*2 Bеfore REYNALDO G. GARZA, to continue doing business. The agreement
HIGGINBOTHAM, and SMITH, gave CNA a security interest in the debtors’ Circuit Judges. assets: Any funds borrowed under the line of credit would give rise to a claim against the JERRY E. SMITH, Circuit Judge: assets of all debtors, which claim would be
accorded super-priority administrative expense Clyde Bergemann, Inc. (“Bergemann”), ap- status against all unsecured creditors of each peals the district court’s affirmance of the debtor. [2]
bankruptcy court’s order authorizing a post-
petition financing agreement between The The bankruptcy court granted the DIP fi- Babcock and Wilcox Company, Inc. nancing motion in an interim order, to which (“B&W”), Diamond Power International, Inc. Bergemann objected on the grounds generally (“Diamond Power”), Babcock & Wilcox Con- that the interests of other creditors would be struction Co., Inc., Americon, Inc. unfairly subordinated to CNA and specifically (collectively, the “debtors”), and Citicorp that the assets of Diamond Power might be North America, Inc. (“CNA”). Finding no exposed to claims by CNA. In response to error, we affirm.
*3 Bergemann’s objection, the debtors amended authorizing the amended DIP financing the agreement to include a clause providing agreement over Bergemann’s objection. that, in the event Diamond Power (or any Bergemann appealed to the district court, other debtor) makes payments to CNA in ex- which affirmed.
cess of funds received by that debtor from
CNA, the debtor will receive a claim against II.
all other debtors, subordinate only to CNA’s
We
review a bankruptcy court’s
claim.
[4]
Bergemann disagreed that this clause
conclusions of law
de novo
and findings of fact
adequately protected
its
interests and
for clеar error.
Traina v. Whitney Nat’l Bank
,
continued to object to the DIP financing
court’s findings, the review for clear error is In March 2000, after a hearing, the strict.” Id.
bankruptcy court issued a final order (the “DIP
financing order”) finding that the DIP A.
financing agreement was necessary to the col- Bergemann contends that the DIP financing lective health of the debtors and that all the order is improper because it substantively con- debtors would benefit from thе agreement and solidates the debtors without following
required procedures. Substantive consolidation is one mechanism for (...continued) administering the bankruptcy estates of be able to use to satisfy a potential judgment in multiple, related entities, and the issue of the Bergemann’s favor. device’s propriety in a particular case normally stipulates, As amended, the DIP financing agreement arises from a bankruptcy court’s express order of consolidation. Bergemann admits that the bankruptcy court did not purport substantively To the extent any Debtor (a “Funding Debt-
or”) makes aggregate payments to Lenders
in excess of the aggregate amount of all
Because it is a judicial creation, the contours
of substantive consolidation are indefinite; it “usu-
loans and advances received by such
ally results in,
inter alia
, pooling the assets of, and
Funding Debtor from Lenders after the
claims against, the two entities; satisfying liabilities
Petition Date, then such Funding Debtor,
from the resultant common fund; eliminating
after the payment in full of the Obligations
inter-company claims; and combining the creditors
and termination of the Commitments, shall
of the two companies for purposes of voting on
be entitled to a claim under Section
reorganization plans.”
In re Augie/Restivo Baking
364(c)(1) of the Bankruptcy Code against
Co., Ltd.
,
however. [7] Because we do not agree that the
The bankruptcy court’s order authorized оnly a pre-confirmation financing arrangement The bankruptcy court did administratively involving all the debtors and from which each consolidate the debtors’ estates. Administrative of the debtors benefits. As the district court consolidation is merely a procedural devise used to
deal efficiently with multiple estates, however,
while substantive consolidation affects the substantive rights of the parties and therefore is (...continued) subject to heightened judicial scrutiny. 1 W ILLIAM Tex. 1994), the court refused the Internal Revenue L. N ORTON , supra , § 20:5. Service’s invitation to interpret state community
property laws as creating a
de facto
substantive
We addressed a similar theory SS albeit under
consolidation of the bankruptcy estates of husband
different facts SS in
Matter of Tex. Extrusion Corp.
,
and wife debtors. In
In re Murray Industries.
, 119
Dynaco Corp. In support of the DIP financing motion, the D.N.H. 1993), the court refused to approve an debtors introduced an affidavit by B&W’s Chief emergency motion for post-petition financing in a Restructuring Officer, who testified that the DIP parent/subsidiary bankruptcy, holding that thе financing agreement was critical to the continued complexity of the financing transaction precluded vitality of each of the Debtors. Bergemann notes approval of the agreement without a hearing. The that the debtors failed to present evidence that court noted in passing that “[t]here are . . . Diamond Power, apart from the other debtors, provisions in the Post-Petition Credit Agreement needed to obtain credit under the DIP financing that arguably may accomplish a de facto agreement and argues from that premise that the substantive consolidation of these estates.” Id. The bankruptcy court erred in authorizing the court failed, however, to describe the agreement in agreement. In its written objection to the DIP any detail or to identify the aspects of the financing motion, however, Bergemann failed to agreement it found objectionable. Moreover, the argue the need for any such individualized court’s statement, which arguably was dictum , was showing, other than stating that “Diamond Power not supported by reasoning or citation of authority. did not require the $300 million in working caрital” We find such a conclusory pronouncement available under the agreement. unpersuasive.
While probably true, that assertion fails to ac-
The other two cases to use the term bear no
count for the other benefits described in the af-
reasonable relationship to the facts of this case. In
fidavit, including each debtor’s need for letters оf
credit which the agreement would provide to
In re Knobel
,
pay an amount disproportionate to funds it
obtains through the agreement, its interests are B.
protected by a super-priority claim against the Bergemann argues that the DIP financing other debtors under 11 U.S.C. § 364(c)(2). order is invalid because it violates the absolute While the availability of a § 364(c)(2) claim priority rule, embodied by 11 U.S.C. § 1129- may not fully protect Diamond Power’s (b)(2)(B), which outlines the requirements for creditors, it does maintain the critical confirming a chapter 11 plan: distinction between Diamond Power’s assets
and liabilities and those of the other debtors, The court shall confirm a plan only if all negating the lynchpin of any substantive of the following requirements are met: consolidation order: The DIP financing order
does not combine the assets or liabilities of the . . . .
debtors and does not establish a common pool
of funds to pay claims. With respect to a class of unsecured
claims SS Moreover, the order fails to exhibit any oth- er properties commonly characterizing sub- (i) the plan provides that each holder stantive consolidation: It neither extinguishes of a claim of such class receive or inter-debtor claims nor combines each debtor’s retain on account of such claim creditors for purposes of voting on a re- property of a value, as of the organization plan. Bergemann’s claim has not effective date of the plan, equal to been cоnsolidated with those of the other debt- the allowed amount of such claim; ors’ unsecured creditors, and Bergemann’s or
recovery has not been limited to a pro-rata
(ii) the holder of any claim or interest that is junior to the claims of such (...continued) class will not receive or retain continue doing business. Weighing Bergemann’s under the plan on account of such lone, unsupported assertion against the debtors’ juniоr claim or interest any detailed affidavit, we cannot say the bankruptcy property. court committed clear error in finding that Diamond Power, like the other Debtors, would (Emphasis added.) By its plain text, the ab- benefit under the agreement. solute priority rule applies only to the Whether Bergemann is adequately protected confirmation of a chapter 11 plan section 1129 is entitled “Confirmation of plan” and pursuant to the bankruptcy court’s order is not therefore is inapplicable to the pre- relevant to the issues addressed in this appeal. See infra note 12.
confirmation DIP financing order.
*6
in this case.
[10]
Bergemann avers that the bankruptcy court
Bergemann cites two additional cases for
attempted “to do outside a plan what it cannot
the prоposition that the absolute priority rule
do in a plan,” citing
In re Braniff Airways,
applies in the pre-confirmation context; neither
Inc.,
assets; moreover, we reasoned that the
restricted nature of the travel scrip “had the
Notably,
Braniff
mentioned the absolute pri-
practical effect of dictating some of the terms
ority rule only when referring to the requirements
the parties must meet in “[a]ny future attempts to
of any future reorgаnization plan,” and
specify the terms whereby a reorganization plan is
concluded that after such a sale, “little would
to be adopted.”
Braniff
,
fundamental nature of the estate’s assets in
495 Central Park
Furthermore, involved a
financing transaction under § 364(d), which rе-
such a way that limits a future reorganization
quires “adequate protection” of senior lienholders.
plan. The DIP financing agreement contem-
In contrast, the financing agreement in this case is
plates neither of those functions; it merely
authorized by § 364(c), which does not require
allows the debtors to obtain the credit
adequate protection.
See In re Garland Corp.
,
necessary to their continued vitality as going
Park applies even more strongly to the financing agreement in this case.
Even were we persuaded that the absolute 1988)) (footnotes omitted). priority rule permissibly could be extended to
pre-confirmation financing arrangements, we Bergemann’s brief to the bankruptcy court would decline to do so here. The debtors es- plainly argued two distinct theories: that the tablished the necessity of the agreement, which DIP financing agreement was a de facto included a provision protecting SS at least in substantive consolidation and that the part SS the interests of the existing creditors. In agreement violated the absolute priority rule. addition, Bergemann is an unsecured creditor Although Bergemann contends that it raised that has not yet even prevailed on thе suit the issue of fraudulent conveyance sufficiently underlying its claim. As the district court to avoid waiver, it can point to no assertion noted, “it is speculative whether Bergemann’s before the bankruptcy court that meets Fair- claim will exist by the time this case reaches child Aircraft ’s strict standard. Bergemann plan confirmation and whether the absolute admits that it referred to the issue only in passing SS as part of priority rule would evеr be invoked in this its substantive consolidation argument SS but reasons case.” Thus, the bankruptcy court did not err in failing to apply the absolute priority rule. nonetheless that it preserved the issue by
quoting two cases in its bankruptcy court C. brief: One expressed concern that “an Bergemann contends the financing overagressive approach [to substantive agreemеnt should not have been approved consolidation] could lead to a series of because it is effectively a fraudulent fraudulent conveyances being considered a conveyance of Diamond Power’s assets. The commingling of assets that may justify district court refused to address the merits of substantive consolidation”; the other stated the argument, finding it waived. We agree. that “[t]ransfers made to benefit third parties
To preserve an issue for appeal, a party must raise it before the trial court:
are clearly not made for ‘fair consideration,’” [14]
which statement Bergemann contends is the
definition of a fraudulent conveyance.
Neither quotation identified the issue of fraudulent conveyance sufficiently for the
bankruptcy court to rule on it one quotation
used the term “fraudulent conveyance,” but in
an irrelevant context, and the other failed even
to identify the relevant legal theory.
Moreover, the quotations were accompanied
by no discussion regarding how that theory
applied to the DIP financing agreement.
Instead, the unexplained quotations were
buried in a section supporting a related, but
distinct, argument.
The bankruptcy court could not have been expected to rule on the issue on the basis of
those quo tations alone. Bergemann waived
the issue of whether the DIP financing
agreement is a fraudulent conveyance. [15]
AFFIRMED.
Notes
[2] The security interest is authorized by I. 11 U.S.C. § 364(c), which specifies that Bergemann, a competitor of Diamond Pow- er’s, filed in 1999 a patent infringement suit, [i]f the trustee is unable to obtain unsecured which is currently pending, seeking $52 million credit allowable under section 503(b)(1) of damages. In February 2000, the debtors filed this title as an administrative expense, the voluntary chapter 11 petitions in response to court, after notice and a hearing, may unrelated mass tort litigation,
[1] and the authorize the obtaining of credit or the bankruptcy court administratively consolidated incurring of debt SS the debtors’ cases. At the same time they filed the petitions, the debtors filed a motion (the (1) with priority over any or all “DIP financing motion”) with the bankruptcy administrative expenses of the kind court seeking authorizatiоn under 11 U.S.C. specified in section 503(b) or 507(b) of §§ 105, 361, 362, 363, and 364(a) to enter this title; into a post-petition financing arrangement with (2) secured by a lien on property of the CNA, pursuant to a debtor-in-possession estate that is not otherwise subject to a revolving credit facility (the “DIP financing lien; or agreement”). (3) secured by a junior lien on property of Under that agreement, the debtors received the estate that is subject to a lien. a $300 million line of credit and the ability to procure letters of credit, which allowed them
[3] Bergemann contends that Diamond Power owns substantial assets outright; Bergemann thus fears that the DIP financing agreement might allow
[1] Diamond Power, Americon, Inc., and Babcock creditors of the other debtors including CNA to & Wilcox Construction Co., Inc., are subsidiaries reach assets that Diamond Power otherwise would of B&W. (continued...)
[13]
In re Creditors Serv. Corp.
,
[14] In re Lawrence Paperboard Corp ., 76 B.R. 866, 874 (Bankr. D. Mass 1987) (quoting Ruben v. Mfrs. Hanover Trust , 661 F.2d 979, 981 (2d Cir. 1981)).
[15] Even if Bergemann had not waived the issue of fraudulent conveyance, its argument, which is premised on the proposition that Diamond Power received no benefit from the DIP financing agreement, is without merit. As discussed supra note 8, the bankruptcy court properly found as a matter of fact that Diamond Power needed and benefited from the agreement.