Baybank-Middlesex v. Ralar Distributors

• Court: Court of Appeals for the First Circuit
• Decided: November 7, 1995
• Docket: 95-1623
• Status: Published

Opinion

USCA1 Opinion

United States Court of Appeals
                            United States Court of Appeals

                                For the First Circuit
                                For the First Circuit

                                 ____________________



        No. 95-1623



                                  BAYBANK-MIDDLESEX,



                                      Appellant,



                                          v.



                          RALAR DISTRIBUTORS, INC., ET AL.,



                                      Appellees.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                          FOR THE DISTRICT OF MASSACHUSETTS



                    [Hon. Michael A. Ponsor, U.S. District Judge]
                                             ___________________



                                 ____________________



                                        Before



                                Torruella, Chief Judge,
                                           ___________

                            Bownes, Senior Circuit Judge,
                                    ____________________

                              and Stahl, Circuit Judge.
                                         _____________



                                 ____________________



            Charles R.  Bennett, Jr., with  whom Kevin J. Simard  and Riemer &
            ________________________             _______________      ________

        Braunstein, were on brief for appellant.
        __________

            Christopher W. Parker,  with whom Rudolph F. DeFelice,  McDermott,
            _____________________             ___________________   __________

        Will &  Emery, Paul R.  Salvage, Susan L.  Burns, and Bacon  & Wilson,
        _____________  ________________  _______________      _______________

        were on brief for appellees.



                                 ____________________

                                   November 7, 1995

                                 ____________________



STAHL, Circuit Judge.   Following its  unsuccessful
                      STAHL, Circuit Judge.
                             _____________



            intermediate appeal to the district  court, Baybank-Middlesex



            ("Baybank")   again   challenges   the   bankruptcy   court's



            disallowance of  its  claim  for  postpetition  interest  and



            attorney fees  under its loan  agreement with the  Chapter 11



            debtors, Ralar Distributors, Inc.  and its parent corporation



            Halmar  Distributors, Inc.  (collectively "Ralar").   Baybank



            recovered  in  full  its   loan  principal  and  all  accrued



            prepetition interest; only postpetition interest and fees are



            now  at  issue.     Notwithstanding  the  fact  that  Baybank



            ultimately recovered  its  prepetition  claim  in  full,  the



            bankruptcy court found that Baybank had been undersecured and



            thus was  not entitled to postpetition fees  and interest; in



            so ruling, the court relied on  its finding at a hearing held



            shortly  after the commencement of the  case that Baybank was



            "under water."



            The bankruptcy  court also rejected  Baybank's argument  that



            Ralar's  failure to  adequately protect  Baybank's collateral



            entitled  Baybank to a "superpriority" administrative expense



            claim for the  postpetition interest and fees.   The district



            court affirmed, and we now affirm the district court.



                                         I. 
                                         I. 
                                         __



                                      BACKGROUND
                                      BACKGROUND
                                      __________



                      On October 16, 1989, Ralar, a wholesale distributor



            of household  and hardware items, filed  a voluntary petition


-2-
                                          2



for relief under Chapter 11 of the Bankruptcy Code.   At that



            time,  Ralar owed Baybank  approximately $10 million, secured



            by all of Ralar's assets.  



                      Shortly  after  the Chapter  11  filing, Ralar  (as



            debtor  in  possession) and  Baybank  reached  an impasse  in



            negotiations concerning  Ralar's use  of cash  collateral and



            inventory during  the pendency of the  Chapter 11 proceeding.



            Baybank ultimately refused to  extend further credit to Ralar



            or  to allow  Ralar  to use  Baybank's collateral,  prompting



            Ralar to move for a bankruptcy court order allowing it to use



            the  collateral.  Over  the next four  months, the bankruptcy



            court held a  series of "cash collateral  hearings," at which



            Baybank objected  to the continued use of  its collateral and



            sought immediate foreclosure.   At the first hearing, Baybank



            and Ralar  reached a stipulation  allowing Ralar to  use cash



            collateral.   At  three subsequent  hearings, the  bankruptcy



            court issued orders allowing Ralar to continue its operations



            using  the collateral  despite  Baybank's objection,  finding



            that  Baybank's interests  were adequately  protected because



            Ralar's continued  sales of inventory to  its customers would



            yield  a higher net return  than Baybank could  realize if it



            foreclosed.    At the  second  cash  collateral hearing,  the



            bankruptcy  court  found  that  Baybank  was   "under  water"



            (undersecured),  but  that  Ralar's  operating  plan  was not



            likely to put Baybank further under water.


-3-
                                          3



After four months  of operation under  bankruptcy



            court  orders allowing Ralar to use the collateral, the court



            ultimately found that Ralar's plan of inventory reduction was



            no  longer protecting  Baybank's interests.   Thus,  in March



            1990  it  granted Baybank  relief  from  the automatic  stay,



            permitting Baybank to foreclose on Ralar's assets.   



                      Payments   Ralar   made  to   Baybank   during  its



            postpetition  operations  combined with  the proceeds  of the



            foreclosure were  sufficient to  repay all of  Baybank's loan



            principal,   all   accrued  prepetition   interest,   and  an



            unspecified amount of  postpetition interest.   Subsequent to



            the  foreclosure, Baybank  filed a  proof of  claim for  $2.2



            million,   comprised   entirely   of    Baybank's   unsecured



            postpetition  interest, attorney fees,  and collection costs,



            which  Ralar   was  obligated   to  pay  Baybank   under  the



            preexisting loan  agreement.   Because  Baybank  already  had



            liquidated all  of Ralar's assets, this  claim was unsecured.



            However,  Baybank sought to recover the postpetition interest



            and   fees  as  a  so-called  "superpriority"  administrative



            expense claim under 11  U.S.C.   507(b), arguing that  if its



            collateral  had been  adequately  protected, the  foreclosure



            proceeds  would have  been  sufficient to  cover the  claimed



            postpetition interest and fees.  



                      The bankruptcy  court disallowed the  claim in  its



            entirety,   ruling  that  (1)  Baybank  was  an  undersecured


-4-
                                          4



creditor   and   therefore  was   not  entitled   to  recover



            postpetition interest and fees  under 11 U.S.C.   506(c), (2)



            Baybank  failed   to  demonstrate  a   failure  of   adequate



            protection,   and  (3)   Baybank  was   not  entitled   to  a



            superpriority claim  under 11  U.S.C.   507(b) even  if Ralar



            had  failed  to  provide  adequate  protection  of  Baybank's



            interest in the  collateral.  The district court affirmed the



            bankruptcy  court's   factual   finding  that   Baybank   was



            undersecured  and found as a  matter of law  that Baybank was



            not  entitled  to postpetition  interest  and fees  nor  to a



            superpriority claim for failure of adequate protection.



                                         II.
                                         II.
                                         ___



                                      DISCUSSION
                                      DISCUSSION
                                      __________



            A.  Standard of Review
            ______________________



                      We  review  challenged   rulings  of  law  by   the



            bankruptcy  court  and  the  district court  de  novo,  while
                                                         __  ____



            contested  findings  of  fact  by the  bankruptcy  court  are



            reviewed only for clear  error.  See Western Auto  Supply Co.
                                             ___ ________________________



            v. Savage Arms,  Inc. (In  re Savage Indus.,  Inc.), 43  F.3d
               __________________  ___________________________



            714,  719-20 n.8 (1st  Cir. 1994).   We are free  to affirm a



            district court's ruling on any ground supported in the record



            even  if the  issue  was  not  pleaded, tried,  or  otherwise



            referred  to  in the  proceedings  below.   Levy  v.  Federal
                                                        ____      _______



            Deposit Ins. Corp., 7 F.3d 1054, 1056 (1st Cir. 1993).
            __________________



            B.  Postpetition Interest and Fees
            __________________________________


-5-
                                          5



Baybank  sought   postpetition  interest,  attorney



            fees, and collection costs that it claimed it was entitled to



            charge  Ralar under the terms  of the loan  agreement.  Under



            the  Bankruptcy  Code,   only  "oversecured"  creditors   are



            entitled  to receive  postpetition interest  and loan-related



            fees  and costs.  11  U.S.C.   506(b);1 United  Sav. Ass'n of
                                                    _____________________



            Texas v.  Timbers of  Inwood Forest  Assocs., Ltd., 484  U.S.
            _____     ________________________________________



            365, 372 (1988).  A creditor is oversecured when the value of



            its collateral exceeds the  amount of its claim; postpetition



            interest  and fees are allowable  only to the  extent of that



            oversecurity.  See Timbers of Inwood Forest, 484 U.S. at 372.
                           ___ ________________________



                      At   the  second   cash  collateral   hearing,  the



            bankruptcy judge made these factual findings:



                           It seems clear, at least I certainly

                      find,   that   a   liquidation  of   this

                      inventory at this point, if  the bank, as

                      sought,  were  permitted  to  foreclosure

                      [sic],  that  a liquidation  only through

                      bulk sales  would produce a  disaster for

                      all, and certainly for the bank . . . .


____________________



            1.  11 U.S.C.   506(b) provides in relevant part: 



                      To the  extent  that an  allowed  secured

                      claim is secured by property the value of

                      which . . . is greater than the amount of

                      such claim, there shall be allowed to the

                      holder  of such  claim, interest  on such

                      claim, and any reasonable fees, costs, or

                      charges provided for under  the agreement

                      under which such claim arose.



                                         -6-
                                          6



Both secured parties,2  I find,  are

                      now under  water.   The question is,  the

                      debtor's  proposal, is  it likely  to put

                      them  further under  water.   And I  find

                      that it  is not likely, it  is not likely

                      that  the debtor's proposal  will put the

                      secured parties further under water.3



            "Under  water" in  the  context of  security interests  means



            undersecured, i.e., the value of the collateral is  less than



            the amount of  the debt.   Webster's Third New  International
                                       __________________________________



            Dictionary 2491 (1986).  Thus, at a  fully litigated, two-day
            __________



            evidentiary  hearing   held   just  two   weeks   after   the



            commencement of bankruptcy, the  bankruptcy judge found in no



            uncertain terms that Baybank was an undersecured creditor.4



                      Baybank argues that  the bankruptcy judge's finding



            that  Baybank  was  undersecured  was obiter  dictum,  not  a
                                                  ______  ______



            factual finding,  and that  the courts  below erred  in using



            that dictum  to disallow its claim  for postpetition interest



            and  fees.  We disagree.  The bankruptcy judge stated clearly



                                
            ____________________



            2.  There was  another secured  creditor, junior  to Baybank,

            also seeking relief from the stay because of lack of adequate

            protection; only Baybank is a party to this appeal.



            3.  Because  much  of  Ralar's  inventory was  seasonal,  the

            bankruptcy  judge  determined  that a  forced  liquidation by

            Baybank  would yield less than Ralar's plan to continue sales

            and use the proceeds to purchase new in-season inventory.  We

            assume that the judge's prediction proved to be correct; that

            would  explain why  Baybank recovered  all its  principal and

            prepetition interest  in spite  of the judge's  finding that,

            based on liquidation value, Baybank was "under water."



            4.  There has been no suggestion, nor is it plausible on this

            record, that  Baybank was oversecured  at the time  of filing

            but that the collateral value eroded substantially in the two

            weeks between filing and the November 1 hearing.



                                         -7-
                                          7



that he  was making a  finding, and there was  good reason to



            make that finding in that context.



                      At  the hearing  where  the bankruptcy  judge found



            that  Baybank  was "under  water,"  the precise  issue  to be



            decided was  whether Baybank was adequately protected against



            erosion  in  collateral  value,  as  required  by  11  U.S.C.



              363(e).    The parties  presented  evidence  on the  effect



            Ralar's use of cash collateral would likely have on the value



            of Baybank's  collateral.  In making  the adequate protection



            determination,  it  was entirely  logical  for  the judge  to



            consider the value  of the collateral relative to  the amount



            of the debt  owed Baybank.  Indeed, we think  it would be odd



            not to  determine collateral value in  an adequate protection



            hearing.  A sufficient equity  cushion is itself a recognized



            form of  adequate protection, thus collateral  valuation is a



            logical step in making an adequate  protection determination.



            See, e.g., First Agric. Bank v. Jug End in the Berkshires, 46
            ___  ____  ______________________________________________



            B.R. 892, 899 (Bankr. D. Mass. 1985) ("The classic protection



            for a secured debt justifying continuation of the stay is the



            existence  of an `equity  cushion.'").  We  conclude that the



            bankruptcy judge's finding that  Baybank was undersecured was



            not dictum, but a factual finding made as part of an adequate



            protection determination.  Baybank has not shown that finding



            to be clearly erroneous.


-8-
                                          8



Baybank  also  makes  this  related  argument:    a



            finding  that a creditor  is adequately protected,  made at a



            hearing early  in a Chapter 11  case, cannot be binding  at a



            later hearing to determine whether that protection ultimately



            proved  inadequate.   If  such a  finding  were binding,  the



            argument  goes, then a court that once found protection to be



            adequate  could  never later  find  that  the protection  had



            failed, and section 507(b), which provides  a "superpriority"



            claim where  adequate protection  fails, would be  rendered a



            nullity.  We agree with that argument, as far as it goes, but



            it falls short in this appeal.  We find that Baybank's appeal



            is foreclosed by  the bankruptcy court's finding  at the cash



            collateral  hearing that  Baybank was  undersecured, not  its
                                                   ____________



            finding that Baybank  was adequately protected.   We need not
                                      ____________________



            determine whether there was  a failure of adequate protection



            because  (1) Baybank,  as  an undersecured  creditor, is  not



            entitled to  postpetition interest and  fees under    506(b)5



                                
            ____________________



            5.  Baybank might have argued, but did not, that even a valid

            finding as to collateral value made at an adequate protection

            hearing  has no res judicata effect when valuations are to be
                            ___ ________

            made  for other purposes at later proceedings.  See, e.g., In
                                                            ___  ____  __

            re  Richardson,  97  B.R.  161, 162  (Bankr.  W.D.N.Y.  1989)
            ______________

            (valuation of  creditor's collateral made for  one purpose is

            not res  judicata as  to later  valuation in  same bankruptcy
                ___  ________

            case for  different purposes).  Instead,  Baybank avoided the

            res  judicata issue  by arguing that  "The issue  before this
            ___  ________

            Court is not the value of Baybank's collateral.  The material

            issue  is  whether or  not  the  Bankruptcy Court's  adequate

            protection order failed. .  . . Thus, the valuation  issue is

            not  material  to  this  appeal."    We  will   not  consider

            potentially  applicable  arguments  that  are   not  squarely

            presented  in a  party's appellate  brief. See,  e.g., United
                                                       ___   ____  ______



                                         -9-
                                          9



and (2) Ralar's use of the collateral caused no  harm or loss



            to Baybank that could give rise to a claim under   507(b), as



            we explain further below.


____________________



            States  v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (appellate
            ______     _______

            arguments not presented "squarely and distinctly" are  deemed

            waived).



                                         -10-
                                          10



C.  Baybank's Claim for Failure of Adequate Protection
            ______________________________________________________



                      Baybank asserts that Ralar's use of  the collateral



            eroded its value, constituting an allowable claim entitled to



            superpriority  under  11 U.S.C.    507(b).6    The basis  for



            Baybank's claim is that  it "suffered a loss" due  to Ralar's
                                         _______________



            use of  the collateral; most  of its brief  focuses, however,



            not on the nature or extent of that claimed loss,  but on how



            such a loss can become an allowable superpriority claim under



              507(b).  Baybank has failed to present a plausible argument



            on the threshold issue of whether in fact it suffered a loss,



            given that it recovered its prepetition claim in full.


____________________



            6.  11 U.S.C.   507(b) provides: 



                      If  the trustee, under  section 362, 363,

                      or 364 of  this title, provides  adequate

                      protection of the interest of a holder of

                      a claim secured by  a lien on property of

                      the debtor and  if, notwithstanding  such

                      protection,  such  creditor  has a  claim

                      allowable under subsection (a)(1) of this

                      section arising from  the stay of  action

                      against such property  under section  362

                      of this  title, from  the  use, sale,  or

                      lease  of such property under section 363

                      of this title, or  from the granting of a

                      lien under section 364(d) of  this title,

                      then  such  creditor's  claim under  such

                      subsection shall have priority over every

                      other claim under such subsection.



            A "claim  allowable under subsection (a)(1)  of this section"

            is, by further cross-reference, an  "administrative expense[]

            allowed  under section  503(b)."   See 11  U.S.C.  507(a)(1).
                                               ___

            The  relevant  part  of    503(b)  allows  as  administrative

            expenses  "the  actual,  necessary  costs  and  expenses   of

            preserving the estate."  See 11 U.S.C.   503(b).
                                     ___



                                         -11-
                                          11



The logical structure of Baybank's argument is: (1)



            Ralar's  unprofitable  operations using  Baybank's collateral



            resulted  in an  erosion  in the  total  value of  collateral



            securing Baybank's  loan; (2) if the collateral  had not been



            so eroded, the collateral value  would have exceeded the debt



            owed Baybank,  and as an  oversecured creditor it  would have



            been  eligible for  postpetition  interest and  fees under   



            506(c);  (3)  thus,  Ralar's  use of  the  collateral  caused



            Baybank  to suffer a loss  to the extent  of the postpetition



            interest and fees it  would have recovered had there  been no



            erosion in  collateral value, and that loss is a "claim . . .



            arising from the stay of  action against [its collateral]" as



            provided in   507(b);  (4) Ralar's use of the  collateral and



            therefore  the  resultant  "loss" to  Baybank  were  "actual,



            necessary costs and expenses  of preserving the estate" which



            qualify as  an administrative claim under    503(b); and, (5)



            the  erosion in collateral  value resulted from  a failure of



            adequate  protection,  thus entitling  Baybank  to receive  a



              507(b)  "superpriority"  for  its    503(b)  administrative



            expense claim.  This fascinating argument has led the parties



            and two courts through a  complex maze of ambiguous statutory



            provisions and opaque, inconsistent case law.  We decline the



            invitation  to enter the  labyrinth ourselves, believing that



            we need go no further than its threshold.


-12-
                                          12



Because we find no  error in the bankruptcy judge's



            factual  finding that Baybank  was undersecured,  we conclude



            that Baybank had no  entitlement to postpetition interest and



            fees  and thus  suffered no loss  that might  give rise  to a



            claim under    503(b)  and 507(b).  Put  differently, even if



            there  was  somehow  a  failure  of  adequate  protection  (a



            question we do not reach), Baybank has no claim "arising from



            the stay of action",  see   507(b), because it  recovered its
                                  ___



            prepetition claim  in full; as an undersecured creditor it is



            entitled to  no more.   On the contrary,  it appears (as  the



            bankruptcy   judge  concluded)   that  Ralar's  use   of  the



            collateral  benefitted Baybank,  allowing it  to  recover its
                        __________



            prepetition claim in full in spite of its being  undersecured



            at the start of the Chapter 11 case.  In any event, it simply



            is  not necessary to address  whether there was  a failure of



            adequate protection where an undersecured creditor ultimately



            recovers  its prepetition claim  in full.   We  conclude that



            Ralar's  use  of  Baybank's  collateral  caused  no  loss  to



            Baybank, therefore Baybank has  no claim under     503(b) and



            507(b).



                                         III.
                                         III.
                                         ____



                                      CONCLUSION
                                      CONCLUSION
                                      __________



                      For  the reasons articulated  above, we  affirm the



            district court's judgment.



                      Affirmed.  Costs to the appellees.
                      Affirmed.  Costs to the appellees.
                      ________   ______________________


-13-
                                          13