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In re Swedeland Development Group Inc.

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


filed: October 8, 1993.

IN RE: SWEDELAND DEVELOPMENT GROUP, INC., DEBTOR THE RESOLUTION TRUST CORPORATION, AS CONSERVATOR OF CARTERET FEDERAL SAVINGS BANK *FN*
v.
SWEDELAND DEVELOPMENT GROUP, INC.; HAYLEX ACQUISITION COMPANY; UNSECURED CREDITOR'S COMMITTEE; FIRST FIDELITY BANK, NATIONAL ASSOCIATION SWEDELAND DEVELOPMENT GROUP, INC., APPELLANT

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY. (D.C. Civil Nos. 92-01083; 92-01321; 92-01796).

Before: Greenberg, Nygaard and Lewis, Circuit Judges.

Author: Nygaard

Opinion OF THE COURT

NYGAARD, Circuit Judge.

The Swedeland Development Group, Inc., a Chapter 11 debtor, appeals from an order of the district court reversing three orders of the bankruptcy court. Those three orders authorized post-petition financing for Swedeland under the Bankruptcy Code, 11 U.S.C. § 364(d), granted seniority to the post-petition lenders over the pre-petition creditor Carteret Federal Savings Bank, F.A., and denied Carteret's motion to lift the automatic stay. The primary issue before us is whether Carteret's appeal to the district court from post-petition financing orders was rendered statutorily moot when Carteret failed to obtain a stay pending its appeal of those orders. We hold that Carteret's appeal to the district court was rendered moot under the Bankruptcy Code, 11 U.S.C. § 364(e). The second issue is whether the bankruptcy court clearly erred when it found that Carteret, the pre-petition creditor, was adequately protected. We conclude that the bankruptcy court was correct and will reverse and remand for the district court to reinstate the vacated orders of the bankruptcy court.

I.

In April 1989, Swedeland acquired property to construct Crystal Springs, a 500 acre residential development which would include a golf course. Carteret financed Swedeland's acquisition and development costs for Crystal Springs through a series of loans. Carteret secured the loans with a first lien on all of Swedeland's property including a collateral assignment of leases. Under the loan agreements, the first $42,000 from the sale of each lot would be paid to Carteret as a release price, of which $12,000 would be applied to the loan for the golf course, and the balance would be applied to the acquisition and construction loans. Carteret refused Swedeland's request for additional financing, but allowed Swedeland to use $2.25 million which had been placed in escrow as an interest reserve. Swedeland eventually filed a Chapter 11 petition which triggered the automatic stay under 11 U.S.C. § 362(a).

The bankruptcy court granted Swedeland use of Carteret's cash collateral,*fn1 in the form of proceeds realized from the sale of housing units, thereby allowing the construction and development of Crystal Springs to continue. As of October 31, 1991, Swedeland's debt to Carteret was $38,395,760. Carteret filed a motion to vacate the automatic stay, and Swedeland filed a motion under the Bankruptcy Code, 11 U.S.C. § 364(d), to obtain working capital and construction financing from Haylex Acquisition Company, Ltd. The section 364(d) post-petition financing from Haylex was to be secured by a lien senior to Carteret's. Later, Swedeland filed another motion to obtain a post-petition revolving construction loan from First Fidelity Bank, N.A. ("FFB"), thus replacing Haylex on the construction portion of the original application.

On March 6, 1992, the bankruptcy court authorized Swedeland to borrow $840,000 from Haylex. On March 9, 1992, the bankruptcy court denied Carteret's motion to vacate the automatic stay because Carteret was adequately protected in light of the reasonable possibility that Swedeland would successfully reorganize. On April 10, 1992, the bankruptcy court authorized Swedeland to borrow up to $3.16 million from FFB on a revolving basis. The March 6 and April 10 orders granted seniority to Haylex's and FFB's liens over Carteret's lien.

Carteret moved for a stay pending appeal of the March 6 order authorizing post-petition financing from Haylex. The bankruptcy court denied the motion, and the district court affirmed the denial. Carteret did not appeal from the district court's order or move for a stay of the April 10 order authorizing post-petition financing from FFB. Instead, it appealed the bankruptcy court's three orders to the district court.

The district court reversed the three orders. It held that (1) Carteret's appeal was not moot under the Bankruptcy Code, 11 U.S.C. § 364(e), and (2) the bankruptcy court's finding that Carteret's lien was adequately protected was clearly erroneous. Swedeland appeals and asks that the bankruptcy court's orders be reinstated. We will consider two issues: first, whether Carteret's failure to obtain a stay pending appeal from the section 364(d) post-petition financing orders statutorily renders its appeal moot; and second, whether the bankruptcy court clearly erred by finding that the pre-petition creditor, Carteret, was adequately protected.

II.

The bankruptcy court granted Swedeland's application for post-petition financing under section 364(d), which provides:

(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.

11 U.S.C. § 364(d) (1988). Swedeland contends that absent a stay pending an appeal or bad faith, an appeal from a post-petition financing order under section 364(d) is moot under section 364(e) and must be dismissed.

Section 364(e) provides:

The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.

Id. § 364(e) (Emphasis added.) Good faith was never disputed; however, because Carteret did not obtain a stay pending appeal, Swedeland contends that the district court erred as a matter of law by reversing the March 6 and April 10 post-petition financing orders. The interpretation of section 364(e) is a question of law, and we exercise plenary review.

Section 364(e) is derived from former Bankruptcy Rule 805 which governed stays pending appeal. 2 Collier on Bankruptcy P 364.06 (Lawrence P. King ed., 15th ed. 1992). Rule 805 provided:

Unless an order approving a sale of property or issuance of a certificate of indebtedness is stayed pending appeal, the sale to a good faith purchaser or the issuance of a certificate to a good faith holder shall not be affected by the reversal or modification of such an order on appeal, whether or not the purchaser or holder knows of the pendency of the appeal.

The Bankruptcy Reform Act of 1978 incorporated the substance of Rule 805 into 11 U.S.C. § 363(m),*fn2 with respect to a sale of property, and into 11 U.S.C. § 364(e), with respect to post-petition financing. The legislative history of section 364(e) makes clear that the credit authorized under section 364(d) "is not affected on appeal by reversal of the authorization unless the authorization and the incurring of the debt were stayed pending appeal." H.R. Rep. No. 595, 95th Cong., 1st Sess. 347 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 5987, 6303. Since a financing order under section 364(d) cannot be affected on appeal absent a stay, any appeal without a stay is statutorily moot. In re Joshua Slocum Ltd., 922 F.2d 1081, 1085 (3d Cir. 1990); In re Highway Truck Drivers Local Union # 107, 888 F.2d 293, 297-98 (3d Cir. 1989).

Carteret concedes that section 364(e) renders an appeal from a section 364(d) financing order moot, but contends it is only moot to the extent of money actually disbursed. Since the Haylex loan has been disbursed to Swedeland in full, Carteret does not contest the March 6 order or the seniority of Haylex's lien. However, Carteret contends that since the FFB loan is revolving, FFB is protected under section 364(e) only for the amount it actually disbursed. According to Carteret, its appeal is not affected by section 364(e) with respect to the portions of the FFB loan that have not been disbursed. We disagree.

As we recently reiterated, a statute means what its plain language says. See In re Assets of Myles Martin, No. 93-1189, 1993 WL 274502 at 8 (3d Cir. July 26, 1993). Section 364(e) clearly states that the matter subject to a "reversal or modification" is the "authorization" to seek post-petition financing.*fn3 The statute also creates an unmistakable condition; authorization to incur debt from a good faith creditor is subject to reversal or modification only if it was stayed pending appeal. An "authorization" plainly means the permission to seek post-petition financing under section 364(d); it does not mean "authorization of the loan agreement to the extent monies have not been disbursed." The statute does not state that portions of an authorization can be appealed while others cannot depending upon whether funds have actually been disbursed. See In re Revco D.S., Inc., 901 F.2d 1359, 1364 (6th Cir. 1990) ("Courts, however, reviewing financing orders subject to section 364(e) have been reluctant to sever individual provisions, whether legal or not, in the absence of a stay pending appeal."). The permission to obtain a revolving loan is part of the "whole package" authorized under section 364(d), and is nonreviewable without a stay. See Id. ; In re Ellingsen MacLean Oil Co., 834 F.2d 599, 603 (6th Cir. 1987) ("Subsection (e), in turn, protects the authorization for priority on a lien from reversal or modification on appeal, as long as the order has not been stayed pending appeal and the creditor extended credit in good faith.") (emphasis added), cert. denied sub nom. Unsecured Creditors' Comm. v. First Nat'l Bank & Trust Co., 488 U.S. 817, 109 S. Ct. 55, 102 L. Ed. 2d 33 (1988).

Absent a stay, therefore, an appeal from a section 364(d) financing order is statutorily moot. Whether a lender has fully disbursed an authorized loan is not a factor. In re Adams Apple, Inc., 829 F.2d 1484, 1486, 1489 (9th Cir. 1987) (appeal moot even though post-petition lender advanced $450,000 of a $775,000 credit line); Ellingsen, 834 F.2d at 600, 604 (appeal moot even though post-petition lender advanced $60,000 and granted a letter of credit for $175,000); Revco, 901 F.2d at 1366-67 (appeal would have been moot even though post-petition lender advanced $30 million of a $140 million credit line were it not for a question of good faith).

The plain language of the statute here is supported by the congressional intent behind and the policy underlying section 364. Section 364 is premised on the strong public policy of encouraging post-petition investments in bankrupt companies. Ellingsen, 834 F.2d at 603; accord In re Saybrook Mfg. Co., 963 F.2d 1490, 1493 (11th Cir. 1992); Adams Apple, 829 F.2d at 1488. "Lenders and suppliers are understandably reluctant to do business with a debtor who is in bankruptcy and who has few, if any, unencumbered assets to offer as collateral." Ellingsen, 834 F.2d at 603. By protecting good faith lenders and making the bankruptcy court's authorization unreviewable absent a stay pending appeal, Congress intended to encourage investors to take a chance on a failing company and thereby enhance its potential to reorganize. See Adams Apple, 829 F.2d at 1488. The limited interpretation of section 364(e) advocated by Carteret would protect the lender from the risk of loss associated with the money disbursed; however, it would not protect the lender's reliance interest in the possibility of profit. Id. Lender would have little incentive to invest in faltering companies rather than less risky enterprises in the absence of section 364(e) protection for their reliance interest. Id. ; Ellingsen, 834 F.2d at 607 (Merritt, J., Dissenting); cf. Kham & Nate's Shoes No. 2, Inc. v. First Bank, 908 F.2d 1351, 1355 (7th Cir. 1990) ("If creditors fear that the rug will be pulled out from under them, they will hesitate to lend."). Thus, Carteret's proposed interpretation would thwart the congressional intent to foster investment in troubled companies by permitting lenders to rely on a bankruptcy court's authorization. Adams Apple, 829 F.2d at 1488.

We conclude that for the purposes of appealing under section 364(e), an authorization under section 364 for post-petition financing is not limited to the monies actually advanced. Since Carteret did not obtain a stay of the authorization at issue as required by section 364(e), we cannot review that authorization. Since we cannot grant relief under the statute, Carteret's appeal is statutorily moot as to the March 6 and April 10 post-petition financing orders.

III.

We now consider whether the district court erred by reversing the bankruptcy court's denial of Carteret's motion to lift the automatic stay. Title 11 U.S.C. § 362(d) provides two bases for relief from the automatic stay:

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

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

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

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

11 U.S.C. § 362(d) (year). The bankruptcy court denied the motion for relief from the automatic stay based on its findings that Carteret was adequately protected and that the property was necessary for a successful reorganization. The district court reviewed these findings and determined they were clearly erroneous. We also review the bankruptcy court's findings for clear error. Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir. 1988).

A.

We first consider whether the bankruptcy court clearly erred by finding that Carteret was adequately protected under section 362(d)(1). A creditor has a secured claim only to the extent of the value of its collateral.*fn4 Since the appraised value of the lien on the Crystal Springs project is $18,495,000, that is the amount for which Swedeland must provide adequate protection.

The Bankruptcy Code does not define "adequate protection," but in section 361 it gives three examples of what may constitute adequate protection. First, making a cash payment or periodic cash payments to the extent necessary to compensate for any decrease in value of the party's interest in property may constitute adequate protection. See 11 U.S.C. § 361(1). Second, providing additional or replacement liens to the extent necessary to compensate for any decrease in value of the interest of the property may suffice. Id. § 361(2). Third, "granting such other relief . . . as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property" may also suffice. Id. § 361(3). Section 361 provides examples of adequate protection in order to illustrate possible approaches to commonly recurring problems; it does not provide an exclusive definition. 2 Collier on Bankruptcy P 362.07[1] (Lawrence P. King ed., 15th ed. 1992).

Congress intended "adequate protection" to be determined on a case-by-case basis depending upon the unique facts and equities of each case. The bankruptcy court, as a court of equity, is required to consider the impact of the stay on the parties and the "balance of hurt" in fashioning relief. Id. Thus, the notion of adequate protection is pragmatic and synthetic, requiring a court to analyze "all of the relevant facts, with a particular focus upon the value of the collateral, the likelihood that it will depreciate or appreciate over time, the prospects for successful reorganization of the Debtor's affairs by means of the Plan, and the Debtor's performance in accordance with the Plan." In re Aqua Assoc., 123 Bankr. 192, 196-97 (Bankr. E.D. Pa. 1991) (quoting In re TM Carlton House Partners, Ltd., 91 Bankr. 349, 357 (Bankr. E.D. Pa. 1988)).

The protection in this case included the payment of a $1.25 million cash collateral account and a mortgage on Swedeland's Bowling Green property valued at $6.7 million. The main component of the protection, however, was the income from the projected build-out. Swedeland maintains that with the post-petition financing and incoming proceeds, it will be able to continue construction, pay the debt in full, and gain equity for itself in the project. The bankruptcy court found that post-petition real estate taxes were being paid; that the appropriate insurance was in place, and that Swedeland was operating its business in a conservative manner within the confines of previously submitted financial projects. In other words, Swedeland was building and selling houses because of the post-petition financing.

The district court believed that the bankruptcy court clearly erred because none of the options proposed by Swedeland offered Carteret the protection it had bargained for as part of the construction loan mortgage: Swedeland gave no new consideration. The district court took the view that Swedeland must offer new consideration. The Bankruptcy Code does not require that protection be in the form of new consideration. Congress left the definition of "adequate protection" to be developed by the courts as the unique facts of each case dictate. The relevant question is whether Carteret's interest was adequately protected.

Section 361 provides as an example that adequate protection can take the form of periodic cash payments to the extent necessary to compensate for any decrease in value of the party's interest. Here, Swedeland agreed to a release price of over $28,000 for the sale of each unit. It is true that under the construction loan agreement, Carteret would have received a release price of $42,000, but we believe that the bankruptcy court did not clearly err when it found that the new figure adequately protected Carteret's interest. Swedeland estimates that over 900 residential units can be constructed on the remaining property, and Carteret's interest would be satisfied from the construction of only 770 units. The bankruptcy court also found that Swedeland's management was highly professional; that the "concept, layout and implementation" of Crystal Springs were "outstanding"; and that Swedeland intended to construct new residential units only upon receiving binding contracts of sale. Thus, Carteret was protected against speculative building.

Finally, the bankruptcy court found that the highest and best use of the property was as a planned residential golf community. The value of Carteret's interest in the Crystal Springs project will increase as Crystal Springs is developed. In this sense, the continued development of Crystal Springs enhances the value of the project and Carteret's interest. The district court did not determine any specific finding to be clearly erroneous, but reversed on the ground that Swedeland did not offer new consideration in addition to the prepetition bargain. We believe that the bankruptcy court's finding that Carteret's interest in the property was adequately protected is supported by the record, and is not clearly erroneous.

B.

We next consider whether the bankruptcy court clearly erred by finding that the property was necessary for an effective reorganization under section 362(d)(2). That section provides that the court shall grant relief from the stay if the creditor is undersecured and the property "is not necessary to an effective reorganization." 11 U.S.C. § 362(d)(2). This means that there must be "a reasonable possibility of a successful reorganization within a reasonable time." Timbers, 108 S. Ct. at 633 (citation omitted).

The bankruptcy court determined that Swedeland's "prospects for reorganization are reasonable." This Conclusion was predicated on findings that Swedeland showed post-petition performance, obtained post-petition financing from Haylex and FFB, can build-out the project and satisfy Carteret's lien even without the new financing, and has been "on target" with its projections to date. Carteret's projections were based on historical costs for developing a project, and the bankruptcy court found them credible. With these findings and the record to support them, we conclude that the bankruptcy court did not err when it found Swedeland's prospects for reorganization were reasonable, particularly when we consider that Carteret moved for relief from the stay within four months of the petition when a less detailed showing of the prospects of reorganization are required. Id. ; see also In re Holly's, Inc., 140 Bankr. 643, 700 (Bankr. W.D. Mich. 1992) ("if the relief from stay is requested at the early stages of the bankruptcy case, the burden upon the debtor is less stringent"). Accordingly, the bankruptcy court correctly concluded that Swedeland should be given the benefit of the automatic stay. Cf. In re Swansea Consol. Resources, Inc., 127 Bankr. 1, 2 (Bankr. D.R.I. 1991).*fn5

IV.

We hold that when a creditor fails to obtain a stay pending appeal of a post-petition financing order under 11 U.S.C. § 364(d), its appeal from that order is rendered moot by 11 U.S.C. § 364(e), and is thus unreviewable. We conclude that the district court erred when it declared the bankruptcy court's finding that Carteret was adequately protected and that the property was necessary to an effective reorganization, to be clearly erroneous. We will reverse and remand with instructions to reinstate the three vacated orders of the bankruptcy court.

GREENBERG, Circuit Judge, Concurring in part and Dissenting in part.

I respectfully Dissent because I disagree with the majority's opinion that under section 364(e), Carteret's appeal to the district court was entirely moot. Instead, I would hold that Carteret's appeal with respect to the undisbursed funds remained viable in the district court, and that Carteret may continue to challenge the bankruptcy court's authorization of the loan by FFB. Accordingly, I would hold that the district court correctly considered on the merits Carteret's appeal of the order of April 10, 1992, authorizing the FFB loan. I then would affirm the district court for the reasons set forth in its opinion.*fn6 I agree with the majority, however, that the appeal from the March 6, 1992 order for the loan from Haylex was moot in the district court, as the funds authorized to be loaned under that order were disbursed before the district court ruled. Thus, I would reverse the district court to the extent that its order reversed the bankruptcy court's order of March 6, 1992.

Section 364(d)(1) of the Bankruptcy Code permits the bankruptcy court, after notice and a hearing, to authorize the debtor to obtain post-petition credit and secure such debt with a superpriority lien. Section 364(e) of the Code, in turn, provides:

The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.

11 U.S.C. § 364(e) (emphasis added). Inasmuch as good faith has not been disputed and a stay as provided in section 364(e) was not granted, Swedeland argues that Carteret's appeal to the district court was moot. Thus, Swedeland contends that the district court should have dismissed the appeal from the orders of the bankruptcy court authorizing the loans.

As a general matter, "'an appeal will be dismissed as moot when events occur during [its] pendency . . . which prevent the appellate court from granting any effective relief.'" General Elec. Co. v. Cathcart, 980 F.2d 927, 934 (3d Cir. 1992) (quoting In re Cantwell, 639 F.2d 1050, 1053 (3d Cir. 1981)) (emphasis added). However, as the Supreme Court recently made clear, this does not mean that an appeal is moot whenever a court cannot restore the parties to the status quo ante. See Church of Scientology v. United States, 121 L. Ed. 2d 313, 113 S. Ct. 447, 450 (1992). Rather, when a court can fashion "some form of meaningful relief," even if it only partially redresses the grievances of the prevailing party, the appeal is not moot. Id. (Emphasis in original).

Based on this case law, I agree with the majority that the appeal insofar as it was taken with respect to Haylex and the funds already disbursed by FFB was moot in the district court. That money had been given to Swedeland, which has given it to third parties to finance the construction of the development. Thus, we cannot order the money to be returned.*fn7 "Simply, these eggs cannot be unscrambled." Bank of New England v. BWL, Inc., 121 Bankr. 413, 417 (D. Me. 1990). These circumstances also preclude this court from disturbing the superpriority lien given to these portions of the financing. Section 364(e) provides that the lien given to post-petition financing cannot be disturbed in the absence of a finding of bad faith or the grant of a stay. Such a rule makes sense because revoking the lien priority would be unfair given that Haylex and FFB extended money to Swedeland with the expectation of obtaining a superpriority. Where I part company with the majority is with its treatment of Carteret's appeal to the district court with respect to the monies not yet advanced to Swedeland. The mere fact that the district court could not order the return of monies already disbursed did not necessarily preclude it from ordering Swedeland not to borrow any further funds from FFB.

I agree with the start of the majority's analysis "that the matter subject to a 'reversal or modification' is the 'authorization' to seek post-petition financing." Typescript at 8. But the majority then indicates that "authorization to incur debt from a good-faith creditor is subject to reversal or modification only if it was stayed pending appeal." Typescript at 8. The problem with this statement is that section 364(e) says no such thing. What it does indicate in the clearest possible language is that the "reversal or modification on appeal of an authorization . . . to obtain credit or incur debt, or of a grant . . . of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted" absent a stay of the authorization. 11 U.S.C. § 364(e).

By stating that "the reversal or modification on appeal of an authorization under this section . . . does not affect the validity of any debt so incurred, or any priority or lien so granted" unless the authorization of the debt or the priority is stayed pending appeal, the statute assumes that an authorization can be reversed or modified in the absence of a stay. Accordingly, what is protected, absent a stay of the authorization, is not the bankruptcy court's authorization, but the validity of the debt and the priority of the lien for money advanced pursuant to the authorization. I therefore respectfully contend that the majority is simply wrong when it holds that "absent a stay, therefore, an appeal from a section 364(d) financing order is statutorily moot," typescript at 9, and Congress made "the bankruptcy court's authorization unreviewable absent a stay pending appeal." Typescript at 10. Furthermore, under the majority's analysis, if a stay of the authorization is not obtained, the appeal will be moot even if no money is advanced pursuant to the authorization pending the appeal. I cannot conceive that Congress intended to protect a potential post-petition lender who had not made a loan. I therefore conclude that the case simply cannot be analyzed by the majority's method.

The majority's reading of section 364(e) quite naturally leads it to rely on what seems to me to be a completely immaterial point. It indicates that section 364(e) "does not state that portions of an authorization can be appealed while others cannot depending upon whether funds have actually been disbursed." Typescript at 8. I certainly agree with that statement, but it misses the point. In fact, section 364(e) does not preclude the appeal of an authorization whether all, none, or some of the funds have been advanced. The reason an appeal should be dismissed if all of the funds have been disbursed is that in view of section 364(e), no relief can be granted unless a stay was granted or unless the credit was not extended in good faith. But if an appeal is allowed, the entire authorization is reviewed. It is the scope of the relief which is limited upon reversal if there has not been a stay and funds have been disbursed.

Notwithstanding my rejection of the majority's reasoning, I acknowledge that I am not necessarily required to reject its result on the facts here. While it would be stretching, it might be possible to consider that a debt advanced in segments creates a single obligation within the contemplation of section 364(e), so that when a post-petition lender advances any portion of the loan, the validity of the entire projected debt is protected in the absence of a stay of the authorization. This would be a significant change from the majority's approach because this reading of section 364(e) would mean that a post-petition lender who disbursed nothing would not be protected by section 364(e).

I also acknowledge that while the cases are not entirely clear, the courts seem to be divided as to whether an appeal is moot under section 364(e) where a portion of the funds has not been given to the debtor and spent or otherwise committed to third parties by the debtor. One court has held "that a claim is moot as soon as a lender has relied on the authorization." In re Adams Apple, Inc., 829 F.2d 1484, 1489 (9th Cir. 1987) (emphasis added). However, the court did not explain what it meant by the term "relied" -- i.e. whether the claim became moot as soon as the lender agreed to advance the money or only after the debtor actually received the funds.*fn8

In another case, however, In re Revco D.S., Inc., 901 F.2d 1359, 1364 (6th Cir. 1990), the court came close to holding that an appeal was moot where only part of the loan had been given to the debtor. But ultimately it could not decide the case on that basis, for the issue of good faith had not been resolved. Of course, under section 364(e), if the credit was not extended in good faith, the post-petition lender could not rely on the order to protect its superpriority or the validity of the debt. In re Ellingsen MacLean Oil Co., 834 F.2d 599 (7th Cir. 1987), cert. denied, 488 U.S. 817, 109 S. Ct. 55 (1988), also provides some support for the Conclusion that the entire appeal is moot when only part of the loan has been advanced.*fn9 It would be possible to rely on the authority of Revco, Ellingsen, and perhaps Adams Apple, to reach the majority's result without the use of the majority's reasoning that absent a stay of the authorization no appeal is possible. That method of analysis would avoid the inescapable Conclusion from the majority's reasoning that an appeal from the authorization is impermissible absent a stay even if the lender does not advance any funds.

But there is contrary authority which suggests that the post-petition lender's protection is limited to its actual cash disbursements. Thus, a Bankruptcy Appellate Panel of the Ninth Circuit has indicated that a case becomes moot only when all the funds have been irretrievably spent. The court defined mootness for the purposes of section 364 as where "funds have been distributed to persons who are not parties to the appeal or if failure to obtain a stay has permitted such a comprehensive change as to render it inequitable to consider the merits of the appeal." In re Blumer, 66 Bankr. 109, 113 (Bank. App. Panel, 9th Cir. 1986). The court suggested a similar definition of mootness in Bank of New England v. BWL, Inc., 121 Bankr. 413. In that case, BWL obtained authorization from the bankruptcy court to obtain $600,000 in post-petition loans from Key Bank of Maine in exchange for a superpriority lien. Bank of New England, a secured creditor of BWL, appealed to the district court to vacate the bankruptcy court's order, but Bank of New England failed to obtain a stay pending appeal or to dispute the issue of good faith. Based on section 364(e), the court held the case was moot and dismissed the appeal. However, the only reason the court gave for concluding that the Bank of New England was without an effective remedy was that it was "very likely that all of the money [obtained from Key Bank] has now been disbursed by Key Bank and spent by Debtor, and that construction is complete and the renovated facilities are fully functional." 121 Bankr. at 417. Thus, the opinion implies that if the court had been persuaded that not all the money had been spent, it would have ruled differently. In re Sun Runner Marine, Inc., 945 F.2d 1089, 1095 (9th Cir. 1991), gives stronger support to the Conclusion that the post-petition lender's protection is limited to its disbursements. There the court rejected a post-petition lender's argument that an appeal from a bankruptcy court's order permitting cross-collateralization which the lender urged was authorized by section 364 was moot, reasoning that the order provided for ongoing financing. Thus, the court could still provide relief by enjoining further financing.

Of these competing approaches to mootness, I think that the Blumer, BWL, In re Sun Runner approach is better. The other approach overemphasizes the policy consideration that it would be inequitable to disturb a reorganization when the post-petition lenders and the debtor have negotiated a financing deal in good faith. Further, permitting a post-petition lender to receive protection for a large potential loan upon advancing only a minor portion of it would permit the tail to wag the dog. Why should we strain to reach the result that a post-petition lender fully protected as to its actual disbursements should be protected as to future disbursements pursuant to an order which can be determined to have been entered erroneously?

I also observe that as a practical matter it may be difficult for a party objecting to a post-petition loan to obtain a stay even if its basis for appeal is meritorious. Indeed, in this very case, Carteret unsuccessfully sought a stay of the March 6, 1992 order, yet it ultimately convinced the district court to reverse that order. I believe that the district Judges who read this opinion will affirm that, in view of their busy schedules, it is difficult for them to consider as adequately as they would like whether a stay of an authorization under section 364(d)(1) should be granted pending appeal. Thus, the very press of time may lead a district court to be reluctant to stay the bankruptcy court's order in what may be a complicated matter. In the circumstances, it seems to me that ordinary fairness requires that insofar as possible, an objector's right to seek relief from a section 364(d)(1) order be preserved. I also point out that the approach of preserving the right to appeal comports with Church of Scientology, as that case instructs that in general there is a live controversy if a court is capable of providing even partial relief.

I recognize that some courts have indicated that "even when the moving party is not entitled to dismissal on article III grounds, common sense or equitable considerations may justify a decision not to decide a case on the merits." In re AOV Industries, Inc., 253 U.S. App. D.C. 186, 792 F.2d 1140, 1147 (D.C. Cir. 1986). Yet, in a case such as this, the equitable consideration of not disrupting the reorganization plan is counterbalanced by the equitable consideration of protecting a pre-petition lender from the dilution of its interests in the debtor's estate. After all, when a pre-petition lender such as Carteret advances vast sums of money and obtains lien rights, I think it is as inequitable, if not more so, for a court to subordinate those rights wrongfully as it would be to interfere with a reorganization plan. I believe that the article III judiciary has a duty to determine "live controversies" so that creditors may, if possible, receive relief from erroneous decisions by the bankruptcy court. Therefore, I would hold that the case was not entirely moot in the district court and would affirm that court to the extent that the case was not moot.


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