                                                         FILED
                                                          JAN 05 2015
 1                        NOT FOR PUBLICATION         SUSAN M. SPRAUL, CLERK
                                                        U.S. BKCY. APP. PANEL
                                                        OF THE NINTH CIRCUIT
 2
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )     BAP Nos.  AZ-13-1471-KiDJu
                                   )               AZ-13-1555-KiDJu
 6   SONORA DESERT DAIRY, L.L.C., )           (Consolidated Appeals)
     et al.,                       )
 7                                 )     Bk. Nos.  12-00262
                    Debtors.       )               12-00263
 8                                 )               12-00264
                                   )               12-00265
 9   WELLS FARGO BANK, N.A.,       )               12;00266
                                   )          (Jointly Administered)
10                  Appellant,     )
                                   )
11   v.                            )     M E M O R A N D U M1
                                   )
12   SONORA DESERT DAIRY, L.L.C.; )
     SONORA DESERT DAIRY II,       )
13   L.L.C.; SONORA DESERT DAIRY   )
     III, L.L.C.; LUECK CATTLE     )
14   COMPANY, L.L.C.; BOB LUECK    )
     FARMS, L.L.C.; AGSTAR         )
15   FINANCIAL SERVICES, FLCA;     )
     OFFICIAL JOINT COMMITTEE OF   )
16   UNSECURED CREDITORS,          )
                                   )
17                  Appellees.     )
     ______________________________)
18
                Argued and Submitted on November 20, 2014,
19                          at Phoenix, Arizona
20                          Filed - January 5, 2015
21             Appeal from the United States Bankruptcy Court
                         for the District of Arizona
22
         Honorable Randolph J. Haines, Bankruptcy Judge, Presiding
23
     Appearances:    Robert J. Miller, Esq., of Bryan Cave LLP for
24                   appellant; Michael S. Dove, Esq., of Gislason &
                     Hunter LLP for appellee AgStar Financial Services,
25                   FCLA.
26
27        1
            This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may have
28   (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
     Cir. BAP Rule 8013-1.
 1   Before:   KIRSCHER, DUNN and JURY, Bankruptcy Judges.
 2
 3        Creditor Wells Fargo Bank, N.A. ("Wells Fargo") appeals:
 4   (1) an order authorizing a postpetition financing loan from
 5   creditor AgStar Financial Services, FLCA, as loan servicer and
 6   attorney-in-fact for First National Bank of Altus ("AgStar"); and
 7   (2) a supplemental order authorizing the debtors to receive
 8   additional postpetition advances from AgStar.   We VACATE and
 9   REMAND the first order; we AFFIRM the second order.
10               I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
11   A.   The parties
12        The debtors ("Debtors") consist of five entities2 owned and
13   operated by Robert Lueck ("Lueck"), a dairy farmer with 37 years
14   of experience in the dairy business.   Debtors filed their
15   chapter 113 bankruptcy cases on January 6, 2012, in response to
16   Wells Fargo's assertion that it was going to seek the appointment
17   of a receiver.
18        On the petition date, Debtors’ assets consisted primarily of:
19   (1) a 518 acre property on which Debtors conducted their dairy
20   operations (the "Dairy Property"); (2) a 1,373 acre farm known as
21   the Arlington Farm; and (3) a dairy herd of approximately 8,000
22
23        2
            The five debtors are: Sonora Desert Dairy, L.L.C.; Sonora
     Desert Dairy II, L.L.C.; Sonora Desert Dairy III, L.L.C.; Lueck
24   Cattle Company, L.L.C.; and Bob Lueck Farms, L.L.C. The
     bankruptcy court ordered on January 12, 2012, that Debtors' cases
25   be jointly administered. Debtors' cases were substantively
     consolidated on May 7, 2012. Debtors’ chapter 11 cases were
26   converted to chapter 7 on December 4, 2013.
27        3
            Unless specified otherwise, all chapter, code and rule
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28   the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

                                     -2-
 1   animals, related feed inventory and milk production.   In September
 2   2010, an appraisal by AgStar valued the Arlington Farm at $13.7
 3   million and the Dairy Property at $23 million (the "Debtors'
 4   Appraisal") for a total of $36.7 million.
 5        AgStar and Wells Fargo comprise Debtors’ two largest secured
 6   creditors.   Debtors owed AgStar, their real estate lender,
 7   approximately $14.7 million as of the petition date (the "AgStar
 8   Prepetition Loan").   Debtors secured this loan by first liens on
 9   the Dairy Property and the Arlington Farm.   Debtors owed Wells
10   Fargo approximately $11.5 million on an operational revolving line
11   of credit (the "Wells Fargo Prepetition Loan").   Debtors secured
12   the Wells Fargo Prepetition Loan by Debtors' personal property,
13   including the dairy herd, feed inventory and milk proceeds.
14        The United States Trustee appointed a creditors’ committee
15   ("Committee") consisting primarily of Debtors' feed suppliers, who
16   asserted approximately $3.3 million in unsecured nonpriority
17   claims.
18        Early in the cases, Debtors contended that the value of their
19   assets exceeded $50 million and that all their prepetition secured
20   and unsecured obligations totaled less than $27 million.    Debtors
21   expected to pay all creditors in full; Lueck expected to retain at
22   least $20 million in equity.
23   B.   The cash collateral orders
24        In their first-day cash collateral motion, Debtors contended
25   that as of the petition date the Dairy Property and Arlington Farm
26   had a value no less than $36.7 million, based on Debtors'
27   Appraisal and Lueck's opinion.    Wells Fargo did not dispute these
28   values.   Debtors scheduled the Arlington Farm at a value of $15

                                       -3-
 1   million, but Debtors expected to sell it for $13-$14 million.
 2   Debtors further contended that the value of the dairy herd and
 3   feed inventory exceeded Wells Fargo’s debt by $1 million.      Lueck
 4   testified days later in response to Wells Fargo's motion to
 5   appoint an examiner4 that the value of the dairy herd and feed
 6   inventory approximated $14.5 million, which exceeded Wells Fargo's
 7   debt.       Debtors agreed to make monthly interest payments of $30,000
 8   to Wells Fargo at the default contract rate.
 9        The bankruptcy court entered a stipulated order on Debtors'
10   first interim cash collateral motion on January 24, 2012.      In
11   exchange for use of its cash collateral, Debtors provided Wells
12   Fargo a replacement lien for its prepetition collateral.      A series
13   of interim cash collateral motions followed; Wells Fargo objected
14   to them.      Given concerns with monthly losses in the value of
15   Debtors' dairy herd and feed inventory during the pendency of the
16   case, Wells Fargo contended that its collateral suffered
17   diminution in value since the petition date.5
18        The bankruptcy court issued at least sixteen interim cash
19   collateral orders.      Beginning with the second interim order and in
20   subsequent interim orders, the bankruptcy court imposed a
21
22
             4
            Eleven days into the bankruptcy cases, Wells Fargo filed a
23   motion to appoint an examiner, which eventually became an
     alternative motion to appoint a trustee. Debtors and the
24   Committee opposed it. After a three-day evidentiary hearing on
     March 22, 28 and 29, 2012, the bankruptcy court denied Wells
25   Fargo's motion on May 8, 2012.
26           5
            Wells Fargo also initially accused Lueck of conducting
     "cull" sales of cattle and failing to tender all of the sale
27   proceeds to Wells Fargo, a claim that was later determined to be
     unfounded. A "cull" sale is a routine sale of ill, aged or
28   nonproductive cows.

                                         -4-
 1   replacement lien for its prepetition collateral and junior liens
 2   on Debtors' real property for the benefit of Wells Fargo, which
 3   served as adequate protection for the Wells Fargo Prepetition
 4   Loan.   Despite any losses in the prepetition collateral, Debtors
 5   asserted that the junior liens on Debtors’ real property
 6   adequately protected Wells Fargo.      The orders entered after the
 7   bankruptcy court approved the Wells Fargo DIP loan, discussed more
 8   thoroughly below, also allowed for the priming of AgStar's senior
 9   lien on Debtors' real property, giving Wells Fargo a $500,000
10   superpriority lien.
11   C.   Debtors' proposed chapter 11 plans
12        Meanwhile, Debtors filed their initial chapter 11 plan and
13   disclosure statement on March 21, 2012.     Debtors' plan proposed to
14   implement the orderly sales of the Arlington Farm, the Dairy
15   Property and other assets Debtors used in their business
16   operations, including the dairy herd, feed inventory and various
17   equipment.    Debtors opposed Wells Fargo's alleged desire to "fire
18   sale" the dairy herd, contending it would result in significantly
19   less funds for the estate.   Debtors intended to continue operating
20   the dairy farm until a suitable buyer could be found and a sale of
21   the Dairy Property could be completed as a going concern.     A
22   working dairy farm may be more valuable than a nonoperational or
23   "dark" one.   Debtors asserted that the proceeds realized from the
24   sale of the Arlington Farm, the Dairy Property and other operating
25   assets would be sufficient to pay off the AgStar Prepetition Loan,
26   the Wells Fargo Prepetition Loan and other secured creditors; the
27   remaining proceeds would pay all of the allowed unsecured claims.
28   In March 2012, Debtors expected over a six-to-nine month period to

                                      -5-
 1   sell the Arlington Farm for between $10-$12 million (as opposed to
 2   the original $13-$14 million figure) and to sell the Dairy
 3   Property for between $20-$25 million.6
 4        Ultimately, the Arlington Farm sold at auction for $8.425
 5   million on August 9, 2012.   From these proceeds, AgStar received
 6   $7.8 million and credited it to its debt of approximately $14.9
 7   million; Wells Fargo received nothing.    Wells Fargo now would have
 8   to look to the Dairy Property for adequate protection should the
 9   Wells Fargo Prepetition Loan not be satisfied by the prepetition
10   collateral plus the replacements liens.
11        Debtors filed their first amended chapter 11 plan and
12   disclosure statement on June 4, 2012.    Debtors contended for the
13   first time that the Wells Fargo Prepetition Loan was undersecured
14   by between $1.4 and $5.95 million as of the petition date.7
15   Debtors' Broker estimated that if operations ceased and the Dairy
16   Property went "dark," its value would decline by at least 20% or a
17   minimum of $5,000,000, based on a sale price between $20-$25
18   million.   Thus, Debtors' projected losses of $875,000 during the
19   summer months were far less than the $5,000,000 reduction that
20   would be realized if the Dairy Property were sold "dark."     Debtors
21
22        6
            Debtors' real estate broker Charles Havranek ("Broker")
     confirmed these numbers at the March 29, 2012 evidentiary hearing
23   on Wells Fargo's motion to appoint an examiner or trustee. Larry
     Clayton, the Wells Fargo employee in charge of the Wells Fargo
24   Prepetition Loan, testified that he agreed with the Broker's
     figures, which totaled $30 million for the two properties on the
25   low end.
26        7
            Debtors clarified in their ninth interim cash collateral
     motion that Wells Fargo was undersecured by at least $1,491,000 or
27   as much as $5,684,367, based on Wells Fargo's own internal
     inspection conducted on January 4, 2012, just two days prior to
28   the petition date.

                                     -6-
 1   ultimately withdrew their first amended plan.
 2   D.   Wells Fargo's first motion for relief from stay
 3        Wells Fargo moved for relief from stay with respect to the
 4   dairy herd on June 28, 2012.    After several postpetition sales of
 5   portions of the dairy herd, Debtors still owed Wells Fargo
 6   approximately $10.3 million.    Wells Fargo argued that since the
 7   petition date, the dairy herd and feed inventory had declined in
 8   value by approximately $2.0 million, from $11.2 million to $9.2
 9   million and it expected more losses.    Wells Fargo disputed the
10   Broker's opinion that the Dairy Property would be devalued by as
11   much as $5 million if the dairy were shut down and the herd sold,
12   leaving the real property and improvements to be sold alone.    The
13   Broker had admitted at deposition that he did no analysis to
14   support this opinion and had no meaningful experience in this
15   factual situation.   Further, argued Wells Fargo, Debtors' position
16   that the Dairy Property and Arlington Farm had sufficient value to
17   cover all secured claims was disingenuous.   Wells Fargo's recent
18   appraisal of the two properties valued them at only $27.5 million.
19   Thus, if foreclosure of the properties occurred, Wells Fargo's
20   interest possibly would be wiped out.   Wells Fargo disputed
21   Debtors' position that it was undersecured by as much as $5.95
22   million on the petition date.
23        Debtors and the Committee opposed Wells Fargo's stay relief
24   motion, contending that Wells Fargo was adequately protected with
25   the replacement lien and junior liens on Debtors' real properties,
26   and that the loss of the dairy herd would unnecessarily result in
27   a reduction of the value of Debtors' assets.
28        The bankruptcy court denied Wells Fargo's request for stay

                                      -7-
 1   relief on November 9, 2012, on the basis that it was adequately
 2   protected.   At the hearing on November 5, 2012, the bankruptcy
 3   court pointed to Wells Fargo's appraisal valuing the Dairy
 4   Property at $21 million, which was consistent with Debtors'
 5   Appraisal.   Based on the parties' estimates on the sale of the
 6   dairy herd and feed inventory at between $4.9 and $7.3 million and
 7   Wells Fargo's debt of $10 million, the court calculated that a
 8   sale of the collateral would leave Wells Fargo with a deficit of
 9   between $2.7 and $5.1 million.   Subtracting out AgStar's remaining
10   senior debt of $8 million, a sale of the Dairy Property for $21
11   million would leave approximately $13 million in equity for Wells
12   Fargo and other creditors.   So, worst case scenario, Wells Fargo
13   had an equity cushion of 39%.
14        However, to protect Wells Fargo's interest in its collateral,
15   the court ordered that:   (1) Wells Fargo be given a valid and
16   perfected junior lien in the Dairy Property; (2) the Dairy
17   Property be sold by March 31, 2013, and if no sale was completed
18   by that date, then (i) Debtors had to begin selling the dairy herd
19   on April 1, 2013, to be completed by May 15, 2013, and pay all
20   proceeds to Wells Fargo, who had the right to object and credit
21   bid, and (ii) Wells Fargo would have stay relief as to the dairy
22   herd effective May 15, 2013.
23   E.   AgStar's first DIP motion; Wells Fargo's DIP loan and the
          Final DIP order
24
25        Meanwhile, on July 18, 2012, Debtors filed their motion for
26   an order:    (1) authorizing postpetition financing from AgStar on a
27   secured basis; (2) compromising and restructuring AgStar's debt
28   under Rule 9019; and (3) granting AgStar relief from stay ("First

                                      -8-
 1   AgStar DIP Motion").   In short, Debtors sought a $1 million
 2   postpetition line of credit from AgStar, secured by a priming lien
 3   on the Arlington Farm and Dairy Property.   The terms of the
 4   proposed DIP loan included an interest rate of 7% and a $10,000
 5   origination fee.   Debtors argued that even with a $1 million
 6   priming lien to AgStar, both AgStar and Wells Fargo were
 7   adequately protected by a substantial equity cushion, based on an
 8   approximate value of the Arlington Farm and Dairy Property at
 9   $33.5 million.
10        Wells Fargo opposed the First AgStar DIP Motion.   Although
11   concerned with the increasing decline in the value of the dairy
12   herd and feed inventory since the petition date, Wells Fargo
13   offered to provide Debtors with a $ 1 million DIP loan, secured by
14   a superpriority priming lien on the Dairy Property. Wells Fargo
15   offered 6% interest and no origination fee.   The initial July 30
16   hearing on the First AgStar DIP Motion was continued to August 16,
17   2012, then continued again to November 5 and November 8 for an
18   evidentiary hearing.
19        Prior to the August 16 hearing, Wells Fargo filed a
20   supplemental brief, which included the detailed terms for Wells
21   Fargo's proposed DIP loan.   Wells Fargo explained that it had been
22   forced to negotiate its DIP loan with the Committee rather than
23   Debtors, because it was Debtors' and AgStar's position that Wells
24   Fargo was not entitled to have private negotiations with Debtors.
25   Wells Fargo believed the economic terms of its proposed DIP loan
26   were better than AgStar's.
27        Debtors filed a supplemental declaration from Lueck.   Despite
28   Wells Fargo's offer, Lueck continued to believe that AgStar's

                                     -9-
 1   proposed financing was in the best interest of creditors.    Wells
 2   Fargo's conditional requirement to sell the dairy herd by
 3   December 31, 2012, whether or not the Dairy Property had been
 4   sold, concerned Lueck.   Lueck believed a forced liquidation of the
 5   herd would impair the value of the Dairy Property and would only
 6   benefit Wells Fargo.   Lueck further declared that he did not trust
 7   Wells Fargo to actually provide the funds.
 8        At the November 5 evidentiary hearing on the First AgStar DIP
 9   Motion, the bankruptcy court expressed its concern that although
10   Wells Fargo had proposed a DIP loan, no motion had been filed.
11   Further, circumstances had changed — i.e., the Arlington Farm had
12   been sold — so AgStar's proposed DIP loan terms were outdated.
13   The court was also concerned with Debtors' failure to negotiate in
14   good faith with Wells Fargo.   If competing DIP loans were put
15   before it, the court stated it would choose which one benefitted
16   Debtors; the constant fighting between the parties would no longer
17   be tolerated.
18        The court and parties further discussed the details of
19   AgStar's revised DIP loan terms and Wells Fargo's proposed DIP
20   loan terms at a continued hearing on November 8, 2012.
21   Ultimately, the bankruptcy court approved the DIP loan proposed by
22   Wells Fargo (the "DIP Loan") and denied approval of the First
23   AgStar DIP Motion.   Although the court expressed its reluctance to
24   authorize the priming of AgStar's senior lien, it concluded the
25   "very sufficient adequate protection" supported priming.    The
26   bankruptcy court overruled AgStar's due process and notice
27   objections regarding the priming of its lien.
28        The bankruptcy court entered an interim order approving

                                     -10-
 1   Debtors' continued use of cash collateral and approving the DIP
 2   Loan for $500,000 on November 9, 2012.    Wells Fargo received, in
 3   addition to the junior lien on the Dairy Property for its
 4   prepetition debt, a priming lien senior to that of AgStar's lien
 5   on the Dairy Property and of any administrative expenses — i.e., a
 6   superpriority lien — in exchange for the DIP funds.   Wells Fargo's
 7   priming lien could not be made subordinate to, or made pari passu
 8   with, any other lien under § 364(d).    In addition, so long as the
 9   DIP Loan remained outstanding, the interim order prohibited
10   Debtors:   from granting any liens on all postpetition collateral
11   (the Dairy Property, insurance proceeds, cash proceeds, products,
12   rents, etc.) senior or equal to the DIP lien of Wells Fargo; and
13   from using any cash collateral of Wells Fargo or any proceeds from
14   the DIP Loan for purposes other than those set forth in the budget
15   agreed to by the parties.    The bankruptcy court held a hearing for
16   a final DIP order on November 26, 2012, overruled AgStar's and
17   Debtors objections and entered a final order on November 29, 2012
18   ("Final DIP Order").   Debtors ultimately drew the entire $500,000
19   in available funds from the DIP Loan.
20   F.   Debtors' multiple cattle sales
21        Over the course of the next few months and pursuant to the
22   conditional stay relief granted to Wells Fargo with respect to the
23   dairy herd, Debtors filed multiple motions to sell portions of the
24   dairy herd under § 363(f).   The sale motions were either granted
25   over Wells Fargo's objection or stipulated to by Wells Fargo.
26   Wells Fargo received all sale proceeds.
27   G.   AgStar's motion for relief from stay
28        On May 9, 2013, AgStar moved for relief from stay under

                                      -11-
 1   § 362(d)(1) and (d)(2) to foreclose on the Dairy Property.    By
 2   that time, Debtors owed approximately $7.4 million on the AgStar
 3   Prepetition Loan, which was junior to Wells Fargo's DIP lien and
 4   senior to Wells Fargo's junior lien on the Dairy Property.    The
 5   Dairy Property had initially been listed for $27 million, then
 6   reduced to $20 million, then reduced again to $16 million.    The
 7   total liens on the property approximated $15.4 million.    Because
 8   the remaining dairy herd would soon be liquidated pursuant to the
 9   stay relief granted to Wells Fargo, AgStar contended the Dairy
10   Property would decline another 10%-20% in value once it went dark.
11   Broker costs amounted to $240,000 based on a sale price of $16
12   million.    Thus, argued AgStar, relief from stay was warranted as
13   little, if any, equity was available in the Dairy Property.
14        AgStar also revealed for the first time that it had conducted
15   an appraisal of the Dairy Property in June 2012; it was valued at
16   $15.5 million.   Debtors' water rights were valued at $750,000.
17   H.   Wells Fargo's second motion for relief from stay
18        Wells Fargo moved for relief from stay again on May 31, 2013.
19   By this time, Debtors had sold the entire dairy herd and paid all
20   proceeds to Wells Fargo.   Wells Fargo contended that Debtors had
21   incurred losses of more than $4.8 million in their dairy
22   operations since the petition date, severely diminishing the
23   bank's cash, herd, feed and other collateral.   Wells Fargo
24   contended that based on Debtors' figures in their April operating
25   reports, the Wells Fargo Prepetition Loan exceeded the value of
26   Debtors' remaining personal property (equipment, etc.) by
27   $210,000.   Thus, argued Wells Fargo, it was entitled to stay
28   relief as to the personal property under § 362(d)(1) and (d)(2).

                                      -12-
 1        AgStar opposed Wells Fargo's second stay relief motion.   In
 2   short, AgStar argued that because the purpose of the DIP Loan was
 3   to provide monies for Debtors' ongoing operations and the monies
 4   at issue were generated from Debtors' dairy operations, then those
 5   monies should be used to pay back the DIP Loan.   AgStar argued
 6   that Wells Fargo's attempt to apply all existing monies to its
 7   prepetition debt severely prejudiced AgStar and provided a
 8   windfall to Wells Fargo by allowing its $500,000 priming lien to
 9   remain intact.
10   I.   AgStar's second DIP motion and related DIP order - the basis
          of Wells Fargo's first appeal
11
12        As of May 30, 2013, Debtors owed Wells Fargo approximately
13   $6 million, including the $500,000 DIP Loan.   On June 6, 2013,
14   Debtors tendered a payment of $516,826.97 to Wells Fargo to
15   satisfy the DIP Loan and a payment of $239,006.34 to be applied to
16   the Wells Fargo Prepetition Loan.
17        Just days later on June 12, 2013, Debtors filed a motion to:
18   (1) authorize a DIP loan from AgStar for $315,000 for winding down
19   purposes (the "AgStar DIP Loan"); (2) grant AgStar and Wells Fargo
20   conditional relief from stay; (3) authorize the sale of the Dairy
21   Property under § 363(f); (4) approve the bidding procedures for
22   the Dairy Property; (5) set the date for the auction; and
23   (6) grant other related relief (the "Second AgStar DIP Motion").
24   As for the proposed AgStar DIP Loan, AgStar agreed to fund
25   Debtors' operation through November 8, 2013, pursuant to an agreed
26   wind down budget.   In exchange, AgStar would be given a priming
27   lien on the Dairy Property (including all insurance proceeds, cash
28   proceeds, products, rents, etc.) senior to that of Wells Fargo's

                                     -13-
 1   DIP lien.   To obtain the DIP financing from AgStar, Debtors were
 2   required to first pay off Wells Fargo's DIP Loan and satisfy the
 3   priming lien.   AgStar's DIP lien could not be subordinate to, or
 4   made pari passu with, any other lien under § 364(d).   Debtors
 5   argued that giving AgStar a priming lien over Wells Fargo was
 6   warranted because both AgStar and Wells Fargo were adequately
 7   protected based on the equity cushion in the Dairy Property.
 8        As for the sale of the Dairy Property, Debtors sought
 9   authorization to auction it on October 4, 2013.   Should the Dairy
10   Property not sell at auction, AgStar and Wells Fargo would be
11   granted stay relief to foreclose on the property after December 2,
12   2013.
13        Wells Fargo opposed the Second AgStar DIP Motion.8    It argued
14   that under the Final DIP Order, which was never appealed, Debtors
15   were not allowed to use any of its cash collateral or proceeds
16   from the DIP Loan for any other purpose than what was agreed to in
17   Debtors' budget, unless they had prior written consent from Wells
18   Fargo; repaying its DIP Loan was not an allowed use and Wells
19   Fargo did not consent.   In Wells Fargo's opinion, Debtors were
20   attempting to use collateral for a loan for which a significant
21   repayment risk existed (the Wells Fargo Prepetition Loan) to repay
22   a loan for which minimal repayment risk existed (the DIP Loan).
23   Wells Fargo argued that no adequate protection could exist under
24   those circumstances.
25        Wells Fargo further argued that the Final DIP Order
26
27           8
            Wells Fargo also agreed to provide Debtors with additional
     DIP financing, but Debtors contended the terms were less
28   favorable.

                                     -14-
 1   prohibited Debtors from obtaining DIP financing and granting any
 2   liens on the prepetition collateral or the postpetition collateral
 3   (including the Dairy Property) senior to, or on parity with, Wells
 4   Fargo's DIP lien.   Despite Debtors' intent to pay off the DIP Loan
 5   with its tender of $516,000, Wells Fargo refused to apply it as
 6   such and placed the money into escrow pending resolution of the
 7   dispute.   Thus, because the DIP lien was still outstanding, argued
 8   Wells Fargo, Debtors could not grant AgStar a senior lien.   Wells
 9   Fargo did not oppose, generally, the sale of the Dairy Property.
10        A hearing on the Second AgStar DIP Motion was held on
11   June 26, 2013.   Wells Fargo reiterated its objection to Debtors
12   using the milk proceeds, which secured the Wells Fargo Prepetition
13   Loan, to pay off the DIP Loan.   In response, the bankruptcy court
14   inquired why the pay off of the DIP Loan was not, dollar for
15   dollar, adequate protection for Wells Fargo; it eliminated a
16   priority lien that was a lien against all of Wells Fargo's
17   prepetition collateral.   Counsel replied that the $500,000 in milk
18   proceeds was cash collateral and the security for Wells Fargo's
19   prepetition debt; the priming DIP lien was secured by the Dairy
20   Property only, not all of Wells Fargo's prepetition collateral.
21   When the court asked counsel why Debtors could not pay off the DIP
22   Loan with the milk proceeds, counsel stated that Debtors could pay
23   off the DIP Loan with the sale proceeds from the Dairy Property;
24   Debtors could not use the cash collateral that secured Wells
25   Fargo's prepetition debt to pay the postpetition debt obligation
26   or they were not adequately protected.   The court disagreed and
27   countered that all Debtors had to show was that Wells Fargo was
28   adequately protected for this particular use of cash collateral,

                                      -15-
 1   not that Wells Fargo would never incur a loss on its prepetition
 2   debt.    In other words, Debtors had to demonstrate that this use of
 3   cash collateral — to pay off the DIP Loan — would not cause
 4   greater loss to Wells Fargo.   Since the cash was being used to pay
 5   down a lien that otherwise was senior to the Wells Fargo
 6   Prepetition Loan, the court could not see how that use of cash
 7   collateral created a greater loss to Wells Fargo.   Counsel then
 8   referred back to the Final DIP Order, which expressly set forth
 9   the uses for the cash collateral; paying off the DIP Loan was not
10   an approved use.
11        After further discussion, and in absence of any contrary
12   authority cited by counsel for Wells Fargo, the bankruptcy court
13   ruled:
14        The debtor may use cash collateral to pay Wells Fargo and
          since the general common law rule is a voluntary payor
15        has the right and power to designate how any payment
          shall be applied, debtor also has the right and power to
16        designate that upon turning this cash collateral over to
          Wells Fargo it shall be applied to the DIP [L]oan.
17
18   Hr’g Tr. 19:18-23, June 26, 2013.   The bankruptcy court further
19   found "as a matter of law" that Debtors' use of the $516,000 in
20   cash collateral to pay off the DIP Loan was adequate protection
21   for the Wells Fargo Prepetition Loan.   Accordingly, the Second
22   AgStar DIP Motion was granted.   Based on the court's ruling, Wells
23   Fargo's objection as to the priming of its DIP lien by the AgStar
24   DIP lien was overruled.
25        The bankruptcy court entered an order granting the Second
26   AgStar DIP Motion on July 12, 2013 (the "AgStar DIP Order").     The
27   court:   ordered Wells Fargo to apply the funds received to the DIP
28   Loan and to release its priming lien on the Dairy Property; gave

                                      -16-
 1   AgStar a priming lien in the amount of $315,000 over its own
 2   senior lien on the Dairy Property; and declared that AgStar's DIP
 3   lien could not be made subordinate to, or made pari passu with,
 4   any other lien under § 364(d).   The court found AgStar to be a
 5   good faith lender entitled to the protections of § 364(e).    An
 6   auction to sell the Dairy Property was to occur on October 4,
 7   2013, but in the event it did not sell, AgStar and Wells Fargo
 8   were granted stay relief to foreclose on the property after
 9   December 2, 2013.   The AgStar DIP Order contemplated that other
10   issues raised in the Second AgStar DIP Motion would be decided at
11   a later hearing.
12        Wells Fargo timely moved to amend the AgStar DIP Order on
13   July 19, 2013.   In short, Wells Fargo contended that the AgStar
14   DIP Order, in its form lodged unilaterally by Debtors and signed
15   by the bankruptcy court, contained language contrary to the
16   court's oral ruling with respect to the proposed sale terms of the
17   Dairy Property and to what matters were reserved for further
18   hearing.
19        The bankruptcy court entered a minute entry on September 10,
20   2013, granting Wells Fargo's motion to amend.    The minute entry
21   also noted that a status hearing on further DIP financing was to
22   be held on November 7, 2013, unless the parties notified the court
23   that no hearing would be necessary.     Now that the AgStar DIP Order
24   was final, Wells Fargo timely filed its notice of appeal on
25   September 24, 2013.   The October 4 auction for the Dairy Property
26   never took place.
27   //
28   //

                                      -17-
 1   J.   The supplemental AgStar DIP order - the basis for Wells
          Fargo's second appeal
 2
 3        On November 6, 2013, Debtors filed a Notice of Lodging
 4   Proposed Stipulated Order Regarding Postpetition Financing.     In
 5   the attached stipulated order entered into by Debtors and AgStar,
 6   Debtors stated that they had drawn approximately $144,000 of the
 7   $315,000 authorized in the AgStar DIP Order entered on July 12,
 8   2013.   Debtors were in immediate need of additional funds to
 9   maintain the Dairy Property until the foreclosure sale scheduled
10   for December 6, 2013, which required an additional draw on the
11   remaining funds in the AgStar DIP Loan but no additional loan
12   beyond the $315,000 previously authorized.   In addition to the
13   existing priming DIP lien authorized on July 12, the bankruptcy
14   court granted AgStar a replacement lien for the AgStar Prepetition
15   Loan on the Dairy Property, which was to be senior to any other
16   liens on the property (excluding the taxing authority's lien).
17        In light of the stipulation filed, the bankruptcy court
18   vacated the status hearing for further DIP financing scheduled for
19   November 7, 2013, and entered Debtors' and AgStar's stipulated
20   financing order as proposed on November 7, 2013 (the "Supplemental
21   AgStar DIP Order").   Wells Fargo timely filed its notice of appeal
22   on November 14, 2013.
23        The Panel issued an order consolidating Wells Fargo's appeals
24   of the AgStar DIP Order and the Supplemental AgStar DIP Order on
25   January 21, 2014.
26   K.   Debtors' cases get converted to chapter 7 and Dairy Property
          is foreclosed
27
28        The Committee moved to convert Debtors' cases to chapter 7 on

                                     -18-
 1   November 19, 2013.   In short, the foreclosure sale of the Dairy
 2   Property set for December 6, 2013, was expected to yield only
 3   enough funds to pay AgStar; no proceeds would be available for any
 4   junior lienholders, administrative claimants or the unsecured
 5   creditors.   Therefore, because no possibility existed for
 6   rehabilitation, the Committee argued that conversion was in the
 7   best interest of creditors.
 8        AgStar filed a limited objection to the Committee's
 9   conversion motion, requesting only that the cases not be converted
10   until after the foreclosure sale of the Dairy Property.    AgStar
11   believed that insufficient funds would be available from the
12   foreclosure sale to pay the AgStar Prepetition Loan, the AgStar
13   DIP Loan and the additional funds authorized in the Supplemental
14   AgStar DIP Order, much less for anyone else's claims.
15        After a hearing on December 2, 2013, the bankruptcy court
16   ordered that Debtors' cases be converted to chapter 7, effective
17   December 10, 2013, after the foreclosure sale of the Dairy
18   Property on December 6.
19        A third-party bidder purchased the Dairy Property for
20   $6,936,264.02; one dollar more than AgStar's opening credit bid.
21   AgStar purchased Debtors' water rights through its credit bid for
22   $999,999.00.   Wells Fargo's junior lien on the Dairy Property was
23   extinguished, leaving approximately $5 million of the Wells Fargo
24   Prepetition Loan left unpaid.
25                               II. JURISDICTION
26        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
27   and 157(b)(2)(D) and (M).    We discuss our jurisdiction below.
28   //

                                       -19-
 1                                 III. ISSUES
 2   1.   Are the appeals moot?
 3   2.   Did the bankruptcy court err when it ordered Wells Fargo to
 4   apply its cash collateral to the DIP Loan and that its DIP lien
 5   was deemed satisfied?
 6   3.   Did the bankruptcy court violate Wells Fargo's due process
 7   rights when it entered the Supplemental AgStar DIP Order?
 8                           IV. STANDARDS OF REVIEW
 9        We review a bankruptcy court's conclusions of law de novo and
10   its factual findings for clear error.       Zurich Am. Ins. Co. v.
11   Int'l Fibercom, Inc. (In re Int'l Fibercom, Inc.), 503 F.3d 933,
12   940 (9th Cir. 2007).    An adequate protection determination and an
13   authorization to use cash collateral are factual issues reviewed
14   for clear error.   See Martin v. United States (In re Martin),
15   761 F.2d 472, 478 (8th Cir. 1985).      Factual findings are clearly
16   erroneous if illogical, implausible or without support in the
17   record.   Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th
18   Cir. 2010).
19        Whether the bankruptcy court's procedures comport with due
20   process is a question of law reviewed de novo.      Price v. Lehtinen
21   (In re Lehtinen), 564 F.3d 1052, 1058 (9th Cir. 2009); Garner v.
22   Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000).
23                                V. DISCUSSION9
24   A.   The appeals are not moot.
25        On April 23, 2014, a motions panel denied AgStar's motion to
26
          9
            On November 13, 2014, appellant filed a statement of
27   additional authorities and asked this Panel to consider such
     authorities. We conclude further consideration of such
28   authorities is unnecessary given the analysis in this memorandum.

                                      -20-
 1   dismiss the appeals as moot, determining that effective relief
 2   remained available.    AgStar asks the merits panel to reconsider
 3   that decision, contending that it has met its heavy burden to
 4   demonstrate the appeals are moot.    See Motor Vehicle Cas. Co. v.
 5   Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869,
 6   880 (9th Cir. 2012).   Despite the motions panel ruling, we have an
 7   independent duty to determine whether appellate jurisdiction
 8   exists.    Dannenberg v. Software Toolworks, Inc., 16 F.3d 1073,
 9   1074 n.1 (9th Cir. 2004).   We lack jurisdiction to decide moot
10   appeals.   United States v. Pattullo (In re Pattullo), 271 F.3d
11   898, 900 (9th Cir. 2001).   If an appeal becomes moot while it is
12   pending before the Panel, we must dismiss it.     Id.   Therefore, we
13   will consider AgStar's request.
14        AgStar merely rehashes the same arguments raised before the
15   motions panel and offers no new grounds for reconsideration.
16   Nonetheless, AgStar contends the appeals are equitably moot
17   because:   (1) Wells Fargo failed to obtain a stay pending appeal;
18   (2) the Dairy Property has been sold to a third party; and (3) we
19   cannot fashion effective relief.    Failure to seek a stay can
20   render an appeal equitably moot.    In re Thorpe Insulation Co.,
21   677 F.3d at 881 ("We will first look at whether a stay was sought,
22   for absent that a party has not fully pursued its rights.")(citing
23   In re Roberts Farms, 652 F.2d 793, 797-98 (9th Cir. 1981)).      For
24   an appeal to be equitably moot, "[t]he question is whether the
25   case 'presents transactions that are so complex or difficult to
26   unwind that the doctrine of equitable mootness would apply.'"        Id.
27   at 880 (quoting Lowenschuss v. Selnick (In re Lowenschuss),
28   170 F.3d 923, 933 (9th Cir. 1999)).      "Ultimately, the decision

                                       -21-
 1   whether or not to unscramble the eggs turns on what is practical
 2   and equitable."    Baker & Drake, Inc. v. Pub. Serv. Comm'n of Nev.
 3   (In re Baker & Drake, Inc.), 35 F.3d 1348, 1352 (9th Cir. 1994)
 4   (citations omitted).
 5        Wells Fargo failed to seek a stay of the AgStar DIP Order or
 6   the Supplemental AgStar DIP Order.      Under Thorpe, that alone may
 7   be enough to render these appeals equitably moot.      See also Stokes
 8   v. Gardner, 2012 WL 1944552 (9th Cir. May 30, 2012)(citing Thorpe
 9   and stating that failure to seek a stay may, "by itself," render a
10   party's claim equitably moot).       Nevertheless, the sale of the
11   Dairy Property to a third party does not preclude us from
12   fashioning effective relief for Wells Fargo.      AgStar can be
13   ordered to pay an appropriate portion of the sale proceeds to
14   Wells Fargo, should we determine Wells Fargo is entitled to any.
15   Further, such relief would not require the unwinding of the Dairy
16   Property sale or have any effect on the third party not before us.
17   Thus, the third party’s absence in these appeals is of no moment.
18   See In re Thorpe Insulation Co., 677 F.3d at 881.
19        We further conclude, although not raised by AgStar, the
20   appeal of the AgStar DIP Order is not statutorily moot under
21   § 364(e).10   Under that provision, if the bankruptcy court found
22
          10
23             Section 364(e) provides:
24        The reversal or modification on appeal of an authorization
          under this section to obtain credit or incur debt, or of a
25        grant under this section of a priority or a lien, does not
          affect the validity of any debt so incurred, or any priority
26        or lien so granted, to an entity that extended such credit in
          good faith, whether or not such entity knew of the pendency
27        of the appeal, unless such authorization and the incurring of
          such debt, or the granting of such priority or lien, were
28                                                       (continued...)

                                      -22-
 1   that the lender acted in good faith in extending the postpetition
 2   loan, a reversal or modification of the unstayed financing order
 3   on appeal does not affect the validity of the creditor's loan or
 4   any liens or priorities securing the loan.   § 364(e); Credit
 5   Alliance Corp. v. Dunning-Ray Ins. Agency, Inc. (In re Blumer),
 6   66 B.R. 109, 113 (9th Cir. BAP 1986).
 7        The AgStar DIP Order does contain a boilerplate "good faith"
 8   finding; Wells Fargo has not made any allegations of bad faith.11
 9   However, it does not follow that we must dismiss that appeal as
10   statutorily moot.   Section 364(e) does not restrict us from
11   reviewing central questions to the AgStar DIP Order:   whether the
12   bankruptcy court provided Wells Fargo with adequate protection and
13   whether the court violated Wells Fargo's due process rights.    See
14   Desert Fire Prot. v. Fontainebleau Las Vegas Holdings, LLC
15   (In re Fontainebleau Las Vegas Holdings, LLC), 434 B.R. 716, 746
16   (S.D. Fla. 2010)(if existing lienholder did not receive adequate
17   protection for the priming lien, the court is not forbidden from
18   granting the lienholder effective relief)(citing 3 COLLIER ON
19   BANKRUPTCY ¶ 364.06[2] (Alan N. Resnick & Henry J. Sommer eds., 15th
20   ed. rev. 2010)); In re Blumer, 66 B.R. at 113 (although lenders
21   satisfied good faith requirement of § 364(e), the appeal was not
22   moot because the court's order violated appellant's due process
23   rights).
24
25
          10
           (...continued)
26        stayed pending appeal.
27        11
            No "good faith" finding was made in the Supplemental AgStar
     DIP Order, so it does not appear to be subject to the protections
28   of § 364(e).

                                     -23-
 1        Accordingly, we see no impediment to providing Wells Fargo
 2   with effective relief.      Thus, the appeals are not moot; we have
 3   jurisdiction under 28 U.S.C. § 158.
 4   B.   The bankruptcy court erred when it ordered Wells Fargo to
          apply the $516,000 payment to its DIP Loan and deemed Wells
 5        Fargo’s DIP lien satisfied.
 6        1.     Governing law
 7        To obtain DIP financing that involves a senior or "priming"
 8   lien on encumbered property, the debtor-in-possession must show
 9   that (1) it was unable to obtain credit without granting such
10   liens and (2) the value of the prepetition lender's lien that will
11   be primed by the DIP lender's lien is adequately protected.       See
12   § 364(d)(1).    The debtor bears the burden of proof on the issue of
13   adequate protection.    See § 364(d)(2).12   The purpose of the
14   adequate protection requirement under § 364(d) is to protect an
15   existing lienholder from any decrease in the value of its security
16   interest resulting from the priming lien.       In other words,
17   adequate protection is provided to ensure that the prepetition
18   creditor receives the value for which the creditor bargained
19   prebankruptcy.    MBank Dallas, N.A. v. O'Connor (In re O'Connor),
20   808 F.2d 1393, 1396 (10th Cir. 1987); In re Mosello, 195 B.R. 277,
21
          12
               Section 364(d)(1) and (2) provides:
22
          (1) The court, after notice and a hearing, may authorize the
23        obtaining of credit or the incurring of debt secured by a
          senior or equal lien on property of the estate that is
24        subject to a lien only if—
               (A) the trustee is unable to obtain such credit
25             otherwise; and
               (B) there is adequate protection of the interest of the
26             holder of the lien on the property of the estate on
               which such senior or equal lien is proposed to be
27             granted.
          (2) In any hearing under this subsection, the trustee has the
28        burden of proof on the issue of adequate protection.

                                        -24-
 1   288 (Bankr. S.D.N.Y. 1996).
 2        Adequate protection may be provided by (1) periodic cash
 3   payments, (2) additional or replacement liens or (3) other relief
 4   resulting in the "indubitable equivalent" of the secured
 5   creditor's interest.    In re Stoney Creek Techs., LLC, 364 B.R.
 6   882, 890 (Bankr. E.D. Pa. 2007)(citing § 361).   In addition, the
 7   requirement to provide adequate protection can be met by showing
 8   the existing lienholder is oversecured with a substantial equity
 9   cushion.   See Pistole v. Mellor (In re Mellor), 734 F.2d 1396,
10   1400 (9th Cir. 1984).   What constitutes adequate protection is to
11   be decided flexibly on a case-by-case basis.   In re O'Connor,
12   808 F.2d at 1396-97.
13        2.    Analysis
14        In analyzing the issues in this appeal, the Panel
15   distinguishes Wells Fargo’s role as a prepetition secured creditor
16   from its role as a DIP lender and the corresponding differences
17   between the collateral used to secure both debts.   Thus, the
18   collateral securing each debt requires specific identification and
19   Wells Fargo’s distinguishing roles associated with the two debts
20   warrant a different calculus.
21        Wells Fargo contends the bankruptcy court erred when it
22   forced Wells Fargo to apply the milk proceeds, which provided
23   security for the Wells Fargo Prepetition Loan, to satisfy the DIP
24   Loan, and it further erred in determining "as a matter of law"
25   that using the milk proceeds to pay off the DIP Loan constituted
26   adequate protection on a dollar-for-dollar basis.   Wells Fargo
27   also contends the bankruptcy court violated the "law of the case
28   doctrine" by allowing Debtors to use cash collateral in a manner

                                      -25-
 1   that was expressly prohibited in the Final DIP Order.
 2        Paragraph 5 of the Final DIP Order provides that Wells Fargo
 3   will receive, in addition to the junior lien it already had on the
 4   Dairy Property, a lien on "any and all assets acquired by the
 5   Debtors after the Petition Date of the same type as the assets on
 6   which Wells Fargo held a lien on the Petition Date."    In re Sonora
 7   Desert Dairy, LLC, No. 2:12-00262, slip order at 7 (Bankr. D.
 8   Ariz. Nov. 29, 2013).   Thus, Debtors extended Wells Fargo's
 9   security interest in all personal property they acquired
10   postpetition that was of the same type on which Wells Fargo held a
11   security interest prepetition — i.e., the dairy herd, feed
12   inventory and milk proceeds – to secure the Wells Fargo
13   Prepetition Loan.   Paragraph 6 of the Final DIP Order provides
14   that the Dairy Property was the collateral securing the DIP Loan,
15   and that Wells Fargo's DIP lien would be senior to or "prime"
16   AgStar's senior lien on the Dairy Property.   Id.   In addition,
17   Paragraph 1 provides that Debtors could only use any cash
18   collateral of Wells Fargo in the manner set forth in the parties'
19   agreed budget attached to the Final DIP Order.   Id. at 5-6.
20   Neither the budget nor the Final DIP Order contemplate that
21   Debtors could use milk proceeds securing the Wells Fargo
22   Prepetition Loan to pay off the DIP Loan secured by the Dairy
23   Property.
24        In reviewing the transcript from the hearing on the Second
25   AgStar DIP Motion, we conclude that Wells Fargo and the bankruptcy
26   court misunderstood each other’s positions.   The court mistakenly
27   assumed that Wells Fargo's DIP Loan was secured by all of Wells
28   Fargo's prepetition collateral (the dairy herd, feed inventory and

                                     -26-
 1   milk proceeds) in addition to the Dairy Property, despite
 2   counsel's statements to the contrary and his citation to
 3   Paragraph 6 of the Final DIP Order.         In other words, the court
 4   believed all of Wells Fargo's collateral, pre- and postpetition,
 5   provided security for the DIP Loan.13        On that assumption, it would
 6   follow that whether Wells Fargo applied the $516,000 cash payment
 7   to its DIP Loan or the Wells Fargo Prepetition Loan would make no
 8   difference; Wells Fargo was receiving its money either way.        It
 9   would also follow under those facts that because the DIP Loan was
10   being paid in full, Wells Fargo was receiving dollar-for-dollar
11   adequate protection, and thus the AgStar DIP Loan and priming lien
12   could be authorized under § 364(d).
13        However, applying the $516,000 payment to the DIP Loan did
14   make a difference; it caused Wells Fargo to lose $516,000 it would
15   have otherwise been able to recover from the sale of the Dairy
16   Property.       Put simply, had Wells Fargo's priming lien remained
17   intact, it would have been paid its $500,000 DIP Loan (plus
18   interest) from the Dairy Property sale proceeds and it would have
19   recovered all of the milk proceeds, which consisted of
20   approximately $800,000 to apply to the Wells Fargo Prepetition
21   Loan.        Accordingly, the bankruptcy court's decision transferred
22   $516,000 of postpetition collateral protected by the § 552(b)(1)14
23
             13
24          The judge making the decision on the AgStar DIP Loan was
     not the same judge who heard the earlier matters and issued the
25   Final DIP Order on November 29, 2012. Immediately after issuing
     the Final DIP Order, Judge Case reassigned Debtors’ cases to Judge
26   Haines, who subsequently issued the AgStar DIP Order on July 12,
     2013.
27
             14
                  Section 552(b)(1) provides:
28                                                              (continued...)

                                          -27-
 1   security interest extension provided in Paragraph 5 of the Final
 2   DIP Order to the payment of the DIP Loan, which prevented an
 3   equivalent payment to the Wells Fargo Prepetition Loan.    Thus, the
 4   mechanism provided in the Final DIP Order to adequately protect
 5   Wells Fargo was thwarted.
 6        Wells Fargo's argument that the "law of the case" doctrine
 7   precluded the bankruptcy court from reexamining issues already
 8   decided in the Final DIP Order lacks merit.    This discretionary,
 9   judicially-imposed doctrine precludes a court from reconsidering
10   an issue explicitly or impliedly decided by a prior disposition
11   from the same court or a higher court.    Hall v. City of L.A.,
12   697 F.3d 1059, 1067 (9th Cir. 2012).     The bankruptcy court did not
13   appear to be reconsidering or reexamining the terms of the Final
14   DIP Order when it made its decision as to the Second AgStar DIP
15   Motion; it simply misunderstood the facts of the case, which led
16   to its error.    The Final DIP Order governed the obligations of the
17   parties, particularly Paragraphs 5 and 6 that created the
18   hierarchy of liens and collateral and how Wells Fargo would be
19   paid.     Because the bankruptcy court did not expressly overrule any
20
21        14
              (...continued)
             Except as provided in sections 363, 506(c), 522, 544, 545,
22           547, and 548 of this title, if the debtor and an entity
             entered into a security agreement before the commencement of
23           the case and if the security interest created by such
             security agreement extends to property of the debtor acquired
24           before the commencement of the case and to proceeds,
             products, offspring, or profits of such property, then such
25           security interest extends to such proceeds, products,
             offspring, or profits acquired by the estate after the
26           commencement of the case to the extent provided by such
             security agreement and by applicable nonbankruptcy law,
27           except to any extent that the court, after notice and a
             hearing and based on the equities of the case, orders
28           otherwise.

                                       -28-
 1   part of that order when it made its ruling, it was required to
 2   enforce the order's terms.
 3        Because the bankruptcy court erred when it ordered Wells
 4   Fargo to apply the $516,000 payment to the DIP Loan and deemed
 5   Wells Fargo's DIP lien satisfied, we must VACATE the AgStar DIP
 6   Order and REMAND for further proceedings.15   The question becomes
 7   then, what sort of relief can be granted to Wells Fargo in light
 8   of the bankruptcy court's good faith finding under § 364(e).    Even
 9   if AgStar's priming DIP lien created under § 364(d) must be left
10   in place despite our vacation, allowing Wells Fargo's DIP lien to
11   have priority over the lien securing the AgStar Prepetition Loan
12   would be permissible under § 364(e), because it will not affect
13   the validity or priority of AgStar's DIP lien.
14   C.   The bankruptcy court did not violate Wells Fargo's due
          process rights when it entered the Supplemental AgStar DIP
15        Order.
16        Wells Fargo challenges the Supplemental AgStar DIP Order on
17   an additional ground — that it violated Wells Fargo's due process
18   rights.   It contends that Debtors never filed a motion to approve
19   the additional DIP financing authorized in the Supplemental AgStar
20   DIP Order or sought a hearing, but rather simply lodged a proposed
21   form of order the day prior to the previously-scheduled status
22   hearing on November 7, 2013.   The bankruptcy court then improperly
23   vacated the status hearing sua sponte and entered the Supplemental
24   AgStar DIP Order as proposed on November 8, 2013.   As a result,
25   Wells Fargo argues that it was never given a reasonable
26
          15
            Although Wells Fargo contends the Supplemental AgStar DIP
27   Order must also be reversed, that order did not detrimentally
     affect Wells Fargo. Its loss was created by the AgStar DIP Order,
28   where Wells Fargo lost $516,000.

                                     -29-
 1   opportunity to object or be heard and was thereby deprived of its
 2   due process rights.
 3        "An integral part of Section 364 is the requirement that
 4   notice and a hearing be granted before a court order is issued."
 5   In re Blumer, 66 B.R. at 113.    The phrase "notice and a hearing,"
 6   as defined in § 102(1), is a term of art.     It does not mean that a
 7   hearing must be granted.   Id.   The bankruptcy court may act
 8   without a hearing if notice has been properly given and (1) a
 9   hearing has not been requested or (2) there is insufficient time
10   for one.   Id. (citing § 102(1)(B).     Notice means "such notice as
11   is appropriate in the particular circumstances[.]"     § 102(1)(A)).
12   "Nowhere is there any provision for an action to be taken without
13   notice where 'notice and a hearing' are required."     In re Blumer,
14   66 B.R. at 113 (citing In re Monach Circuit Indus., Inc., 41 B.R.
15   859, 861 (Bankr. E.D. Pa. 1984)).     "This is true even in emergency
16   situations."   Id.
17        Wells Fargo's arguments lack merit.     Although it argues that
18   Debtors never filed a motion to approve additional DIP financing,
19   Debtors had filed the Second AgStar DIP Motion, which covered the
20   proposed $315,000 DIP loan from AgStar that was ultimately
21   authorized by the bankruptcy court.     Wells Fargo was given the
22   opportunity to, and did, oppose that motion.     Thus, Wells Fargo's
23   claim that the first notice it received of this additional DIP
24   financing request was from the proposed form of order lodged by
25   Debtors is not credible.   Further, the bankruptcy court was not
26   required to hold a hearing on the matter since all Debtors were
27   requesting was an additional draw from the $315,000 AgStar DIP
28   Loan already authorized by the court at a prior hearing, where

                                      -30-
 1   Wells Fargo's objections had already been overruled.
 2        Accordingly, we conclude that Wells Fargo's due process
 3   rights were not violated by entry of the Supplemental AgStar DIP
 4   Order.
 5                             VI. CONCLUSION
 6        Based on the foregoing reasons, we VACATE the AgStar DIP
 7   Order and REMAND it to the bankruptcy court for further
 8   proceedings consistent with this memorandum.   As to the
 9   Supplemental AgStar DIP Order, we AFFIRM.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                    -31-
