

                  UNITED STATES COURT OF APPEALS
                      FOR THE FIRST CIRCUIT
                                           

No. 94-1674

                     PAUL J. GRELLA, TRUSTEE,

                            Appellant,

                                v.

                  SALEM FIVE CENT SAVINGS BANK,

                            Appellee.

                                           

           APPEAL FROM THE UNITED STATES DISTRICT COURT

                FOR THE DISTRICT OF MASSACHUSETTS

         [Hon. Edward F. Harrington, U.S. District Judge]                                                                  

                                           

                              Before

                     Torruella, Chief Judge,                                                     

           Coffin and Campbell, Senior Circuit Judges.                                                               

                                           

     Kevin P. Sweeney, with whom Alexander L. Cataldo, Timothy E.                                                                           
McAllister and Cuddy Bixby were on brief for appellant.                                    
     Kevin  J.  Simard, with  whom Isaac  H.  Peres and  Riemer &amp;                                                                           
Braunstein were on brief for appellee.                    

                                           

                         December 6, 1994
                                           

          TORRUELLA, Chief  Judge.   This appeal raises  an issue                    TORRUELLA, Chief  Judge.                                           

frequently debated  in bankruptcy courts around  the country, but

never  yet addressed  by  this court  -- namely,  the permissible

scope of a hearing on a motion for relief from the automatic stay

under    362 of the Bankruptcy Code.1  Paul J. Grella, trustee in

bankruptcy  ("Trustee") for  debtor The Beverly  Corporation (the

"Debtor"),  appeals   the  district  court's  affirmance  of  the

bankruptcy court's  grant of summary judgment  against Trustee in

favor of  creditor Salem  Five Cents  Savings Bank  (the "Bank").

Because  we  find that  the  bankruptcy court  erred  in entering

summary  judgment   against  the  Trustee  and   barring  him  on

principles of res judicata  and collateral estoppel from pursuing                                    

a  counterclaim against the Bank,  we reverse, and  remand to the

bankruptcy  court for  further proceedings  consistent  with this

opinion.

                          I.  BACKGROUND                                    I.  BACKGROUND

          On  January 26,  1988, the  Debtor signed  a $1,000,000

promissory  note  in  favor  of  the  Bank.    The  Debtor  later

collaterally assigned various promissory notes and mortgages (the

"Seventeen Notes") to  the Bank to  secure that debt.   Among the

Seventeen  Notes was a $290,000 note  from the Wellesley Mortgage

Corporation (the "Wellesley Note").  

          On  September 4,  1992,  the Debtor  filed a  voluntary

petition under Chapter 7  of the Bankruptcy Code, activating  the
                                                  

1   Unless otherwise noted,  all citations of  statutory sections
are  to the Bankruptcy  Reform Act of  1978, 11 U.S.C.     101 et                                                                           
seq., as amended.             

                               -2-

automatic stay provisions of    362.   On December 18, 1992,  the

Bank filed a Motion  for Relief from the Automatic  Stay pursuant

to   362(d)(1),  seeking an order  allowing the Bank  to exercise

its contractual  and state  law rights  and remedies against  the

Debtor with respect  to the Seventeen Notes.2  In  its Motion for

Relief, the  Bank claimed to have a "perfected security interest"

in  the Seventeen  Notes because  it was  "in sole  and exclusive

possession" of the  originals.  The Bank did not  state or allege

any  other details  regarding its  security interest.   The  Bank

asserted, as a  basis for relief, that  the Debtor was  unable to

provide  the Bank  with  adequate protection  for its  collateral

position.

          In his Response  to the Bank's  Motion for Relief  from

Stay, the Trustee did  not contest the Bank's Motion,  but merely

stated  that he  had  not  had  sufficient  time  to  review  the

pertinent  files  and determine  the  existence  of any  possible

defenses to the Bank's claims.  The Trustee then requested that a

preliminary hearing on the  Motion be scheduled, after sufficient

time to review the files.

          After a  hearing on the  Bank's Motion for  Relief from

                                                  

2  Section 362(d)(1) provides in pertinent part:

            On  request  of a  party in  interest and
            after notice  and  a hearing,  the  court
            shall grant  relief from  the stay .  . .
            for cause, including the lack of adequate
            protection of an interest in  property of
            such party in interest. . . .

                               -3-

Stay  on  January 14,  1993,3  the Bankruptcy  Court  granted the

Motion  and issued an order lifting the  automatic stay as to the

Bank, and  allowing  the Bank  to exercise  "any and  all of  its

contractual and state  law rights and  remedies" with respect  to

the Seventeen  Notes.  In neither  the hearing nor the  order did

the  bankruptcy court make any  findings about the  status of the

Bank's security interest in the Seventeen Notes.

          Having  obtained relief  from  stay, the  Bank filed  a

Complaint on February 19, 1993, requesting a determination of its

secured  status under   506(a),4 and a turnover and accounting of

funds by  the Trustee as to  the Seventeen Notes.   In support of

its Complaint, the  Bank alleged  only that it  had a  "perfected

security  interest"  in the  Notes because  it  was "in  sole and

exclusive  possession" of them.  Again, the Bank offered no other

details or arguments regarding its interest in the Notes. 

          On  March 29,  1993,  the Trustee  answered the  Bank's

Complaint (the  "Answer"), denying the Bank's  allegation that it

had a perfected security interest  in the Seventeen Notes because

of  its  exclusive  possession.    The  Trustee  asserted  as  an

affirmative defense  that the Bank  did not perfect  its security

                                                  

3  The Trustee did not attend this hearing, for  reasons that are
unexplained in the record.  Both the Bank and  the district court
make much of his absence.  While we agree with the district court
that  a  trustee's  failure  to  attend  a  scheduled  hearing is
troubling and not to  be encouraged, we do  not find his  absence
relevant to our analysis here.

4  Section  506 allows a  creditor to seek  determination of  the
status of  a lien on property in which the debtor's estate has an
interest.

                               -4-

interest in the Wellesley Note prior to 90 days before the Debtor

filed  its  bankruptcy petition.    The  Answer also  included  a

Counterclaim, alleging that the  Bank's interest in the Wellesley

Note is avoidable as a preferential transfer.5  

          On  April  8, 1993,  the  Bank  answered the  Trustee's

counterclaim (the  "Reply").  The  Bank asserted, inter  alia, on                                                                       

the grounds of estoppel, waiver and collateral estoppel, that the

Trustee  was barred  from  pursuing  his preference  counterclaim

because he  failed to file or pursue  any objection to the Bank's

Motion for Relief from Stay.

          On July 7, 1993, the Trustee moved for summary judgment

on  his preference  counterclaim.   On August  3, 1993,  the Bank

opposed  that motion and cross-moved  for summary judgment on the

ground that either res judicata or collateral estoppel barred the                                         

counterclaim,  as  the  issue of  the  "validity"  of  the Bank's

interest  in  the Notes  was  decided when  the  Bankruptcy Court

granted the relief from  stay.  The Bankruptcy Court  denied both

summary judgment motions, finding genuine issues of material fact

to exist regarding "the status of the holder of the note."   With

respect  to  the  Bank's  res judicata  and  collateral  estoppel                                                
                                                  

5   A "preference"  is a transfer  of a debtor's  assets during a
specified  pre-bankruptcy  period that  unjustifiably  favors the
transferee  over other creditors.  In re Melon Produce, Inc., 976                                                                      
F.2d  71, 73 (1st  Cir. 1992).   Section 547 allows  a bankruptcy
trustee,   in  certain   circumstances,  to   avoid  preferential
transfers  of an interest of the debtor  if the transfer was made
within 90  days before the date  of the filing of  the bankruptcy
petition.    The creation  of  a perfected  security  interest in
property  during  this  90-day  preference  period  is  itself  a
preferential transfer  if it  meets the other  requirements of   
547.  In re Melon Produce, Inc., 976 F.2d at 74.                                         

                               -5-

arguments, the Bankruptcy Court did not make a ruling, but merely

said that it was a "legal issue which we can get into later."  

          On November  16, 1993, the  Trustee filed a  motion for

summary  judgment on  the  res judicata  and collateral  estoppel                                                 

issues,  arguing  that the  doctrines  were  inapplicable to  the

Trustee's   preference  counterclaim,   as  there  had   been  no

adjudication on the merits of the Bank's security interest during

the  relief from  stay  proceeding.   On the  first  page of  his

Memorandum  of Law in support of the Motion for summary judgment,

the Trustee stated:

            Only the note  entitled "Wellesley  Mort.
            Corp. of April  25, 1990" (the  Wellesley
            Note) . . . is presently in dispute.  The
            other notes and mortgages . . . have been
            determined   [by   the  Trustee]   to  be
            perfected security interests in  favor of
            [the Bank].

          Three days  later, the Trustee filed a Motion for Leave

to Amend his Memorandum  of Law, seeking to amend  this statement

of facts.  The Trustee explained that the original memorandum was

written  some months before, and at that time the Trustee thought

that there was  no dispute as to sixteen of  the Seventeen Notes.

Sometime after the original memorandum was written, but before it

was  filed, the Trustee apparently determined  that he did indeed

dispute the Bank's interest  in the other notes as well,  but had

neglected to edit his memorandum before filing it with the court.

The Bank objected to the Trustee's Motion for summary judgment on

the res judicata and  collateral estoppel issues, and cross-moved                          

for summary judgment.  

                               -6-

          After a  hearing on  the motions, the  bankruptcy court

granted  summary  judgment  in  favor  of  the  Bank.6    In  its

decision,  the  court  stated  without explanation  that  it  was

treating the Trustee's preference counterclaim as an "affirmative

defense."   Although  the court  recognized that  the hearing  on

relief from  stay was a  preliminary one,  the court  went on  to

state:

            The   question   of   the  validity   and
            perfection of a  security interest  which
            is the  subject of  a request  for relief
            from stay goes to the heart of the issues
            before  the court  [during a  relief from
            stay hearing].   If the security interest
            were invalid or unperfected,  there would
            be no cause for  relief from stay and the
            request  would  be denied  .  .  . .  The
            Trustee could have raised  the perfection
            issue    [underlying    his    preference
            counterclaim]  at  the  hearing   on  the
            motion for relief.  If he felt that I was
            wrong in denying  him additional time  to
            respond,  an  appeal  from my  order  was
            appropriate.    Having had  the potential
            for  one bite  at  the  apple, he  cannot
            relitigate the issue at this time.

The  court reasoned  that the  perfection issue  was necessarily,

implicitly decided in the relief from stay  proceedings, and thus

granted  summary judgment in the  Bank's favor "as  to the entire

adversary  proceeding"  on collateral  estoppel  or  res judicata                                                                           

grounds.

          On May 23, 1994, the district court issued a Memorandum

and  Order  affirming  the  bankruptcy  court's  decision.    The
                                                  

6   Although the  court did not explicitly  rule on the Trustee's
Motion for Leave  to Amend  his original memorandum  of law,  the
court stated in  its Decision  that the parties  agreed that  the
only note in dispute was the Wellesley Note.

                               -7-

district court ruled that  collateral estoppel bars the Trustee's

preference counterclaim, and entered judgment in the Bank's favor

on May 25, 1994.    

                         II.  DISCUSSION                                   II.  DISCUSSION

          A.  Standard of Review                    A.  Standard of Review                                          

          In an appeal from district court review of a bankruptcy

court  order, we  independently  review  the  bankruptcy  court's

decision, applying  the "clearly erroneous" standard  to findings

of fact and de novo review to conclusions of law.  In re SPM Mfg.                                                                           

Corp.,  984  F.2d  1305,   1310-11  (1st  Cir.  1993)  (citations               

omitted).  No special  deference is owed to the  district court's

determinations.  Id. at 1311.                             

          B.  Claim and Issue Preclusion                    B.  Claim and Issue Preclusion                                                  

          To evaluate  the bankruptcy  court's decision, we  must

consider  the doctrine  of  res  judicata  generally.    We  have                                                   

explained that there are two different aspects of res judicata --                                                                        

claim  preclusion  and  collateral  estoppel (also  called  issue

preclusion).  Dennis v.  Rhode Island Hosp. Trust, 744  F.2d 893,                                                           

898  (1st Cir. 1984).  The essential elements of claim preclusion

are: (1) a final judgment on the merits in an earlier action; (2)

an identity  of parties or privies  in the two suits;  and (3) an

identity of  the cause of action  in both suits.   Aunyx Corp. v.                                                                        

Canon U.S.A., Inc., 978 F.2d 3, 6 (1st Cir. 1992), cert.  denied,                                                                          

   U.S.    , 113  S. Ct.  1416 (1993).   Once these  elements are

established, claim  preclusion also bars the  relitigation of any

issue  that was,  or might  have been, raised  in respect  to the                                               

                               -8-

subject matter of the prior litigation.  Dennis, 744 F.2d at  898                                                         

(citations omitted) (emphasis in original).

          The   principle  of   collateral  estoppel,   or  issue

preclusion, bars relitigation  of any factual or legal issue that

was actually decided in previous litigation "between the parties,                      

whether on the  same or a different claim."   Dennis, 744 F.2d at                                                              

899  (quoting Restatement  (Second)  of Judgments,    27  (1982))

(emphasis in original).  When there is an identity of the parties

in  subsequent actions,  a  party must  establish four  essential

elements for a successful application of issue preclusion to  the

later action:  (1) the  issue sought to be precluded must  be the

same  as that involved  in the prior  action; (2) the  issue must

have been  actually  litigated;  (3) the  issue  must  have  been

determined by a  valid and  binding final judgment;  and (4)  the

determination  of  the  issue must  have  been  essential  to the

judgment.  See NLRB  v. Donna-Lee Sportswear Co., Inc.,  836 F.2d                                                                

31, 34  (1st Cir. 1987); In re Sestito, 136 B.R. 602, 604 (Bankr.                                                

D. Mass. 1992);  In re Dubian, 77 B.R. 332,  337 (Bankr. D. Mass.                                       

1987).   An  issue may be  "actually" decided  even if  it is not

explicitly  decided, for  it may  have constituted,  logically or                    

practically, a necessary component of the decision reached in the

prior  litigation.     Dennis,  744  F.2d  at  899  (emphasis  in                                       

original).

          As the  Trustee points out,  it is unclear  whether the

bankruptcy court relied on claim or  issue preclusion in entering

summary   judgment   and   barring   the   Trustee's   preference

                               -9-

counterclaim.   Although  the  court's decision  refers to  claim

preclusion, it is  based on  an issue preclusion  analysis.   The

district court  likewise expressly  based its reasoning  on issue

preclusion principles.   Both  the Bank  and the Trustee  contend

that  the doctrine of  issue preclusion is  the appropriate basis

for  our analysis  here,  and we  agree.   Thus, the  broad issue

before us is whether all of the elements of issue preclusion, set

forth  above,  are met.   In  order  to make  this determination,

however,  we  must  first   consider  exactly  what  issues  were

adjudicated  during the initial action, a hearing on a motion for

relief from stay.

          C.   Issues Determined During a   362(d) Hearing                    C.   Issues Determined During a   362(d) Hearing                                                                    

          The  Trustee argues that the  allowance of a motion for

relief from stay  does not  preclude the later  prosecution of  a

preference action, as a  determination of the non-avoidability of

a lien  under   547 is  not, logically or practically,  part of a

court's  decision to grant relief from  stay.  In support of this

position,  the Trustee  cites the  Seventh Circuit's  decision of

Matter  of Vitreous  Steel Prods.  Co., 911  F.2d 1223  (7th Cir.                                                

1990), and urges us to adopt that court's reasoning.

          In  Vitreous  Steel,  the  appeals court  held  that  a                                       

decision to lift the automatic stay pursuant to   362(d) does not

preclude the prosecution under    547 of an adversary  complaint.

Vitreous Steel, 911 F.2d  at 1234.  The  court reasoned that  the                        

possible avoidability of a transfer to a creditor  under   547 is

not  an issue proper for adjudication by a court during a hearing

                               -10-

on a motion  to lift  the automatic stay,  and accordingly  found

that  the   bankruptcy  court   erred  in  barring   a  trustee's

preferential transfer claim on  collateral estoppel grounds.  Id.                                                                          

          The Vitreous Steel holding rests on persuasive grounds.                                      

First,  as the Seventh Circuit  noted, it is  consistent with the

statutory scheme established by   362,  and particularly with the

purpose of  the relief from stay  provision of   362(d).   Id. at                                                                       

1232.   As  soon  as  a  petition in  bankruptcy  is  filed,  the

automatic stay provisions  of   362  take effect, preventing  all

pre-petition creditors from taking action to collect their debts.

In certain situations,  such as  when a creditor  has a  security

interest in the debtor's property and the value of the collateral

is less than the  amount of the debt, bankruptcy  proceedings may

only delay the inevitable result.  There may be no reason to make

the creditor wait for the distribution of the estate, and indeed,

early release  of  the property  may  aid administration  of  the

estate  by allowing a quicker  determination of the  amount of an

undersecured creditor's  claim.  Id. at 1231-32.   Thus, Congress                                             

included  the provision  for  relief from  stay  under    362(d),

allowing  bankruptcy  courts  to  lift  the  stay  as to  certain

creditors if grounds for relief are presented.   Id. at 1232; see                                                                           

11 U.S.C.   362(d).  These grounds are the adequacy of protection

for  the creditor, the debtor's  equity in the  property, and the

necessity of the  property to  an effective  reorganization.   11

U.S.C.   362(d).  That the statute sets forth certain grounds for

                               -11-

relief and  no others indicates Congress' intent  that the issues

decided by a bankruptcy  court on a creditor's motion to lift the

stay be limited to these matters.  See 11 U.S.C.   362(d).                                                

          Moreover, the hearing  on a motion for relief from stay

is meant to be a summary proceeding, and the statute requires the

bankruptcy  court's action to be quick.  Vitreous Steel, 911 F.2d                                                                 

at 1232; see 11 U.S.C.   362(e).  Section    362(e) provides that                      

a bankruptcy court must hold a preliminary hearing on a motion to

lift  the stay  within thirty days  from the  date the  motion is

filed, or the  stay will be considered  lifted.  A  final hearing

must  be  commenced  within  thirty days  after  the  preliminary

hearing.  Vitreous Steel, 911 F.2d at 1232 (citing Fed. R. Bankr.                                  

P. 4001(a)(2)); see 11 U.S.C.   362(e).                                  

          The  limited  grounds  set   forth  in  the   statutory

language, read in the context of the overall scheme of   362, and

combined with the preliminary, summary nature  of the relief from

stay proceedings, have led most courts to find that such hearings

do  not  involve a  full adjudication  on  the merits  of claims,

defenses,  or counterclaims,  but  simply a  determination as  to

whether  a  creditor has  a colorable  claim  to property  of the

estate.   See,  e.g., Estate  Contruction Co.  v. Miller  &amp; Smith                                                                           

Holding Co., Inc., 14 F.3d 213, 219  (4th Cir. 1994) (hearings to                           

lift the stay are summary in character, and counterclaims are not

precluded later if not raised at this stage); Vitreous Steel, 911                                                                      

F.2d at 1232 (questions of the validity of liens are not at issue

in a   362 hearing,  but only whether there is a  colorable claim

                               -12-

on property); In re Johnson, 756 F.2d 738, 740 (9th Cir.),  cert.                                                                          

denied,  474  U.S. 828  (1985)  (relief  from stay  hearings  are                

limited in scope to adequacy of protection, equity, and necessity

to an effective reorganization, and validity of underlying claims

is  not litigated); Nat'l  Westminster Bank, U.S.A.  v. Ross, 130                                                                      

B.R. 656, 658 (Bankr. S.D.N.Y.), aff'd, 962 F.2d 1 (2d Cir. 1991)                                                

(decision  to  lift  stay   does  not  involve  determination  of

counterclaims, and thus those claims are not precluded later); In                                                                           

re  Quality Elect. Ctrs., Inc.,  57 B.R. 288,  290 (Bankr. D.N.M.                                        

1986) (relief from stay proceedings limited to whether the moving

creditor has a colorable claim to a perfected security interest);

In  re Pappas,  55  B.R.  658,  660-61  (Bankr.  D.  Mass.  1985)                       

(trustee's   counterclaims  may   be   considered,   though   not

adjudicated, at relief from stay proceedings);7 In  re Geller, 55                                                                       

B.R.  970, 974-75  (Bankr.  D.N.H. 1985)  (although a  bankruptcy

court  may  consider  counterclaims  during a  relief  from  stay

hearing,  it is not authorized to a res judicata determination of                                                          

                                                  

7   The Bank cites In  re Pappas in support of  its argument that                                          
preference  counterclaims are  among  claims  that challenge  the
"validity" of a creditor's lien, and thus are part of  the relief
from  stay  determination.   The  Bank's reliance  on  that case,
however,  is misplaced.   As  the Trustee  points out,  that case
involved  the unusual factual  situation of a  creditor trying to
prevent a trustee from pursuing a defense to a motion for relief.
The Pappas court recognized that while a   362  motion for relief                    
hearing  is not the  proper forum  for deciding  counterclaims, a
court  need not  blind  itself  to  such counterclaims,  and  may
consider them where  raised.   In re Pappas,  55 B.R. at  660-61.                                                     
The   court  went   on   to  discuss   the  distinction   between
"considering"  and "adjudicating"  such claims,  and specifically
stated that claims that challenge the validity of a lien "will be
considered, though not adjudicated, at the hearing on relief from
stay."  Id. at 661.  The Bank somehow overlooked this statement.                    

                               -13-

such claims on their  merits); In re  Tally Well Serv., Inc.,  45                                                                      

B.R. 149, 151-52  (Bankr. E.D.  Mich. 1984) (a  court may  merely

consider  counterclaims  and  defenses  at  a  relief  from  stay

hearing,  but such hearing is not the proper proceeding for those

claims'  adjudication);  cf.  In  re Shehu,  128  B.R.  26, 28-29                                                    

(Bankr.  D.  Conn.  1991)  (acknowledging  the  narrow  scope  of

hearings  on relief from stay, but allowing the debtor to present

evidence on "indirect defenses" going to offset the amount of the

secured debt, for the limited  purpose of determining whether the

debtor has equity in the property). 

          These courts'  interpretation  of    362 also  comports

with the statute's legislative history:

            At the expedited hearing under subsection
            (e), and at  all hearings on relief  from
            the  stay,  the  only issue  will  be the
            claim of  the  creditor and  the lack  of
            adequate protection or existence of other
            cause  for relief  from  the stay.   This                                                               
            hearing  will not be the appropriate time                                                               
            at which to  bring in other  issues, such                                                               
            as counterclaims against the  creditor on                                                               
            largely   unrelated   matters.      Those                                                   
            counterclaims  are not  to be  handled in
            the summary fashion that  the preliminary
            hearing  under  this  provision will  be.
            Rather, they will be  the subject of more
            complete proceedings by  the trustees  to
            recover  property of  the  estate  or  to
            object to the allowance of a claim. 

H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 344 (1977), reprinted                                                                           

in  1978 U.S. Code  Cong. &amp; Admin.  News 5787, at  6300 (emphasis            

added).   The Senate report reiterates this explanation, but also

adds:

            However,  this  would  not  preclude  the
            party  seeking  continuance  of the  stay

                               -14-

            from presenting evidence on the existence
            of claims which the court may consider in
            exercising  its  discretion.     What  is                                                               
            precluded  is  a  determination  of  such                                                               
            collateral  claims on  the merits  at the                                                               
            hearing.                              

S. Rep. No.  95-989, 95th Cong., 2d  Sess. 55, reprinted  in 1978                                                                      

U.S. Code Cong. &amp; Admin. News 5787, at 5841 (emphasis added).   

          The  relief  from stay  procedures  established  by the

Bankruptcy  Rules also point to the limited scope of the hearing.

Relief  from the stay  is obtained  by a  simple motion,  Fed. R.

Bankr.  P. 4001, and it  is a "contested  matter," rather than an

adversary  proceeding.   Fed. R.  Bankr. P.  9014.   See Advisory                                                                  

Committee  Note to Fed. R. Bankr. P. 7001 ("[R]equests for relief

from   the  automatic   stay   do  not   commence  an   adversary

proceeding.").    In  contrast,  all  actions  to  determine  the

validity  of a  lien, such as  a preference  action under    547,

require  full adjudication  on  verified pleadings,  and must  be

litigated in adversary proceedings.  Fed. R.  Bankr. P. 7001.  To

allow a relief  from stay  hearing to become  any more  extensive

than  a quick determination of whether a creditor has a colorable

claim would turn the hearing into a full-scale adversary lawsuit,

In re  Gellert, 55 B.R.  at 974, and  would be inconsistent  with                        

this procedural scheme.

          We  agree with  the  Trustee's argument  that  allowing

these hearings  to become adversary proceedings  would also force

the  untimely,  expedited  adjudication of  complex  and critical

issues during the  early stages of the case, on  the basis of the

movant creditor's  unverified motion for relief.   Trustees would

                               -15-

be forced to assert (and win) not only objections to motions  for

relief  from  stay,  but  any   and  all  possible  defenses  and

counterclaims to the underlying claims of the movant creditor, or

risk being precluded  from raising them later.  Bankruptcy courts

would likewise be forced to determine the  validity, priority and

extent of  a lien during  the relief from  stay hearing,  and the

creditor's motion would thus become a "substitute" for the normal

adversary   proceedings  on  the  merits.    See  In  re  Quality                                                                           

Electronics, 57 B.R. at 290.                     

          Moreover,  the  Bankruptcy  Code specifically  provides

that a trustee has two years after appointment or until the close

of  the case  to commence  a    547  preference action.   Section

546(a)(1).  A relief from stay proceeding, conversely, is usually

commenced very  shortly after  the bankruptcy petition  is filed,

and, as explained  above, must  be completed no  more than  sixty

days from the filing of the  motion for relief.  Forcing trustees

to raise  their counterclaims  within that short  period, usually

during the nascent stages  of a bankruptcy case, would  in effect

allow  movant  creditors  to  drastically  reduce  the   two-year

limitations period  set forth  in  the Code.   Not  only is  this

result patently unfair and inefficient, it renders the Bankruptcy

Code's statutes  of limitations provision irrelevant  -- a result

we cannot endorse.

          For  all these  reasons, we  find that  a hearing  on a

motion for relief  from stay  is merely a  summary proceeding  of

limited effect, and adopt the Vitreous Steel court's holding that                                                      

                               -16-

a court hearing a motion for relief from stay should seek only to

determine whether the party seeking  relief has a colorable claim

to property of the estate.  The statutory and procedural schemes,

the legislative history,  and the  case law all  direct that  the

hearing on  a motion to  lift the  stay is not  a proceeding  for

determining  the  merits of  the  underlying substantive  claims,

defenses,  or  counterclaims.    Rather,  it is  analogous  to  a

preliminary   injunction   hearing,   requiring   a   speedy  and

necessarily  cursory determination  of the  reasonable likelihood

that  a creditor has a legitimate claim  or lien as to a debtor's

property.8  If  a court finds that  likelihood to exist, this  is

not a determination of the validity of those claims, but merely a

grant  of permission  from the  court allowing  that  creditor to

litigate its substantive claims  elsewhere without violating  the

automatic stay.

          This is not  to say  that bankruptcy  courts can  never

                                                  

8   Indeed, the legislative history  of   362  suggests this very
analogy:

            [T]he  automatic  stay  is similar  to  a
            temporary   restraining   order.      The
            preliminary  hearing  [on  a  motion  for
            relief  from  stay]  is  similar  to  the
            hearing  on   a  preliminary  injunction,
            . . . . The main difference lies in which
            party  must bring  the  issue before  the
            court.  While in the  injunction setting,
            the  party  seeking  the injunction  must
            prosecute the action, in  proceedings for
            relief  from  the  automatic   stay,  the
            enjoined party must move.  

H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 344 (1977), reprinted                                                                           
in 1978 U.S. Code Cong. &amp; Admin. News 5787, at 6300.            

                               -17-

consider   counterclaims   and  defenses,   including  preference                  

counterclaims, during  a relief  from stay  hearing.   As several

bankruptcy  courts  have   discussed,  there  is  a   significant

difference  between  mere  consideration  of  claims   and  final

adjudication on the merits.  See In re Pappas, 55 B.R. at 660; In                                                                           

re Gellert,  55 B.R. at 974-75; In re Tally Well, 45 B.R. at 152.                                                          

Certainly,  a court may take  into account any  matter that bears

directly  on  the debtor's  equity,  or  that  clearly refutes  a

creditor's  claim to  the property.   For  example, if  a trustee

raises a defense  to a creditor's claim  at the relief  from stay

hearing, the court need not ignore this defense, but may consider

it when deciding whether to lift the stay.  If, however, the stay

is not lifted, that  creditor is not barred forever  from seeking

payment.  It must simply comply with the automatic stay, and wait

with the other creditors for the estate's administration. 

          Conversely,  if the  stay is  lifted, the  creditor may

then prosecute its  claim in subsequent litigation.   The trustee

is not precluded from raising  defenses or counterclaims in those

subsequent  proceedings,  because  the  defense  was  not   fully

adjudicated, but only considered, during the preliminary hearing.

As  a  matter of  law, the  only  issue properly  and necessarily

before a bankruptcy  court during relief from stay proceedings is

whether  the  movant  creditor  has a  colorable  claim;  thus, a

decision to lift the  stay is not an adjudication of the validity

or avoidability of the  claim, but only a determination  that the

creditor's  claim   is  sufficiently  plausible   to  allow   its

                               -18-

prosecution elsewhere.

          The Bank  nevertheless submits that the  Vitreous Steel                                                                           

analysis is "flawed," and argues:

            [A] determination (though not necessarily
            a final one) as  to a creditor's security
            interest  is  an  integral  part  of  any                                  
            decision  regarding  the  lifting of  the
            stay .  . .  if  the creditor's  security
            interest  can be avoided  for any reason,
            there is no cause  to grant the  creditor
            relief  from  stay  because the  creditor
            lacks   an   interest  in   the  debtor's
            property.  

(Emphasis  in original).    Essentially, the  Bank contends  that

because  establishing  the  validity  of  a  creditor's  security

interest is an essential element of a relief from  stay, the fact

that  the stay  was indeed  lifted  necessarily implies  that the

security interest is valid.  

          This argument is meritless for two reasons.  First,  it

ignores the  important distinction between  the consideration and

adjudication of an  issue.  In  a relief  from stay hearing,  the

only  issue  properly before  the court,  and  thus the  only one

actually  adjudicated,  is  whether  the stay  should  be  lifted

because a creditor has shown a colorable claim.  Put another way,

and employing the preliminary injunction analogy discussed above,

a  creditor must  show  a reasonable  likelihood  that it  has  a

meritorious claim,  and the  court may  consider any  defenses or

counterclaims that  bear on  whether  this reasonable  likelihood

exists.  If  the stay is lifted, however, what  has been actually

adjudicated  is only that the creditor  has shown this reasonable

likelihood.   It is not a ruling  on the merits of the underlying

                               -19-

claim.9

          Second, the Bank's argument also ignores the difference

between  a void claim or lien, and a  valid yet voidable lien.  A                                                                  

creditor's valid,  perfected  security interest  in the  debtor's

property may nevertheless be  voidable as a preferential transfer

under   547.  In  re Melon Produce, 976 F.2d at 74  (the creation                                            

of  a  perfected  security  interest  in  property  is  itself  a                                                                        

preference, when the perfection  takes place during the statutory

preference period and other criteria  are satisfied).  A creditor

may therefore have a  lien that is sufficient to  justify lifting

the  stay,  yet   ultimately  avoidable  by  the   trustee  as  a

preferential  transfer under   547.   Thus, the Bank's contention

that  "if the creditor's security interest can be avoided for any

reason, there is no cause to grant the creditor relief from stay"

is simply wrong. 

          The  only   case  that   the  Bank   cites  purportedly

supporting  its argument that  a relief from  stay proceeding can

have  preclusive effect  on a  subsequent counterclaim  is In  re                                                                           

Monument Record Corp.,  71 B.R.   853 (Bankr.  M.D. Tenn.  1987).                               

This  case, however,  is entirely  distinguishable.   In Monument                                                                           

Record,  the creditor  and  the trustee  entered into  a specific                

                                                  

9   The Bank also urges  us to reject the  Vitreous Steel court's                                                                   
"rigid rule"  and adopt a "flexible approach"  which takes unique
circumstances  into  account.   We  will  not, however,  overlook
Congressional  intent,  statutory   language,  and   well-settled
procedural   machinery  that  all   limit  the   issues  properly
adjudicated  in such hearings.  It is perhaps not surprising that
the  Bank fails to cite any authority for its "flexible approach"
argument, as it lacks any legal or practical basis.

                               -20-

agreement, in order to  resolve the motion for relief  from stay,

stipulating  that the  creditor's security  interest was  a valid

first lien.   Id. at  855.  The  bankruptcy court held  that this                          

specific agreement  precluded the  trustee from challenging  in a

later  adversary  proceeding  the  perfection  of  the   security

interest.   Id.  at 864.    We agree  with the  Trustee that  the                        

parties' express agreement  was the crux  of the Monument  Record                                                                           

court's  ruling, and find  that decision is  logically limited to

those unique circumstances.    

          Applying our holding to the facts presented here, it is

evident that  the bankruptcy court's order  lifting the automatic

stay upon the Bank's motion did not have preclusive effect on the

Trustee's  counterclaims.   The  only issue  properly before  the

court  during  that  hearing  was whether  the  Bank's  claim was

colorable, or  sufficiently plausible,  to lift  the  stay.   The

court did not, and  indeed, could not adjudicate  the substantive

merits  of either the Bank's  claim, or any  possible defenses or

counterclaims.10    Thus,  the  issue  raised  by  the  Trustee's
                                                  

10  This is  so even if the Trustee had  attended the hearing and
actually raised any defenses.  Thus, the Trustee's absence at the
hearing  is  irrelevant.   The Bank  contends that  the Trustee's
failure  to deny the allegations in the Bank's motion for relief,
and  to attend the hearing, constitutes a "judicial admission" of
the  validity of  the  Bank's security  interest.   The  Bank  is
misguided.    Because  a  court cannot  properly  adjudicate  the
validity of a lien  during relief from stay proceedings,  a party
also  cannot  "admit,"  with  preclusive, binding  effect,  to  a
claim's validity.   See In re Torco Equip. Co.,  65 B.R. 353, 355                                                        
(Bankr.  W.D. Ky.  1986) (preference  claim is  not a  compulsory
counterclaim  to a motion for relief because of the limited scope
of   362 proceedings).  To hold otherwise would require a trustee
to  plead  any and  all  affirmative  defenses and  counterclaims
during the relief  from stay proceedings,  or be forever  barred.

                               -21-

preference counterclaim was  not before the  court at the  relief

from  stay  hearing,  was   not  actually  (or  even  implicitly)

litigated,  and was not essential to the court's decision to lift

the  stay.  Therefore, the  elements of issue  preclusion are not

met here.11    Accordingly, both  the  bankruptcy court  and  the

district  court   erred  in   precluding   the  Trustee's   later

counterclaim on those grounds.

                                                  

As we have explained, this is untenable.

11   Moreover,  because  a  relief  from stay  proceeding  merely
removes a  bar to  a creditor  from  prosecuting its  substantive
claims,  and does  not  determine the  merits  of the  underlying
claim, there is no identity  of cause of action between a  relief
from  stay proceeding and an adversary  proceeding on the claim's
validity.   Thus, the  elements of claim  preclusion are likewise
not met here.

                               -22-

          D.   The Trustee's   547 Preference Counterclaim                    D.   The Trustee's   547 Preference Counterclaim                                                                    

            1.  The Wellesley Note                      1.  The Wellesley Note

          With respect to the Trustee's counterclaim under   547,

the  bankruptcy court ruled that a genuine issue of material fact

exists as  to the status of  the Bank's security interest  in the

Wellesley  Note, and we find that the record supports the court's

finding.12    We  therefore remand  the  case  to the  bankruptcy

court for further proceedings on the validity of the Bank's claim

and the Trustee's counterclaim as to the Wellesley Note.

            2.  The other sixteen of the Seventeen Notes                        2.  The other sixteen of the Seventeen Notes

          Regarding  the parties' dispute  over the other sixteen

of the Seventeen Notes, the Trustee requests, in the "Conclusion"

section  of his  brief,  that we  "strike  any finding  that  the

Trustee  has  agreed  that  the Seventeen  Notes  other  than the

Wellesley  Note are  'valid'  security interests."    In a  final

footnote to his reply brief, the Trustee maintains that he is not

contending that his motion to amend should have been allowed, but

only that genuine factual issues exist regarding the validity, as                                                                       

opposed  to the perfection, of the other sixteen of the Seventeen

Notes, and thus summary  judgment as to those notes  is improper.

He offers no further support for this statement. 

          Regardless  of the  meaning or  merit of  the Trustee's
                                                  

12   While  the Bank contends  that its security  interest in the
Wellesley Note  was perfected by  possession prior to  the 90-day
statutory preference  period, the Trustee contends  that the Bank
did  not actually  have possession  of the  Note until  about two
months before  the Debtor filed  its bankruptcy  petition.   Both
parties'  contentions have support in the record, thus creating a
genuine factual issue.

                               -23-

argument as to the other sixteen of the Seventeen Notes, we agree

with  the Bank  that the  Trustee has  not properly  presented or

argued  this  issue on  appeal.   We  have warned  litigants that

issues averted to  in a perfunctory manner, unaccompanied by some

effort at developed argumentation, are deemed waived for purposes

of appeal.   Willhauck v.  Halpin, 953  F.2d 689,  700 (1st  Cir.                                           

1991).    Parties must  spell  out their  arguments  squarely and

distinctly, or "forever  hold their peace."  Id.   In his 50-page                                                         

brief,  the Trustee  did not raise  or address  the issue  of the

other sixteen  notes at  any  point except  for the  one-sentence

statement,  unsupported  by any  argument  or  case law,  in  his

conclusion.   Even  when  the Bank  pointed  out this  flaw,  the

Trustee  did not  more fully  develop the  argument in  his reply

brief, but  deemed it worthy of only a cursory footnote.  This is

simply insufficient  presentation and argumentation of  the issue

for any meaningful analysis,  and we therefore deem  it waived.13

                         III.  CONCLUSION                                   III.  CONCLUSION

          For the  foregoing reasons,  we conclude that  both the

bankruptcy  court and  the district  court erred  in barring  the

Trustee's preference counterclaim as to the Wellesley Note on the

grounds of  either claim  or issue  preclusion.  Accordingly,  we

remand  to the bankruptcy court for adjudication on the merits of

                                                  

13  Because the argument is waived, we do not  address it, and we
likewise  do not  address the  Bank's counter-arguments  that the
Trustee's statements  in his Memorandum of  Law are "admissions,"
and that the Trustee is estopped from denying his statements.

                               -24-

the  Bank's  security  interest and  the  Trustee's  counterclaim

regarding the Wellesley Note.

                               -25-
