Bank of New York Trust Company, et al v. Scotia Pacific LLC, et al


PUBLISHED OPINION FILED. [09-40307 Vacated and Remanded with instructions] Judge: EHJ , Judge: ECP , Judge: HSO. Mandate pull date is 11/09/2010 [09-40307]

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Bank of New York Trust Company, et al v. Scotia Pacific LLC, et al Doc. 0 Case: 09-40307 Document: 00511267458 Page: 1 Date Filed: 10/19/2010 IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED October 19, 2010 N o . 09-40307 Lyle W. Cayce Clerk I n 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 B A N K OF NEW YORK TRUST COMPANY NA, as Indenture trustee for the T im b e r 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. P A C I F I C LUMBER COMPANY; SCOTIA PACIFIC LLC; MARATHON STRUCTURED FINANCE FUND LP; MENDOCINO REDWOOD COMPANY LLC; COMMITTEE OF UNSECURED CREDITORS; BANK OF AMERICA, Appellees Case: 09-40307 Document: 00511267458 Page: 2 Date Filed: 10/19/2010 No. 09-40307 A N G E L O , GORDON & CO LP; AURELIUS CAPITAL MANAGEMENT LP; DAVIDSON KEMPNER CAPITAL MANAGEMENT LLC, Appellants, v. M A R A T H O N STRUCTURED FINANCE FUND LP; MENDOCINO REDWOOD COMPANY LLC; COMMITTEE OF UNSECURED CREDITORS; BANK OF AMERICA; SCOTIA PACIFIC LLC; PACIFIC LUMBER COMPANY, Appellees C S G INVESTMENTS, INC, Appellant, v. S C O T I A PACIFIC LLC; PACIFIC LUMBER COMPANY, Appellees S C O T I A REDWOOD FOUNDATION, INC., Appellant, v. S C O T I A PACIFIC LLC; PACIFIC LUMBER COMPANY, Appellees 2 Case: 09-40307 Document: 00511267458 Page: 3 Date Filed: 10/19/2010 No. 09-40307 A p p e a l from the United States District Court fo r the Southern District of Texas B e fo r e JONES, Chief Judge, PRADO, Circuit Judge, and OZERDEN,* District Judge. E D I T H H. JONES, Chief Judge: T h is appeal involves a dispute over compensation for diminution in the v a lu e of collateral during the pendency of a Chapter 11 bankruptcy. The a p p e lla n t s , 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 o f their appeal for lack of subject matter jurisdiction and contend that the b a n k r u p t c y court erred in denying their "superpriority" administrative claim on t h e bankruptcy estate. 11 U.S.C. 507(b). The Appellees, supporters of Scopac's r e o r g a n iz a t io n plan, argue that the district court lacked jurisdiction due to the N o te h o ld e r s ' separate appeal of the plan confirmation order, an order this court a ffir m e d , in large part, last year. See In re Pacific Lumber Co., 584 F.3d 229 (5th C ir . 2009) (Jones, C.J.). They further assert that the bankruptcy court correctly c a lc u la te d the value of the Noteholders' administrative claim: zero. We hold that ju r is d ic t io n exists and, on the merits, uphold an administrative priority claim o f $29.7 million. I. BACKGROUND I n January 2007, the Pacific Lumber Company ("Palco") and several of its s u b s id ia r ie s , including Scopac, filed petitions for relief under Chapter 11 of the B a n k r u p t c y Code. Scopac's principal assets were 200,000 acres of redwood t im b e r la n d and cash and cash equivalents on hand. There were three major * District Judge of the Southern District of Mississippi, sitting by designation. 3 Case: 09-40307 Document: 00511267458 Page: 4 Date Filed: 10/19/2010 No. 09-40307 c r e d it o r s : the Noteholders were owed $714 million and had a lien on s u b s t a n t ia lly all of Scopac's's assets; Bank of America was owed $36.2 million a n d had a senior lien on the same assets; and Marathon, a private equity fund, w a s owed $160 million. While the automatic stay was in place, the bankruptcy court entered a s e r ie s of cash collateral orders authorizing Palco to employ creditors' assets for t h e purpose of preserving the value of the estate and requiring it to provide a d e q u a t e protection to those creditors in return.1 These orders granted Bank of A m e r ic a and the Noteholders a lien on all property of the estate not already s u b je c t to their existing liens and a superpriority administrative claim to the e x t e n t of the post-petition diminution of their interests. In January 2008, the bankruptcy court entered an order terminating the p e r io d of exclusivity during which only the debtors had been allowed to propose p la n s for reorganization. See 11 U.S.C. 1121. Marathon partnered with the M e n d o c in o Redwood Company, Inc., a timber company, to propose a r e o r g a n iz a t io n plan for Palco and Scopac. Their plan allowed for the payment o f the current value of the Noteholders' secured claim on the collateral, the p a y m e n t of the principal and non-default interest on the Bank of America claim, t h e payment of a portion of Scopac's trade creditors' debt, and the payment of a p o r t io n of the debt owed to Palco's unsecured creditors. Marathon would convert t h e $160 million debt owed to it into equity, and Marathon and MRC would c o n t r ib u t e $580 million in cash to the new companies. Ultimately, this plan, w it h slight amendments, was confirmed, and Marathon and MRC effectively p u r c h a s e d the reorganized companies out of bankruptcy. "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. 1 4 Case: 09-40307 Document: 00511267458 Page: 5 Date Filed: 10/19/2010 No. 09-40307 T h e major sticking point at confirmation was the confirmation-date value o f Scopac's timberland and, by extension, the value of the Noteholders' secured c la im . In April and May of 2008, the bankruptcy court held several hearings on t h e proposed plan, at which both MRC/Marathon and the Noteholders presented e x p e r t testimony on the value of the timberland at the time of confirmation. The h ig h e r the value, the more that MRC and Marathon would have to pay to satisfy t h e Noteholders' claim. I n partial response to the proposed plan's low-ball valuation of the t im b e r la n d , the Noteholders filed a motion for a superpriority administrative e x p e n s e claim pursuant to 11 U.S.C. 507(b). They contended that the value p la c e d on their timberland under the terms of the MRC/Marathon plan reflected a substantial post-petition decline for which they should be compensated. See 1 1 U.S.C. 363(e), 361. I n June, the bankruptcy court issued a 119-page decision containing fin d in g s of fact and conclusions of law on the MRC/Marathon plan. The court fo u n d that the timberland was worth no more than $510 million--far less than t h e face value of the debt held by the Noteholders. (The value of the timberland a t confirmation, a subject of the prior appeal, is not at issue in the present a c t io n .2 ) It delayed entry of the confirmation order, however, to consider the N o te h o ld e r s ' 507(b) claim. T o that end, the court conducted hearings in late June and early July at w h ic h the parties presented evidence and expert testimony on the value of S c o p a c 's timberland and other assets on the petition date. According to u n d isp u te d testimony, the Noteholders' collateral included Scopac's $48.7 million in non-timber assets, both cash and equivalents, on the petition date. From this, 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. 2 5 Case: 09-40307 Document: 00511267458 Page: 6 Date Filed: 10/19/2010 No. 09-40307 t h e court deducted $36.2 million for Bank of America's higher-priority claim and t h e $8.9 million that Scopac had paid the Noteholders' representatives for s e r v ic e s during the bankruptcy. That left the Noteholders with a net secured in t e r e s t of $3.6 million in non-timber collateral. The parties' experts clashed over the value of the timberland on the p e t it io n date. The Noteholders' expert, James Fleming, testified that its value h a d dropped significantly over the pendency of the bankruptcy due to a sharp d e c lin e in timber prices and reduced harvest estimates. He proposed a petitiond a t e value of $646 million--still less than the full value of the Noteholders' c la im . The appellees' expert, Richard LaMont, testified that the timberland had a c t u a lly appreciated since Scopac filed for bankruptcy due to a decline in the d is c o u n t rate applicable to long-term timber investments. The bankruptcy court denied the Noteholders' 507(b) motion. It largely c r e d it e d LaMont's testimony, concluding that the timberland had not declined in value during the bankruptcy. Thus, the Noteholders were, on net, entitled to $ 5 1 3 .6 million: $510 million for the timberland and $3.6 million for other c o lla t e r a l. MRC/Marathon agreed to modify its plan to provide for payment of t h a t amount, rendering unnecessary 507(b) relief because the value of the c la im was zero. O n July 8, the modified MRC/Marathon plan was confirmed. The court a ls o entered a separate "Final Order" denying the 507(b) motion. The Noteholders filed separate notices of appeal to the district court from t h e confirmation order and the 507(b) order. In bankruptcy court, the N o te h o ld e r s also petitioned for a stay of confirmation, as well as direct appeal 6 Case: 09-40307 Document: 00511267458 Page: 7 Date Filed: 10/19/2010 No. 09-40307 o f the confirmation order to this court. The stay was not granted; direct appeal w a s .3 I n February 2009, the district court dismissed the Noteholders' appeal of t h e 507(b) order. This court's consideration of the appeal of the confirmation o r d e r , it held, divested it of jurisdiction over the appeal of the 507(b) order, b e c a u s e the 507(b) order "is an integral part of the Confirmation Order." The N o te h o ld e r s moved for rehearing, requesting that the court vacate its dismissal o r , pursuant to 28 U.S.C. 1631, transfer the 507(b) appeal to this court. The d is t r ic t court refused to employ 1631. In September 2009, this court largely affirmed the confirmation order, b a s e d on its review of the bankruptcy court's factual findings on valuation at the t im e of confirmation. 584 F.3d at 24749. The opinion mentioned, but did not d is c u s s or rule upon, the 507(b) hearings and order. Id. at 239 n.1112, 249 n .2 4 . II. STANDARD OF REVIEW W h e th e r a district court possesses subject matter jurisdiction is a question o f law reviewed de novo on appeal. Young v. Hosemann, 598 F.3d 184, 187 (5th C ir . 2010). T h is court reviews the decision of a district court, sitting as an appellate c o u r t, by applying the same standards of review to the bankruptcy court's fin d in g s of fact and conclusions of law as applied by the district court. In re M o r r is o n , 555 F.3d 473, 480 (5th Cir. 2009). A bankruptcy court's findings of fa c t 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 a n d firm conviction that a mistake has been made." Id. 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. 3 7 Case: 09-40307 Document: 00511267458 Page: 8 Date Filed: 10/19/2010 No. 09-40307 I I I . DISCUSSION W e consider, in turn, the district court's jurisdiction over this appeal, w h e t h e r the appeal must be dismissed for equitable mootness due to the s u b s t a n t ia l consummation of the reorganization plan, and the merits of the N o te h o ld e r s ' 507(b) claim. A. Jurisdiction T h e Noteholders argue that the 507(b) order was separate from the c o n fir m a t io n order and that, accordingly, their appeal of the confirmation order d id 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 c o n fir m a t io n order. "The filing of a notice of appeal is an event of jurisdictional s ig n ific a n c e -- it confers jurisdiction on the court of appeals and divests the d is t r ic t 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 (1 9 8 2 ). In bankruptcy, discrete controversies within the overall case framework m a y often deserve separate appellate consideration: "Concepts of finality, for e x a m p le , are less concrete in the bankruptcy context and, thus, principles d is fa v o r in g appeal of orders that do not dispose of an entire case are often less r i g o r o u s ly adhered to in bankruptcy cases." 3 0 3 F.3d 571, 580 (5th Cir. 2002). In re Transtexas Gas Corp., As a result, this court has "repeatedly r e c o g n iz e d that, when a notice of appeal has been filed in a bankruptcy case, the b a n k r u p t c y court retains jurisdiction to address elements of the bankruptcy p r o c e e d in g that are not the subject of that appeal." Id. at 580 n.2. It may even c o n t i n u e to address matters indirectly implicated in the appeal. Accordingly, t h is court has specifically rejected "the broad rule that a bankruptcy court may n o t consider any request which either directly or indirectly touches upon the is s u e s involved in a pending appeal and may not do anything which has any 8 Case: 09-40307 Document: 00511267458 Page: 9 Date Filed: 10/19/2010 No. 09-40307 im p a c t on the order on appeal." In re Sullivan Cent. Plaza I, Ltd., 935 F.2d 723, 7 2 7 (5th Cir. 1991). These precedents point toward a functional test: "once an a p p e a l is pending, it is imperative that a lower court not exercise jurisdiction o v e r those issues which, although not themselves expressly on appeal, n e v e r t h e le s s so impact the appeal so as to interfere with or effectively c ir c u m v e n t the appeal process." In re Whispering Pines Estates, Inc., 369 B.R. 7 5 2 , 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 t h e confirmation order. We answer this question in the negative. The present a p p e a l does not challenge the confirmation order or the MRC/Marathon plan, in c lu d in g the plan's valuation of the Noteholders' secured claim. Rather, it c h a lle n g e s the bankruptcy court's ruling on the diminution in value of the s e c u r e d claim after the petition date and the status of sales proceeds of collateral b e fo r e confirmation. These are independent factual inquiries, unrelated to c o n fir m a t io n . Further, because the payment of administrative priority claims m u s t be made in cash, in full to confirm a reorganization plan (unless the parties a g r e e otherwise), 11 U.S.C. 1129(a)(9)(A), all parties were on notice of the legal p r io r it y of the Noteholders' 507(b) claim and thus of its potential financial e ffe c t on confirmation. But the 507(b) ruling was in no way dependent upon t h e plan confirmation. Indeed, the bankruptcy court held separate hearings on t h e 507(b) motion, the parties briefed the issue apart from confirmation, and t h e bankruptcy court deliberately issued its ruling on the motion in a separate order. Both the parties and the bankruptcy court treated the two issues d is t in c t ly . We follow their lead. This appeal raises issues that could not have been raised in the appeal of t h e confirmation order, seeks relief unavailable in that appeal, and could not h a v e had the effect of interfering with that appeal or circumventing it. For those 9 Case: 09-40307 Document: 00511267458 Page: 10 Date Filed: 10/19/2010 No. 09-40307 r e a s o n s , the pendency of the confirmation order appeal did not deprive the d is t r ic t court of jurisdiction over this appeal. B . Equitable Mootness T h e appellees argue that we should nonetheless dismiss this appeal as b e in g equitably moot because reversal of the bankruptcy court's 507(b) order a t this time could destroy the reorganization and irreparably injure third parties w h o have relied on the reorganization plan since its confirmation. T h e doctrine of equitable mootness is designed to protect concerns unique t o bankruptcy proceedings. Manges v. Seattle-First Nat'l Bank (Matter of M a n g e s ), 29 F.3d 1034, 1038 (5th Cir. 1994). Equitable mootness is not an A r t ic le III inquiry into whether a live case or controversy exists, but rather a r e c o g n it io n that there is a point beyond which a court cannot order fundamental c h a n g e s in reorganization actions. Id. at 1039. There are three factors to e x a m i n e in an equitable mootness assessment: "(i) whether a stay has been o b ta in e d , (ii) whether the plan has been `substantially consummated,' and (iii) whether the relief requested would affect either the rights of parties not b e fo r e 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 a ft e r its implementation, id. (citation omitted), or, in other words, "whether the c o u r t can grant relief without undermining the plan." In re SI Restructuring, I n c ., 542 F.3d 131, 136 (5th Cir. 2008). The first two prongs are not at issue. The Noteholders were denied a stay, a n d 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 (d e s c r ib in g consummation). That leaves the question of impact on the r e o r g a n iz a t io n and third parties. 10 Case: 09-40307 Document: 00511267458 Page: 11 Date Filed: 10/19/2010 No. 09-40307 T h is issue was raised, in a similar fashion, in the appeal of the c o n fir m a t i o n order. We addressed it at some length--in particular, its a p p lic a t io n where full recovery may be impossible due to consummation: O t h e r courts have carefully weighed the consequences before a p p ly in g equitable mootness to issues raised on appeal of plan c o n fir m a t io n orders. Notably, they hold that appellate review need n o t be declined when, because a plan has been substantially c o n s u m m a t e d , a creditor could not obtain full relief. If the appeal s u c c e e d s , the courts say, they may fashion whatever relief is p r a c t ic a b le . After all, appellants "would readily accept some fr a c t io n a l recovery that does not impair feasibility or affect parties n o t before this Court, rather than suffer the mootness of [their] a p p e a l as a whole." Id. at 241 (internal citations omitted, insertion in original). T h e court considered mootness on a claim-by-claim basis and held moot o n ly two claims for which there was "no remedy . . . other than unwinding the p la n ." Id. at 251. The most analogous claim to those at issue in the present case w a s the Noteholders' challenge of the valuation of their secured claim, which (as h e r e ) could have imposed a very significant liability on the estate, to the great d e t r im e n t of both the success of the reorganization and third parties. The court fo u n d the issue not moot, due to the court's ability to fashion alternative forms o f relief that did not upset the expectations of third parties. Id. at 24344. The appellees here argue that the relief sought by the Noteholders would u p s e t third-party expectations because the reorganized entity does not have liq u id assets on hand to pay a judgment of even a few million dollars. This issue i s controlled by Pacific Lumber. First, the valuation claim in that case t h r e a te n e d a similarly-sized judgment on a similarly cash-poor entity, which had t h e n just emerged from bankruptcy. Second, that a judgment might have " a d v e r s e consequences to MRC/Marathon is not only a natural result of any o r d in a r y appeal--one side goes away disappointed--but adverse appellate c o n s e q u e n c e s were foreseeable to them as sophisticated investors who opted to 11 Case: 09-40307 Document: 00511267458 Page: 12 Date Filed: 10/19/2010 No. 09-40307 p r e s s the limits of bankruptcy confirmation and valuation rules." Id. at 244. MRC and Marathon should not be considered third parties for the purposes of m o o t n e s s analysis in this appeal any more than in the prior appeal of the c o n fir m a t io n order. Third and finally, so long as there is the possibility of " f r a c t io n a l recovery," the Noteholders need not suffer the mootness of their c la im s . Based on Pacific Lumber, the Noteholders' appeal is not subject to d is m is s a l for equitable mootness.4 C . 507(b) Claim T h e Noteholders contend that the bankruptcy court erred in fixing the v a lu e of their 507(b) claim. This court has explained that adequate protection of a secured creditor's c o lla t e r a l and its fallback administrative priority claim are tradeoffs for the a u t o m a t ic stay that prevents foreclosure on debtors' assets: the debtor receives " b r e a th in g 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 (5 t h Cir. 2004). A secured creditor whose collateral is subject to the automatic s t a y may first seek adequate protection for diminution of the value of the p r o p e r t y , 11 U.S.C. 362(d)(1), 363(e), 364(d), and then, if the protection u lt im a te ly proves inadequate, a priority administrative claim under 507(b). Section 507(b) of the Bankruptcy Code allows an administrative expense claim u n d e r 503(b) where adequate protection payments prove insufficient to c o m p e n s a te a secured creditor for the diminution in the value of its collateral. " I t is an attempt to codify a statutory fail-safe system in recognition of the u lt im a te reality that protection previously determined the `indubitable 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. 4 12 Case: 09-40307 Document: 00511267458 Page: 13 Date Filed: 10/19/2010 No. 09-40307 e q u iv a le n t ' . . . may later prove inadequate." In re Carpet Ctr. Leasing Co., Inc., 4 F.3d 940, 941 (11th Cir. 1993) (internal quotation marks and citations o m itte d ). On six occasions, the bankruptcy court entered orders authorizing Scopac t o use the Noteholders' and Bank of America's cash collateral to operate its b u s in e s s and preserve the estate, and in each order it required Scopac to provide a d e q u a t e protection under 363(e).5 At issue is the extent of that protection. 1. T im b e r Sales Proceeds T h e Noteholders first argue that the bankruptcy court erred when it d e c lin e d to recognize their lien on $29.7 million in proceeds that Scopac took in fr o m timber sales during the pendency of the bankruptcy. At the petition date, t h e Noteholders held a secured claim on Scopac's non-timber collateral of $48.7 m illio n , subject to Bank of America's higher priority lien of $36.2 million. The b a n k r u p t c y court, in calculating the value of the Noteholders' 507(b) claim, d e d u c te d the $36.2 million from the cash collateral available at the filing date o n ly , leaving $12.5 million, from which it further deducted the $8.9 million that S c o p a c had paid the Noteholders' professionals for services during the b a n k r u p t c y litigation. This left a $3.6 million interest. The Noteholders assert, a n d 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). 13 Case: 09-40307 Document: 00511267458 Page: 14 Date Filed: 10/19/2010 No. 09-40307 E a c h of the court's cash collateral orders granted Bank of America and the N o te h o ld e r s (in varying language): [A ] first priority, perfected replacement lien and security interest in a l l the property of Scopac of the same type as the Prepetition C o lla t e r a l in which BofA and the Trustee do not have a lien because o f the operation of Section 552 of the Bankruptcy Code and in the C a s h Collateral of Scopac, to the extent of the postpetition d im in u t io n of its interests in the Prepetition Collateral and the C a s h Collateral. Further, the orders were perfectly clear that the "proceeds and product of the P r e p e t itio n Collateral constitute cash collateral." (d e fin in g "cash collateral"). T h e cash collateral orders protected the Noteholders in two ways. They p r o t e c t e d against a diminution in the value of the $48.7 million cash collateral t h a t 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 p r o c e e d s from timber sales during the reorganization. The bankruptcy court e n tir e ly omitted the second component from its calculations and failed to credit t h o s e proceeds to the Noteholders' 507(b) claim. A p p e lle e s object to the Noteholders' $29.7 million claim because, they say, t h is contention was waived in the trial court, the Appellees were prejudiced t h e r e b y , and the Noteholders "have no valid superpriority claim to Scopac's net p r o c e e d s ." Br. for Appellees at 42. Their attempt to dispute, at this late stage, t h e precise terms of the cash collateral orders quoted above is unavailing. The q u e s t io n s of waiver and prejudice are closer, but ultimately also unpersuasive. W e have carefully reviewed the Noteholders' pleadings and briefing in c o n n e c t io n with their 507(b) claim. The claim rested clearly on the provisions o f the cash collateral orders. Testimony at the hearing established that the cash c o lla t e r a l included $48.7 million at the date of filing and $29.7 million additional See 11 U.S.C. 363(a) 14 Case: 09-40307 Document: 00511267458 Page: 15 Date Filed: 10/19/2010 No. 09-40307 r e v e n u e derived during the case from timber proceeds. At several points during this litigation, the Noteholders observed that this amount ($29.7 million) closely a p p r o x im a t e d what the court had authorized in payment to various bankruptcy p r o fe s s io n a ls during the case. Although the Noteholders may have consented to p a y m e n t s to professionals, the Appellees concede that "in exchange they were g r a n t e d adequate protection." Br. for Appellees at 46, n.17. The Noteholders h a d the burden to prove their entitlement to a 507(b) priority claim. Ford M o to r Credit Co. v. Dobbins, 35 F.3d 860, 866 (4th Cir. 1994). They did so by d e v e lo p in g the evidence and resting on the terms of multiple cash collateral orders. Although they could have put this point more precisely,6 their e n tit le m e n t to a lien and priority claim on nearly $30 million in proceeds from t h e sale of their timber collateral did not evaporate, nor was it waived. With the c o r r e c t and complete amounts of cash collateral put before it, the court should h a v e included the $29.7 million proceeds for timber sales. The Appellees are not p r e ju d ic e d by this result, which flows directly from multiple cash collateral o r d e r s subscribed by Scopac and the bankruptcy court. Nor should Appellees h a v e any claim to renege on the cash collateral orders for equitable reasons. 2. P a y m e n t to Noteholders' Professionals T h e Noteholders next argue that the bankruptcy court improperly d e d u c te d 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). 15 Case: 09-40307 Document: 00511267458 Page: 16 Date Filed: 10/19/2010 No. 09-40307 t o the Noteholders' professionals out of cash collateral proceeds.7 Principally, t h e y urge that the court erred in deducting the sum after it had failed to count t h e $29.7 million in their favor for the 507(b) claim. The proceeds that came into the estate during the bankruptcy, discussed a b o v e , were almost entirely consumed by professional fees and related expenses in c u r r e d by the estate, the creditors' committees, and the Noteholders. These p a y m e n t s were authorized by the cash collateral orders. The basis for the p a y m e n t s to the Noteholders' professionals was the Noteholders' lien on those p r o c e e d s . By denying the Noteholders' claim on the proceeds, the bankruptcy c o u r t effectively charged the Noteholders for all of these expenses, including t h o s e incurred by the estate and the committees. It then deducted the N o te h o ld e r s ' own professionals' fees, for a second time, from the amount that r e m a in e d . This was clear error. T h e result of this re-evaluation of the cash collateral portion of the 507(b) m o t io n is as follows: 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. 7 16 Case: 09-40307 Document: 00511267458 Page: 17 Date Filed: 10/19/2010 No. 09-40307 C a s h Collateral at date of bankruptcy: Net timber sales proceeds: (B a n k of America higher lien): N e t interest in cash collateral: (P a y m e n t under MRC/Marathon Plan for cash collateral) (P a y m e n t to Noteholders' professionals from timber proceeds) N e t owed for 507(b) adequate protection $48.7 million + $29.7 million S $36.2 million = $42.2 million S$3.6 million S $ 8 .9 million $29.7 million T h e Noteholders were entitled to receive an additional $29.7 million in payment o f their administrative priority claim. 3. D e c li n in g Value of Collateral F in a lly , 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 filin g 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 t im b e r la n d 's foreclosure value at the petition date to its fair-market value at the d a t e of confirmation, which had the effect of obscuring the decline in the value o f the property. An asset's foreclosure value is typically lower than its fairm a r k e t value. Assocs. Commer. Corp. v. Rash, 520 U.S. 953, 958 (1997) (e x p la in in g that fair-market value is "generally higher than what a secured c r e d it o r 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 m e a s u r e . Id. at 965. The bankruptcy court's ruling from the bench belies the argument that it lo o k e d exclusively to foreclosure value: 17 Case: 09-40307 Document: 00511267458 Page: 18 Date Filed: 10/19/2010 No. 09-40307 [E ]v e n looking at the fair market value, the evidence showed that fr o m filing to confirmation, the forests grew so that there are more t r e e s . Capital improvements were made--roads, tree planting, w a t e r s h e d analysis--which freed more areas for harvesting. P e r h a p s the roads don't add any value, as Mr. Dean suggested, but t h e tree planting and the watershed analysis did free up more areas fo r harvesting, which ultimately will lead to more value. All of this m a y lead to a value being higher at confirmation, but the Court is n o t prepared to make that finding that there has been any change in value since the filing. T h e court proceeded to discuss additional evidence pertaining to the relative c h a n g e in value of the timber itself, citing a decrease in the discount rate since filin g , which had the effect of increasing the market value of the forest. On net, t h e court found that, "the value of the forests has remained relatively constant s in c e the filing." This is the proper comparison, and no legal error occurred. T h e crux of this challenge is to the bankruptcy court's factual findings, w h ic h are subject to review for clear error. The court reached its determination fo llo w in g three days of hearings on the 507(b) issue, extensive briefing by both p a r tie s , and testimony by several experts. The Appellees' chief expert, LaMont, is a timberland appraiser who testified that the value of the timberland had in c r e a s e d due to forest growth, stable log prices, and the decline in the discount r a t e . The Noteholders and their experts challenged several aspects of LaMont's m e t h o d o lo g y , but the court ultimately found him to be credible and his testimony c r e d it a b le . MRC's chairman also testified, stating that MRC's internal valuation m o d e l also showed an increase in the value of the timberland due to the discount ra te. T h e evidence on which the court premised its determination is strikingly s im ila r -- t h e same experts, the same types of evidence, the same methodologies, e t c .-- t o that underlying the confirmation order appeal. This court ultimately c o n c lu d e d that the bankruptcy court was justified in giving LaMont's testimony " s ig n ific a n t weight" and that its valuation finding was not clearly wrong. In re 18 Case: 09-40307 Document: 00511267458 Page: 19 Date Filed: 10/19/2010 No. 09-40307 P a c ific Lumber, 584 F.3d at 248. It is difficult to see, given the similarity of the is s u e s and record, how a different result could be reached in the present appeal. T h e Noteholders also fault the bankruptcy court for relying on "hindsight a n a ly s is " to determine the value of timberland on the petition date. This, too, is a factual challenge. As the Noteholders acknowledge repeatedly, the court's t a s k was to determine whether the timberland had declined in value and, if so, b y how much. A methodology that works backwards from a later valuation w o u ld suffice. This argument, again, is with the bankruptcy court's evaluation a n d application of the expert testimony. And the expert testimony that the N o te h o ld e r s criticize, LaMont's, was one among several factors in the b a n k r u p t c y court's final determination. The court relied primarily on a decline in the discount rate, a fact that the Noteholders do not challenge. W e are therefore without "the definite and firm conviction that a mistake h a s been made." I V . CONCLUSION B e in g satisfied with our appellate jurisdiction, we have concluded that the b a n k r u p t c y court undervalued the Noteholders' priority administrative 507(b) c la im by $29.7 million. The court erred in not crediting their interest with t im b e r sales proceeds that were received during the bankruptcy, on which they h a d a lien and priority interest arising from the court's many cash collateral orders. To deprive the Noteholders of this amount would undermine a fu n d a m e n t a l protection for secured parties whose collateral is used by the debtor d u r in g its reorganization efforts. T h e judgment of the district court is VACATED, and the case is R E M A N D E D with instructions to enter judgment for the Noteholders for a $29.7 m illio n administrative priority claim against the reorganized debtor. V A C A T E D and REMANDED with Instructions. 19

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