Case: 09-40307 Document: 00511267458 Page: 1 Date Filed: 10/19/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 19, 2010
No. 09-40307 Lyle W. Cayce
Clerk
In the Matter of: SCOPAC;
SCOTIA DEVELOPMENT LLC;
SALMON CREEK LLC; SCOTIA INN INC;
BRITT LUMBER COMPANY, INC;
THE PACIFIC LUMBER COMPANY;
STEVE WILLS TRUCKING AND LOGGING LLC,
Debtors
BANK OF NEW YORK TRUST COMPANY NA, as Indenture trustee for the
Timber Notes ("Indenture Trustee");
CSG INVESTMENTS INC;
ANGELO, GORDON & COMPANY L.P.;
AURELIUS CAPITAL MANAGEMENT, L.P.;
DAVIDSON KEMPNER CAPITAL MANAGEMENT LLC;
SCOTIA REDWOOD FOUNDATION INC,
Appellants,
v.
PACIFIC LUMBER COMPANY;
SCOTIA PACIFIC LLC;
MARATHON STRUCTURED FINANCE FUND LP;
MENDOCINO REDWOOD COMPANY LLC;
COMMITTEE OF UNSECURED CREDITORS;
BANK OF AMERICA,
Appellees
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No. 09-40307
ANGELO, GORDON & CO LP;
AURELIUS CAPITAL MANAGEMENT LP;
DAVIDSON KEMPNER CAPITAL MANAGEMENT LLC,
Appellants,
v.
MARATHON STRUCTURED FINANCE FUND LP;
MENDOCINO REDWOOD COMPANY LLC;
COMMITTEE OF UNSECURED CREDITORS;
BANK OF AMERICA;
SCOTIA PACIFIC LLC;
PACIFIC LUMBER COMPANY,
Appellees
CSG INVESTMENTS, INC,
Appellant,
v.
SCOTIA PACIFIC LLC; PACIFIC LUMBER COMPANY,
Appellees
SCOTIA REDWOOD FOUNDATION, INC.,
Appellant,
v.
SCOTIA PACIFIC LLC; PACIFIC LUMBER COMPANY,
Appellees
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Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, PRADO, Circuit Judge, and OZERDEN,* District
Judge.
EDITH H. JONES, Chief Judge:
This appeal involves a dispute over compensation for diminution in the
value of collateral during the pendency of a Chapter 11 bankruptcy. The
appellants, holders of notes secured by the timber and non-timber assets of the
Scotia Pacific Co., LLC (“Scopac”), seek review of the district court’s dismissal
of their appeal for lack of subject matter jurisdiction and contend that the
bankruptcy court erred in denying their “superpriority” administrative claim on
the bankruptcy estate. 11 U.S.C. § 507(b). The Appellees, supporters of Scopac’s
reorganization plan, argue that the district court lacked jurisdiction due to the
Noteholders’ separate appeal of the plan confirmation order, an order this court
affirmed, in large part, last year. See In re Pacific Lumber Co., 584 F.3d 229 (5th
Cir. 2009) (Jones, C.J.). They further assert that the bankruptcy court correctly
calculated the value of the Noteholders’ administrative claim: zero. We hold that
jurisdiction exists and, on the merits, uphold an administrative priority claim
of $29.7 million.
I. BACKGROUND
In January 2007, the Pacific Lumber Company (“Palco”) and several of its
subsidiaries, including Scopac, filed petitions for relief under Chapter 11 of the
Bankruptcy Code. Scopac’s principal assets were 200,000 acres of redwood
timberland and cash and cash equivalents on hand. There were three major
*
District Judge of the Southern District of Mississippi, sitting by designation.
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creditors: the Noteholders were owed $714 million and had a lien on
substantially all of Scopac’s’s assets; Bank of America was owed $36.2 million
and had a senior lien on the same assets; and Marathon, a private equity fund,
was owed $160 million.
While the automatic stay was in place, the bankruptcy court entered a
series of cash collateral orders authorizing Palco to employ creditors’ assets for
the purpose of preserving the value of the estate and requiring it to provide
adequate protection to those creditors in return.1 These orders granted Bank of
America and the Noteholders a lien on all property of the estate not already
subject to their existing liens and a superpriority administrative claim to the
extent of the post-petition diminution of their interests.
In January 2008, the bankruptcy court entered an order terminating the
period of exclusivity during which only the debtors had been allowed to propose
plans for reorganization. See 11 U.S.C. § 1121. Marathon partnered with the
Mendocino Redwood Company, Inc., a timber company, to propose a
reorganization plan for Palco and Scopac. Their plan allowed for the payment
of the current value of the Noteholders’ secured claim on the collateral, the
payment of the principal and non-default interest on the Bank of America claim,
the payment of a portion of Scopac’s trade creditors’ debt, and the payment of a
portion of the debt owed to Palco’s unsecured creditors. Marathon would convert
the $160 million debt owed to it into equity, and Marathon and MRC would
contribute $580 million in cash to the new companies. Ultimately, this plan,
with slight amendments, was confirmed, and Marathon and MRC effectively
purchased the reorganized companies out of bankruptcy.
1
“Adequate protection” is a term of art in bankruptcy practice, defined in 11 U.S.C.
§ 361 and applied in §§ 362(d) and 363(e); in short, it is a payment, replacement lien, or other
relief sufficient to protect the creditor against diminution in the value of his collateral during
the bankruptcy.
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The major sticking point at confirmation was the confirmation-date value
of Scopac’s timberland and, by extension, the value of the Noteholders’ secured
claim. In April and May of 2008, the bankruptcy court held several hearings on
the proposed plan, at which both MRC/Marathon and the Noteholders presented
expert testimony on the value of the timberland at the time of confirmation. The
higher the value, the more that MRC and Marathon would have to pay to satisfy
the Noteholders’ claim.
In partial response to the proposed plan’s low-ball valuation of the
timberland, the Noteholders filed a motion for a superpriority administrative
expense claim pursuant to 11 U.S.C. § 507(b). They contended that the value
placed on their timberland under the terms of the MRC/Marathon plan reflected
a substantial post-petition decline for which they should be compensated. See
11 U.S.C. §§ 363(e), 361.
In June, the bankruptcy court issued a 119-page decision containing
findings of fact and conclusions of law on the MRC/Marathon plan. The court
found that the timberland was worth no more than $510 million—far less than
the face value of the debt held by the Noteholders. (The value of the timberland
at confirmation, a subject of the prior appeal, is not at issue in the present
action.2 ) It delayed entry of the confirmation order, however, to consider the
Noteholders’ § 507(b) claim.
To that end, the court conducted hearings in late June and early July at
which the parties presented evidence and expert testimony on the value of
Scopac’s timberland and other assets on the petition date. According to
undisputed testimony, the Noteholders’ collateral included Scopac’s $48.7 million
in non-timber assets, both cash and equivalents, on the petition date. From this,
2
The valuation was challenged and upheld in the appeal of the confirmation order. The
$510 million figure, this court found, “represents a reasonable accommodation of complex and
sometimes contradictory testimony.” 584 F.3d at 248.
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the court deducted $36.2 million for Bank of America’s higher-priority claim and
the $8.9 million that Scopac had paid the Noteholders’ representatives for
services during the bankruptcy. That left the Noteholders with a net secured
interest of $3.6 million in non-timber collateral.
The parties’ experts clashed over the value of the timberland on the
petition date. The Noteholders’ expert, James Fleming, testified that its value
had dropped significantly over the pendency of the bankruptcy due to a sharp
decline in timber prices and reduced harvest estimates. He proposed a petition-
date value of $646 million—still less than the full value of the Noteholders’
claim. The appellees’ expert, Richard LaMont, testified that the timberland had
actually appreciated since Scopac filed for bankruptcy due to a decline in the
discount rate applicable to long-term timber investments.
The bankruptcy court denied the Noteholders’ § 507(b) motion. It largely
credited LaMont’s testimony, concluding that the timberland had not declined
in value during the bankruptcy. Thus, the Noteholders were, on net, entitled to
$513.6 million: $510 million for the timberland and $3.6 million for other
collateral. MRC/Marathon agreed to modify its plan to provide for payment of
that amount, rendering unnecessary § 507(b) relief because the value of the
claim was zero.
On July 8, the modified MRC/Marathon plan was confirmed. The court
also entered a separate “Final Order” denying the § 507(b) motion.
The Noteholders filed separate notices of appeal to the district court from
the confirmation order and the § 507(b) order. In bankruptcy court, the
Noteholders also petitioned for a stay of confirmation, as well as direct appeal
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of the confirmation order to this court. The stay was not granted; direct appeal
was.3
In February 2009, the district court dismissed the Noteholders’ appeal of
the § 507(b) order. This court’s consideration of the appeal of the confirmation
order, it held, divested it of jurisdiction over the appeal of the § 507(b) order,
because the § 507(b) order “is an integral part of the Confirmation Order.” The
Noteholders moved for rehearing, requesting that the court vacate its dismissal
or, pursuant to 28 U.S.C. § 1631, transfer the § 507(b) appeal to this court. The
district court refused to employ § 1631.
In September 2009, this court largely affirmed the confirmation order,
based on its review of the bankruptcy court’s factual findings on valuation at the
time of confirmation. 584 F.3d at 247–49. The opinion mentioned, but did not
discuss or rule upon, the § 507(b) hearings and order. Id. at 239 n.11–12, 249
n.24.
II. STANDARD OF REVIEW
Whether a district court possesses subject matter jurisdiction is a question
of law reviewed de novo on appeal. Young v. Hosemann, 598 F.3d 184, 187 (5th
Cir. 2010).
This court reviews the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court. In re
Morrison, 555 F.3d 473, 480 (5th Cir. 2009). A bankruptcy court’s findings of
fact are reviewed for clear error and conclusions of law are reviewed de novo. Id.
Its findings of fact may be reversed only if the reviewing court has “the definite
and firm conviction that a mistake has been made.” Id.
3
This court accepted certification of direct appeal pursuant to 28 U.S.C. § 158(d) but
we denied, perhaps in error, a stay of confirmation pending appeal. See In re Pacific Lumber,
584 F.3d at 242-43.
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III. DISCUSSION
We consider, in turn, the district court’s jurisdiction over this appeal,
whether the appeal must be dismissed for equitable mootness due to the
substantial consummation of the reorganization plan, and the merits of the
Noteholders’ § 507(b) claim.
A. Jurisdiction
The Noteholders argue that the § 507(b) order was separate from the
confirmation order and that, accordingly, their appeal of the confirmation order
did not deprive the district court of jurisdiction to hear its challenge to the
§ 507(b) order.
At issue is the jurisdictional significance of the notice of appeal of the
confirmation order. “The filing of a notice of appeal is an event of jurisdictional
significance—it confers jurisdiction on the court of appeals and divests the
district court of its control over those aspects of the case involved in the appeal.”
Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58, 103 S. Ct. 400, 402
(1982). In bankruptcy, discrete controversies within the overall case framework
may often deserve separate appellate consideration: “Concepts of finality, for
example, are less concrete in the bankruptcy context and, thus, principles
disfavoring appeal of orders that do not dispose of an entire case are often less
rigorously adhered to in bankruptcy cases.” In re Transtexas Gas Corp.,
303 F.3d 571, 580 (5th Cir. 2002). As a result, this court has “repeatedly
recognized that, when a notice of appeal has been filed in a bankruptcy case, the
bankruptcy court retains jurisdiction to address elements of the bankruptcy
proceeding that are not the subject of that appeal.” Id. at 580 n.2. It may even
continue to address matters indirectly implicated in the appeal. Accordingly,
this court has specifically rejected “the broad rule that a bankruptcy court may
not consider any request which either directly or indirectly touches upon the
issues involved in a pending appeal and may not do anything which has any
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impact on the order on appeal.” In re Sullivan Cent. Plaza I, Ltd., 935 F.2d 723,
727 (5th Cir. 1991). These precedents point toward a functional test: “once an
appeal is pending, it is imperative that a lower court not exercise jurisdiction
over those issues which, although not themselves expressly on appeal,
nevertheless so impact the appeal so as to interfere with or effectively
circumvent the appeal process.” In re Whispering Pines Estates, Inc., 369 B.R.
752, 759 (B.A.P. 1st Cir. 2007).
The specific question, then, is whether separate consideration of the
§ 507(b) issue would interfere with or allow the circumvention of the appeal of
the confirmation order. We answer this question in the negative. The present
appeal does not challenge the confirmation order or the MRC/Marathon plan,
including the plan’s valuation of the Noteholders’ secured claim. Rather, it
challenges the bankruptcy court’s ruling on the diminution in value of the
secured claim after the petition date and the status of sales proceeds of collateral
before confirmation. These are independent factual inquiries, unrelated to
confirmation. Further, because the payment of administrative priority claims
must be made in cash, in full to confirm a reorganization plan (unless the parties
agree otherwise), 11 U.S.C. § 1129(a)(9)(A), all parties were on notice of the legal
priority of the Noteholders’ § 507(b) claim and thus of its potential financial
effect on confirmation. But the § 507(b) ruling was in no way dependent upon
the plan confirmation. Indeed, the bankruptcy court held separate hearings on
the § 507(b) motion, the parties briefed the issue apart from confirmation, and
the bankruptcy court deliberately issued its ruling on the motion in a separate
order. Both the parties and the bankruptcy court treated the two issues
distinctly. We follow their lead.
This appeal raises issues that could not have been raised in the appeal of
the confirmation order, seeks relief unavailable in that appeal, and could not
have had the effect of interfering with that appeal or circumventing it. For those
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reasons, the pendency of the confirmation order appeal did not deprive the
district court of jurisdiction over this appeal.
B. Equitable Mootness
The appellees argue that we should nonetheless dismiss this appeal as
being equitably moot because reversal of the bankruptcy court’s § 507(b) order
at this time could destroy the reorganization and irreparably injure third parties
who have relied on the reorganization plan since its confirmation.
The doctrine of equitable mootness is designed to protect concerns unique
to bankruptcy proceedings. Manges v. Seattle-First Nat’l Bank (Matter of
Manges), 29 F.3d 1034, 1038 (5th Cir. 1994). Equitable mootness is not an
Article III inquiry into whether a live case or controversy exists, but rather a
recognition that there is a point beyond which a court cannot order fundamental
changes in reorganization actions. Id. at 1039. There are three factors to
examine in an equitable mootness assessment: “(i) whether a stay has been
obtained, (ii) whether the plan has been ‘substantially consummated,’ and
(iii) whether the relief requested would affect either the rights of parties not
before the court or the success of the plan.” Id. The ultimate inquiry is whether
it is prudent to upset a plan of reorganization when a period of time has passed
after its implementation, id. (citation omitted), or, in other words, “whether the
court can grant relief without undermining the plan.” In re SI Restructuring,
Inc., 542 F.3d 131, 136 (5th Cir. 2008).
The first two prongs are not at issue. The Noteholders were denied a stay,
and the plan has been substantially consummated, as defined in 11 U.S.C.
§ 1101(2), over the past two years. See In re Pacific Lumber Co., 584 F.3d at 242
(describing consummation). That leaves the question of impact on the
reorganization and third parties.
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This issue was raised, in a similar fashion, in the appeal of the
confirmation order. We addressed it at some length—in particular, its
application where full recovery may be impossible due to consummation:
Other courts have carefully weighed the consequences before
applying equitable mootness to issues raised on appeal of plan
confirmation orders. Notably, they hold that appellate review need
not be declined when, because a plan has been substantially
consummated, a creditor could not obtain full relief. If the appeal
succeeds, the courts say, they may fashion whatever relief is
practicable. After all, appellants “would readily accept some
fractional recovery that does not impair feasibility or affect parties
not before this Court, rather than suffer the mootness of [their]
appeal as a whole.”
Id. at 241 (internal citations omitted, insertion in original).
The court considered mootness on a claim-by-claim basis and held moot
only two claims for which there was “no remedy . . . other than unwinding the
plan.” Id. at 251. The most analogous claim to those at issue in the present case
was the Noteholders’ challenge of the valuation of their secured claim, which (as
here) could have imposed a very significant liability on the estate, to the great
detriment of both the success of the reorganization and third parties. The court
found the issue not moot, due to the court’s ability to fashion alternative forms
of relief that did not upset the expectations of third parties. Id. at 243–44.
The appellees here argue that the relief sought by the Noteholders would
upset third-party expectations because the reorganized entity does not have
liquid assets on hand to pay a judgment of even a few million dollars. This issue
is controlled by Pacific Lumber. First, the valuation claim in that case
threatened a similarly-sized judgment on a similarly cash-poor entity, which had
then just emerged from bankruptcy. Second, that a judgment might have
“adverse consequences to MRC/Marathon is not only a natural result of any
ordinary appeal—one side goes away disappointed—but adverse appellate
consequences were foreseeable to them as sophisticated investors who opted to
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press the limits of bankruptcy confirmation and valuation rules.” Id. at 244.
MRC and Marathon should not be considered third parties for the purposes of
mootness analysis in this appeal any more than in the prior appeal of the
confirmation order. Third and finally, so long as there is the possibility of
“fractional recovery,” the Noteholders need not suffer the mootness of their
claims.
Based on Pacific Lumber, the Noteholders’ appeal is not subject to
dismissal for equitable mootness.4
C. § 507(b) Claim
The Noteholders contend that the bankruptcy court erred in fixing the
value of their § 507(b) claim.
This court has explained that adequate protection of a secured creditor’s
collateral and its fallback administrative priority claim are tradeoffs for the
automatic stay that prevents foreclosure on debtors’ assets: the debtor receives
“breathing room” to reorganize, while the present value of a creditor’s interests
is protected throughout the reorganization. In re Stembridge, 394 F.3d 383, 387
(5th Cir. 2004). A secured creditor whose collateral is subject to the automatic
stay may first seek adequate protection for diminution of the value of the
property, 11 U.S.C. §§ 362(d)(1), 363(e), 364(d), and then, if the protection
ultimately proves inadequate, a priority administrative claim under § 507(b).
Section 507(b) of the Bankruptcy Code allows an administrative expense claim
under § 503(b) where adequate protection payments prove insufficient to
compensate a secured creditor for the diminution in the value of its collateral.
“It is an attempt to codify a statutory fail-safe system in recognition of the
ultimate reality that protection previously determined the ‘indubitable
4
In the interests of judicial economy and finality, we also decline the appellees’
suggestion that the legal questions presented in this appeal be remanded for consideration by
the district court.
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equivalent’ . . . may later prove inadequate.” In re Carpet Ctr. Leasing Co., Inc.,
4 F.3d 940, 941 (11th Cir. 1993) (internal quotation marks and citations
omitted).
On six occasions, the bankruptcy court entered orders authorizing Scopac
to use the Noteholders’ and Bank of America’s cash collateral to operate its
business and preserve the estate, and in each order it required Scopac to provide
adequate protection under § 363(e).5 At issue is the extent of that protection.
1. Timber Sales Proceeds
The Noteholders first argue that the bankruptcy court erred when it
declined to recognize their lien on $29.7 million in proceeds that Scopac took in
from timber sales during the pendency of the bankruptcy. At the petition date,
the Noteholders held a secured claim on Scopac’s non-timber collateral of $48.7
million, subject to Bank of America’s higher priority lien of $36.2 million. The
bankruptcy court, in calculating the value of the Noteholders’ § 507(b) claim,
deducted the $36.2 million from the cash collateral available at the filing date
only, leaving $12.5 million, from which it further deducted the $8.9 million that
Scopac had paid the Noteholders’ professionals for services during the
bankruptcy litigation. This left a $3.6 million interest. The Noteholders assert,
and we agree, that this conclusion was flawed.
5
The cash collateral order of March 18, 2008, for example, directed that:
Each of BofA and the Trustee . . . is also granted a superpriority cost of administration priority
claim under 11 U.S.C. § 507(b) to the extent of the postpetition diminution of their respective
interests in the Prepetition Collateral and the Cash Collateral.
....
No costs or expenses of administration or other costs or expenses of Scopac that have been or
may be incurred in its Chapter 11 case shall be charged either against BofA’s or the Trustee’s
Prepetition Collateral or Cash Collateral pursuant to Section 506(c) of the Bankruptcy Code
without the prior express written consent of each of BofA and the Trustee.
Scopac’s Third Final Order (Agreed) Authorizing Use of Cash Collateral Pursuant to Section
363 of the Bankruptcy Code at 10, In re Scotia Dev. LLC, et al., No. 07-20027-C-11 (Bankr.
S.D. Tex. Mar. 18, 2008).
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Each of the court’s cash collateral orders granted Bank of America and the
Noteholders (in varying language):
[A] first priority, perfected replacement lien and security interest in
all the property of Scopac of the same type as the Prepetition
Collateral in which BofA and the Trustee do not have a lien because
of the operation of Section 552 of the Bankruptcy Code and in the
Cash Collateral of Scopac, to the extent of the postpetition
diminution of its interests in the Prepetition Collateral and the
Cash Collateral.
Further, the orders were perfectly clear that the “proceeds and product of the
Prepetition Collateral constitute cash collateral.” See 11 U.S.C. § 363(a)
(defining “cash collateral”).
The cash collateral orders protected the Noteholders in two ways. They
protected against a diminution in the value of the $48.7 million cash collateral
that existed at the date of filing. They also specifically granted a continuing lien
in the proceeds of the prepetition collateral, i.e., the $29.7 million generated
proceeds from timber sales during the reorganization. The bankruptcy court
entirely omitted the second component from its calculations and failed to credit
those proceeds to the Noteholders’ § 507(b) claim.
Appellees object to the Noteholders’ $29.7 million claim because, they say,
this contention was waived in the trial court, the Appellees were prejudiced
thereby, and the Noteholders “have no valid superpriority claim to Scopac’s net
proceeds.” Br. for Appellees at 42. Their attempt to dispute, at this late stage,
the precise terms of the cash collateral orders quoted above is unavailing. The
questions of waiver and prejudice are closer, but ultimately also unpersuasive.
We have carefully reviewed the Noteholders’ pleadings and briefing in
connection with their § 507(b) claim. The claim rested clearly on the provisions
of the cash collateral orders. Testimony at the hearing established that the cash
collateral included $48.7 million at the date of filing and $29.7 million additional
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revenue derived during the case from timber proceeds. At several points during
this litigation, the Noteholders observed that this amount ($29.7 million) closely
approximated what the court had authorized in payment to various bankruptcy
professionals during the case. Although the Noteholders may have consented to
payments to professionals, the Appellees concede that “in exchange they were
granted adequate protection.” Br. for Appellees at 46, n.17. The Noteholders
had the burden to prove their entitlement to a § 507(b) priority claim. Ford
Motor Credit Co. v. Dobbins, 35 F.3d 860, 866 (4th Cir. 1994). They did so by
developing the evidence and resting on the terms of multiple cash collateral
orders. Although they could have put this point more precisely,6 their
entitlement to a lien and priority claim on nearly $30 million in proceeds from
the sale of their timber collateral did not evaporate, nor was it waived. With the
correct and complete amounts of cash collateral put before it, the court should
have included the $29.7 million proceeds for timber sales. The Appellees are not
prejudiced by this result, which flows directly from multiple cash collateral
orders subscribed by Scopac and the bankruptcy court. Nor should Appellees
have any claim to renege on the cash collateral orders for equitable reasons.
2. Payment to Noteholders’ Professionals
The Noteholders next argue that the bankruptcy court improperly
deducted from their § 507(b) claim $8.9 million in payments that Scopac made
6
Therefore, under Section 507(b), the Indenture Trustee is entitled
to a superpriority administrative expense claim for the
diminution of value in its collateral. This includes a
superpriority administrative expense claim for the cash collateral
that has been expended by Scopac, including but not limited to
the over $20 million in professional fees and other expenses paid
by Scopac.
Motion to Grant Indenture Trustee a Superpriority Administrative Expense Claim Pursuant
to Section 507(b) at 4, In re Scotia Dev. LLC, et al., No. 07-20027-C-11 (Bankr. S.D. Tex.
May 1, 2008).
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to the Noteholders’ professionals out of cash collateral proceeds.7 Principally,
they urge that the court erred in deducting the sum after it had failed to count
the $29.7 million in their favor for the § 507(b) claim.
The proceeds that came into the estate during the bankruptcy, discussed
above, were almost entirely consumed by professional fees and related expenses
incurred by the estate, the creditors’ committees, and the Noteholders. These
payments were authorized by the cash collateral orders. The basis for the
payments to the Noteholders’ professionals was the Noteholders’ lien on those
proceeds. By denying the Noteholders’ claim on the proceeds, the bankruptcy
court effectively charged the Noteholders for all of these expenses, including
those incurred by the estate and the committees. It then deducted the
Noteholders’ own professionals’ fees, for a second time, from the amount that
remained. This was clear error.
The result of this re-evaluation of the cash collateral portion of the § 507(b)
motion is as follows:
7
They also argue that this sum should not have been deducted from their claim
because they would not have incurred these expenses but for the automatic stay. The
Noteholders rely on neither statutory provisions nor the cash collateral orders to support this
argument. They contend only that this case is “unique.” Nothing unique inheres in this
situation.
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Cash Collateral at date of bankruptcy: $48.7 million
Net timber sales proceeds: + $29.7 million
(Bank of America higher lien): S $36.2 million
Net interest in cash collateral: = $42.2 million
(Payment under MRC/Marathon Plan S$3.6 million
for cash collateral)
(Payment to Noteholders’ professionals
from timber proceeds) S$8.9 million
Net owed for § 507(b) adequate protection $29.7 million
The Noteholders were entitled to receive an additional $29.7 million in payment
of their administrative priority claim.
3. Declining Value of Collateral
Finally, the Noteholders assert a claim for an alleged post-petition decline
in the value of their secured interest in Scopac’s timberland between the date of
filing and the date of the hearing. They claim that the bankruptcy court erred
in its determination that the property did not, in fact, decline in value.
The bankruptcy court’s first error, they assert, was to compare the
timberland’s foreclosure value at the petition date to its fair-market value at the
date of confirmation, which had the effect of obscuring the decline in the value
of the property. An asset’s foreclosure value is typically lower than its fair-
market value. Assocs. Commer. Corp. v. Rash, 520 U.S. 953, 958 (1997)
(explaining that fair-market value is “generally higher than what a secured
creditor could realize pursuing . . . foreclosure . . . . ”). In general, when valuing
a secured claim under 11 U.S.C. § 506(a)(1), fair-market value is the appropriate
measure. Id. at 965.
The bankruptcy court’s ruling from the bench belies the argument that it
looked exclusively to foreclosure value:
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No. 09-40307
[E]ven looking at the fair market value, the evidence showed that
from filing to confirmation, the forests grew so that there are more
trees. Capital improvements were made—roads, tree planting,
watershed analysis—which freed more areas for harvesting.
Perhaps the roads don’t add any value, as Mr. Dean suggested, but
the tree planting and the watershed analysis did free up more areas
for harvesting, which ultimately will lead to more value. All of this
may lead to a value being higher at confirmation, but the Court is
not prepared to make that finding that there has been any change
in value since the filing.
The court proceeded to discuss additional evidence pertaining to the relative
change in value of the timber itself, citing a decrease in the discount rate since
filing, which had the effect of increasing the market value of the forest. On net,
the court found that, “the value of the forests has remained relatively constant
since the filing.” This is the proper comparison, and no legal error occurred.
The crux of this challenge is to the bankruptcy court’s factual findings,
which are subject to review for clear error. The court reached its determination
following three days of hearings on the § 507(b) issue, extensive briefing by both
parties, and testimony by several experts. The Appellees’ chief expert, LaMont,
is a timberland appraiser who testified that the value of the timberland had
increased due to forest growth, stable log prices, and the decline in the discount
rate. The Noteholders and their experts challenged several aspects of LaMont’s
methodology, but the court ultimately found him to be credible and his testimony
creditable. MRC’s chairman also testified, stating that MRC’s internal valuation
model also showed an increase in the value of the timberland due to the discount
rate.
The evidence on which the court premised its determination is strikingly
similar—the same experts, the same types of evidence, the same methodologies,
etc.—to that underlying the confirmation order appeal. This court ultimately
concluded that the bankruptcy court was justified in giving LaMont’s testimony
“significant weight” and that its valuation finding was not clearly wrong. In re
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Pacific Lumber, 584 F.3d at 248. It is difficult to see, given the similarity of the
issues and record, how a different result could be reached in the present appeal.
The Noteholders also fault the bankruptcy court for relying on “hindsight
analysis” to determine the value of timberland on the petition date. This, too,
is a factual challenge. As the Noteholders acknowledge repeatedly, the court’s
task was to determine whether the timberland had declined in value and, if so,
by how much. A methodology that works backwards from a later valuation
would suffice. This argument, again, is with the bankruptcy court’s evaluation
and application of the expert testimony. And the expert testimony that the
Noteholders criticize, LaMont’s, was one among several factors in the
bankruptcy court’s final determination. The court relied primarily on a decline
in the discount rate, a fact that the Noteholders do not challenge.
We are therefore without “the definite and firm conviction that a mistake
has been made.”
IV. CONCLUSION
Being satisfied with our appellate jurisdiction, we have concluded that the
bankruptcy court undervalued the Noteholders’ priority administrative § 507(b)
claim by $29.7 million. The court erred in not crediting their interest with
timber sales proceeds that were received during the bankruptcy, on which they
had a lien and priority interest arising from the court’s many cash collateral
orders. To deprive the Noteholders of this amount would undermine a
fundamental protection for secured parties whose collateral is used by the debtor
during its reorganization efforts.
The judgment of the district court is VACATED, and the case is
REMANDED with instructions to enter judgment for the Noteholders for a $29.7
million administrative priority claim against the reorganized debtor.
VACATED and REMANDED with Instructions.
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