Ford Motor Credit Co. v. Dobbins

Citation35 F.3d 860
Decision Date15 September 1994
Docket NumberNo. 93-1476,93-1476
Parties, 26 Bankr.Ct.Dec. 19, Bankr. L. Rep. P 76,096 FORD MOTOR CREDIT COMPANY, Plaintiff-Appellee, v. Rayfeal C. DOBBINS, a/k/a Ray C. Dobbins; Mary Ellen Dobbins, Defendants-Appellants.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: John Saul Edwards, Roanoke, VA, for appellants. Benjamin C. Ackerly, Sr., Hunton & Williams, Richmond, VA, for appellee. ON BRIEF: Patricia L. Hobbs, Hunton & Williams, Richmond, VA, for appellee.

Before WILKINSON, HAMILTON and MICHAEL, Circuit Judges.

Affirmed in part, reversed in part, and remanded by published opinion. Judge MICHAEL wrote the opinion, in which Judge WILKINSON and Judge HAMILTON joined.

OPINION

MICHAEL, Circuit Judge:

Chapter 11 debtors Rayfeal C. and Mary Ellen Dobbins appeal from a district court decision that was favorable in several respects to creditor Ford Motor Credit Corporation (FMCC) in its pursuit of a deficiency claim. The district court reversed the bankruptcy court (1) by granting FMCC a superpriority administrative expense under 11 U.S.C. Sec. 507(b), (2) by awarding FMCC postpetition interest under 11 U.S.C. Sec. 506(b), and (3) by finding that the Dobbinses were not entitled to any additional credit from FMCC under a parts return agreement between Ford Motor Company (Ford) and the bankrupt car dealership owned by the Dobbinses. For the reasons that follow, we affirm in part and reverse in part. Specifically, we hold that the district court erred both in granting FMCC a Sec. 507(b) superpriority and in awarding FMCC postpetition interest. The district court did not err, however, in concluding that the Dobbinses are not entitled to any additional credit from FMCC under the parts return agreement.

I. Background

From 1970 until 1980 Mr. Dobbins operated a car dealership, Ray Dobbins Lincoln-Mercury, Inc. (the Dealership), in Roanoke, Virginia. The Dobbinses were the sole officers and shareholders of the Dealership. In 1980, as a result of financial problems, the Dealership ceased operating. On March 3, 1981, the Dealership filed a petition under Chapter 11 of the Bankruptcy Code. That same day the Dobbinses filed their own Chapter 11 petition.

FMCC provided financing to the Dealership. Specifically, FMCC provided several mortgage loans, a capital loan, and a wholesale loan, the latter of which financed the Dealership's acquisition of new and used cars. The loans were secured by certain personal property of the Dealership, including parts and equipment. The Dobbinses personally guaranteed payment of the Dealership's debt to FMCC. The Dobbinses' guaranty was secured by a deed of trust on their real property at 3112 Melrose Avenue in Roanoke, Virginia (Melrose Avenue property), which was where the Dealership was located. 1 The real property was owned by the Dobbinses individually and was leased to the Dealership. 2

On January 20, 1982, the bankruptcy court entered an order approving the Dealership's return of automotive parts to Ford pursuant to a parts return provision in the franchise agreement. (Ford and FMCC are separate corporate entities.) In June 1982, Ford notified the Dealership that it had rejected a large portion of the returned parts. Ford sent back the rejected parts and paid $46,682.55 for the parts it accepted. The $46,682.55 ultimately went to FMCC, which had a security interest in the parts.

Meanwhile, on April 7, 1982, FMCC moved for relief from the automatic stay (1) in the Dobbinses' bankruptcy case to foreclose on the Melrose Avenue property and (2) in the Dealership's bankruptcy case to take possession of and sell certain personal property owned by the Dealership. The bankruptcy court consolidated the motions and held a hearing, at which FMCC asserted that the value of its claim against the Dealership was $697,720.54. FMCC and the Dobbinses presented expert testimony on the value of the secured collateral. FMCC's experts valued the Melrose Avenue property at $425,000 and the remaining personal property of the Dealership at $47,731. The Dobbinses' and the Dealership's experts valued the Melrose Avenue property at $898,000 and the remaining personal property at $190,000.

On March 31, 1983, the bankruptcy court entered an order finding that "[FMCC's] interest [was] adequately protected by the equity in the subject property." JA 36. Accordingly, the court denied FMCC's motion for relief from the stay pending a hearing on the reorganization plans of both the Dealership and the Dobbinses. The court did not make any findings regarding the values of the Melrose Avenue property or the Dealership's personal property. FMCC did not appeal this order.

On November 29, 1983, the bankruptcy court issued orders confirming the plans in both cases. Paragraph Seven of the Dealership's plan said, inter alia:

the debtor in possession will sell the remaining fixtures and real property of the Debtor at 3112 Melrose Avenue. Due to improving economic conditions, this sale will close on or before November 30, 1984, with the proceeds disbursed to [FMCC].... The proposed purchase price of the dealership facility at 3112 Melrose Avenue is $1.4 million. From these proceeds, the entire remaining allowed indebtedness ... owed to [FMCC] plus any allowed expenses will be paid in full.

JA 41 (p 7). Further, Paragraph Sixteen of that plan said that if the Melrose Avenue Property was not sold as provided in Paragraph Seven, the Dealership would be in default. In the event of such default, FMCC could file an affidavit with the court, and five days later the automatic stay would be lifted to permit FMCC to "take possession of the property and dispose of it in accordance with its rights without further action required by the Bankruptcy Court or any other court." JA 42 (p 16). The Dobbinses' plan incorporated by reference Paragraph Seven of the Dealership's plan and likewise said that in the event the Melrose Avenue property was not sold by November 30, 1984, the Dobbinses would be in default and FMCC could take possession.

The Dobbinses were unable to sell the Melrose Avenue property. On February 10, 1986, the bankruptcy court lifted the stay so that FMCC could sell the property. FMCC listed the property with a realty agency that specialized in marketing commercial property. On January 30, 1987, about one year after the court lifted the stay, FMCC finally sold the Melrose Avenue property for $375,000 at a private sale. The court approved the sale over the Dobbinses' objection that the price was too low. After sale-related costs and expenses were deducted, the net sale proceeds ($301,123.83) were applied to FMCC's claim.

Following the sale, FMCC filed a Second Amended Proof of Claim in the Dobbinses' bankruptcy case for its deficiency in the amount of $545,639.41, which included postpetition interest, legal fees and expenses. 3 Significantly, in its Second Amended Proof of Claim FMCC sought a superpriority administrative expense under 11 U.S.C. Sec. 507(b) for the alleged decrease in the value of the Melrose Avenue property from the date of the adequate protection order to the date of the sale. The Dobbinses objected to FMCC's claim on several grounds. After a hearing, the bankruptcy court ruled on March 19, 1992, that FMCC was not entitled to a Sec. 507(b) superpriority in the Dobbinses' bankruptcy case because

any superpriority administrative expense of FMCC under Sec. 507 would be assertable only against the estate of the principal debtor, the dealership.... The priority cannot be transferred with prejudice to the Dobbins' Chapter 11 creditors. As to the Dobbins' Chapter 11 creditors, FMCC's guaranty claims are simply those of an unsecured creditor and cannot be elevated ahead of other unsecured creditors.

JA 249. The bankruptcy court also concluded that FMCC, as an undersecured creditor, was not entitled to postpetition interest, legal fees or other expenses. Finally, the court found that Ford agreed to pay to the Dealership $88,000 for returned parts pursuant to the parts return agreement; because FMCC only credited the Dobbinses for the $46,682.55 paid by Ford, the bankruptcy court concluded that the Dobbinses were entitled to an additional credit of $41,317.45 from FMCC ($88,000 minus $46,682.55). In the final analysis, the bankruptcy court concluded that FMCC had an unsecured claim in the Dobbinses' case in the amount of $72,406.83. 4

FMCC appealed the bankruptcy court's order, and on February 11, 1993, the district court reversed the bankruptcy court in several respects. The district court held, inter alia: (1) that FMCC was entitled to a Sec. 507(b) superpriority in the amount of $322,720.54 5 because the "adequate protection" proved to be inadequate; (2) that FMCC was entitled to postpetition interest on its claim because, although it was undersecured when the Melrose Avenue property was sold, it was oversecured earlier in the bankruptcy proceedings; and (3) that the Dobbinses were not entitled to any additional credit from FMCC under the parts return agreement.

The Dobbinses filed this appeal, contending that the district erred: (1) in granting FMCC a Sec. 507(b) superpriority, (2) in awarding FMCC postpetition interest, and (3) in concluding that the parts return agreement did not entitle the Dobbinses to an additional $41,317.45 credit from FMCC. For the reasons that follow, we hold that the district court erred in granting FMCC a superpriority and in awarding FMCC postpetition interest. In addition, we hold that the district court did not err in concluding that the Dobbinses were not entitled to an additional credit from FMCC under the parts return agreement.

II. Standard of Review

"This court reviews questions of statutory interpretation de novo." Ford Motor Credit Co. v. Reynolds & Reynolds Co. (In re JKJ Chevrolet, Inc.), 26 F.3d 481, 483 (4th Cir.1994). "With respect to the Bankruptcy Court's findings of fact, the appropriate...

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