In Re: Qualitech Steel Corp, 01-3055
| Decision Date | 21 December 2001 |
| Docket Number | No. 01-3055,01-3055 |
| Citation | 276 F.3d 245 |
| Parties | (7th Cir. 2001) In the Matter of: Qualitech Steel Corporation, Debtor Appeal of: Official Committee of Unsecured Creditors |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. IP 00-496-C H/G--David F. Hamilton, Judge.
Michael Yetnikoff (argued), David F. Heroy, Bell, Boyd & Lloyd, Chicago, IL, for Appellant.
Andrew P. Brozman (argued), Jennifer C. DeMarco, Chadbourne & Parke, New York, NY, for Appellee.
William I. Kohn, Barnes & Thornburg, Chicago, IL, for Debtors.
Before Bauer, Posner, and Easterbrook, Circuit Judges.
Qualitech Steel Corporation had a short, unhappy, and expensive life. Formed in 1996 to exploit new technologies for producing specialty steels, Qualitech spent more than $400 million building two plants. Both took longer to build than expected, were more costly to construct and operate than expected, and generally performed below expectations. By March 1999, when it entered bankruptcy, Qualitech had not reached full scale and was losing about $10 million a month trying to get there. It owed secured lenders about $265 million; the security included almost all of the firm's assets. Management deemed Qualitech's facilities worth about $225 million when the bankruptcy proceeding began, so the unsecured creditors had little to hope for--little, but not nothing. Qualitech has sought to recover about $4 million from creditors in preference-avoidance actions under the Bankruptcy Code, and these recoveries would be shared among all unsecured cred itors (including the secured lenders, to the extent their loans exceeded the value of the security).
Everyone recognized from the outset that the plants should be sold, either to an established producer or to someone willing to take considerable risk in an effort to get the plants working to original hopes. Some investment in keeping the operations going pending sale might be justified as the purchase of an option in obtaining the benefits of any upturn in the business's prospects. Efforts to obtain new financing were unsuccessful, however, as all available assets were encumbered. Some (but not all) of the original secured lenders offered to put a total of $30 million in new capital into the venture, if they received a super-priority interest. Such a transaction required demoting the other secured lenders' position and substituting new security under 11 U.S.C. sec.364(d)(1). The only other assets in sight were the proceeds of preference- recovery actions (also known as avoidance actions). After notice and a hearing, the bankruptcy court approved debtor-in- possession (dip) financing of $30 million, with super-security and an award of replacement security to the senior lenders, to the extent that this was necessary to maintain their financial position. No one appealed or sought a stay. In August 1999 all of Qualitech's operating assets were sold for consideration that the bankruptcy court deemed equivalent to $180 million.
The first $30 million of the proceeds went to the dip financers, leaving $150 million for the old secured creditors. They accordingly invoked the provision giving them extra security--first dibs in the preference-recovery kitty, which would make up some but far from all of the loss. The unsecured creditors contended, however, that the securedlenders could not have lost anything; after all, if the $30 million investment were prudent, it should have improved these creditors' position. But the bankruptcy judge concluded that good money had been thrown after bad, that the secured lenders' position had been eroded by at least the value of the anticipated preference recoveries, and that they therefore were entitled to a substitute security interest in that collateral. The district court affirmed, and the unsecured creditors have appealed to us. As a practical matter, the decision is final for the purpose of 28 U.S.C. sec.158(d), because the plan for the distribution of the sale proceeds is the...
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