PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SPARTAN MILLS,
Plaintiff-Appellant,

v.                                                                 No. 96-1760

BANK OF AMERICA ILLINOIS,
Defendant-Appellee.

Appeal from the United States District Court
for the District of South Carolina, at Spartanburg.
William B. Traxler, Jr., District Judge.
(CA-95-1552-7-21)

Argued: January 30, 1997

Decided: May 6, 1997

Before MURNAGHAN, NIEMEYER, and MOTZ, Circuit Judges.

_________________________________________________________________

Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Murnaghan and Judge Motz joined.

_________________________________________________________________

COUNSEL

ARGUED: Bentford E. Martin, BLAIR, CONAWAY, BOGRAD &
MARTIN, P.A., Charlotte, North Carolina, for Appellant. Thomas
Sam Kiriakos, MAYER, BROWN & PLATT, Chicago, Illinois, for
Appellee. ON BRIEF: David M. Grogan, BLAIR, CONAWAY,
BOGRAD & MARTIN, P.A., Charlotte, North Carolina, for Appel-
lant. John J. Voorhees, Jr., MAYER, BROWN & PLATT, Chicago,
Illinois; A. M. Quattlebaum, Jr., NELSON, MULLINS, RILEY &
SCARBOROUGH, L.L.P., Greenville, South Carolina, for Appellee.
OPINION

NIEMEYER, Circuit Judge:

Spartan Mills filed this action against Bank of America Illinois in
the District of South Carolina to enforce a state statutory textile pro-
cessor's lien against the sale proceeds of certain equipment and inven-
tory of Dash Industries, Inc., a debtor in bankruptcy. Spartan Mills
claims to have a first priority position in those proceeds. The equip-
ment and inventory had been sold by order of a Florida bankruptcy
court and the proceeds paid to Bank of America, Dash Industries'
bank, pursuant to the bankruptcy court's finding that the bank had a
first priority security interest in the assets. Bank of America contends
that the bankruptcy court's final order determining that its lien had
priority in Dash Industries' assets now precludes Spartan Mills, under
principles of res judicata, from relitigating that issue in this action.
The district court agreed and entered summary judgment in Bank of
America's favor. We affirm.

I

Dash Industries, a Florida apparel manufacturer and distributor,
retained Spartan Mills to make sheet metal "screens" for transferring
Dash Industries designs onto fabric and to manufacture the fabric
itself. In the spring and summer of 1993, Dash Industries owed Spar-
tan Mills over $600,000 for these services. To secure payment of
Dash Industries' outstanding debt with Spartan Mills, Spartan Mills
asserted a first priority, possessory textile processor's lien pursuant to
S.C. Code § 29-15-70 in the screens, related equipment, and fabric in
its custody.

In May 1993, Dash Industries filed a Chapter 11 bankruptcy pro-
ceeding in the Bankruptcy Court for the Southern District of Florida.
As part of its reorganization plan, Dash Industries sought to finance
its ongoing operations through a continuing arrangement with Bank
of America Illinois, its bank, to whom Dash Industries was already
indebted in an amount exceeding $1.5 million. Bank of America
claimed a first priority lien in all of Dash Industries' assets to secure
repayment of outstanding loans. By order dated June 11, 1993, the
bankruptcy judge authorized Dash Industries to continue to borrow

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from Bank of America and limited Dash Industries' use of Bank of
America's cash collateral. To provide Bank of America sufficient
security to continue financing Dash Industries, the bankruptcy judge
recognized the bank's "lien against and security interest in all pres-
ently owned and hereafter acquired property, assets, and rights, of any
kind or nature, of the Debtor, wherever located." The court also
ordered provisionally that the lien and security interest "shall be a first
and prior lien on and security interest in" the assets of Dash Indus-
tries. The bankruptcy court expressly stated in its order, however, that
it was not then determining the "validity, priority, or extent of" Bank
of America's pre-petition rights or lien upon Dash Industries' assets.
Rather, it was notifying all creditors that, if any creditor wished to
challenge "the validity or priority of [Bank of America's] claims or
liens," it was required to file a motion or other pleading doing so by
August 15, 1993. The court warned that if no motion or pleading were
so filed, the first priority lien position of Bank of America would be
established "as a finding of this Court and . . . shall no longer be pro-
visional." The bankruptcy court's June 11 order included the follow-
ing admonition:

          Consistent with the foregoing, any objection to the claims or
          liens of [Bank of America] and any adversary proceeding or
          other action alleging an affirmative claim on behalf of [Dash
          Industries'] bankruptcy estate for relief in damages or other-
          wise against [Bank of America] must be brought on or
          before August 15, 1993 or be otherwise barred .

(Emphasis added). Spartan Mills received a copy of this June 11
order, and, during this same period, its counsel, on his own applica-
tion, became the representative of the unsecured creditors committee.
Despite the bankruptcy court's order that Bank of America would be
given a first priority lien on Dash Industries' assets unless an objec-
tion or adversary proceeding were commenced by August 15, 1993,
Spartan Mills neither made any objection nor filed any motion, plead-
ing, or adversary proceeding by that date.

After the closing date for filing objections or adversary proceed-
ings, the bankruptcy judge entered an order dated August 24, 1993,
directing the court-appointed examiner to sell all of Dash Industries'
assets "free and clear of liens in parcel or bulk with liens attaching

                     3
to the proceeds." And following the sale of the assets to Cone Mills
for $810,000 -- netting $781,075 to the bankruptcy estate after pay-
ment of expenses -- the bankruptcy court entered an order of Septem-
ber 2 approving the sale "free and clear of liens, with liens to attach
to proceeds," subject to objection if filed by September 15, 1993.
Spartan Mills received a copy of these orders also. Although it did not
object to the sale, on September 15, 1993, Spartan Mills did file an
adversary proceeding in the bankruptcy court to declare that its textile
processor's lien was valid and prior to any other lien. The docket
sheet discloses, however, that Spartan Mills took no further steps to
prosecute its adversary proceeding.

On September 20, 1993, the bankruptcy court converted Dash
Industries' bankruptcy from Chapter 11 to Chapter 7. Also on that
date, Dash Industries sent Spartan Mills a draft order approving the
sale, which provided that the sale proceeds were to be held in escrow
"pending further order of this Court." Three days later, however, Bank
of America filed a limited objection to the draft order that requested
immediate disbursement to Bank of America of its share of the sale
proceeds "[p]ursuant to this Court's June 11, 1993, Order." Bank of
America served a copy of the objection on Spartan Mills.

Finally, on September 24, 1993, the bankruptcy court approved the
sale of assets to Cone Mills "free and clear of liens." Its order found
that Bank of America "holds a valid and duly perfected security inter-
est in all of [Dash Industries'] assets" and that "[n]o other creditors
hold valid and duly perfected security interests in the assets." The
court further directed that the proceeds of the sale be paid to Bank of
America in satisfaction of its lien at the closing date, October 15,
1993. Spartan Mills acknowledges that it was served directly with a
copy of this order, receiving it on September 27, 1993. Its attorneys
contend, however, that they did not receive a copy of the court's Sep-
tember 24 order until several weeks later, noting that, as of September
19, they no longer represented the creditors' committee.

Nevertheless, before payment of the sale proceeds was made to
Bank of America, Spartan Mills negotiated and entered into an agree-
ment with Bank of America on October 14, 1993, under which it
agreed to relinquish possession of the equipment and inventory to
Cone Mills so as to allow completion of the court-ordered sale. It

                    4
imposed as its condition, however, that Bank of America agree that
in any litigation over the entitlement to the sale proceeds, "Spartan
Mills will not be deemed to have relinquished the Property for the
purposes of determining the attachments, perfection and priority of its
asserted lien therein." Thereafter, the bankruptcy estate paid $781,075
to Bank of America, and two months later Spartan Mills dismissed its
adversary proceeding to determine its priority.

A year-and-a-half later, on May 18, 1995, Spartan Mills filed this
action in the District of South Carolina seeking (1) a declaratory judg-
ment that its lien was superior to Bank of America's lien and that,
therefore, Bank of America converted its property and (2) a judgment
in the amount that Dash Industries owed to Spartan Mills, plus inter-
est. Bank of America filed a counterclaim for a declaratory judgment
that the Florida bankruptcy court had previously decided the priority
of liens and that Spartan Mills was now bound by the bankruptcy
court's order. On cross-motions for summary judgment, the district
court granted Bank of America's motion for summary judgment. The
district court noted that, even if the Florida bankruptcy court erred in
ordering payment of the proceeds to Bank of America without the
institution of an adversary proceeding or resolution of Spartan Mills'
adversary proceeding, the Florida court's order adjudicating the liens'
priorities was a final order which Spartan Mills neither appealed nor
challenged. Relying on Celotex Corp. v. Edwards , 115 S. Ct. 1493
(1995) (upholding a final bankruptcy court order against collateral
attack), the district court concluded:

          If Spartan feels the Bankruptcy Court exceeded its jurisdic-
          tion or did not accord Spartan due process, then Spartan's
          remedy lies in Florida not in South Carolina. Spartan's
          action constitutes an improper collateral attack on the Sale
          Order issued by the United States Bankruptcy Court for the
          Southern District of Florida, and thus, the Sale Order may
          not be challenged in this forum.

II

The judicial system's need for order and finality requires that
orders of courts having jurisdiction to enter them be obeyed until
reversed, even if proper grounds exist to challenge them. A challenge

                    5
for error may be directed to the ordering court or a higher court, as
rules provide, but it may not be made collaterally unless it is based
on the original court's lack of jurisdiction. These principles are firm
and long standing. See Celotex Corp. v. Edwards , 115 S. Ct. 1493,
1498 (1995).

In Celotex, the Supreme Court barred judgment creditors from exe-
cuting against the supersedeas bond of the judgment debtor's surety
when such execution would have collaterally attacked the injunction
of a bankruptcy court with jurisdiction, even though the creditors had
proper grounds to object to the injunction. The court stated, "`persons
subject to an injunctive order issued by a court with jurisdiction are
expected to obey the decree until it is modified or reversed, even if
they have proper grounds to object to the order.'" Id. at 1498 (quoting
GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375, 386 (1980)).
The Court observed that this rule had been applied to bankruptcy
orders for more than 60 years. See Celotex, 115 S. Ct. at 1498; Oriel
v. Russell, 278 U.S. 358 (1929) (holding that a bankruptcy turnover
order could not be collaterally attacked in a later contempt proceeding
brought to enforce it).

In this case, the Florida bankruptcy court issued an order on June
11, 1993, provisionally finding that Bank of America had a first prior-
ity lien on all of Dash Industries' assets, including its equipment and
inventory. And in its orders of August 24 and September 2, the court
ordered the sale of those assets free and clear of all liens, with liens
to attach to the sale proceeds. Finally, on September 24, 1993, follow-
ing a period which the court allowed for creditors to object, the bank-
ruptcy court ratified the sale and ordered that the net proceeds be paid
to Bank of America as lien holder enjoying a first priority position.

Spartan Mills had notice of these orders but failed to object to or
appeal them. While it did file an adversary proceeding, it voluntarily
dismissed it. If the bankruptcy court had jurisdiction to enter these
orders, under Celotex we must consider them binding on Spartan
Mills, even if they were in error, and therefore must reject this collat-
eral attack. See Lindsey v. Ipock, 732 F.2d 619, 622 (8th Cir. 1984)
("once [the creditor] was apprised of the bankruptcy court's sale order
and failed to timely appeal, he was obligated to obey these orders
even if they were in error").

                     6
Spartan Mills contends that it is not governed by the principles of
Celotex because (1) the Florida bankruptcy court did not have juris-
diction over the subject matter or over the person of Spartan Mills and
(2) the bankruptcy court did not follow established procedures for
voiding its lien, denying Spartan Mills the due process notice that
would give preclusive effect to the bankruptcy court's orders. We will
discuss these issues in order.

A

No one contends that the bankruptcy court did not have jurisdiction
over Dash Industries and its assets, both to reorganize them under
Chapter 11 and later to liquidate them under Chapter 7. See 28 U.S.C.
§§ 157(a), 1334(b). "Congress intended to grant comprehensive juris-
diction to the bankruptcy courts so that they might deal efficiently and
expeditiously with all matters connected with the bankruptcy estate,
and . . . the `related to' language of § 1334(b) must be read to give
district courts (and bankruptcy courts under § 157(a)) jurisdiction
over more than simple proceedings involving the property of the
debtor or the estate." Celotex, 115 S. Ct. at 1499 (internal quotations
omitted). Accordingly, a district court, and derivatively the bank-
ruptcy court, has jurisdiction over an action related to bankruptcy "if
the outcome could alter the debtor's rights, liabilities, options, or free-
dom of action (either positively or negatively) and[it] in any way
impacts upon the handling and administration of the bankrupt estate."
Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984); see also
A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002 n.11 (4th Cir. 1986)
(adopting the Pacor test).

Spartan Mills contends nevertheless that the bankruptcy court had
no jurisdiction to settle the private dispute between it and Bank of
America over the relative priority of their liens because the distribu-
tion of the proceeds to one or the other would have no effect on the
debtor's estate. Such an argument, however, ignores the fact that rec-
ognition of Bank of America's first priority position was essential to
the initial reorganization and later liquidation of Dash Industries'
estate. All of the corporation's Chapter 11 financing was dependent
on Bank of America's first lien position, and the later sale of the
estate's assets could not have been completed if a valid claim of a
possessory lien had been interposed. The "determination[ ] of the

                     7
validity, extent, or priority of liens" is at the heart of this bankruptcy
case and statutorily within the core of the bankruptcy court's "related
to" jurisdiction. See 28 U.S.C. § 157(b)(2)(K). We have little diffi-
culty in concluding that the Florida bankruptcy court had subject mat-
ter jurisdiction over all of Dash Industries' assets and any lien contest
in respect to them.

It also cannot be disputed that Spartan Mills was a party to the
bankruptcy proceedings in Florida. It was a creditor; it received notice
of all proceedings; it served as representative of the creditors' com-
mittee; and it filed its own adversary proceeding in the case.

B

For its weightier argument, Spartan Mills contends that the bank-
ruptcy court's departure from established procedure for adjudicating
the priority of liens denied it the due process notice necessary to bind
it through principles of res judicata. It argues that our decision in Cen-
Pen Corp. v. Hanson, 58 F.3d 89 (4th Cir. 1995), squarely supports
its position. In Cen-Pen, we held that a confirmation order that treated
Cen-Pen as an unsecured creditor of the debtor in bankruptcy could
not have preclusive effect as to the validity of a lien that Cen-Pen
claimed in the debtor's assets. We stated, "confirmation generally
cannot have preclusive effect as to the validity of a lien, which must
be resolved in an adversary proceeding." Id. at 93. We noted that
inclusion of boilerplate language on page four of the debtors' pro-
posed plan voiding liens did not, in the circumstances there, provide
sufficient notice to the creditor that his lien was not being allowed to
pass through the bankruptcy process intact: "The Hansons' plan
nowhere mentioned or otherwise acknowledged Cen-Pen's liens, and
certainly did not `provide for' treatment of the liens or full payment
of the underlying claim." Id. at 94. Even though Spartan Mills cannot
rely on a similar factual circumstance here, it nonetheless argues that
because it was not served with notice in an adversary proceeding filed
to invalidate its first priority, textile processor's lien created under
South Carolina law, under Cen-Pen it is not bound by the bankruptcy
court's final order distributing the proceeds to Bank of America. We
think that Spartan Mills applies Cen-Pen too broadly.

While it is clear that no one instituted an adversary proceeding
against Spartan Mills for the purpose of subordinating its textile pro-

                     8
cessor's lien, Spartan Mills itself did institute such an action, even
though it did not prosecute it. But apart from its own action in filing
an adversary proceeding, we believe that if Spartan Mills knew that
proper bankruptcy procedure had not been followed, its remedy was
to seek reconsideration from the bankruptcy court itself or to appeal
to the district court in Florida and ultimately to the Eleventh Circuit.
See Fed. R. Bankr. P. 8002, 9023, 9024. Under the holding of
Celotex, Spartan Mills cannot allow a final order that deprives it of
a lien position to stand and then hope to attack it collaterally at
another time and in another forum. Both our circuit and other federal
courts have barred bankruptcy parties from collateral assertions of
legal claims after they fail, without reason, to object and appeal as
required. See, e.g., First Union Comm. Corp. v. Nelson, Mullins,
Riley, and Scarborough (In re Varat Enterprises, Inc.), 81 F.3d 1310,
1315 (4th Cir. 1996); U.S. Dep't of the Air Force v. Carolina Para-
chute Corp., 907 F.2d 1469, 1473-74 (4th Cir. 1990); Wallis v. Justice
Oaks II, Ltd. (In re Justice Oaks, Ltd.), 898 F.2d 1544, 1550-52 (11th
Cir. 1990); cf. 11 U.S.C. § 506(d) ("To the extent that a lien secures
a claim against the debtor that is not an allowed secured claim, such
lien is void . . . ."); 11 U.S.C. § 1141(a) ("Except [as otherwise pro-
vided] . . . the provisions of a confirmed plan bind . . . any creditor
. . . ."); 11 U.S.C. § 1327(c) ("Except as otherwise provided in the
plan or in the order confirming the plan, the property vesting in the
debtor . . . is free and clear of any claim or interest of any creditor
provided for by the plan"). As the Supreme Court recently noted in
Celotex, "It is for the court of first instance to determine the question
of the validity of the law, and until its decision is reversed for error
by orderly review, either by itself or by a higher court, its orders
based on its decision are to be respected." 115 S. Ct. at 1501 (quoting
Walker v. Birmingham, 388 U.S. 307, 314 (1967)); see also Lindsey,
732 F.2d at 622 (forbidding collateral attack on an erroneous but
unappealed bankruptcy order). The lien of a creditor is void if the
unappealed, final order of a bankruptcy court vested with proper juris-
diction so declares regardless of the bankruptcy court's failure to
adhere to normal bankruptcy procedures.

While Spartan Mills has agreed that we must apply Celotex to the
extent it applies in this case, it argues that Celotex cannot be applied
when the bankruptcy court denied Spartan Mills the notice required
by due process.

                     9
Due process requires that in order for a proceeding to be accorded
finality, notice must be given that is "reasonably calculated, under all
the circumstances, to apprise interested parties of the pendency of the
action and afford them an opportunity to present their objections."
Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314
(1950); see also Piedmont Trust Bank v. Linkous (In re Linkous), 990
F.2d 160, 162-63 (4th Cir. 1993). In this case, Spartan Mills had that
notice. During the period when its counsel represented the creditor's
committee, the bankruptcy court issued an order proposing to allow
Dash Industries to borrow money from Bank of America and, in
exchange, to recognize Bank of America's first priority lien in all of
Dash Industries' assets, consistent with Bank of America's claim for
a first position in its pre-petition lending. The court ordered that per-
sons objecting to Bank of America's first position file an objection or
other pleading by a date certain or be barred from challenging its
position. The court also ordered the sale of all of Dash Industries'
assets, free and clear of liens, with distribution of the proceeds to
Bank of America in recognition of its first position. And finally the
court ratified these acts. Spartan Mills agrees that it received notice
of all of these orders. And it surely cannot maintain that the orders
failed to advise it that its claimed lien was being subverted. The prop-
erty in which Spartan Mills had claimed a possessory lien was sold
to Cone Mills free and clear of all liens, and the proceeds were dis-
tributed by court order to Bank of America in direct conflict with
Spartan Mills' first lien claim. Moreover, Spartan Mills' actions in fil-
ing an adversary proceeding challenging these rulings and in negotiat-
ing a stipulation with Bank of America to help it maintain its position
belie any claimed lack of knowledge.

Rather than object in the Florida bankruptcy court or appeal the
bankruptcy court's orders, the record provides ample support for the
conclusion that Spartan Mills made a considered decision to try to liti-
gate its lien claim in South Carolina at another time. It pursued an
agreement with Bank of America and entered into a stipulation on
October 14 which would bar Bank of America from asserting Spartan
Mills' lack of possession of Dash Industries' assets as a defense in
any subsequent action. It thereafter voluntarily dismissed its adver-
sary proceeding filed in the Florida bankruptcy proceeding in the face
of a final order that awarded the first lien position to Bank of Amer-
ica. And finally during Spartan Mills' argument before the district

                     10
court, its counsel stated, "frankly, Spartan preferred to be in a differ-
ent forum to litigate the lien statute." This is not the case where Spar-
tan Mills was caught by surprise because of a lack of due process
notice. Rather, Spartan Mills apparently determined that it would liti-
gate its claim at a different time and in a different court. But in doing
so, it left standing final orders that adjudicated its lien claim.

Respect for the orderly process of law demands that the Florida
bankruptcy court's final, unappealed order be given effect. See
Celotex, 115 S. Ct. at 1501 (a collateral attack on a bankruptcy order
cannot be permitted "without seriously undercutting the orderly pro-
cess of the law"). Accordingly, the judgment of the district court is

AFFIRMED.

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