                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-25-1995

IN RE: Indian Palms
Precedential or Non-Precedential:

Docket 94-5265




Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995

Recommended Citation
"IN RE: Indian Palms" (1995). 1995 Decisions. Paper 197.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/197


This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
1
           UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT


                      N0. 94-5265


        IN RE:   INDIAN PALMS ASSOCIATES, LTD.,
                  B.C. 90-25765 (WFT)

                 NANTUCKET INVESTORS II

                          v.

CALIFORNIA FEDERAL BANK; INDIAN PALMS ASSOCIATES, LTD.
           OFFICE OF UNITED STATES TRUSTEE

           *Argo Loan Limited Partnership
                      Appellant

        *(Pursuant to Court's 9/12/94 order)



   On Appeal From the United States District Court
            For the District of New Jersey
         (D.C. Civil Action No. 93-cv-04519)


              Argued:   December 7, 1994

 BEFORE:   STAPLETON, ROTH and LEWIS, Circuit Judges

            (Opinion Filed July 25, 1995)




                    Jonathan E. Polonsky (Argued)
                    Thomas P. Higgins
                    Thelen, Marrin, Johnson & Bridges
                    330 Madison Avenue, Suite 1100
                    New York, New York 10017-5001
                      Attorneys for Appellee

                    Paul Kizel (Argued)


                           2
Ravin, Sarasohn, Cook, Baumgarten,
Fisch & Baime
103 Eisenhower Parkway
Roseland, NJ 07068
  Attorneys for Appellant




      2
                        OPINION OF THE COURT




STAPLETON, Circuit Judge:



          Creditor California Federal Bank ("CalFed"), holder of

a first mortgage against the debtor partnership's primary asset

("the property"), seeks relief from the automatic stay in a

Chapter 11 bankruptcy proceeding in order to initiate foreclosure

proceedings.0   Nantucket Investors II ("Nantucket Investors"),

who holds a second mortgage against the property, opposes the

lifting of the stay.

          The bankruptcy court granted CalFed relief from the

stay under 11 U.S.C. § 362(d)(1), finding that CalFed's interest

in the property was not being adequately protected during the

pendency of the bankruptcy proceedings.   The district court

reversed, finding that CalFed's current claim, having been

reduced by post-petition payments, was less than the bankruptcy

court had determined and was adequately protected.   The district

court also found that the debtor retained equity in the property

and that relief from the automatic stay would therefore be

unavailable under 11 U.S.C. § 362(d)(2) as well.0    We will

0
          Following the district court's disposition of this
matter, CalFed assigned its claim to Argo Loan Limited
Partnership who was substituted as the named appellant in this
matter. For ease of discussion, we will refer to both CalFed and
Argo Loan Limited Partnership as CalFed.
0
          The bankruptcy court had jurisdiction pursuant to 28
U.S.C. § 1334(b) and 28 U.S.C. § 157(b)(1)-(2), which confers


                                 3
reverse the order of the district court and remand with

instructions to return this matter to the bankruptcy court for

further proceedings consistent with this opinion.



                                 I.

           Indian Palms Associates, the debtor partnership, was

formed to acquire a 176-unit garden apartment complex located in

Florida.   The debtor purchased that property from Nantucket

Investors in 1983, and it is the debtor's primary asset.   In 1984

the debtor executed a promissory note of $3.9 million in favor of

CalFed, and a mortgage and security agreement to secure payment

of the note.   Pursuant to the mortgage and note, CalFed also

received an assignment of the property's leases, rents, and

income.

           On December 13, 1990, the debtor filed for relief under

Chapter 11 of the Bankruptcy Code, triggering the automatic stay

imposed by 11 U.S.C. § 362(a).   At that time, CalFed held a first

mortgage against the property, which, with accrued interest and

late charges, totalled approximately $4.5 million.   Nantucket

Investors held a second mortgage on the property of approximately

$500,000, and a third mortgage was held by FEC Mortgage Company

jurisdiction over core proceedings arising under Title 11,
including a motion for relief from the automatic stay. The
district court had jurisdiction to entertain an appeal from the
bankruptcy court's granting of relief from the stay pursuant to
28 U.S.C. § 158(a). This court has jurisdiction to entertain the
instant appeal pursuant to 28 U.S.C. § 158(d) as the district
court entered a final order reversing the bankruptcy court's
order. CalFed filed a timely notice of appeal following the
district court's denial of its motion for rehearing. See Fed. R.
App. P. 6(b)(2)(i).


                                 4
("FEC") in the amount of $1.6 million.      FEC was, and remains, an

affiliate of the debtor.    At the time of the bankruptcy filing,

there was also a property tax lien against the property of

between $92,000 and $300,000.0    The parties agree that the tax

lien has priority over CalFed's first mortgage.       At the time of

the bankruptcy filing, the value of the property was between

$4.65 and $5.25 million.

             During the course of the bankruptcy proceedings, the

debtor filed a series of plans of reorganization which were not

confirmed.    CalFed consented to both the second and third amended

plans, but the debtor withdrew the third amended plan when CalFed

refused to agree to certain amendments that were necessary to

ensure the plan's confirmation.       CalFed then moved for relief

from the automatic stay under sections 362(d)(1) and (d)(2) of

the Bankruptcy Code so that it could institute foreclosure

proceedings against the property.      In opposition to that motion,

the debtor submitted a letter memorandum with a proposed fourth

amended plan of reorganization.

             The debtor's fourth amended plan proposed the

following: (1) the continuance of CalFed's lien on the property

in the full amount of its claim with annual interest payments

based on an interest rate of 7.75%, plus payments of excess cash

flow after the first two years, and a balloon payment for the


0
          The debtor's Disclosure Statement of Financial Affairs
indicated that the tax liens at the time of the bankruptcy filing
were $92,000, but the district court noted that material in the
record suggested that tax liens as of the filing date could have
been as high as $300,000.


                                  5
remaining mortgage balance five years after confirmation, (2) the

payment in full of all real estate taxes and arrearages, (3) an

initial $50,000 payment to Nantucket Investors on its second

mortgage with various payments to follow, and (4) the infusion of

$425,000 in new capital by the debtor's partners for capital

improvements on and maintenance of the property.

          The bankruptcy court held a hearing on CalFed's motion

to vacate the stay.   At the hearing, Nantucket Investors joined

the debtor in actively opposing the proposed lifting of the stay.

The bankruptcy court granted CalFed's motion.   In its oral

ruling, the bankruptcy court explained that the debtor had failed

to show that CalFed's interest in the property was adequately

protected because the value of the property had been steadily

declining since the bankruptcy petition was filed and the debtor

had submitted no evidence to demonstrate that the value would not

continue to decline if the stay were not lifted.    The bankruptcy

court thus found that the lifting of the stay could be granted

under section 362(d)(1) which provides that "the court shall

grant relief from the [automatic] stay . . . for cause, including

the lack of adequate protection of an interest in property of

such party in interest."   11 U.S.C. § 362(d)(1).

          Based on what it understood to be a concession by the

debtor, the bankruptcy court determined that the $1.1 million in

post-petition payments made by the debtor to CalFed had been

interest payments rather than payments on the principal debt.

Thus, in reaching the conclusion that CalFed was inadequately

protected, the bankruptcy court did not reduce the principal debt


                                6
by the amount of these post-petition payments and concluded that

CalFed was owed just over $4.5 million.    As a result, the

debtor's secured indebtedness to CalFed was found to be slightly

greater than the property's value at the time of the hearing,

which was stipulated to be $4.5 million.

          The bankruptcy court's discussion of the liens

outstanding against the property led to an implicit finding that

the total liens exceeded the current stipulated value of the

property and that the debtor therefore had no equity in the

property -- a factor supporting relief from the stay under

section 362(d)(2).    Although the court noted that its resolution

of the issues under section 362(d)(1) meant that it need not

consider the factors necessary for relief from the stay under

section 362(d)(2), the court went on to discuss the second

section 362(d)(2) factor -- whether the property is necessary to

an effective reorganization.    The court concluded that the

proposed fourth plan would not be confirmable without CalFed's

consent because it improperly extended the original maturity date

of CalFed's loan.    According to the bankruptcy court, section

362(d)(2) thus provided an alternate basis for granting relief

from the automatic stay.    The court entered an order lifting the

stay and allowing CalFed to institute a foreclosure action

against the debtor.

          Nantucket Investors appealed to the district court.0

Thereafter, CalFed filed a motion to strike certain documents

0
          The debtor did not participate in that appeal and is
not participating in the appeal to this court.

                                 7
that Nantucket Investors had designated as part of the record on

appeal.   The district court denied CalFed's motion to strike the

documents and reversed the bankruptcy court's order lifting the

stay.

          With respect to CalFed's motion to strike, the district

court concluded that the documents, while not submitted to or

reviewed by the bankruptcy court, had all been filed with the

bankruptcy court as part of the debtor's Chapter 11 proceeding,

and were therefore part of the bankruptcy court record.   The

district court found it immaterial whether the bankruptcy court

had actually considered any of these documents because they had

all been available to the bankruptcy court for its consideration.

As to Nantucket's appeal, the district court found clearly

erroneous the bankruptcy court's finding of an agreement among

the parties that the post-petition payments of $1.1 million

represented interest payments.   First, the district court noted

that the debtor had argued to the contrary in the hearing before

the bankruptcy court.0   Second, the district court determined

that of the $1.1 million post-petition payments made by the
0
          Counsel for the debtor had stated that it did not
concede that the post-petition payments represented payments of
interest, and argued that they were payments on the aggregate
debt owed. App. 326. However, in its letter memorandum to the
bankruptcy court in opposition to CalFed's motion for relief from
the stay, the debtor noted that in the proposed fourth plan it
elected not to apply the post-petition payments to reduce its
outstanding indebtedness to CalFed. App. 296. The bankruptcy
court apparently understood the debtor's position to be that the
post-petition payments were not to be applied against the
principal portion of CalFed's lien. At the hearing, CalFed
argued that the payments represented interest or were in the
nature of adequate protection payments. App. 327-28.



                                 8
debtor to CalFed, at least $955,000 should have been attributed

to payments on principal rather than interest.   Relying on United

States Savings Ass'n of Texas v. Timbers of Inwood Forest

Assocs., Ltd., 484 U.S. 365 (1988), the district court concluded

that section 506(b) of the Bankruptcy Code limits post-petition

interest to oversecured claims and only to the extent of their

oversecurity at the time the bankruptcy petition is filed.0 Based

on the parties's appraisals, the district court estimated that

the value of the property at the time of filing was approximately

$4.75 million.   It further found that CalFed's claim at that time

was approximately $4.513 million subordinated to tax liens of

$92,000.00.0   As a result, CalFed was only oversecured by

approximately $145,000 and thus, under 11 U.S.C.
0
          The Bankruptcy Code does not speak of secured and
unsecured creditors, but of allowed secured and unsecured claims.
11 U.S.C. § 506(a). An allowed claim is secured to the extent
the value of the collateral equals the claim. To the extent a
claim exceeds the value of the collateral securing it, it becomes
an unsecured claim in the bankruptcy case. Thus, an undersecured
claim becomes bifurcated under § 506(a) into two claims, one
secured and one unsecured. Because the bankruptcy court
concluded that CalFed's claim was oversecured, its claim was
considered a fully secured claim for purposes of determining the
accrual of interest under § 506(b).
0
          The parties disputed the value of the property on the
date the bankruptcy petition was filed. The earliest appraisal
presented to the bankruptcy court set the value of the property
at $4.65 million as of June 1, 1991. The debtor also had an
appraisal showing the value of the property to be $5.2 million as
of July 1991, although the debtor indicated that that appraisal
had been revised to $4.9 million three months later. App. 330-
33. The district court used the compromise figure of $4.75
million to represent the value of the property at the time of
filing, and also used $92,000 as the filing date tax lien figure,
although the evidence indicated that figure might have been
higher. See supra note 3. The court noted that on remand the
bankruptcy court was free to make more accurate findings as to
the value of the property and the amount of the tax lien on the


                                 9
§ 506(b), the full $1.1 million in post-petition payments could

not have represented payments on interest.    Rather, at most, only

$145,000 of the post-petition payments were payments of interest.

Allocating the balance of these payments to payments on principal

left CalFed with a claim of approximately $3.558 million.

Comparing this figure to the current value of the property (which

for purposes of this motion the parties stipulated to be $4.5

million), less the outstanding value of the senior tax lien

($250,000), left CalFed with a $700,000 "equity cushion."   The

district court determined that this difference was sufficient to

protect CalFed's interest, and held that CalFed was therefore not

entitled to relief under section 362(d)(1).

          The district court went on to determine whether relief

could be granted under section 362(d)(2).    The district court

rejected the bankruptcy court's implicit comparison between the

value of the property and the total liens against the property,

and accepted Nantucket Investors's argument that only the

difference between CalFed's claim and the property's current

value (less the current value of the senior tax lien) should be

considered.   This left the debtor with an equity interest worth

approximately $700,000.   The court found this analysis

appropriate under the circumstances because both junior lien

holders, Nantucket Investors and the debtor's affiliate FEC,

opposed the lifting of the stay and were willing to accept under


filing date, but concluded that the outcome of its calculations
would not change even if figures more generous to CalFed's
position were used.


                                10
the fourth plan of reorganization a drastic impairment of their

claims, which the court found had the effect of increasing the

debtor's interest in the property.0   The district court found it

equitable under these circumstances to disregard their claims in

determining whether the debtor had equity in the property.    The

district court thus found that the stay could not be lifted under

section 362(d)(2).

           The district court also reached the issue whether the

property was necessary to an effective reorganization, the second

prerequisite to the granting of relief under section 362(d)(2).

It rejected the bankruptcy court's view that a "cram down" which

extended the terms of a mortgage was unreasonable as a matter of

law.   The district court stated that, if its ruling on the

existence of equity were reversed on appeal, the matter should be

remanded to the bankruptcy court for a determination as to

whether the debtor had proposed an effective reorganization such

0
          The debtor and Nantucket testified before the
bankruptcy court regarding modifications to the fourth plan to
which the creditors had recently agreed. Under the revised
fourth plan, Nantucket would get a payment of $50,000 upon
confirmation of the plan, and a $150,000 lien which would accrue
interest at the rate of 8%, would be paid in full in five years,
and would be subordinated to CalFed's claim and the tax lien. The
balance of its claim, $350,000, would accrue at 8% and would be
subordinated to the debtor's limited partners receiving four
times its investment capital of $425,000. App. 342-43. The FEC
mortgage, held by the debtor's general partner, would be
subordinated to all other claims, including the unsecured claims
and the equity interest holders receiving ten times the value of
their $425,000 new capital infusion. App. 343. The tax lien,
which had been converted to a tax certificate and sold to another
party with whom the debtor negotiated a reduction in interest,
would be reduced from $300,000 to $250,000 and accrue interest at
the negotiated rate of 10% instead of at the former 18% interest
rate.


                                11
that relief under § 362(d)(2) would be foreclosed.    The district

court entered an order remanding to the bankruptcy court for

entry of an order denying CalFed's motion and for further

proceedings consistent with its opinion.    The "further

proceedings" apparently referred to the bankruptcy court's

ability to determine the actual amount of the tax liens and the

actual value of the property as of the filing date.    See supra

note 7.   CalFed filed a motion for rehearing, which the district

court, in an unpublished opinion, denied.    CalFed filed a timely

appeal and subsequently assigned its claim to Argo Loan Limited

Partnership.



                                II.

                Argo Loan Limited Partnership, as assignee of

CalFed's claim, raises three issues on appeal: (1) whether the

district court erred in denying CalFed's motion to strike

documents not presented to or considered by the bankruptcy court

in connection with CalFed's motion to lift the stay; (2) whether

the district court erred in determining that the debtor had

equity in the property for purposes of 11 U.S.C. § 362(d)(2)(A),

and (3) whether the district court exceeded its scope of

appellate review by making factual findings with regard to the

proper allocation of the $1.1 million post-petition payments.      We

review the bankruptcy court's factual findings under the clearly

erroneous standard.   Landon v. Hunt, 977 F.2d 829, 840 (3d Cir.

1992); Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir.
1988).    The district court's and the bankruptcy court's legal


                                 12
conclusions are subject to plenary review.     In re Sharon Steel

Corp., 871 F.2d 1217 (3d Cir. 1989).

           We conclude that CalFed's motion to strike was properly

denied because the documents which CalFed sought to strike from

the appellate record, having been filed in the bankruptcy case

record, were part of the relevant record in this contested

matter.   However, we disagree with the district court's

application of the standards for determining the debtor's equity

in the property and conclude that the debtor did not have equity

in the property under the correct legal standard.     We will

therefore reverse and remand so that the bankruptcy court may

determine whether relief from the automatic stay should be

granted under section 362(d)(2).     We also conclude that the

district court did not engage in any impermissible factfinding in

determining the proper allocation of the post-petition payments,

but simply applied the law to the record developed before the

bankruptcy court.



                               III.

           In relevant part, the current version0 of Bankruptcy

Rule 8006 provides:


               Within 10 days after filing the notice
          of appeal . . . the appellant shall file with
          the clerk [of the bankruptcy court] and serve
          on the appellee a designation of the items to

0
          Subsequent to the district court's disposition of this
appeal, Bankruptcy Rule 8006 was amended, but the changes
relevant to this appeal were stylistic only. See Fed. R. Bankr.
P. 8006 advisory committee's note (1994 amendment).


                                13
            be included in the record on appeal and a
            statement of the issues to be presented.
            Within 10 days after the service of the
            appellant's statement the appellee may file
            and serve on the appellant a designation of
            additional items to be included in the record
            on appeal and, if the appellee has filed a
            cross appeal, the appellee as cross appellant
            shall file and serve a statement of the
            issues to be presented on the cross appeal
            and a designation of additional items to be
            included in the record. A cross appellee
            may, within 10 days of service of the cross
            appellant's statement, file and serve on the
            cross appellant a designation of additional
            items to be included in the record. The
            record on appeal shall include the items so
            designated by the parties, the notice of
            appeal, the judgment, order, or decree
            appealed from, and any opinion, findings of
            fact, and conclusions of law of the court.

Fed. R. Bankr. P. 8006 (emphasis added).    Pursuant to Bankruptcy

Rule 8006, Nantucket Investors designated as part of the record

on appeal fourteen documents that CalFed promptly moved to

strike.   These included the Chapter 11 petition, the debtor's

statement of financial affairs and schedules, the debtor's second

and third amended plans and disclosure statements, a prior motion

of CalFed to lift the automatic stay, and a number of briefs with
accompanying certifications that had been filed in the bankruptcy

case.

            In its motion to strike these documents from the

appellate record, CalFed took the position that these fourteen

documents could not be properly designated under Rule 8006

because they had not been submitted to the bankruptcy court for

its consideration in connection with the instant motion to lift

the stay.    The district court declined to strike the documents.



                                 14
It subsequently relied upon some of these documents for the

purpose of showing the position CalFed took before the bankruptcy

court in connection with a prior motion to lift the stay.0    It

did not use any of these documents for any other purpose.

Notably, it did not, for example, look to the debtor's statement

of affairs and schedules for the purpose of establishing the

value of assets at the time of filing.     Rather, the district

court remanded for the purpose of having the bankruptcy court

consider this and other similar matters.

          The issue thus presented is whether a party designating

the record on appeal under Bankruptcy Rule 8006 can draw only

from the record created in connection with the motion that

initiated a contested matter0 or whether that party can draw from

the record of the bankruptcy case.

0
          This was relevant in the context of a waiver issue. See
infra part VI.
0
          Disputes litigated in the bankruptcy court are divided
into adversary proceedings and contested matters. Ten types of
disputes are designated as adversary proceedings in Bankruptcy
Rule 7001. These include most proceedings to recover money or
property (including recoveries under the trustee's avoiding
powers); proceedings to determine the validity, priority, or
extent of a lien; proceedings to determine the dischargeability
of a debt; proceedings to revoke a confirmed plan of
reorganization; proceedings to determine a claim or cause of
action removed to the bankruptcy court; and others. Adversary
proceedings are governed by more formal rules of procedure than
contested matters and must be instituted by the filing of a
complaint. Pursuant to Chapter VII of the Bankruptcy Rules, many
of the Federal Rules of Civil Procedure are applicable and these
proceedings are thus conducted much like ordinary civil
litigation.
          Other disputes that arise in connection with the
bankruptcy case, including requests for relief from the automatic
stay, are contested matters. See Fed. R. Bankr. P. 9014 advisory
committee note (1983 adoption) (a contested matter is "an actual
dispute, other than an adversary proceeding, before the


                               15
          We have previously held that a bankruptcy judge

deciding an adversary proceeding, which is an independent

litigation, and an appellate court reviewing that decision,

cannot properly use documents filed only in the underlying

bankruptcy case unless that use can be justified under the

judicial notice doctrine.   In re Aughenbaugh, 125 F.2d 887, 889

(3d Cir. 1942).0   The district court in this case regarded this

contested matter to be sufficiently associated with the general

administration of the debtor's estate that the relevant record

bankruptcy court"). They are generally initiated by motion and
do not require a responsive pleading (unless the bankruptcy court
directs that an answer be served). Only certain of the rules
governing adversary proceedings apply to the resolution of
contested matters and the court may direct that these rules will
not apply in the litigation of a particular contested matter or
that other rules will apply. See Fed. R. Bankr. P. 9014. The
procedures governing contested matters are thus less formal.
0
          We held in that case that in determining the issue of
insolvency in an action by the trustee to avoid a transfer as a
preference, the referee could not rely on the bankruptcy
schedules, official appraisals, proofs of claims, and other items
on file in the bankruptcy case when they had not been introduced
into evidence in the trustee's preference action. In re
Aughenbaugh, 125 F.2d at 890. We stated:

          If the trustee desired to rely upon any
          papers already on file in the bankruptcy
          proceeding it was incumbent upon him to offer
          them at the hearing of his exceptions in
          order that the mortgagee might know that they
          were being ruled upon and might have an
          opportunity to meet them with such other
          evidence as might be available to it.

Id. at 889. We noted further that the doctrine of judicial
notice did not provide a basis for the referee's use of the
challenged documents in that case. Id. at 890 ("[T]he facts to
which [the previously filed documents] related, being disputed in
the very controversy under consideration, were not the sort of
facts of which the referee was entitled to take judicial
notice.").


                                 16
should include the case file as well as the documents submitted

in connection with the motion to lift the stay.   We, and most of

the courts that have heretofore considered the matter, agree.

See, e.g., In re Chateaugay Corp., 64 B.R. 990, 995 (S.D.N.Y.

1986); In re T. Michaelis Corvette Supplies, Inc., 14 B.R. 365,

367 (Bankr. N.D. Ohio 1981); Saco Local Dev. Corp. v. Armstrong

(In re Saco Local Dev. Corp.), 13 B.R. 226, 229-30 (Bankr. D. Me.

1981).

          We hasten to add that the fact that a document is

included in the relevant record does not mean that the bankruptcy

judge, or the reviewing district court judge, is entitled to use

it for any purpose.   Just as with documents in the record of a

civil action filed in a district court, there are principles that

limit its use.

          One limitation is the rule that each litigant should be

given a fair opportunity to rebut and put into perspective the

evidence admitted against its position.   It is understood, for

example, that the facts relating to the merits of the case will

be decided on the basis of evidence admitted into the trial

record.   Andrews v. Bechtel Power Corp., 780 F.2d 124, 142 (1st
Cir. 1985), cert. denied, 476 U.S. 1172 (1986).   Thus, for

example, an admission of a party previously made in the record

should normally be tendered and admitted into evidence at the

trial, before the judge in a bench trial can use it to resolve

the factual merits of the case.

          Another limitation is the rule requiring evidentiary

competence.   Under this rule, a document cannot be put to a

                                  17
hearsay use for most purposes, and for this reason, a previously

filed court document will generally not be competent evidence of

the truth of the matters asserted therein.

          Neither of these limitations means, however, that when

the course and timing of proceedings, or the positions previously

taken by the parties in the case, become relevant for any reason,

a trial or appellate judge may not look to any document in the

case record to establish the relevant fact.   Documents in the

case record will be relevant to many issues, including waiver,

estoppel, preservation of an issue for appeal, the fact and

length of litigation delay, limitations issues, prejudice to an

opposing party, and the like.   The use of documents in the case

record for such purposes does not offend the limitations

discussed above because the documents are not being used to

determine disputed facts relating to the merits of the case and

their use thus does not impose on a party's ability to meet the

evidence against it.   Similarly, it is not seriously questioned

that the filing of documents in the case record provides

competent evidence of certain facts -- that a specific document

was filed, that a party took a certain position, that certain

judicial findings, allegations, or admissions were made.   See In

re Bestway Prods., 151 B.R. 530, 540-41 (Bankr. E.D. Cal. 1993),

aff'd, 165 B.R. 339 (9th Cir. B.A.P. 1994), and aff'd sub nom. In

re Wetherbee, 165 B.R. 339 (9th Cir. B.A.P. 1994).

          Here the district court properly looked to the record

of the underlying bankruptcy case.   Documents outside the record

developed on CalFed's lift stay motion were used for the sole

                                18
purpose of determining whether CalFed had waived an argument it

sought to make in its motion for reconsideration.   This purpose

comports with the rules we have discussed.

            Even if we were to accept CalFed's view of the limited

source from which a party may designate the record under

Bankruptcy Rule 8006, however, we could not fault the district

court in denying CalFed's motion to strike.    Nantucket Investors

argues that the doctrine of judicial notice provides an

additional basis on which to affirm the district court's denial

of CalFed's motion to strike.    Federal Rule of Evidence 201

authorizes a court to take judicial notice of an adjudicative

fact if that fact is "not subject to reasonable dispute."    Fed.

R. Evid. 201(b).   "Judicial notice may be taken at any stage of

the proceeding," Fed. R. Evid. 201(f), including on appeal, id.

advisory committee's note (1972 proposed rules), as long as it is

not unfair to a party to do so and does not undermine the trial

court's factfinding authority.   Charles Alan Wright & Kenneth W.

Graham, 21 Federal Practice and Procedure, § 5110, at 525 (1977);

cf. Zell v. Jacoby-Bender, Inc., 542 F.2d 34, 38 (7th Cir. 1976)

(refusing to take judicial notice of documents filed in companion

case to undermine trial court's findings where to do so would

violate rule that appellate court must consider only record

before the trial court and exception for "new developments" was

not met).

            Nantucket Investors' designation of the appellate

record can be viewed as a request that the district court take

judicial notice of certain portions of the record in the

                                 19
underlying bankruptcy case.   When so viewed, we think the

district court's response to CalFed's motion to strike was

authorized by Federal Rule of Evidence 201.0   See, e.g., Job v.

Calder (In re Calder), 907 F.2d 953, 955 n.2 (10th Cir. 1990)

(upholding bankruptcy court's taking judicial notice of omissions

in debtor's previously filed statement of affairs and schedule of

assets as evidence that debtor had made a false oath); In re

Strathatos, 163 B.R. 83 (N.D. Tex. 1993) (taking judicial notice

of bankruptcy court's findings of facts).



                               IV.



0
          The district court's use of the challenged documents
conformed to the standards for judicial notice because the
noticed facts were facts not subject to reasonable dispute and
CalFed was given an opportunity to be heard. See Fed. R. Evid.
201(e) (upon request a party must be given an opportunity to be
heard regarding both the propriety of taking judicial notice and
the "tenor" of the matter noticed). In light of the fact that
the court may take judicial notice of adjudicative facts on its
own initiative, the Rule provides that the opportunity to be
heard may occur after judicial notice has been taken. Fed. R.
Evid. 201(e); see also id. advisory committee's note (1972
proposed rules) ("No formal scheme of giving notice is provided.
An adversely affected party may learn in advance that judicial
notice is in contemplation . . . [o]r he may have no advance
notice at all."). CalFed had an opportunity to oppose the
propriety of the district court's consideration of these
documents, and in fact did so, by filing its motion to strike the
documents and by presenting argument in support of that motion to
the district court. Moreover, Nantucket Investors argued in its
brief to this court that judicial notice provided an alternative
basis on which to affirm the district court's denial of CalFed's
motion to strike. Thus, CalFed had the opportunity to address
before us the propriety of the district court's taking judicial
notice of these documents. Accordingly, the failure of the
district court to give CalFed an opportunity to oppose the taking
of judicial notice is at worst a harmless error.


                                20
            When a debtor files for protection under Chapter 11 of

the Bankruptcy Code, section 362(a) provides an automatic stay of

most actions against the debtor's property, including actions to

realize the value of collateral securing an obligation of the

debtor.   11 U.S.C. § 362(a).   Because a secured creditor risks

losing the benefit of its security interest if it is unable to

foreclose against the property, the Bankruptcy Code permits a

creditor to seek such relief by filing a motion for relief from

the automatic stay under 11 U.S.C. § 362(d).    That section

provides:


            On request of a party in interest and after
            notice and a hearing, the court shall grant
            relief from the [automatic] stay . . ., such
            as by terminating, annulling, modifying, or
            conditioning such stay--

            (1)   for cause, including the lack of
                  adequate protection of an interest in
                  property of such party in interest; or

            (2)   with respect to a stay of an act against
                  property under subsection (a) of this
                  section, if--

                  (A)       the debtor does not have
                            an equity in such
                            property; and

                  (B)       such property is not
                            necessary to an effective
                            reorganization.

Section 362(d) is thus intended to balance the interests of the

creditors and the debtor.

            CalFed sought relief from the automatic stay under both

subsections (d)(1) and (d)(2) of section 362(d).       We first review



                                  21
the district court's conclusion that the debtor retained equity

in the property.   We conclude that the district court committed

an error of law.



                                A.

           The classic test for determining equity under section

362(d)(2) focuses on a comparison between the total liens against

the property and the property's current value.   Stewart v.

Gurley, 745 F.2d 1194, 1195 (9th Cir. 1984) (citing cases); In re

Hanley, 102 B.R. 36, 37 (W.D. Pa. 1989); In re Colonial Ctr.,

Inc., 156 B.R. 452, 460 (Bankr. E.D. Pa. 1993); La Jolla Mortg.

Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 290 (Bankr. S.D.

Calif. 1982); State Employee Retirement Fund v. Gardner (In re

Gardner), 14 B.R. 455, 456 (Bankr. E.D. Pa. 1981); North East

Fed. Savs. & Loan Assoc. v. Mikole Devels., Inc. (In re Mikole

Devels., Inc.), 14 B.R. 524, 524 (Bankr. E.D. Pa. 1981).    "All

encumbrances are totalled to determine equity whether or not all

lienholders have requested relief from the stay."   Nazareth Nat'l

Bank & Trust Co. v. Trina-Dee, Inc. (In re Trina-Dee, Inc.), 26

B.R. 152, 154 (Bankr. E.D. Pa. 1983), aff'd, 731 F.2d 170 (3d
Cir. 1984).   The district court chose not to apply this formula,

finding it appropriate under the circumstances to exclude

consideration of the junior secured claims held by Nantucket and

FEC.   Nantucket Investors argues that the district court properly

excluded the interests of it and FEC because both agreed to

compromise their interests in a subordination agreement in order



                                22
to avoid foreclosure.0   We find that the following factors weigh

against Nantucket Investors' position: (1) the plain language of

section 362(d)(2)(A); (2) the legislative history and policies

behind the Bankruptcy Code; and (3) the fact that the Code

provides other means by which the interests of junior lienholders

may be protected.



                                 B.

          The Bankruptcy Code does not define the term "equity"

in section 362(d)(2)(A) or in any other section.    Nor does the

legislative history shine any direct light on the intended

meaning of this term.    When Congress enacted the present-day

Bankruptcy Code, however, the generally understood meaning of

equity interest was the value of a property above all secured

liens.   See Black's Law Dictionary 634 (4th ed. 1968) (defining

equity for purposes of real estate transactions as: "The

remaining interest belonging to one who has pledged or mortgaged

his property, or the surplus of value which may remain after the

property has been disposed of for the satisfaction of liens.     The

amount or value of a property above the total liens or

charges.").   We must assume that Congress was cognizant of this

traditional meaning when it enacted section 362(d)(2)(A) without


0
          The treatment of the junior lienholders' claims under
the proposed fourth plan is discussed supra note 8. We do not
question the propriety or enforceability of the subordination
agreements involving Nantucket Investors' and FEC's claims, 11
U.S.C. § 510(a); we simply reject the argument that the
subordination agreements can be used to determine the debtor's
equity interest.

                                 23
a controlling definition.    See Walter E. Heller Western, Inc. v.

Faires (In re Faires), 34 B.R. 549, 552 (Bankr. W.D. Wash. 1983).

          Nantucket Investors argues that the term equity in

section 362(d)(2) is ambiguous because equity is accorded a

different meaning when the creditor's "equity cushion" is

calculated in determining whether the creditor's interest is

adequately protected under section 362(d)(1).    The text of

section 362(d)(1), which governs relief from the automatic stay

for good cause including lack of adequate protection, does not

contain the term "equity."   However, in determining whether a

secured creditor's interest is adequately protected, most courts

engage in an analysis of the property's "equity cushion" -- the

value of the property after deducting the claim of the creditor

seeking relief from the automatic stay and all senior claims.

See, e.g., In re Colonial Center, Inc., 156 B.R. 452, 459 (Bankr.

E.D. Pa. 1993); La Jolla Mortg. Fund v. Rancho El Cajon Assocs.,

18 B.R. 283, 289 (Bankr. S.D. Calif. 1982).    Junior liens are

disregarded for "equity cushion" analysis because the secured

creditor is entitled to adequate protection only as to its claim;

it may not claim protection for others.   La Jolla Mortgage Fund,
18 B.R. at 289.   In contrast, all liens are considered in

calculating the equity retained by the debtor under section

362(d)(2), because the equity analysis in that section focuses on

"the value, above all secured claims against the property, that

can be realized from the sale of the property for the benefit of

all unsecured creditors."    Pistole v. Mellor (In re Mellor), 734
F.2d 1396, 1400 n.2 (9th Cir. 1984).    Thus, the analysis of the


                                 24
creditor's "equity cushion" under section 362(d)(1) differs from

a calculation of the debtor's equity under section 362(d)(2) and

does not render the term "equity" ambiguous.   E.g., Mellor, 734

F.2d at 1400 n.2 (noting that "equity cushion" differs from

"equity" in that the former is concerned with the value of the

property above the amount owed to the creditor with a secured

claim and the latter is concerned with the value above all

secured claims against the property); In re Colonial Ctr., Inc.,

156 B.R. 452, 459-60 (Bankr. E.D. Pa. 1993); In re South County

Realty, Inc. II, 69 B.R. 611, 614 (Bankr. M.D. Fla. 1987); In re

Dunes Casino Hotel, 69 B.R. 784, 793-94 (Bankr. D.N.J. 1986).



                                 C.

            We recognize that some bankruptcy courts have rejected

the standard definition of equity for purposes of section

362(d)(2) analysis when junior lienholders protest the lifting of

the automatic stay to permit foreclosure.    See Cote v. United

Finance Co. (In re Cote), 27 B.R. 510, 513 (Bankr. D. Or. 1983);

Asquino v. Palmer River Realty, Inc. (In re Palmer River Realty,
Inc.), 26 B.R. 138, 140 (Bankr. D.R.I. 1983); Central Fla. Prod.

Credit Assoc. v. Spring Garden Foliage, Inc. (In re Spring Garden

Foliage, Inc.), 15 B.R. 140, 143 (Bankr. M.D. Fla. 1981).

Nantucket Investors urges us to adopt that rule, but we decline

to do so.
          We find no hint in the language or legislative history
of section 362(d), and the interests balancing it incorporates,
that authorizes excluding the junior lienholders' claims from the
equity calculation when their interests diverge from the senior



                                 25
lienholder's.0   As the Court of Appeals for the Ninth Circuit has
explained:

          The language of the statute simply refers to
          the debtor's "equity," which has been defined
          as 'the amount or value of a property above
          the total liens or charges.' The statute
          does not refer to the debtor's equity as
          against the only plaintiff-lienholder seeking
          to lift the stay or persons holding liens
          senior to that of the plaintiff-lienholder.
          The minority view improperly focuses upon the
          interests of junior lienholders . . . .

Stewart v. Gurley, 745 F.2d at 1196 (quoting Walter E. Heller

Western, Inc. v. Faires (In re Faires), 34 B.R. 549, 552 (Bankr.

W.D. Wash. 1983)).

          A definition of equity that requires consideration of

all secured liens comports with the purpose of section 362(d)(2)

analysis and strikes the proper balance among the secured

creditors', the unsecured creditors', and the debtor's interests.

The basic purpose behind Chapter 11 of the Bankruptcy Code is to

offer protection to the insolvent debtor who seeks rehabilitation

through a plan of reorganization.     To the extent that property is

of no benefit to the debtor, because the debtor retains no equity

in it and the property is unnecessary to an effective

reorganization, only the junior lienholders will benefit by

0
          To the extent we have located any legislative history
that shines light on this issue, it appears that section
362(d)(2)(A) was intended to protect a creditor's right to
foreclosure. In a joint explanatory statement prepared by the
floor managers on the ultimately enacted compromise bill, it was
noted that "section [362(d)(2)] is intended to solve the problem
of real property mortgage foreclosures of property where the
bankruptcy petition is filed on the eve of foreclosure." 124
Cong. Rec. H11047, H11092-93; 124 Cong. Rec. S17403, S17409.
Excluding the junior lienholders' claims when they oppose
foreclosure would not further this intent.


                                 26
avoiding foreclosure, at the expense of senior lienholders.    See

Stewart v. Gurley, 745 F.2d at 1196 ("Unless the debtor can

demonstrate that the property is necessary to an effective

reorganization, the property is of no value to him.    Refusing to

grant relief from the automatic stay under those circumstances

would only promote the junior lienholders' interests over those

of the senior lienholder.").

          Furthermore, we note that the language of section

362(d)(2) is mandatory, when both factors necessary for relief

under section 362(d)(2) are met "the court shall grant relief."

11 U.S.C. § 362(d)(2).   Excluding the claims of objecting junior

lienholders from the equity calculation when the subsection

(d)(2) factors are otherwise met would thus contravene the plain

language of that provision.



                                D.

          Our refusal to adopt Nantucket Investors' position does

not prevent the bankruptcy court from otherwise considering the

interests of objecting junior lienholders.    On the contrary, when

a senior lienholder successfully petitions the bankruptcy court

for relief from the automatic stay in order to proceed with a

foreclosure action, junior lienholders may protect their

interests by bidding at foreclosure in order to retain their

secured interest in the property.    Additionally, it is

appropriate for the bankruptcy court to consider the interests of

junior lienholders in determining whether an effective



                                27
reorganization is possible without the encumbered property.   See

In re Mellor, 734 F.2d at 1401; 2 Collier on Bankruptcy,

§ 362.07[2], at 362-69 & n.15a (Lawrence P. King ed., 15th ed.

1994).   Thus for example, in this case the bankruptcy court may

properly consider the junior lienholders' subordination

agreements in determining whether an effective reorganization is

possible and whether the property is necessary to that end.

Because we find that there are other means by which the

bankruptcy court may consider the interests of junior lienholders

in determining whether relief from the automatic stay is proper,

we find no need to adopt a changeable definition of equity that

excludes consideration of protesting junior lienholders'

interests under certain circumstances.0

           We will therefore reverse the district court insofar as

it determined that the debtor has equity in the property, and

will remand with instructions to return this matter to the

bankruptcy court so that it may consider the second factor

necessary for relief under section 362(d)(2), namely whether the

property is necessary to an effective reorganization.0


0
          We reject Nantucket Investors' argument that its
willingness to cede a portion of its secured claim to the debtor
to defeat lifting of the stay under § 362(d)(2) should be
considered in calculating the debtor's equity. Nantucket
Investors has not in fact ceded any portion of its claim to the
debtor and we will not accept its willingness to do so as the
equivalent.
0
          Under the proper equity calculation, the outstanding
liens against the property exceed the current stipulated value of
the property and the debtor thus retains no equity in the
property.


                                28
                                 V.

          A final note regarding relief under § 362(d)(2) is

necessary in light of our remand order.    In a single-asset

bankruptcy case like this one, the property will almost always be

necessary for reorganization for the very reason that it is the

debtor's sole asset, and relief under 362(d)(2)(B) will be

available only if the bankruptcy court concludes that

reorganization within a reasonable time is not feasible.       See

United Savings Ass'n v. Timbers of Inwood Forest, 484 U.S. at 376

(noting that the requirement that the property be "necessary to

an effective reorganization" requires a showing that there is "a

reasonable possibility of a successful reorganization within a

reasonable time" (internal quotation omitted)); Ahlers v. Norwest

Bank Worthington (In re Ahlers), 794 F.2d 388 (8th Cir. 1986),

rev'd on other grounds, 485 U.S. 197 (1988).   The bankruptcy

court found that the debtor's fourth plan would not be

confirmable under the Bankruptcy Code's cram down procedure,0

because it extended the maturity date of CalFed's mortgage beyond

its original term.    The district rejected the bankruptcy court's

conclusion that there was any such per se rule.    We agree.    As

the district court noted, the plain terms of the Bankruptcy Code

refute the proposition that a plan may not extend the maturity

date of a mortgage.   See 11 U.S.C.


0
          Where the debtor cannot secure the acceptance of all
classes of impaired claims, the Bankruptcy Code permits the
confirmation of a plan over the objections of impaired classes
under certain conditions through a procedure known as a cram
down. 11 U.S.C. § 1129(a)(10), (b).


                                 29
§ 1123(a)(5) ("[A] plan [of reorganization] shall . . . provide

adequate means for the plan's implementation, such as . . .

modification of any lien; . . . extension of a maturity date or a

change in an interest rate or other term of outstanding

securities.").     There is no per se rule that a nonconsensual plan

may not extend a secured lien beyond its original mortgage date.

In re Crane Automotive, Inc., 88 B.R. 81, 83 (Bankr. W.D. Pa.

1988); In re Martin, 66 B.R. 921, 930 (Bankr. D. Mont. 1986); In

re Hollanger, 15 B.R. 35, 46-47 (Bankr. W.D. La. 1981). Therefore

on considering whether relief from the stay is warranted under

section 362(d)(2), the bankruptcy court may not find that

reorganization is precluded as a matter of law solely because a

proposed plan extends the maturity date on CalFed's mortgage.



                                 VI.

             As noted, CalFed also sought relief from the automatic

stay under section 362(d)(1) on the ground its claim was not

adequately protected.    The bankruptcy court granted relief on

this ground and the district court reversed.    On appeal, CalFed

maintains that the district court engaged in impermissible fact

finding in determining that the current value of its claim is

less than the current stipulated value of the property, and that

its claim is adequately protected by the remaining "equity

cushion."0


0
          Under 28 U.S.C. § 158(a), the district court sits as an
appellate court and is not authorized to engage in independent
fact finding. Indeed, under the appropriate standards of review,


                                  30
          Central to the determination of adequate protection in

this case is the proper allocation of approximately $1.1 million

in post-petition payments made by the debtor to CalFed.   Although

the bankruptcy court did not make a specific finding regarding

the allocation of the post-petition payments, in finding that the

current value of CalFed's claim was approximately $4.5 million

(the same as the value of its claim when the bankruptcy petition

was filed), the bankruptcy court must have allocated all of the

post-petition payments to interest rather than to payments

reducing the underlying debt.0   The district court, relying on

the evidence adduced during the bankruptcy hearing, concluded

that such an allocation was improper as a matter of law since,

under the guiding legal principles, interest can accrue post-

petition only to the extent that a creditor's secured claim

exceeds the value of the property securing it.   See 11 U.S.C.

§ 506(b); Timbers, 384 U.S. at 372-73.   Thus, the district court

concluded that because, as of the petition date, CalFed's claim

exceeded the estimated value petition date value of the property

(less the estimated value of the tax lien) by only approximately

$145,000, the bulk of the post-petition payments had to be

allocated to payments on the principal debt, reducing the current

value of CalFed's claim to a figure approximately $700,000 less

than the current stipulated value of the property, and leaving


the district court reviews the bankruptcy court's findings in a
core proceeding only for clear error. Fed. R. Bankr. P. 8013.
0
          The basis for the bankruptcy court's conclusion that
CalFed's claim had not been reduced by the $1.1 million post-
petition payments is not entirely clear. See supra note 5.


                                 31
CalFed's claim adequately protected against further erosion in

the value of the property.     CalFed maintains that after

determining that the debtor and Nantucket Investors had not

conceded that interest had accrued post-petition to the full

extent of the post-petition payments, the district court should

have remanded the issue to the bankruptcy court so that it could

consider all relevant factors pertaining to the allocation of the

post-petition payments, and could then determine the actual value

of CalFed's current claim and whether its claim was adequately

protected.

             The heart of CalFed's argument is that one relevant

factor that the bankruptcy and district courts have not yet

considered is whether the assignment of rents gave CalFed a lien

on the property's rental income when the bankruptcy petition was

filed.   CalFed maintains that if it had such an interest, the

value of the collateral securing its claim would have been the

sum of the petition date value of the property plus the present

value of the future rental income, and that its claim would have

been "oversecured" by an amount greater than the $145,000 figure

used by the district court to determine under Timbers how much

post-petition interest could have accrued.     CalFed asserts that

the district court's determination that the current stipulated

value of the property exceeds the value of CalFed's current claim

by nearly $700,000, and its conclusion that CalFed was thus

adequately protected, therefore rested on an incomplete set of

facts.   We disagree.



                                  32
          In the papers accompanying its motion for relief from

the stay, CalFed asserted that its claim on the date the

bankruptcy petition was filed was approximately $4.5 million, and

that since the petition date, the amount outstanding under the

note and mortgage had grown by approximately $1.59 million,

including approximately $1.49 million in post-petition interest.

App. 6 (declaration of bank vice-president).   However, neither in

its moving papers nor its accompanying brief did CalFed assert a

legal basis for the accrual of this much post-petition interest.0

          The allocation of the post-petition payments became a

contested issue at the hearing before the bankruptcy court.

Indeed, the bankruptcy court noted that the proper allocation of

these payments would likely determine whether CalFed's interest

was adequately protected.   As the hearing transcript

demonstrates, however, the parties presented only two theories

that would support the allocation of post-petition payments to

something other than a reduction of the principal debt: CalFed's

unsupported assertion that the payments may have been in the
nature of adequate protection payments,0 and the debtor's

contention that interest could have accrued post-petition only to

the extent that CalFed's claim exceeded the value of the property




0
          CalFed's lack of adequate protection argument rested on
the property's decline in value since the bankruptcy filing and
the debtor's failure to propose a confirmable plan since that
time.
0
        See 11 U.S.C. § 361(1).


                                33
as of the petition date, less the petition date value of the tax

lien.0



0
           Mr. Kitzel argued on behalf of CalFed. Mr. Bauer
represented the debtor and Mr. Higgens represented Nantucket
Investors.

               THE COURT: Does the Debtor concede that
          interest accrued during the [Chapter] 11 or
          not?

               MR. BAUER:   No, your Honor.   We do not
          concede. . . .

               . . . .

               THE COURT: One of the dispositive
          issues is going to be the amount of the
          short-fall. And so, therefore, we need to
          peg a value, and we need to peg what your
          pay-off figure is.

               I mean, the Debtor made substantial
          payments in the [Chapter] 11 of over a
          million dollars. The question is, was there,
          also, the post-petition interest accrual of a
          million four [as CalFed asserted in the
          declaration of bank vice president Koehler
          which accompanied its motion].

          . . . If interest continued to accrue, your
          debt increased by a half million.

               If interest didn't accrue, and the
          Debtor tendered over a million dollars in
          payments, your balance [owing to CalFed] may
          be . . . substantially less than what it was
          when you filed. So, I mean, it becomes very
          critical as to whether interest continued to
          accrue or not under the Timbers case.

               MR. KITZEL: Your Honor, the payment of
          the million dollars also is in the form of
          adequate protection payments. So it is not
          necessarily interest.



                                34
         . . .I believe that that's the reason why --
         the value of the property was decreasing, the
         payments . . . were made.

               THE COURT: Well, what shows that in the
         record? Is there an order that memorializes
         that?

              MR. BAUER: There is no cash collateral
         order. There's nothing that says that it was
         adequate protection payment. We paid them a
         million dollars during the course of this
         case, in excess of a million. That should be
         implied [sic] to the aggregate indebtedness
         owing to CalFed. . . . There is nothing that
         states it should be applied to interest.

               . . . .

              THE COURT: Wait. What does CalFed say
         the property was worth on the day the Chapter
         11 was filed? Isn't that what Timbers tells
         us? We have to look and see if you were over
         collateralized or under collateralized on the
         date of the filing to determine whether
         interest accrues or not; right?

App. 326-29.

          Following a discussion of the evidence regarding the
value of the property as of the petition filing date the debtor
conceded that the value of the property at that time was "in the
ballpark" of $4.5 to $4.6 million. App. 333. CalFed had
previously asserted that its claim on the petition date was
approximately $4.5 million. App. 331. The discussion of the
accrual of post-petition interest continued:

              THE COURT: All right. So, therefore,
         interest accrued; right?. . . .

              MR. BAUER: Only to the value of the
         property it could have accrued to.

              It couldn't accrue in excess of the
         value of the property. . . .

               . . . .




                               35
          Significantly, neither before the bankruptcy court nor

in response to Nantucket Investors' appeal to the district court

did CalFed raise its potential interest in the rental stream to

explain how interest could have accrued beyond the extent of

CalFed's facial oversecurity.   CalFed presented this argument for

the first time in connection with its motion for relief from the

stay when it sought reconsideration from the district court

following that court's reversal of the bankruptcy court's

conclusion that CalFed was not adequately protected.0   On appeal

to this court, it maintains that "[t]he rental income stream was

the source of the post-petition payments." Appellant's Amended

Brief at 35.   However, for purposes of its motion for relief from

the stay, CalFed has posited its rental stream theory too late.



               There's also another piece of this
          puzzle that's missing, and that is, at the
          outset of this case, when it was filed, there
          were tax arrearages of approximately
          $300,000.

                . . . .

               If we're looking to see what they're
          entitled to by way of accruing interest, then
          that $300,000, which was a jump-ahead lien,
          has to be factored into the scenario.

App. 333-34. CalFed responded by arguing that a recent letter
from the debtor to the bank's representative admitting that the
property "has greatly deteriorated over the past few years"
established a prima facie case that CalFed's interest was not
adequately protected. App. 335-37.
0
          CalFed had asserted an interest in the rental income in
a 1991 motion in which it sought relief from the automatic stay
and to prohibit the debtor from using cash collateral in the form
of rents, which motion it withdrew upon consenting to the
debtor's second proposed plan of reorganization.


                                36
          "Ordinarily, an appeals court will not consider issues

not raised in the court below."0    Trailways Lines, Inc. v.

Trailways, Inc. Joint Council of Amalgamated Transit Union, 785

F.2d 101, 104 n.2 (3d Cir.), cert. denied, 479 U.s. 932 (1986).

Having failed to raise its rental stream theory as a basis for

allocating the post-petition payments to interest payments during

the fact finding hearing before the bankruptcy court, CalFed has

waived the argument that it has a lien on the rental income of

the property for purposes of this motion for relief from the

automatic stay.    CalFed is therefore precluded from submitting

new evidence on remand to establish the petition date value of

its claim, other than within the parameters set forth by the

district court.0   Whether CalFed will be estopped from asserting

an interest in the rental stream during other proceedings in this

Chapter 11 case will depend on the application of principles of

res judicata, collateral estoppel, and law of the case as they




0
          Although an exception to this rule permits appellate
review of an issue not raised in the trial court to serve the
interests of justice, Trailways Lines, Inc., 785 F.2d at 104 n.2,
the grounds for this exception are not met in this case.
0
          The district court carefully noted that certain
relevant facts were not definitively established by the evidence
before the bankruptcy court, including the petition date value of
the tax lien and the petition date value of the property. Thus,
the district court noted that on remand, the bankruptcy court
could calculate these actual values in determining the precise
amount of CalFed's "equity cushion." However, in light of the
range in which these values would fall (based on the record
evidence before it) the district court noted that the precise
calculations would not have a legal effect on its conclusion that
CalFed's claim was adequately protected by a significant equity
cushion.

                                   37
apply in bankruptcy proceedings.0 We express no view on that

issue.   The only issue currently before us is the effect CalFed's

failure to raise its interest in the rental income has on the

disposition of its present motion to lift the automatic stay.

           The district court did not engage in independent fact

finding.   The court simply applied the law -- that interest can

accrue post-petition only to the extent the value of the

collateral securing a creditor's claim exceeds the petition date

value of its claim -- to the record developed before the

bankruptcy court.    The only disputed facts regarding the

allocation of the post-petition payments concerned the actual

petition date value of the property and the actual petition date

value of the tax lien, facts that the district court properly

declined to ascertain.



                                VII.

           We reverse the district court's determination that the

debtor has equity in the property within the meaning of section

362(d)(2)(A) and remand with instructions to return this matter

to the bankruptcy court so that it may determine whether the

property is necessary to an effective reorganization, and thus

whether relief from the automatic stay may be granted under

section 362(d)(2).    We affirm the district court's order in all

other respects.



0
          See generally Hon. Barry Russell, Bankruptcy Evidence
Manual, §§ 1-40 (1994).


                                 38
           In Re:   Indian Palms v. California Federal


                            No. 94-5265


-----------------------------------------------------------------


ROTH, Circuit Judge, concurring in part and dissent

ing in part.




          Although I concur with the majority in Parts I-III, V

and VI of their opinion, I cannot agree with their conclusion in

Part IV that the debtor did not retain equity in the property.    I

must therefore respectfully dissent from the reversal of the

district court's determination in that regard.

          The majority adopts the "classic test" for determining

equity under § 362(d)(2):   subtracting the value of all the

secured liens on the property from the property's current value.

They reject the district court's exclusion   of the junior secured

claims of Nantucket and FEC from the subtrahend of the

calculation.   However, if junior lienholders are willing to

concede their secured position in such a way that the senior

lienholder's interest is protected, the debtor may have actual,

if not literal, equity in the property.   I see no reason why that

concession should not be permitted and "equity" be defined in a

reorganization by the balance, reached by subtracting the

security of concerned lienholders from the value of the property,


                                39
rather than from a calculation of figures that do not represent

the reality of the commercial situation.

           Nantucket urges the court to adopt the district court's

reasoning that, pursuant to the Fourth Amended Plan, the junior

lienholders effectively granted the Debtor a portion of their

equity in the Property by subordinating part of their secured

claims.   I agree that such an interpretation of "equity" is

reasonable and could permit a Chapter 11 reorganization to

succeed in a situation where the junior lienholders were willing

to step back, at least in part, from their secured positions. For

example, in a single asset reorganization, junior lienholders may

face the eradication of their interest in the debtor's property

if a plan of reorganization cannot be developed.   Their

willingness to cooperate to save their own interest may be the

factor which will permit the reorganization to succeed.

           Adherents of the majority's interpretation of "equity"

have criticized the subtraction of the amounts owed to junior

lienholders from a determination of equity as "improperly

focus[ing] upon the interests of junior lienholders as opposed to

the interests of the debtor or senior lienholder."     Stewart v.

Gurley, 745 F.2d 1194, 1196 (9th Cir. 1984).   The concern is that

the interests of the junior lienholders will be promoted over

those of the senior lienholder.   Id.   However, if the property is

necessary to the reorganization and if the senior lienholder is

adequately protected, it makes very good sense to me in a

§362(d)(2)(A) calculation to credit the interests of the junior

lienholders to equity.   I would urge that we do so.

                                                                    40
           In the present case, the district court found that if

it were to uphold the bankruptcy court's grant of a stay, "the

claims of both the Debtor and its affiliate FEC, along with the

objecting lienholder Nantucket and all of the unsecured creditors

[would] be wiped out."    In re:   Indian Palms Associates, Ltd. No.

93-4519, slip op. at 13 (D.N.J. Feb. 8, 1994).     That consequence

surely accounts for Nantucket and FEC's concessions in the Fourth

Amended Plan.   If the junior lienholders are willing to make

concessions, I can see no reason why they should not be permitted

to subordinate or restructure their liens so that the senior

lienholder is protected and the reorganization may then go

through.

           Moreover, as the district court stated, by recognizing

the junior lienholders' concessions and finding that they gave

the debtor equity in the property, the court would further "the

objectives of the Bankruptcy Code of both preserving the liens of

the secured creditors and, to the extent feasible, adopting plans

which will protect the interests of junior lienholders, unsecured

creditors and equity holders."     Id. at 15.

           Although they are in the minority, other courts have

seen the logic of calculating "equity" without deducting the

liens of junior lienholders who are willing to cooperate with the

debtor.    See, e.g., In re Palmer River Realty, Inc., 26 B.R. 138,
139-40 (Bankr. D.R.I. 1983) (in calculating equity under

§362(d)(2)(A), second mortgage had no relevance to question of

equity where second mortgagee expressed desire to support

reorganization attempt; "second mortgage should not be considered

                                                                    3
in determining whether there is an equity cushion in the subject

property.").

            The majority also cites as a reason for adopting its

construction of § 362(d) the "mandatory" language of the section:

"the court shall grant relief from the stay".    [Typescript at 27]

Inherent in this reading of the statute is the interpretation of

"equity" in the "classic" manner as was done by the majority. If,

however, we were to interpret "equity" as we suggest above, the

elements of subsection (d)(2)(A) might not be satisfied and the

mandatory language would not then be triggered.

            Moreover, the majority stops its reading of § 362(d)

too soon.    The section goes on to provide that the form of relief

granted may be "such as by terminating, annulling, modifying, or

conditioning such stay--".    The fact that the relief requested of

the bankruptcy court is termination does not preclude the court

from granting other relief:    for example, relief which will

condition the continuation of the stay on concessions by the

junior lienholders.    A leading bankruptcy commentator agrees that

this statutory language should be construed flexibly:
               The flexibility of section 362 is
          underscored by the language of subsection (d)
          which provides that relief may be granted by
          "terminating, annulling, modifying, or
          conditioning" the stay. The effect is to
          permit the court to fashion the relief to the
          particular circumstances of the case. Thus
          modification or conditioning of the stay may
          be sufficient to protect the non debtor party
          by permitting the exercise of certain but not
          all of its rights.

2 Collier on Bankruptcy, § 362.07, at 362-64 (Lawrence P. King

ed., 15th ed. 1994).


                                                                   4
            Finally, the majority comments that the junior

lienholders here may be protected by demonstrating to the

bankruptcy court that the property is necessary to an effective

reorganization.    I am unwilling, however, to rely on this element

of subsection (d)(2)(B) for ensuring a remedy for a junior

lienholder, such as Nantucket.    There is the possibility for too

much interplay between subsections (A) and (B) of § 362(d)(2).    I

can envision a scenario in which consideration of the

requirements of subsections (A) and (B) are conflated into one

exercise:    the bankruptcy court finds a reorganization would not

be possible because of the debtor's lack of classically construed

"equity" in the property and decides to grant relief from the

stay; the bankruptcy court would not then go on, as the majority

discusses here, to consider whether the property was necessary

for an effective reorganization and subsection (B) would not be

available, in what might otherwise be a successful

reorganization, to protect the interests of the junior

lienholders.

            For all the above reasons, I conclude that the language

of § 362(d)(2) does not require the majority's "classic"

interpretation of equity.    I am persuaded instead that the

interests of the Bankruptcy Code in protecting all lienholders

should permit junior lienholders to concede their security in

order to create equity for the debtor and to permit a

reorganization to go forward where, lacking that concession, it

would not.




                                                                     5
