
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
