O'Connor, In re

• Decision Date: 12 January 1987
• Docket Number: No. 85-2209,85-2209
• Parties: , Bankr. L. Rep. P 71,571 In re William Joseph O'CONNOR; and Jane Elizabeth O'Connor, Debtors. MBANK DALLAS, N.A., formerly known as Mercantile National Bank At Dallas, Appellee, v. William Joseph O'CONNOR; and Jane Elizabeth O'Connor, Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1393

808 F.2d 1393

15 Bankr.Ct.Dec. 735, Bankr. L. Rep. P 71,571

In re William Joseph O'CONNOR; and Jane Elizabeth O'Connor Debtors MBANK DALLAS, N.A., formerly known as Mercantile National Bank At Dallas, Appellee, v. William Joseph O'CONNOR; and Jane Elizabeth O'Connor, Appellants.

No. 85-2209.

United States Court of Appeals Tenth Circuit.

Jan. 12, 1987.

Rehearing Denied Feb. 4, 1987.

Jack L. Kinzie and Bobbie T. Shell of Andrews Davis Legg Bixler Milsten & Murrah, Oklahoma City, Okl., for appellants.

J. Maxwell Tucker of Winstead, McGuire, Sechrest & Minick, Dallas, Tex., for appellee.

Before MOORE, ANDERSON and TACHA, Circuit Judges.

JOHN P. MOORE, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir.R. 10(e). The cause is thereby submitted without oral argument.

This is an appeal from a judgment of a district court sitting as an appellate court in bankruptcy. We have jurisdiction to consider this appeal under 28 U.S.C. Sec. 158(d). ¹ The district court reversed an order which granted the Debtors' motion to use cash collateral pursuant to 11 U.S.C. Sec. 363 based upon a finding that the subject creditors were adequately protected. We hold that whether the Debtors have provided adequate protection is a question of fact which must be judged on the clearly erroneous standard. Since the district court failed to apply the correct standard of review, we reverse its judgment.

The controversy under consideration evolves from a voluntary petition for reorganization filed by Mr. William Joseph O'Connor and Mrs. Jane Elizabeth O'Connor, husband and wife, (Debtors) pursuant to Chapter 11 of the Bankruptcy Reform Act of 1978 (Code). During administration of the case, the Debtors sought leave from the bankruptcy court to use certain cash on deposit in a court-controlled bank account to drill 3 gas wells in areas previously leased by a limited partnership in which Mr. O'Connor was the general partner. To protect creditors claiming interests in the subject cash, Debtors offered replacement liens on the well proceeds and on other unencumbered regular monthly income received by Mr. O'Connor. MBank Dallas, N.A., (Bank) asserted a security interest in the cash and objected to the Debtors' proposal.

After notice and a hearing at which the bankruptcy court took evidence regarding the value of the revenue that would be generated by the drilling project and the prospects for success, as well as the value of the monthly income offered as an additional replacement lien, the court made findings of fact and concluded it would be in the best interest of the estate to grant the leave requested. The court further concluded that the Bank would be adequately protected by the replacement liens offered by the Debtors.

The Bank appealed this decision to the district court which set bond and stayed the use of the cash. The district court ultimately reversed the bankruptcy court, concluding the bankruptcy court erred in finding the Bank would be adequately protected. Relying upon Rader v. Boyd, 267 F.2d 911 (10th Cir.1959), the district court concluded that the replacement liens were too speculative to provide the adequate protection required by 11 U.S.C. Sec. 363(e). ² The district court did not consider whether the findings of the bankruptcy court were clearly erroneous but simply ruled as a matter of law that Rader mandated reversal of the bankruptcy court.

The record indicates the Debtors had cash available from operations in the amount of $721,600. Since that cash represented proceeds from property on which the Bank claimed a security interest, it asserted the funds were subject to a proceeds lien and were "cash collateral" within the meaning of 11 U.S.C. Sec. 363. The record, however, discloses the Bank's exclusive claim to that collateral has been contested by another secured creditor in a companion proceeding. That creditor claims a mechanic's lien filed before perfection of the Bank's lien gives it priority over the Bank. Yet, for the sake of an expedient determination of the issue of adequate protection in the instant proceeding, neither the Debtors nor the other secured creditor have contested the nature and extent of the Bank's claim to the cash collateral. Notwithstanding, there is no question that the value of the lien held by the Bank for which adequate protection was sought could not exceed the amount of the money on deposit in the controlled account at the time the Debtors sought leave to use the cash collateral. ³

At the hearing before the bankruptcy court, the Debtors offered evidence that in the area in which Debtors proposed to drill, Mr. O'Connor's limited partnership had 150 proven wells, 148 of which were still producing. Mr. O'Connor testified that the 3 proposed wells would be drilled "on the inside of what we have already established as producing wells, therefore putting the risk down to a very nominal level." He also testified that purchasers of the gas to be produced were already available and that there was presently a ready market for that gas which would extend well into the future. The Debtors' expert testified that future cash flow could be expected from the project in the sum of $6,774,862 and that the O'Connor share of that expectation was $5,284,392. In the opinion of the expert, the Debtors' interest, discounted to present value, was worth $3,674,071 at the time of the hearing. Although the Bank offered contrary evidence, the bankruptcy court rejected the Bank's assertions.

On the basis of the disputed evidence, the bankruptcy court found that "future net revenues attributable to Debtors' interest in the wells will be $5.2 million and that the present value of those revenues is in excess of $2.8 million." The court further found that Debtors had additional unencumbered property with "a present value of $10,000 per month." The bankruptcy court concluded that the Bank was adequately protected by the replacement liens in the properties having these values and, as a consequence, "granting the motion would be in the best interest of the estate and its creditors."

In its appeal to the district court and in its brief here, the Bank has advanced many reasons why the bankruptcy court reached the wrong decision but gives only passing treatment to the issue of consequence; that is, whether the bankruptcy court's findings are clearly erroneous. We have not considered the issue before, but we are convinced that whether a creditor is adequately protected is a question of fact.

In recognition of the powers created in bankruptcy law to adjust debts and creditors' interests, Congress realized the need to protect creditors from unfair treatment. Hence, it codified the concept of adequate protection into the several aggressive remedies available to debtors and bankruptcy trustees. See 2 Collier on Bankruptcy p 361.01 (15th ed. 1979). The whole purpose in providing adequate protection for a creditor is to insure that the creditor receives the value for which the creditor bargained prebankruptcy. ⁴ House Rep. No. 95-595, 95th Cong., 2d Sess. 53, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6295. In determining these values, the courts have considered "adequate protection" a concept which is to be decided flexibly on the proverbial "case-by-case" basis. In re Martin, 761 F.2d 472 (8th Cir.1985); In re Monroe Park, 17 B.R. 934 (D.C.Del.1982). Since "value" is the linchpin of adequate protection, and since value is a function of many factual variables, it logically follows that adequate protection is a question of fact. In re Martin, 761 F.2d at 472; In re George Ruggiere Chrysler-Plymouth, Inc., 727 F.2d 1017 (11th Cir.1984); In re Bank Hapoalim B.M., Chicago Branch v. E.L.I., Ltd., 42 B.R. 376 (D.C.N.D.Ill.1984); Brookfield Production Credit Association v. Borron, 36 B.R. 445 (D.C.E.D.Mo.1983), aff'd, 738 F.2d 951 (8th Cir.1984). As a question of fact, the bankruptcy court's determination that adequate protection exists or fails to exist can be reversed on appeal only if it is clearly erroneous. Fed.R.Bankr.P. 8013; International Brotherhood of Teamsters v. IML Freight, Inc., 789 F.2d 1460 (10th Cir.1986); Farmer's Co-op Ass'n of Talmage, Kan. v. Strunk, 671 F.2d 391 (10th Cir.1982). We have said that a clearly erroneous finding is one that leaves the reviewing court with the distinct and firm conviction that a mistake was made. State Distributors, Inc. v. Glenmore Distilleries, 738 F.2d 405 (10th Cir.1984). We are left with no such conviction here.

While the bankruptcy court had before it disputed facts, ample evidence supports its conclusion. Additionally, its judgment on the factual determinations is entitled to "due regard" on appeal. Fed.R.Bankr.P. 8013. Notwithstanding the Bank's argument that the Debtors' proposal was too speculative to provide adequate protection, the Bank bears the heavy burden of proving the bankruptcy court's contrary conclusion is clearly erroneous.

The question of adequacy was examined and decided by the bankruptcy court on disputed but sufficient evidence. Mr. O'Connor testified that the wells were going to be drilled in a proven area in which all his previous attempts had been successful. He explained that he had drilled 150 wells and all were still producing except for 2 which had experienced mechanical failure. In addition, Debtors' expert witness testified that ready buyers existed to buy the product of the proposed wells in a quantity to provide a cash flow more than sufficient to protect the Bank's proceeds lien. ⁵ Not only does this evidence support the bankruptcy court's conclusion that there was adequate protection, but it points out the very reason why Rader is inapposite here.

It must be remembered that the question of...