In Re Corporation Inc., Case No. 00-01771 (Bankr. D.C. 4/30/2008)
| Decision Date | 30 April 2008 |
| Docket Number | Adversary Proceeding No. 05-10077.,Case No. 00-01771. (Jointly Administered) |
| Parties | In re NETtel CORPORATION, INC., et al., Chapter 7, Debtors. NORTEL NETWORKS, INC., Plaintiff, v. WENDELL W. WEBSTER, Trustee, Defendant. |
| Court | United States Bankruptcy Courts. District of Columbia Circuit |
NETtel Corporation, Inc., as debtor, commenced a case under chapter 11 of the Bankruptcy Code (11 U.S.C.) by filing a voluntary petition.1 The debtor's principal prepetition secured lenders were Nortel Networks, Inc., Allied Capital Corporation and Williams Communications, Inc. ("the Lenders"). During the pendency of the case as a chapter 11 case (the "Chapter 11 Period"), the debtor served as a debtor in possession under 11 U.S.C. § 1101 entitled to exercise the powers specified by 11 U.S.C. § 1107. In that capacity, it was authorized to use the Lenders' cash collateral pursuant to the terms of an interim cash collateral order ("Interim Order"), which included a provision for replacement liens for any diminishment of the cash collateral as a means of adequate protection. Upon the conversion of the case to one under chapter 7 of the Bankruptcy Code, the debtor ceased to be a debtor in possession. Wendell W. Webster was appointed trustee in the chapter 7 case.
Serving as the administrative agent for the Lenders (including itself), Nortel, as plaintiff in this adversary proceeding, seeks a judgment determining and declaring the extent to which it has replacement liens on proceeds of preference action recoveries (the "Preference Action Proceeds") that Webster has made under sections 547 and 550 of the Bankruptcy Code (11 U.S.C.). Nortel contends in its complaint that the debtor and Webster diminished the value of the Lenders' cash collateral postpetition by an amount substantially in excess of $2.9 million and, pursuant to the terms of the Interim Order entered into during the Chapter 11 Period, the Lenders were granted a replacement lien of equal amount in the Preference Action Proceeds. Nortel has filed a motion for partial summary judgment limited to depletion of the Lenders' cash collateral during the Chapter 11 Period, contending that there are no disputed issues of material fact as to at least $2,593,572.83 of the Lenders' asserted replacement lien, and that the Lenders are therefore entitled to immediate disbursement of those funds from Webster.
Webster opposes Nortel's motion, making two principal arguments, first, that the Lenders cannot trace the deposits made into the debtor's deposit accounts during the Chapter 11 Period to the Lenders' prepetition collateral because the debtor failed to segregate the Lenders' cash collateral from other estate funds (including proceeds of postpetition accounts receivable), and, second, that the Lenders' claim to a replacement lien for the partial depletion of the debtor's deposit accounts must fail because the Lenders failed prepetition to take the proper steps to perfect their security interest in the debtor's deposit accounts.
The material facts, which are largely undisputed, are as follows.
The debtor, NETtel Corporation, Inc., filed a voluntary petition under Chapter 11 of the Bankruptcy Code on September 28, 2000. On October 23, 2000, the case was converted to a case under Chapter 7 of the Bankruptcy Code. The debtor operated as debtor in possession for 25 days under chapter 11. On October 24, 2000, Webster was appointed as chapter 7 trustee of the debtor's bankruptcy estate.
Nortel Networks, Inc. is a prepetition secured lender of the debtor and is the administrative agent for itself and Allied Capital Corporation and Williams Communications, Inc., also prepetition secured lenders of the debtor. Pursuant to a prepetition credit agreement, the debtor purported to grant the Lenders a security interest in substantially all of the debtor's prepetition assets, including:
a. All Capital Stock of each of the subsidiaries of the Debtor;
b. All Property of the Debtor, as more particularly defined in the Security Documents, including without limitation: accounts; chattel paper; instruments; general intangibles; documents; contract rights; equipment; inventory; intellectual property; licenses; investment property; deposit accounts; customer deposits; brokerage accounts; Pledged Shares; indebtedness owed to Debtor; real property; other goods and personal property of any kind or character, whether tangible or intangible; and
c. All cash and non-cash proceeds and products of any and all of the foregoing.
As of the petition date, the debtor's aggregate outstanding indebtedness to the Lenders was approximately $92 million.2 The Credit Agreement between the Lenders and the debtor reflects the grant of a security interest in substantially all of the debtor's prepetition assets.
On October 18, 2000, before the debtor's case was converted from a case under chapter 11 to a case under chapter 7 of the Bankruptcy Code, the court approved the Interim Order (entitled Interim Agreement and Consent Order Authorizing the Debtor's Use of the Lenders' Cash Collateral on Certain Terms and Conditions). As adequate protection to the Lenders, the Interim Order provided in pertinent part in decretal paragraph 5 that:
the Court hereby grants to Nortel Networks as Administrative Agent for the benefit of itself and the Lenders a valid and perfected first priority lien on and security interest in, any and all of the Debtor's rights, title and interests in and to all of its goods, property and interests in property ... whether acquired or obtained before or after the Petition Date ...,*[FN 1], including without limitation interests in and recoveries realized from all actions brought by the Debtor or its predecessors or successors in interest pursuant to Sections 542, 543, 544, 545, 547, 548, 549, 550 and 553(b) of the Bankruptcy Code (the "Postpetition Collateral"). Nortel Networks' (as Administrative Agent for the benefit of itself and the Lenders) liens and security interests in the Postpetition Collateral ... shall not be subject or subordinate to any lien or security interest that is avoided and preserved for the benefit of the Debtor pursuant to Section 551 of the Bankruptcy Code.
FN 1: *but only to the extent that Nortel as administrative agent for itself and the Lenders' pre-petition liens are (a) valid and perfected pre-petition liens and security interests or (b) to the extent Debtor's use of Lenders' Collateral or Cash Collateral are not fully replaced with postpetition assets of equal value.
Nortel concedes that part (b) of the footnote is a limitation on the Lenders' right to a lien on the proceeds of the preference actions, but contends as to part (a) of the footnote that the Lenders' liens are now deemed to have been perfected prepetition pursuant to the terms of the Interim Order regarding the time for raising objections to the perfected status of the liens. In pertinent part, the Interim Order provided, first, in recital paragraph 6, that:
Subject to the terms of paragraph eighteen (18) below (entitled" Limited Period for Objections to Liens and Claims"), the Debtor acknowledges, reaffirms and stipulates to the Pre-petition Indebtedness owed by the Debtor to Lenders and to the validity, perfection, priority, and extent of certain security interests and liens securing such Pre-petition Indebtedness (defined below) in favor of Nortel Networks as Administrative Agent for its benefit and the benefit of the Lenders on the Pre-petition Collateral (defined below), in each case pursuant to the written agreements, documents and instruments described below [describing agreements].
Second, in recital paragraph 10, the Interim Order provided in relevant part:
Subject to the terms of paragraph eighteen (18) below ... [the Lenders'] liens and security interests in, to and against all of the Pre-petition Collateral are valid, enforceable and properly perfected ....
Finally, in recital paragraph 9, the debtor and Nortel stipulated that the Lenders had perfected their security interests in and liens on the Pre-petition Collateral.
Decretal paragraph 18, however, provided a procedure for objecting to the Lenders' asserted liens: parties were to have a "Review Period" ending on "the later of the date this Order becomes a Final Order or sixty (60) days from the date this Order is entered," and if no filing was made during the Review Period to raise a contest, all parties would be forever barred from contesting the validity, perfection, priority and enforceability of the Lenders' liens and security interests. This provision overrides any stipulation in the recital paragraphs of the Interim Order regarding the perfection of the lenders' liens and security interests.
Because the Interim Order was never made a final order, the Review Period has never expired, and thus Webster has timely raised his contention that the Lenders' liens and security interests were not perfected in the debtor's deposit accounts. At the hearing on the Interim Order on October 13, 2000, the court struck language in the proposed interim order providing that if no timely objection was made to the interim order, the interim order was to be deemed a final order without further order. The court made clear at the hearing that the Interim Order was to become a final order only via the entry of a new order as a final order, and the language of the Interim Order as entered plainly so provided. At the October 12, 2000, hearing, Nortel's counsel agreed to re-submit an order captioning it as a final order. Through apparent inadvertence, no proposed Final Order was ever submitted by the Lenders, as the docket does not reflect the submission of such a proposed order.
Notice of the hearing on the motion for use of cash collateral gave notice of the emergency hearing but no notice of the deadline for filing...
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