USCA1 Opinion

United States Court of Appeals

United States Court of Appeals
For the First Circuit
For the First Circuit
____________________

No. 95-1623

BAYBANK-MIDDLESEX,

Appellant,

v.

RALAR DISTRIBUTORS, INC., ET AL.,

Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

___________________

____________________

Before

Torruella, Chief Judge,

___________
Bownes, Senior Circuit Judge,
____________________
and Stahl, Circuit Judge.
_____________

____________________

Charles R. Bennett, Jr., with

________________________

whom Kevin J. Simard

_______________

and Rieme
_____

Braunstein, were on brief for appellant.

__________
Christopher W. Parker,
_____________________

with whom Rudolph F. DeFelice,

___________________

McDermo
_______

Will & Emery, Paul R. Salvage, Susan L. Burns, and Bacon & Wils
_____________ ________________ _______________
_____________

were on brief for appellees.

____________________
November 7, 1995
____________________

STAHL, Circuit Judge.

STAHL, Circuit Judge.
_____________

Following its

intermediate appeal to the district

("Baybank")

again

disallowance of

attorney fees

its

challenges

claim

for

under its loan

Distributors, Inc.

recovered

in

full

its

court, Baybank-Middlesex

the

bankruptcy

postpetition

court's

interest

agreement with the

debtors, Ralar Distributors, Inc.

Halmar

unsuccessful

Chapter 11

and its parent corporation

(collectively "Ralar").

loan

and

principal

and

Baybank

all

accrued

prepetition interest; only postpetition interest and fees are

now

at

issue.

ultimately recovered

Notwithstanding

its

the

prepetition

fact

claim

that

in

Baybank

full,

the

bankruptcy court found that Baybank had been undersecured and

thus was

not entitled to postpetition fees

and interest; in

so ruling, the court relied on

shortly

its finding at a hearing held

after the commencement of the

case that Baybank was

"under water."

The bankruptcy

Ralar's

entitled

court also rejected

failure to

Baybank's argument

adequately protect

that

Baybank's collateral

Baybank to a "superpriority" administrative expense

claim for the

postpetition interest and fees.

The district

court affirmed, and we now affirm the district court.

I.
I.
__

BACKGROUND
BACKGROUND
__________

On October 16, 1989, Ralar, a wholesale distributor

of household

and hardware items, filed

a voluntary petition

-22

for relief under Chapter 11 of the Bankruptcy Code.

time,

Ralar owed Baybank

At that

approximately $10 million, secured

by all of Ralar's assets.

Shortly

debtor

in

after

the Chapter

possession) and

negotiations concerning

11

filing, Ralar

(as

Baybank

reached

an impasse

in

Ralar's use

of cash

collateral and

inventory during

the pendency of the

Baybank ultimately refused to

or

to allow

Ralar

to use

Chapter 11 proceeding.

extend further credit to Ralar

Baybank's collateral,

prompting

Ralar to move for a bankruptcy court order allowing it to use

the

collateral.

court held a

Over

the next four

series of "cash collateral

Baybank objected

to the continued use of

sought immediate foreclosure.

and Ralar

collateral.

months, the bankruptcy

its collateral and

At the first hearing, Baybank

reached a stipulation

At

hearings," at which

allowing Ralar to

three subsequent

hearings, the

use cash

bankruptcy

court issued orders allowing Ralar to continue its operations

using

that

the collateral

despite

Baybank's interests

Baybank's objection,

were adequately

finding

protected because

Ralar's continued

yield

sales of inventory to

a higher net return

foreclosed.

bankruptcy

At the

court

(undersecured),

but

than Baybank could

second

found

that

its customers would

cash

that

collateral hearing,

Baybank

Ralar's

was

operating

likely to put Baybank further under water.

-33

realize if it

the

"under

water"

plan

was not

After four months

court

of operation under

bankruptcy

orders allowing Ralar to use the collateral, the court

ultimately found that Ralar's plan of inventory reduction was

no

1990

longer protecting

it

Baybank's interests.

granted Baybank

relief

from

Thus,

in March

the automatic

stay,

permitting Baybank to foreclose on Ralar's assets.

Payments

postpetition

operations

foreclosure were

principal,

Ralar

all

accrued

to

combined with

sufficient to

unspecified amount of

the

made

Baybank

the proceeds

repay all of

prepetition

filed a

proof of

its

of the

Baybank's loan

interest,

postpetition interest.

foreclosure, Baybank

during

and

an

Subsequent to

claim for

$2.2

million,

comprised

postpetition

which

was

preexisting loan

liquidated all

and

fees

obligated

proceeds

to

agreement.

Baybank's

pay

Because

unsecured

and collection costs,

Baybank

Baybank

of Ralar's assets, this

under

the

already

had

claim was unsecured.

Baybank sought to recover the postpetition interest

as

so-called

expense claim under 11

collateral

of

interest, attorney fees,

Ralar

However,

entirely

had been

would have

"superpriority"

U.S.C.

507(b), arguing that

adequately

been

administrative

protected, the

sufficient to

if its

foreclosure

cover the

claimed

postpetition interest and fees.

The bankruptcy

entirety,

ruling

that

court disallowed the

(1)

Baybank

was

an

claim in

its

undersecured

-44

creditor

and

therefore

was

not

postpetition interest and fees

Baybank

failed

protection,

to

and

superpriority claim

had

failed

to

Baybank

under 11

provide

to

under 11 U.S.C.

demonstrate

(3)

entitled

failure

was

U.S.C.

adequate

not

recover

506(c), (2)

of

adequate

entitled

to

507(b) even

protection

of

if Ralar

Baybank's

interest in the

bankruptcy

court's

undersecured

not

collateral.

The district court affirmed the

factual

finding

and found as a

entitled

that

Baybank

was

matter of law

that Baybank was

interest

nor

to postpetition

and fees

to a

superpriority claim for failure of adequate protection.

II.
II.
___

DISCUSSION
DISCUSSION
__________

A. Standard of Review
______________________

We

review

bankruptcy

court

contested

findings

challenged

and

of

reviewed only for clear

the

rulings

district court

fact

error.

by the

of

law

de
__

bankruptcy

See Western Auto

by

novo,
____

court

the

while

are

Supply Co.

___ ________________________

v. Savage Arms, Inc. (In re Savage Indus., Inc.), 43

__________________ ___________________________

714,

719-20 n.8 (1st

Cir. 1994).

We are free

F.3d

to affirm a

district court's ruling on any ground supported in the record

even

if the

referred

to

issue

in the

was

not

pleaded, tried,

proceedings

below.

Levy
____

or

otherwise

v.

Deposit Ins. Corp., 7 F.3d 1054, 1056 (1st Cir. 1993).

__________________

B. Postpetition Interest and Fees

__________________________________

-55

Federal
_______

Baybank

sought

postpetition

interest,

attorney

fees, and collection costs that it claimed it was entitled to

charge

the

Ralar under the terms

Bankruptcy

entitled

fees

to receive

and costs.

Texas v.
_____

Code,

11

only

of the loan

"oversecured"

postpetition interest

U.S.C.

agreement.

creditors

are

and loan-related

506(b);1 United Sav. Ass'n of

_____________________

Timbers of Inwood Forest Assocs., Ltd., 484

________________________________________

365, 372 (1988).

Under

U.S.

A creditor is oversecured when the value of

its collateral exceeds the

amount of its claim; postpetition

interest

and fees are allowable

oversecurity.

At

only to the

extent of that

See Timbers of Inwood Forest, 484 U.S. at 372.

___ ________________________

the

second

cash

collateral

hearing,

bankruptcy judge made these factual findings:

It seems clear, at least I certainly

find,

that

liquidation

inventory at this point, if

sought,
[sic],

were
that

bulk sales

permitted

to

of

this

the bank, as
foreclosure

a liquidation

only through

would produce a

disaster for

all, and certainly for the bank . . . .

____________________

1.

11 U.S.C.

To the

506(b) provides in relevant part:

extent

that an

allowed

secured

the

claim is secured by property the value of

which . . . is greater than the amount of
such claim, there shall be allowed to the
holder

of such

claim, interest

on such

claim, and any reasonable fees, costs, or

charges provided for under

the agreement

under which such claim arose.

-66

Both secured parties,2

now under
debtor's

water.

I find,

are

The question is,

the

proposal, is

it likely

to put

them

further under

that it
that

water.

And I

is not likely, it

find

is not likely

the debtor's proposal

will put the

secured parties further under water.3

"Under

water" in

the

context of

security interests

undersecured, i.e., the value of the collateral is

the amount of

the debt.

Dictionary 2491 (1986).

__________

evidentiary

hearing

means

less than

Webster's Third New International

__________________________________

Thus, at a

held

just

commencement of bankruptcy, the

fully litigated, two-day

two

weeks

after

the

bankruptcy judge found in no

uncertain terms that Baybank was an undersecured creditor.4

Baybank argues that

that

Baybank

was

factual finding,

that dictum

the bankruptcy judge's finding

undersecured

and that

was obiter
______

the courts

to disallow its claim

dictum,
______

below erred

not

in using

for postpetition interest

and

fees.

We disagree.

The bankruptcy judge stated clearly

____________________

2.

There was

another secured

creditor, junior

to Baybank,

also seeking relief from the stay because of lack of adequate

protection; only Baybank is a party to this appeal.

3.

Because

bankruptcy
Baybank

much
judge

of

Ralar's

determined

inventory was
that a

forced

seasonal,

the

liquidation by

would yield less than Ralar's plan to continue sales

and use the proceeds to purchase new in-season inventory.

We

assume that the judge's prediction proved to be correct; that

would

explain why

prepetition interest

Baybank recovered
in spite

all its

principal and

of the judge's

finding that,

based on liquidation value, Baybank was "under water."

4.

There has been no suggestion, nor is it plausible on this

record, that

Baybank was oversecured

at the time

of filing

but that the collateral value eroded substantially in the two

weeks between filing and the November 1 hearing.

-77

that he

was making a

finding, and there was

good reason to

make that finding in that context.

At

that

Baybank

the hearing

was "under

where

the bankruptcy

water,"

the precise

judge found

issue

to be

decided was

whether Baybank was adequately protected against

erosion

collateral

363(e).

in

The parties

value,

as

required

by

11

U.S.C.

presented

evidence

on the

effect

Ralar's use of cash collateral would likely have on the value

of Baybank's

collateral.

determination,

it

consider the value

of the debt

not to

In making

was entirely

the adequate protection

logical

form of

the judge

of the collateral relative to

owed Baybank.

Indeed, we think

determine collateral value in

hearing.

for

A sufficient equity

to

the amount

it would be odd

an adequate protection

cushion is itself a recognized

adequate protection, thus collateral

logical step in making an adequate

valuation is a

protection determination.

See, e.g., First Agric. Bank v. Jug End in the Berkshires, 46

___ ____ ______________________________________________

B.R. 892, 899 (Bankr. D. Mass. 1985) ("The classic protection

for a secured debt justifying continuation of the stay is the

existence

of an `equity

cushion.'").

bankruptcy judge's finding that

We

conclude that the

Baybank was undersecured was

not dictum, but a factual finding made as part of an adequate

protection determination.

Baybank has not shown that finding

to be clearly erroneous.

-88

Baybank

also

makes

this

related

argument:

finding

that a creditor

hearing early

is adequately protected,

in a Chapter 11

made at a

case, cannot be binding

at a

later hearing to determine whether that protection ultimately

proved

inadequate.

If

such a

finding

were binding,

the

argument

goes, then a court that once found protection to be

adequate

could

never later

find

that

failed, and section 507(b), which provides

claim where

nullity.

adequate protection

had

a "superpriority"

fails, would be

rendered a

We agree with that argument, as far as it goes, but

it falls short in this appeal.

is foreclosed by

collateral

the protection

We find that Baybank's appeal

the bankruptcy court's finding

hearing that

finding that Baybank

Baybank was

at the cash

undersecured, not
____________

was adequately protected.

____________________

its

We need not

determine whether there was

because

(1) Baybank,

entitled to

as

a failure of adequate protection

an undersecured

postpetition interest and

creditor, is

fees under

not

506(b)5

____________________

5.

Baybank might have argued, but did not, that even a valid

finding as to collateral value made at an adequate protection

hearing
made

has no res judicata effect when valuations are to be

___ ________

for other purposes at later proceedings.

re Richardson,
______________
(valuation of
not res
___

B.R.

161, 162

(Bankr.

W.D.N.Y.

creditor's collateral made for

judicata as
________

case for
res
___

97

See, e.g., In
___ ____ __

to later

different purposes).

judicata issue
________

valuation in
Instead,

by arguing that

one purpose is
same bankruptcy

Baybank avoided the

"The issue

Court is not the value of Baybank's collateral.

issue

is

whether or

not

protection order failed. .

not

material

potentially
presented

to

this

applicable
in a

the

1989)

before this
The material

Bankruptcy Court's

adequate

. . Thus, the valuation

issue is

appeal."

We

will

not

consider

arguments

that

are

not

squarely

party's appellate

brief. See,

e.g., United

___

____

______

-99

and (2) Ralar's use of the collateral caused no

to Baybank that could give rise to a claim under

we explain further below.

harm or loss

507(b), as

____________________

States
______

v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (appellate

_______

arguments not presented "squarely and distinctly" are

waived).

-1010

deemed

C. Baybank's Claim for Failure of Adequate Protection

______________________________________________________

Baybank asserts that Ralar's use of

the collateral

eroded its value, constituting an allowable claim entitled to

superpriority

under

11 U.S.C.

Baybank's claim is that

use of

507(b).6

The basis

it "suffered a loss" due

_______________

the collateral; most

of its brief

for

to Ralar's

focuses, however,

not on the nature or extent of that claimed loss,

but on how

such a loss can become an allowable superpriority claim under

507(b).

Baybank has failed to present a plausible argument

on the threshold issue of whether in fact it suffered a loss,

given that it recovered its prepetition claim in full.

____________________

6.

11 U.S.C.

If

507(b) provides:

the trustee, under

or 364 of

section 362, 363,

this title, provides

adequate

protection of the interest of a holder of

a claim secured by
the debtor and
protection,

a lien on property of

if, notwithstanding

such

creditor

such

has a

claim

allowable under subsection (a)(1) of this

section arising from
against such property
of this
lease

title, from

the stay of

under section
the

362

use, sale,

or

of such property under section 363

of this title, or

from the granting of a

lien under section 364(d) of

then

action

such

creditor's

this title,

claim under

such

subsection shall have priority over every

other claim under such subsection.

A "claim

allowable under subsection (a)(1)

is, by further cross-reference, an

allowed

under section

503(b)."

of this section"

"administrative expense[]
See 11

U.S.C.

507(a)(1).

___
The

relevant

expenses

"the

part

of

actual,

preserving the estate."

503(b)

allows

as

necessary

costs

and

See 11 U.S.C.
___

administrative
expenses

of

503(b).

-1111

The logical structure of Baybank's argument is: (1)

Ralar's

resulted

unprofitable

in an

operations using

erosion

in the

total

Baybank's collateral

value of

collateral

securing Baybank's

loan; (2) if the collateral

so eroded, the collateral value

owed Baybank,

been

and as an

eligible for

(3)

thus,

Baybank

to suffer a loss

interest and fees it

erosion in

Ralar's

the

to the extent

collateral

caused

of the postpetition

been no

507(b);

the

action against [its collateral]" as

(4) Ralar's use of the

resultant

"loss" to

necessary costs and expenses

the

use of

fees under

collateral value, and that loss is a "claim . . .

provided in

qualify as

interest and

would have

would have recovered had there

arising from the stay of

therefore

would have exceeded the debt

oversecured creditor it

postpetition

506(c);

had not been

Baybank

were

"actual,

of preserving the estate" which

an administrative claim under

erosion in collateral

collateral and

503(b); and, (5)

value resulted from

a failure of

adequate

507(b)

protection,

thus entitling

"superpriority"

expense claim.

for

its

Baybank

503(b)

administrative

This fascinating argument has led the parties

and two courts through a

complex maze of ambiguous statutory

provisions and opaque, inconsistent case law.

invitation

to receive

to enter the

We decline the

labyrinth ourselves, believing that

we need go no further than its threshold.

-1212

Because we find no

factual

finding that Baybank

that Baybank had no

fees

and thus

claim under

there

error in the bankruptcy judge's

was

was undersecured,

we conclude

entitlement to postpetition interest and

suffered no loss

503(b)

somehow

that might

and 507(b).

failure

of

Put

give rise

to a

differently, even if

adequate

protection

(a

question we do not reach), Baybank has no claim "arising from

the stay of action",

prepetition claim

entitled to

see
___

507(b), because it

recovered its

in full; as an undersecured creditor it is

no more.

On the contrary,

it appears (as

the

bankruptcy

judge

collateral

concluded)

that

benefitted Baybank,
__________

Ralar's

allowing it

use

to

prepetition claim in full in spite of its being

at the start of the Chapter 11 case.

is

not necessary to address

of

the

recover its

undersecured

In any event, it simply

whether there was

a failure of

adequate protection where an undersecured creditor ultimately

recovers

Ralar's

its prepetition claim

use

of

Baybank's

in full.

collateral

Baybank, therefore Baybank has

We

caused

no claim under

507(b).

III.
III.
____

CONCLUSION
CONCLUSION
__________

conclude that

no

loss

to

503(b) and

For

the reasons articulated

above, we

district court's judgment.

Affirmed.
Affirmed.
________

Costs to the appellees.

Costs to the appellees.
______________________

-1313

affirm the