In the
United States Court of Appeals
For the Seventh Circuit

No. 01-3055

In the Matter of:

Qualitech Steel Corporation,

Debtor

Appeal of:

Official Committee of Unsecured Creditors

Appeal from the United States District Court
for the Southern District of Indiana,
Indianapolis Division.
No. IP 00-496-C H/G--David F. Hamilton, Judge.

Argued December 4, 2001--Decided December 21, 2001


  Before Bauer, Posner, and Easterbrook,
Circuit Judges.

  Easterbrook, Circuit Judge. Qualitech
Steel Corporation had a short, unhappy,
and expensive life. Formed in 1996 to
exploit new technologies for producing
specialty steels, Qualitech spent more
than $400 million building two plants.
Both took longer to build than expected,
were more costly to construct and operate
than expected, and generally performed
below expectations. By March 1999, when
it entered bankruptcy, Qualitech had not
reached full scale and was losing about
$10 million a month trying to get there.
It owed secured lenders about $265
million; the security included almost all
of the firm’s assets. Management deemed
Qualitech’s facilities worth about $225
million when the bankruptcy proceeding
began, so the unsecured creditors had
little to hope for--little, but not
nothing. Qualitech has sought to recover
about $4 million from creditors in
preference-avoidance actions under the
Bankruptcy Code, and these recoveries
would be shared among all unsecured cred
itors (including the secured lenders, to
the extent their loans exceeded the value
of the security).

  Everyone recognized from the outset that
the plants should be sold, either to an
established producer or to someone
willing to take considerable risk in an
effort to get the plants working to
original hopes. Some investment in
keeping the operations going pending sale
might be justified as the purchase of an
option in obtaining the benefits of any
upturn in the business’s prospects.
Efforts to obtain new financing were
unsuccessful, however, as all available
assets were encumbered. Some (but not
all) of the original secured lenders
offered to put a total of $30 million in
new capital into the venture, if they
received a super-priority interest. Such
a transaction required demoting the other
secured lenders’ position and
substituting new security under 11 U.S.C.
sec.364(d)(1). The only other assets in
sight were the proceeds of preference-
recovery actions (also known as avoidance
actions). After notice and a hearing, the
bankruptcy court approved debtor-in-
possession (dip) financing of $30 million,
with super-security and an award of
replacement security to the senior
lenders, to the extent that this was
necessary to maintain their financial
position. No one appealed or sought a
stay. In August 1999 all of Qualitech’s
operating assets were sold for
consideration that the bankruptcy court
deemed equivalent to $180 million. (The
bid was complex and subject to potential
adjustments that could raise or lower its
effective value. The unsecured creditors
contended that the bid should be valued
at $227 million, but the bankruptcy judge
chose the lower value. No one doubts that
this bid, whatever its worth, was the
best deal that could be obtained.)

  The first $30 million of the proceeds
went to the dip financers, leaving $150
million for the old secured creditors.
They accordingly invoked the provision
giving them extra security--first dibs in
the preference-recovery kitty, which
would make up some but far from all of
the loss. The unsecured creditors
contended, however, that the
securedlenders could not have lost
anything; after all, if the $30 million
investment were prudent, it should have
improved these creditors’ position. But
the bankruptcy judge concluded that good
money had been thrown after bad, that the
secured lenders’ position had been eroded
by at least the value of the anticipated
preference recoveries, and that they
therefore were entitled to a substitute
security interest in that collateral. The
district court affirmed, and the
unsecured creditors have appealed to us.
As a practical matter, the decision is
final for the purpose of 28 U.S.C.
sec.158(d), because the plan for the
distribution of the sale proceeds is the
effective plan of reorganization. All of
Qualitech’s operating assets have been
sold; the secured lenders’ claim reaches
all actual and potential assets of the
estate, and the unsecured lenders have
been wiped out. Particular avoidance
actions remain to be decided, but each is
a separate adversary action,
independently appealable later. See In re
Morse Electric Co., 805 F.2d 262 (7th
Cir. 1986). What we have now winds up the
main proceedings, and the existence of
these collateral avoidance disputes does
not make the order less final.

  Even if the sale should be valued at
$227 million rather than $180 million,
the secured creditors suffered a loss as
a result of the dip financing. They had
security worth $225 million going in and
$197 million (maximum) coming out. The
difference is substantially more than the
highest estimate of any sums that could
be recovered in avoidance actions, so
sec.364(d)(1) entitles the secured
lenders to those sums. This assumes that
the assets really were worth $225 million
in March 1999. Maybe they weren’t; if
whoever owned them had to pony up $10
million per month to keep them viable,
the discounted value of that expenditure
stream had to be subtracted from the
anticipated sale price in order to
determine the assets’ present value. If
Qualitech had turned over the keys and
deeds to the secured lenders in March,
they would have had to bear these costs
themselves. Yet the $225 million value is
the original estimate of Qualitech’s
management; it is not some hokey number
that the secured creditors cooked up to
disguise the fact that maintenance
outlays had to be subtracted from any
eventual sale price. The unsecured
creditors might have argued in the
bankruptcy court that $225 million was
just a seat-of-the-pants figure that
should be reevaluated to determine how
much the secured lenders really lost. But
no such argument was made in either the
bankruptcy court or the district court,
and hints along these lines in the
appellate brief are far too late. We must
take it as established that (a) in March
1999 the secured creditors had interests
worth $225 million, yet (b) in August
1999 these interests were worth, at most,
$197 million after paying off the
diplenders. These two figures compel
affirmance of the judgment.

  Instead of tackling this calculation
head on, the unsecured creditors beat
about the bush. They contend, for
example, that courts do not favor using
sec.364 to give pre-petition lenders
security interests in the proceeds of
avoidance actions. That’s an accurate
assessment. Section 364(d) is supposed to
be a last resort. See Douglas G. Baird,
The Elements of Bankruptcy 187-88 (rev.
ed. 2001). The statutory text itself
conveys that message (emphasis added):

(d) (1) The court, after notice and a
hearing, may authorize the obtaining of
credit or the incurring of debt secured
by a senior or equal lien on property of
the estate that is subject to a lien only
if--(A) the trustee is unable to obtain
such credit otherwise; and (B) there is
adequate protection of the interest of
the holder of the lien on the property of
the estate on which such senior or equal
lien is proposed to be granted. (2) In
any hearing under this subsection, the
trustee has the burden of proof on the
issue of adequate protection.

Perhaps the authorization of dip financing
and the associated use of preference-
recovery proceeds for "adequate security"
was imprudent; that some of the secured
lenders refused to advance any more
funds, even with super-security, suggests
as much. (Though the fact that others of
their number put up extra money, knowing
that they were undersecured, implies a
belief that keeping Qualitech alive had a
positive option value.) But the time to
make this point is long past. The
bankruptcy judge did authorize financing
with additional security to the original
lenders. The unsecured creditors did not
seek a stay, and it is too late to tell
those among the secured lenders that
opposed this dip financing that they,
rather than the unsecured creditors, must
swallow the loss from the decision even
though sec.364(d) requires their
protection.

  The unsecured creditors’ remaining
arguments fare no better. It makes no
difference who bears the burden of
persuasion on valuation issues under
sec.364(d), because the secured lenders
lost more than the value of the avoidance
actions on any calculation. And the
argument that we should reverse the
judgment so that the bankruptcy judge can
receive additional evidence from the
secured creditors’ files overlooks the
fact that the unsecured creditors did not
seek this information until the day
before the evidentiary hearing (too late,
the bankruptcy judge held) and did not
raise the discovery issue on appeal to
the district court until filing their
reply brief. The point has been
forfeited.

Affirmed
