correct procedure had been followed, the bankruptcy court properly refused to rule nunc pro tunc that the agreement constituted adequate protection, because the payments thereunder were excessive and because the agreement violated the provisions of Sec. 361(3) prohibiting adequate protection in the form of an administrative expense. Id. at 824-26.

In reviewing an order of the bankruptcy court, the appellate court applies the same standard as the district court: findings of fact by the bankruptcy court are to be set aside only if clearly erroneous and conclusions of law are subject to de novo review. In re Mullet, 817 F.2d 677, 678-79 (10th Cir.1987). In this instance, there are no contested issues of fact. The sole question before this court concerns the effect of Travelers' failure to seek explicit court approval of the Memorandum of Agreement on its application for a superpriority administrative expense. We conclude Travelers' and the trustee's failure to obtain court approval of the Memorandum of Agreement was not fatal to Travelers' application for a superpriority expense and that, in any event, the agreement was neither a compromise or settlement nor violative of Sec. 361(3).

We begin by examining the sections of the Bankruptcy Code which address the provision of adequate protection to creditors. Section 361 sets forth three nonexclusive methods by which adequate protection may be afforded to a creditor. One method is by "requiring the trustee to make a cash payment or periodic cash payments" to the creditor to offset any decrease in the value of the creditor's interest in its collateral occasioned by the automatic stay or use, sale or lease of the collateral other than in the ordinary course of business. 11 U.S.C. Sec. 361(1). Sections 362, 363, and 364 detail the instances in which the need for adequate protection might arise. They include damage to a creditor's secured interest as a result of the automatic stay, id. Sec. 362, the trustee's use, sale or lease of property of the estate (other than in the ordinary course of business) in which the creditor has an interest, id. Sec. 363, and the trustee's acquisition of unsecured debt by the grant of a senior or equal lien on property in which the creditor has a secured interest, id. Sec. 364.

Under Secs. 362, 363, and 364, it is clear that the creditor, in seeking relief from the stay, and the trustee, in using estate property out of the ordinary course or incurring unsecured debt, must give notice and obtain court approval before taking any action authorized by these sections. Id. Secs. 362(d), 363(b), 364(b). When a creditor affected by the proposed action objects, the court must then determine whether the interest of a secured creditor is adequately protected. Id. Secs. 362(d), 363(e), 364(d). However, the trustee or the debtor in possession, not the court, is the party required to provide or propose the particular means of adequate protection. In re Heatron, Inc., 6 B.R. 493, 494 (Bankr.W.D.Mo.1980); In re San Clemente Estates, 5 B.R. 605, 609 (Bankr.S.D.Cal.1980).

Contrary to the district court's statement that court approval of an adequate protection plan is always required by statute, 71 B.R. at 823, the Code is silent with respect to the necessity of court approval of an adequate protection plan when a creditor does not object to the protection being offered. Moreover, few, if any, courts have directly confronted this issue. The best-reasoned decision on this issue can be found in In re Callister, 15 B.R. 521 (Bankr.D.Utah 1981), aff'd sub nom. Ingersoll Rand Fin. Corp. v. Callister, 13 Bankr.Ct. Dec. 21 (CRR) (April 16, 1984), wherein the court addressed the issue of court approval of ex parte adequate protection stipulations. The court stated,

Stipulations raise another complex of problems. On one hand, they show cooperation between creditors and the estate which should be requited. They reduce costs otherwise incurred in litigation and permit a constructive allocation of resources. They lessen the judicial burden of administering the estate, an important principal of the Reform Act. On the other hand, most authorities have assumed that a court order under 11 U.S.C. Section 362(d)(1) is essential for relief under 507(b). These authorities may be incorrect since 507(b) speaks in terms of the trustee not the court providing adequate protection, and this is consistent with the legislative history to 361.

Id. at 531, 532 (citations omitted). However, the court in Callister was not forced to directly consider the issue of a noncourt-approved adequate protection agreement, as the stipulation in that case had already been approved by the court. Id. at 532 n. 30; see also, In re Engle, No. 87-4135 (E.D.Pa. Dec. 30, 1987) (1987 WL 32706) (permitting subsequent court approval of ex-parte adequate protection agreement); In re Mutschler, 45 B.R. 494 (Bankr.D.N.D.1984) (wherein creditor given superpriority expense despite the fact that its stipulation was court-approved without notice and hearing to other creditors). Other courts, following the lead of In re Callister, have addressed the effect of ex parte adequate protection agreements or stipulations, several of which have assumed such agreements were valid without further consideration. See, e.g., In re Becker, 51 B.R. 975, 980 (Bankr.D.Minn.1985); In re B & W Tractor Co., 38 B.R. 613, 617 (Bankr.E.D.N.C.1984); In re Bramham, 38 B.R. 459, 466 (Bankr.D. Nev.1984).

We concur with the court's conclusion in Callister that neither the Code nor its legislative history supports the interpretation that court approval of an ex parte adequate protection agreement is a prerequisite to a 507(b) expense. Such a rule would deprive the bankruptcy court of much-needed flexibility with respect to the administration of the bankruptcy estate. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 338-40, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6295, 6296. But while such agreements are not presumptively invalid, neither should claims arising from them be automatically approved. On the contrary, ex parte adequate protection agreements should receive close scrutiny from the court. In particular, "[w]hen examining administrative claims arising from such agreements, the court should consider 1) whether the agreement is consistent with the intent and purpose of the Bankruptcy Code, 2) whether the conduct of the secured creditor has been inequitable, and 3) whether effecting the agreement would create an inequitable result." In re B & W Tractor Co., 38 B.R. at 617. When an ex parte adequate protection agreement is determined to be "too adequate," it should it be modified or set aside. Id. at 618; see also, In re Becker, 51 B.R. at 980.

In the instant case, the bankruptcy court denied Travelers' application for a superpriority administrative expense, finding that the Memorandum of Agreement was not in the nature of adequate protection, because there was "nothing pending at the time by which the trustee had to provide adequate...