Swedeland Development Group, Inc., In re

Decision Date25 February 1994
Docket NumberNo. 92-5552,92-5552
Citation16 F.3d 552
Parties, 25 Bankr.Ct.Dec. 486, Bankr. L. Rep. P 75,803 In re SWEDELAND DEVELOPMENT GROUP, INC., Debtor. The RESOLUTION TRUST CORPORATION, as Conservator of Carteret Federal Savings Bank v. SWEDELAND DEVELOPMENT GROUP, INC.; Haylex Acquisition Company; Unsecured Creditors Committee; First Fidelity Bank, National Association. Swedeland Development Group, Inc., Appellant.
CourtU.S. Court of Appeals — Third Circuit

Before GREENBERG, NYGAARD, and LEWIS, Circuit Judges.

Reargued in banc Feb. 2, 1994.



GREENBERG, Circuit Judge.


Swedeland Development Group, Inc., a debtor in possession under Chapter 11 of the Bankruptcy Code, appeals from a district court order entered on September 17, 1992, which reversed three orders of the bankruptcy court. Two of the orders of the bankruptcy court authorized Swedeland to obtain post-petition loans on a superpriority basis pursuant to 11 U.S.C. Sec. 364(d)(1) for use in construction of Swedeland's golf course and residential development. The third order denied an application by Carteret Federal Savings Bank, 1 Swedeland's principal prepetition creditor, for relief from the automatic stay which arose when Swedeland filed its Chapter 11 petition. Carteret sought relief pursuant to 11 U.S.C. Sec. 362(d) so that it could foreclose on Swedeland's assets on which it held a mortgage securing Swedeland's indebtedness.

Swedeland argued in the district court that Carteret's appeals from the orders authorizing the loans on a superpriority basis should be dismissed, as pending the appeals Carteret had not obtained a stay of the orders authorizing the loans as provided in 11 U.S.C. Sec. 364(e). But the district court rejected that argument and decided the appeals on the merits. We agree with Swedeland that the appeal from one of the bankruptcy court orders authorizing a post-petition loan was moot in the district court and should have been dismissed, but we determine that the appeal from the other order was not moot. We further conclude that the district court correctly held that the bankruptcy court erred in entering the non-moot order authorizing a post-petition loan. Finally, we agree with the district court that the bankruptcy court erred in denying Carteret relief from the automatic stay. Consequently, to the extent that the district court should have dismissed the appeal, we will vacate its order, but we otherwise will affirm the order of the district court.


This case arises from Swedeland's development of a 508-acre golf course and residential project located in Hardystown Township, Sussex County, New Jersey, and known as Crystal Springs. Swedeland acquired the property in April 1989 and began construction later that year. The plans for the project included homes, a golf course, tennis courts, and an infrastructure such as roads and sewers. The golf course with its clubhouse opened on Memorial Day in 1991.

The project was very large and required substantial financing for acquisition of the property and construction of the improvements. Carteret supplied the financing through a series of loans totaling $37,000,000. 2 For security, Carteret obtained a first mortgage on Swedeland's real estate in the Crystal Springs project, personal guarantees from Swedeland's principals, and a mortgage on real estate Swedeland owned which was located in Jefferson Township, Morris County, New Jersey, and known as the Bowling Green Golf Course. The terms of the Carteret-Swedeland loan provided for the first $42,100 from the sale of each residential unit at Crystal Springs to be paid to Carteret, $12,100 to be applied to the loan for the Crystal Springs Golf Course and the balance to be applied to the other acquisition and construction loans.

Unfortunately, the project ran into financial difficulty which led Swedeland to seek additional financing from Carteret in April 1991. But Carteret was barred from granting that financing by restrictions in the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Carteret, however, permitted Swedeland to use $2,250,000 from a collateral security escrow account established pursuant to the Swedeland-Carteret loan agreement to cure Swedeland's potential monetary defaults.

Apparently this additional financing was insufficient, for on August 2, 1991, Swedeland filed a petition under Chapter 11 in which it showed its debt to Carteret as being slightly in excess of $36,000,000. While Carteret contends that somewhat more was due, we are not concerned with the difference as it is undisputed that Carteret's security has been valued at all times since the filing of Swedeland's Chapter 11 petition at far less than Swedeland's debt to it. Indeed, the parties have accepted an appraisal obtained by Carteret, stating that the value of the Crystal Springs property is $18,495,000. When Swedeland filed the petition, 900 residential units remained to be built. Following the filing of the petition and a series of hearings, the bankruptcy court allowed Swedeland, over Carteret's objections, to use Carteret's cash collateral for operating expenses pursuant to 11 U.S.C. Sec. 363. This cash collateral was derived from the proceeds of sales of units in the development.

Not surprisingly, in the fluid situation presented by the ongoing construction of a major real estate project, events moved rapidly in the bankruptcy court. Swedeland filed a motion pursuant to 11 U.S.C. Sec. 364(d)(1) to obtain working capital and construction financing on a superpriority basis from Haylex Acquisition Company, L.P. for construction of the development. Section 364(d)(1) provides that the court, after notice and hearing "may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if": (1) the trustee is unable to obtain such credit otherwise, and (2) "there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted." Such financing would, of course, have subordinated Carteret's lien to a lien securing Haylex's loan. Swedeland justified its motion by urging that the Crystal Springs Golf Course would generate a positive cash flow, the residential units could be completed and sold, and the completion of the project by the end of the century would result in Carteret being paid in full. Thus, Swedeland argued that Carteret was adequately protected.

While Carteret seems not to have contended that Swedeland could obtain the post-petition financing without the creation of a superpriority lien, it nevertheless opposed Swedeland's application for authority to obtain the Haylex loan, as it disputed the assumptions underlying the application. In addition, Carteret sought relief from the automatic stay so it could foreclose on its mortgage. The bankruptcy court held an evidentiary hearing on the cross-applications, and on March 6, 1992, authorized Swedeland to borrow $840,000 from Haylex on a superpriority basis. On March 9, 1992, the bankruptcy court denied Carteret's motion for relief from the automatic stay, concluding that Carteret was adequately protected since there was a reasonable possibility that Swedeland could reorganize successfully. See 11 U.S.C. Sec. 362(d). Carteret appealed to the district court from the orders of March 6 and March 9, 1992, and unsuccessfully sought a stay of the March 6 order from both the bankruptcy court and the district court. Following denial of the stay, Haylex disbursed its loan in full to Swedeland which has expended the funds.

Prior to the entry of the above orders, Swedeland had filed an application to obtain other superpriority financing from First Fidelity Bank. Once again, Swedeland was successful and on April 10, 1992, the bankruptcy court authorized it to borrow up to $3,160,000 from First Fidelity on a revolving basis. Though Carteret appealed from that order, it did not seek to have it stayed pending the appeal. The parties agree that First Fidelity has disbursed some, but not all, of its loan as authorized by the April 10, 1992 order. We understand that the Haylex funds were used for working capital and the First Fidelity funds were used for construction.

The district court, exercising jurisdiction under 28 U.S.C. Sec. 158(a), reversed the three bankruptcy court orders in a comprehensive memorandum opinion dated September 16, 1992. In its discussion, the district court first dealt with Swedeland's argument, advanced in a motion to dismiss Carteret's appeals, that the appeals from the orders of March 6 and April 10, 1992, authorizing the Haylex and First Fidelity loans were moot. Swedeland predicated this motion principally on 11 U.S.C. Sec. 364(e) which provides as follows:

The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were...

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