Prudential Insurance Company v. SW Boston Hotel Venture, LLC, 1st Cir. (2014)

7/26/2019 Prudential Insurance Company v. SW Boston Hotel Venture, LLC, 1st Cir. (2014)

1/51

United States Court of AppealsFor the First Circuit

Nos. 12- 9008, 12- 9009

SW BOSTON HOTEL VENTURE, LLC; AUTO SALES & SERVI CE, I NC. ;GENERAL TRADI NG COMPANY; FRANK SAWYER CORPORATI ON;

100 STUART STREET, LLC; 30- 32 OLI VER STREET CORPORATI ON;GENERAL LAND CORPORATI ON; 131 ARLI NGTON STREET TRUST,

Debt ors.

THE PRUDENTI AL I NSURANCE COMPANY OF AMERI CA,

Appel l ee,

v.



Appel l ant s.

Nos. 12- 9011, 12- 9012



Debt ors.

THE PRUDENTI AL I NSURANCE COMPANY OF AMERI CA,

Appel l ee,

v.

CI TY OF BOSTON,

Appel l ant .


2/51

APPEALS FROM THE BANKRUPTCY APPELLATE PANELFOR THE FI RST CI RCUI T

Bef or e

Lynch, Chi ef J udge,St ahl and Howar d, Ci r cui t J udges.

Har ol d B. Mur phy, wi t h whom Char l es R. Bennet t , J r . , J ohn C.El st ad, Chr i st opher M. Condon, and Mur phy & Ki ng, P. C. , were on

br i ef , f or appel l ant s SW Bost on Hot el Vent ur e, LLC; Aut o Sal es &Ser vi ce, I nc. ; Gener al Tradi ng Company; Fr ank Sawyer Cor por at i on;100 St uar t St r eet , LLC; 30- 32 Ol i ver St r eet Cor por at i on; Gener alLand Cor por at i on; and 131 Ar l i ngt on St r eet Tr ust .

E. Kat e Buyuk, wi t h whom J oseph F. Ryan and Lyne, Woodwor t h &Evar t s LLP wer e on br i ef , f or appel l ant Ci t y of Bost on.

Emanuel C. Gr i l l o, wi t h whom Wi l l i am M. J ay and Goodwi nPr oct er LLP wer e on br i ef , f or appel l ee.

Apr i l 11, 2014

-2-


3/51

STAHL, Circuit Judge. Thi s appeal pr esent s mul t i pl e

i ssues ari si ng f r om a heavi l y cont est ed Chapt er 11 bankrupt cy

pr oceedi ng. St at ed si mpl y, a secur ed cr edi t or appeal ed t o t he

Bankr upt cy Appel l at e Panel f or t he Fi r st Ci r cui t ( "t he BAP") f r om

t he bankrupt cy cour t ' s order s det er mi ni ng i t s ent i t l ement t o post -

pet i t i on i nt er est ( and t hus t he t ot al amount of i t s cl ai m) and

conf i r mi ng t he debt or s' Chapt er 11 pl an. The BAP r ever sed i n par t ,

si gni f i cant l y i ncreasi ng t he secur ed credi t or ' s ent i t l ement t o

post - pet i t i on i nt er est , and vacat ed and r emanded the conf i r mat i on

or der . The debt or s and t he Ci t y of Bost on ( "Ci t y" ) , as a j uni or

credi t or , appeal ed t o t hi s cour t . Af t er car ef ul consi der at i on, we

concl ude that t he BAP er r ed i n r ever si ng t he bankrupt cy cour t ' s

post - pet i t i on i nt er est det er mi nat i on. And, because t he BAP' s

conf i r mat i on or der was based sol el y on i t s err oneous i nt er est

det er mi nat i on, we vacat e t hat or der as wel l .

I. Facts & Background

A. Financing and Construction of the W

I n 2007, Debt or - Appel l ant SW Bost on Hot el Vent ur e, LLC,

( "SW Bost on") sought f i nanci ng t o devel op a mi xed- used pr oper t y

t hat woul d become t he WHotel and Resi dences ( " t he W") i n Bost on' s

t heat er di st r i ct . I n J anuar y of 2008, af t er a pr evi ous l ender

wi t hdr ew i t s f i nanci ng commi t ment , t he Pr udent i al I nsurance Company

of Amer i ca ( "Pr udent i al " ) agr eed t o pr ovi de up t o $192. 2 mi l l i on i n

f i nanci ng ( " t he Pr udent i al Loan") pur suant t o a const r uct i on l oan

-3-


4/51

agr eement ( " t he CLA") . Prudent i al t ook a mort gage and f i r st

pr i or i t y secur i t y i nt er est i n SW Bost on' s r eal and per sonal

pr oper t y and any pr oceeds t her eof . I t al so r equi r ed addi t i onal

col l at er al and credi t suppor t i n t he f or m of cer t ai n r eal est at e

and ot her pr opert y owned by t he remai ni ng Debt ors- Appel l ant s

( "Af f i l i at ed Debt or s") , as wel l as a $17. 3 mi l l i on l et t er of

cr edi t . Sover ei gn Bank i ssued t he l et t er of cr edi t based on t he

cr edi t pr ovi ded by t wo non- debt or af f i l i at es of SW Bost on.

The W proj ect consi st s of a 235- r oom hot el , 123 l uxur y

condomi ni um uni t s, an under gr ound par ki ng gar age, a r est aur ant , a

spa and r el at ed r et ai l space, and a bar . The hot el was t o oper at e

under t he WHotel s br and of St arwood Hotel s and Resor t s Wor l dwi de,

I nc. ( "St ar wood") , wi t h St ar wood managi ng t he operat i ons.

The Wopened on schedul e i n Oct ober of 2009, but , due i n

l ar ge par t t o t he ongoi ng r ecessi on, obt ai ned subst ant i al l y f ewer

commi t ment s t o pur chase condomi ni ums than t he CLA r equi r ed. I n

addi t i on, t he r est aur ant , spa, and bar - - al l r equi r ed t o oper at e

under t he W Hotel f l ag - - had not been compl eted, and t he Debt ors

l acked suf f i ci ent f undi ng t o compl ete t hem. I n December 2009,

af t er Pr udent i al decl i ned t o pr ovi de addi t i onal f unds, SW Bost on

and t he Ci t y ent er ed i nt o a l oan agr eement ( " t he Ci t y Loan") , wi t h

t he Ci t y agr eei ng t o pr ovi de $10. 5 mi l l i on i n addi t i onal f undi ng. 1

1 The Ci t y st r esses t hat , t o make t hi s l oan, i t bor r owed $10. 5mi l l i on f r omt he U. S. Depart ment of Housi ng and Ur ban Devel opment ,gi vi ng i n r et ur n a not e secur ed by a pl edge of pr esent and f ut ur e

-4-


5/51

The Ci t y Loan was secur ed by a j uni or l i en on most of t he

col l at er al t hat secur ed t he Pr udent i al Loan and a f i r st l i en on $4

mi l l i on i n cash pr ovi ded by an Af f i l i at ed Debt or . The CLA r equi r ed

t he Debt or s t o obt ai n Pr udent i al ' s consent bef or e ent er i ng i nt o any

j uni or l oans. I n r et urn f or i t s consent , Pr udent i al r equi r ed t he

Ci t y t o execut e an I nt er cr edi t or Agr eement t hat , among ot her

t hi ngs, subor di nat ed t he Ci t y' s r i ght t o payment t o Pr udent i al and

pur por t ed t o assi gn t o Pr udent i al t he Ci t y' s r i ght t o vot e on any

bankr upt cy pl an.

B. Bankruptcy Court Proceedings

On Apr i l 28, 2010, af t er SW Bost on f ai l ed t o make a

mandat or y quar t er l y payment t o Pr udent i al and l oan- r est r uct ur i ng

negot i at i ons f ai l ed, SW Bost on and f our of t he Af f i l i at ed Debt or s

f i l ed vol unt ar y Chapt er 11 bankrupt cy pet i t i ons. The r emai ni ng

t hr ee Af f i l i ated Debt ors commenced Chapt er 11 cases on J une 4. The

bankrupt cy cour t admi ni st er ed al l of t he Chapt er 11 cases j oi nt l y.

Pr udent i al f i l ed a pr oof of cl ai m asser t i ng secur ed cl ai ms of not

l ess t han $180, 803, 186, pl us f ees, cost s, and pr e- and post -

pet i t i on i nt er est . Shor t l y af t er t he pet i t i on dat e, Pr udent i al

Communi t y Devel opment Bl ock Gr ant r evenues, f undi ng the Ci t y r el i eson f or i t s af f ordabl e housi ng and economi c devel opment pr ogr ams.The Ci t y f ur t her notes t hat , had i t not st epped i n, " [ t ] he Debt or sand Pr udent i al bot h wer e at r i sk of l osi ng si gni f i cant por t i ons oft hei r i nvest ment s, and t he Ci t y of Bost on woul d have been l ef t wi t han unf i ni shed bui l di ng t hat woul d have been a bl i ght and aneconomi c det r i ment t o an al r eady vul ner abl e sect i on of t he ci t y. "

-5-


6/51

dr ew down t he l et t er of credi t , r educi ng i t s pr e- pet i t i on cl ai mt o

$165, 592, 659.

The f i l i ng of t he bankr upt cy pet i t i ons r esul t ed i n

i mposi t i on of an aut omat i c st ay as t o al l credi t or s' ef f or t s t o

enf or ce t hei r l i ens. See 11 U. S. C. 362( a) . However , 362( d)

r equi r es t he cour t t o gr ant r el i ef f r om t he st ay unl ess cer t ai n

cr edi t or saf eguar ds ar e met . See i d. 362( d) ( 1) . 2 I n August of

2010, Pr udent i al f i l ed a mot i on f or r el i ef f r om t he st ay as t o SW

Bost on onl y ( " l i f t - st ay mot i on") , ar gui ng t hat i t was under secur ed

because t he amount of i t s cl ai m agai nst SW Bost on exceeded t he

val ue of SW Bost on' s asset s and t hat t he Debt ors l acked t he means

t o pr ovi de al t er nat i ve f or ms of adequat e pr ot ect i on. I t sought

per mi ssi on t o exer ci se i t s cont r act ual r i ght s and r emedi es t o,

among ot her t hi ngs, commence f or ecl osure pr oceedi ngs. I n i t s

J anuar y 28, 2011, r ul i ng, t he bankr upt cy cour t f ound t hat SW

Bost on' s out st andi ng debt t o Pr udent i al , af t er deduct i ons f or

payment s made f r om ongoi ng condomi ni um sal es and excl usi ve of any

post - pet i t i on i nt er est or expenses, was appr oxi mat el y $154 mi l l i on.

Prudent i al ' s expert val ued t he r emai ni ng condomi ni ums at $86

2 The bankr upt cy cour t i s di r ect ed t o gr ant r el i ef f r om t hest ay "f or cause, i ncl udi ng t he l ack of adequat e pr ot ect i on of an

i nt er est i n pr oper t y of such par t y i n i nt er est ; " or , wi t h r espectt o an act agai nst par t i cul ar pr oper t y, i f " ( A) t he debt or does nothave an equi t y i n such pr oper t y; and ( B) such pr oper t y i s notnecessar y t o an ef f ect i ve r eor gani zat i on . . . . " 11 U. S. C. 362( d) ( 1) , ( 2) . Pr udent i al moved f or r el i ef under bot hsubsect i ons.

-6-


7/51

mi l l i on and t he W hot el at $55 mi l l i on, whi l e SW Bost on' s exper t

val ued t he remai ni ng condomi ni ums at $90. 6 mi l l i on and t he hotel at

$65. 6 mi l l i on. Af t er a t hr ee- day evi dent i ar y hear i ng, t he

bankr upt cy cour t concl uded t hat t he val ue of t he condomi ni ums was

$88 mi l l i on and t he val ue of t he hot el was $65. 6 mi l l i on, maki ng

t he t ot al val ue of SW Bost on' s col l at er al $153. 6 mi l l i on. Thus,

Prudent i al was under secur ed as t o SW Bost on al one. However , t he

bankrupt cy cour t not ed t hat , wi t h r espect t o t he ent i r e col l at er al

package of al l of t he Debt or s, Pr udent i al had an equi t y cushi on i n

excess of $19 mi l l i on. Taki ng t hat f i ndi ng i n conj unct i on wi t h t he

f act s t hat SW Bost on was r educi ng t he amount of t he out st andi ng

debt t hr ough payment s f r omcondomi ni umsal es and t hat t he val ue of

i t s secur ed cl ai mwas not decl i ni ng, t he bankrupt cy cour t concl uded

t hat Pr udent i al was adequat el y pr ot ect ed under 362( d) ( 1) . Wi t h

r espect t o 362( d) ( 2) , t he bankrupt cy cour t f ound t hat SW Bost on

l acked equi t y i n t he Wpr oj ect , but t hat t he pr oper t y was necessary

t o a successf ul r eor gani zat i on, whi ch t he cour t r ul ed was

r easonabl y l i kel y. The bankrupt cy cour t t her ef or e deni ed

Pr udent i al ' s l i f t - st ay mot i on on J anuar y 28, 2011.

On March 28, 2011, SW Bost on f i l ed a mot i on f or cour t

appr oval of a pur chase and sal e agr eement ( " t he P&S") f or t he sal e

of t he hot el and gar age t o an unr el at ed t hi r d par t y f or $89. 5

mi l l i on. The bankr upt cy cour t gr ant ed t he mot i on on May 24. But ,

bef or e the sal e coul d cl ose, SW Bost on was r equi r ed t o resol ve

-7-


8/51

sever al out st andi ng i ssues on whi ch t he P&S was cont i ngent . For

exampl e, t he P&S was condi t i oned on t he ass i gnment of cer t ai n

const r uct i on war r ant i es f r om t he W' s const r uct i on manager , Bovi s

Lend- Lease LMB, I nc. ( "Bovi s" ) , t o t he pur chaser . Al t hough t he

Bovi s- SW Bost on cont r act r equi r ed assi gnment of t he war r ant i es t o

SW Bost on upon compl et i on of t he pr oj ect , Bovi s cl ai med t o be

excused f r om t hi s obl i gat i on due t o var i ous di sput es wi t h SW

Bost on. The P&S was al so condi t i oned on t he assi gnment t o t he

pur chaser of sever al St ar wood- SW Bost on cont r act s. However ,

St ar wood al l eged t hat var i ous i ncur abl e non- monet ar y def aul t s - -

i ncl udi ng f ai l ur e t o t i mel y open t he spa and bar - - pr ecl uded

assumpt i on and assi gnment of t he cont r act s. Af t er SW Bost on

managed to resol ve t hese cont i ngenci es, t he sal e cl osed on J une 8,

2011, and t he net pr oceeds of $88, 322, 017 were pai d over t o

Pr udent i al .

On Mar ch 31, 2011, t hr ee days af t er f i l i ng t he hot el sal e

mot i on, t he Debt or s f i l ed t hei r r eor gani zat i on pl an. The pl an need

not be descri bed i n gr eat det ai l , but , i n br oad st r okes, i t cal l ed

f or Pr udent i al t o be pai d i n f ul l by Mar ch of 2014 i f t he hot el

sal e cl osed, or af t er a mor e ext ended per i od i f i t di d not . The

pl an cont empl at ed that Pr udent i al woul d recei ve post - ef f ect i ve- dat e

i nt er est of 4. 25% per annum, but i t made no pr ovi si on f or post -

pet i t i on, pr e- ef f ecti ve- dat e i nt er est . Pr udent i al obj ected t o

conf i r mat i on of t he pl an on mul t i pl e gr ounds.

-8-


9/51

Throughout t he pendency of t he bankrupt cy case, SWBost on

cont i nued const r uct i on. Af t er SW Bost on r esol ved var i ous i ssues

wi t h cont r act ors who had suspended t hei r work because of t he

bankr upt cy f i l i ngs, t he spa was compl et ed and opened on August 18,

2010. That Sept ember, af t er t wo work i nt er r upt i ons caused by a

change i n t he bui l di ng code and t he st at e' s appeal of a var i ance

gr ant ed to SWBost on, SWBost on r ecei ved al l necessary appr oval s t o

r ecommence const r uct i on of t he bar . Mul t i pl e open const r uct i on

i t ems on t he W wer e compl et ed. SW Bost on cont i nued t o sel l

condomi ni ums, payi ng over t he pr oceeds ( l ess cer t ai n deduct i ons) t o

Pr udent i al .

On Apr i l 15, 2011, Prudent i al moved f or a det er mi nat i on

t hat i t was over secur ed and t her ef or e ent i t l ed t o post - pet i t i on

i nt er est under 11 U. S. C. 506( b) . 3 I n gener al t er ms, a cl ai m i s

over secur ed i f t he val ue of t he credi t or ' s i nt er est i n i t s

col l at er al exceeds the amount of i t s cl ai m. Under 506( b) , an

over secur ed credi t or i s ent i t l ed t o post - pet i t i on i nt er est , as wel l

as r easonabl e f ees, cost s, or char ges pr ovi ded f or i n t he par t i es'

cont r act s or by st at e l aw, up t o t he ext ent of i t s over secur i t y.

Pr udent i al ar gued t hat i t shoul d r ecei ve post - pet i t i on i nt er est at

3 Speci f i cal l y, Pr udent i al sought t o appl y any condomi ni umpr oceeds i t r ecei ved f r om t he Debt or s f i r st t o out st andi ng post -pet i t i on i nt er est and second t o t he out st andi ng pr i nci pl e bal anceof t he Pr udent i al Loan.

-9-


10/51

t he cont r act ual def aul t r at e of 14. 5% per annum, 4 5% hi gher t han

t he cont r act ual base r at e, accr ui ng f r om t he pet i t i on dat e. The

Debt ors ar gued t hat Prudent i al onl y became oversecured upon t he

cl osi ng of t he hot el sal e, and t her ef or e coul d onl y r ecei ve post -

pet i t i on i nt er est f r omt hat poi nt f or war d. They al so cl ai med t hat

t he def aul t r at e was unenf or ceabl e and i nequi t abl e, and r equest ed

t hat , t o t he ext ent Pr udent i al was ent i t l ed t o any post - pet i t i on

i nt er est , i t shoul d accr ue at t he base r at e of 9. 5% per annum.

The bankrupt cy cour t hel d a t hree- day combi ned t r i al

addr essi ng Prudent i al ' s 506( b) mot i on and t he Debt or s' pr oposed

pl an. On Oct ober 4, 2011, i t i ssued an or der gr ant i ng Pr udent i al

post - pet i t i on i nt er est at 14. 5% per annum, commenci ng on the hot el

sal e dat e. The cour t r ul ed t hat t he hot el sal e pr i ce, r at her t han

i t s ear l i er val uat i on at t he l i f t - st ay hear i ng, was t he best

i ndi cat or of t he hot el ' s val ue. However , i t al so not ed t hat , i n

l i ght of t he ongoi ng i mpr ovement s and t he r esol ut i on of var i ous

cont i ngenci es, t he sal e pr i ce di d not r ef l ect i t s val ue on any

ear l i er dat e. Ther ef or e, i t f ound t hat Prudent i al onl y became

over secur ed once t he hot el sal e cl osed. Af t er r ecei vi ng t he

par t i es' i nt er est cal cul at i ons ( whi ch di f f er ed onl y as t o whet her

t he i nt er est shoul d be compoundi ng) , t he bankrupt cy cour t ent er ed

an or der f i xi ng Pr udent i al ' s cl ai ms, i ncl usi ve of non- compoundi ng

4 As di scussed i n gr eat er det ai l bel ow, af t er t he bankrupt cycour t i ssued i t s 506( b) or der , Pr udent i al al so cl ai med t hat i twas ent i t l ed t o mont hl y compoundi ng of i t s i nt er est .

-10-


11/51

post - pet i t i on i nt er est . Pr udent i al appeal ed and t he Debt or s cr oss-

appeal ed t he 506( b) deci si on and t he resul t ant cl ai morder t o the

BAP.

On November 14 and 16, r espect i vel y, t he bankr upt cy cour t

i ssued an opi ni on f i ndi ng t hat t he pl an ( wi t h some modi f i cat i ons)

met al l conf i r mat i on r equi r ement s and an or der conf i r mi ng t he

modi f i ed pl an over Prudent i al ' s obj ect i ons. On November 17,

Pr udent i al f i l ed a not i ce of appeal of t he conf i r mat i on deci si on t o

t he BAP, al ong wi t h a mot i on t o st ay t he conf i r mat i on or der pendi ng

appeal . The bankrupt cy court deni ed t he st ay mot i on on November

21, and, on November 30, so di d t he BAP when Prudent i al sought t he

same r el i ef t here. The pl an became ef f ect i ve on December 1.

C. Bankruptcy Appellate Panel Proceedings

Whi l e t he par t i es wer e br i ef i ng t he appeal s, t he Debt or s

moved t o di smi ss Pr udent i al ' s appeal s as equi t abl y moot . The BAP

f ound t hat , al t hough t he pl an had been subst ant i al l y consummated,

t he appeal s wer e not equi t abl y moot because Prudent i al coul d st i l l

be af f or ded r el i ef wi t hout har mi ng i nnocent t hi r d par t i es or

unr avel i ng the reor gani zat i on (especi al l y because Pr udent i al

r epr esent ed i t s wi l l i ngness t o accept al t er nat i ve f or ms of r el i ef

t hat woul d not r equi r e such unr avel i ng) .

As t o the 506( b) appeal , t he BAP: ( 1) hel d t hat

Pr udent i al was ent i t l ed t o post - pet i t i on i nt er est f r omt he pet i t i on

dat e, r ever si ng t he bankrupt cy cour t ' s f i ndi ng t hat Pr udent i al had

-11-


12/51

onl y become over secur ed on t he hot el sal e dat e; ( 2) af f i r med t he

bankrupt cy cour t ' s det er mi nat i on t hat t he cont r act ual def aul t r at e

of i nt er est ( 14. 5%) appl i ed; and ( 3) r ever sed t he bankrupt cy

cour t ' s rul i ng t hat t he i nt er est was not compoundi ng. As t o t he

conf i r mat i on or der appeal , wi t hout addr essi ng t he conf i r mabi l i t y of

t he pl an, t he BAP vacat ed and r emanded t he conf i r mat i on order so

t hat t he pl an coul d be amended t o accommodat e Pr udent i al ' s now-

i ncr eased cl ai m. The Debt ors and t he Ci t y5 each appeal ed bot h of

t he BAP' s deci si ons t o t hi s cour t . Pr udent i al moved t o di smi ss t he

conf i r mat i on or der appeal s f or l ack of j ur i sdi ct i on, ar gui ng t hat

t hey wer e not f i nal appeal abl e or der s. Those mot i ons wer e r ef er r ed

t o t hi s panel f or consi der at i on al ong wi t h t he mer i t s.

Throughout t hese proceedi ngs, t he Debt or s have cont i nued

t o sel l W condomi ni ums and have si nce pai d Pr udent i al t he f ul l

amount due under t he or i gi nal l y conf i r med pl an. The Ci t y, i n

cont r ast , has not r ecei ved al l t he payment s owed t o i t under t he

pl an, whi ch became ef f ect i ve on December 1, 2011. The Debt ors, we

were i nf ormed at oral argument , have al so st opped maki ng

i nst al l ment payment s owed t o ot her cr edi t or s under t hat pl an.

5 The Ci t y, as a j uni or l i enhol der , ar gues t hat i t s abi l i t y t or ecover i t s af f ordabl e housi ng and economi c devel opment money maybe sever el y compr omi sed i f t he BAP' s order st ands.

-12-


13/51

II. Analysis

Accordi ng no speci al def erence t o t he BAP, we f ocus

i nst ead on t he bankrupt cy cour t ' s deci si ons, r evi ewi ng concl usi ons

of l aw de novo and f i ndi ngs of f act f or cl ear er r or . St or nawaye

Fi n. Cor p. v. Hi l l ( I n r e Hi l l ) , 562 F. 3d 29, 32 ( 1st Ci r . 2009) .

The bankrupt cy cour t ' s i nt er pret at i on of t he r el evant st at utes

pr esent s a quest i on of l aw, whi l e i t s appl i cat i on of t hose st at ut es

t o t he f act s of t hi s case pr esent s a mi xed quest i on of l aw and f act

t hat we r evi ew f or cl ear er r or unl ess i t s anal ysi s was "i nf ect ed by

l egal er r or . " Wi nt hr op Ol d Far m Nur ser i es, I nc. v. New Bedf or d

I nst . f or Sav. ( I n r e Wi nt hr op Ol d Far m Nur ser i es, I nc. ) , 50 F. 3d

72, 73 ( 1st Ci r . 1995) ( i nt er nal quot at i on mar ks omi t t ed) . Absent

l egal er r or , we wi l l not r ever se a f act ual f i ndi ng under t hi s

" f or mi dabl e st andar d, " Shar f ar z v. Goguen ( I n r e Goguen) , 691 F. 3d

62, 69 ( 1st Ci r . 2012) , unl ess, "on t he whol e of t he r ecor d, we

f or m a st r ong, unyi el di ng bel i ef t hat a mi st ake has been made, "

Cumpi ano v. Banco Sant ander P. R. , 902 F. 2d 148, 152 ( 1st Ci r .

1990) . " I f t he bankrupt cy cour t ' s account of t he evi dence i s

pl ausi bl e i n l i ght of t he r ecor d vi ewed i n i t s ent i r et y, we may not

r ever se. " Goat I sl and S. Condo. Ass' n v. I DC Cl ambakes, I nc. ( I n

r e I DC Cl ambakes, I nc. ) , 727 F. 3d 58, 64 ( 1st Ci r . 2013)

( al t er at i on and i nt er nal quot at i on mar ks omi t t ed) .

-13-


14/51

A. Equitable Mootness

The Debt or s f i r st appeal f r om t he BAP' s deni al of t hei r

mot i ons to di smi ss Pr udent i al ' s appeal s as equi t abl y moot . The

doct r i ne of equi t abl e moot ness al l ows an appel l at e cour t t o di smi ss

a bankrupt cy appeal i f "an unwar r ant ed or r epeat ed f ai l ur e to

r equest a st ay enabl ed devel opment s t o evol ve i n r el i ance on t he

bankrupt cy cour t order t o t he degr ee t hat t hei r r emedi at i on has

become i mpr act i cabl e or i mposs i bl e, " Hi cks, Muse & Co. v. Br andt

( I n r e Heal t hco I nt ' l , I nc. ) , 136 F. 3d 45, 48 ( 1st Ci r . 1998) , or

i f " t he chal l enged bankr upt cy cour t order has been i mpl ement ed t o

t he degr ee that meani ngf ul appel l at e r el i ef i s no l onger

pr act i cabl e even t hough t he appel l ant may have sought a st ay wi t h

al l due di l i gence, " i d.

As a thr eshol d i ssue, 6 t he par t i es di sput e t he

appr opr i at e st andar d of r evi ew, t he subj ect of a ci r cui t spl i t t hat

t hi s ci r cui t has not yet addr essed. Compar e Li qui di t y Sol ut i ons,

I nc. v. Wi nn- Di xi e St or es, I nc. ( I n r e Wi nn- Di xi e St or e, I nc. ) , 286

6 Ther e i s, i n f act , a pr i or t hr eshol d i ssue. Pr udent i alar gues t hat t hi s cour t l acks j ur i sdi ct i on because t he Debt or s di dnot i dent i f y i n t hei r not i ces of appeal t he BAP' s or der s denyi ngt he mot i ons t o di smi ss. We di sagr ee. See Mar t nez- Ser r ano v.Qual i t y Heal t h Ser vs. of P. R. , I nc. , 568 F. 3d 278, 28283 ( 1st Ci r .2009) ( r ej ect i ng ar gument t hat cour t l acked j ur i sdi ct i on t o

consi der excl usi on of exper t wi t ness wher e onl y f i nal j udgment wasl i st ed i n not i ce, because "a not i ce of appeal i s deemed t oencompass not onl y t he f i nal j udgment but al so al l i nt er l ocut or yor der s t hat mer ge i nt o i t " ) . Mor eover , t he Debt or s l i st ed t heequi t abl e moot ness i ssue i n t hei r st at ement of i ssues on appeal ,and t her e i s no asser t i on t hat Prudent i al was caught by sur pr i sedue t o t echni cal def ect s, i f any, i n t he not i ces of appeal .

-14-


15/51

F. App' x 619, 622 & n. 2 ( 11t h Ci r . 2008) ( per cur i am) ( adopt i ng de

novo st andar d) , Cur r eys of Neb. , I nc. v. Uni t ed Pr oducer s, I nc. ( I n

r e Uni t ed Pr oducer s, I nc. ) , 526 F. 3d 942, 94647 ( 6t h Ci r . 2008)

( same) , and Uni t ed St at es v. Gen. Wi r el ess, I nc. ( I n r e GWI PCS 1

I nc. ) , 230 F. 3d 788, 799800 ( 5t h Ci r . 2000) ( same) , wi t h R2 I nvs . ,

I nc. v. Char t er Commc' ns, I nc. ( I n r e Char t er Commc' ns, I nc. ) , 691

F. 3d 476, 483 ( 2d Ci r . 2012) ( adopt i ng abuse- of - di scr et i on

st andar d) , Sear ch Mkt . Di r ect , I nc. v. J ubber ( I n r e Pai ge) , 584

F. 3d 1327, 133435 ( 10t h Ci r . 2009) ( same) , I n r e Cont i nent al

Ai r l i nes, 91 F. 3d 553, 560 ( 3d Ci r . 1996) ( en banc) ( same) , and I n

r e AOV I ndus. , I nc. , 792 F. 2d 1140, 1148 ( D. C. Ci r . 1986) ( same) .

The Debt or s ar gue t hat our r evi ew shoul d be de novo

"[ s] i nce t he [ c] our t appl i es pl enar y r evi ew t o vi r t ual l y al l ot her

r ul i ngs of t he BAP. " Pr udent i al , not i ng t hat a di smi ssal f or

equi t abl e moot ness i s an exer ci se of t he "cour t ' s di scret i on i n

mat t er s of r emedy and j udi ci al admi ni st r at i on not t o det er mi ne a

case on i t s mer i t s, " Rochman v. Ne. Ut i l s. Ser v. Gr p. ( I n r e Pub.

Ser v. Co. of N. H. ) , 963 F. 2d 469, 471 ( 1st Ci r . 1992) ( i nt er nal

quot at i on mar ks omi t t ed) , ar gues t hat r evi ew shoul d be f or abuse of

t hat di scr et i on. We need not r esol ve t he i ssue because we cannot

say t hat t he BAP' s r ef usal t o di smi ss t he appeal s was i nappr opr i at e

under ei t her st andar d.

I n a car ef ul and det ai l ed anal ysi s t hat we need not

r epr oduce her e, t he BAP consi der ed t he r el evant f act or s and

-15-


16/51

concl uded t hat , i f Pr udent i al pr evai l ed on appeal , t he bankrupt cy

cour t coul d f ashi on some f or m of pr act i cabl e r el i ef , even i f onl y

par t i al or al t er nat i ve. We per cei ve no r eason t o di sl odge t hi s

det er mi nat i on. We t her ef or e t ur n t o t he subst ance of t he

bankrupt cy cour t ' s or der s.

B. 506(b) Order

As a gener al mat t er , unmat ur ed i nt er est i s not al l owed

af t er t he f i l i ng of a bankr upt cy pet i t i on. 11 U. S. C. 502( b) ( 2) .

However , Congr ess has cr eat ed an except i on t o thi s r ul e i n t he case

of "over secur ed" credi t or s. See Uni t ed Sav. Ass' n of Tex. v.

Ti mber s of I nwood For est Assocs. , 484 U. S. 365, 37273 ( 1988) ; For d

Mot or Cr edi t Co. v. Dobbi ns, 35 F. 3d 860, 869 ( 4t h Ci r . 1994) . Two

pr ovi si ons of 506 of t he Bankr upt cy Code govern the award of

post - pet i t i on i nt er est t o an over secur ed credi t or . Fi r st , 506( a)

sets t he amount of a cr edi t or ' s al l owed secur ed cl ai m:

An al l owed cl ai m of a credi t or secur ed by a l i en onpr oper t y i n whi ch t he est at e has an i nt er est , . . . i s asecur ed cl ai m t o t he ext ent of t he val ue of suchcredi t or ' s i nt er est i n t he est at e' s i nt er est i n suchpr oper t y, 7 . . . and i s an unsecur ed cl ai m t o t he ext ent

7 A cr edi t or ' s " i nt er est i n pr oper t y" i s i t s "secur i t yi nt er est wi t hout t aki ng account of [ i t s] r i ght t o i mmedi at epossessi on of t he col l at er al on def aul t , " Ti mber s, 484 U. S. at 372,or , i n ot her wor ds, t he val ue of t he col l at er al al one, not

i ncl udi ng ot her r i ght s t hat t he wor d " i nt er est " may i nvoke, i d. at37172. The phr ase " t he val ue of such cr edi t or ' s i nt er est i n t heest at e' s i nt er est i n such pr oper t y" r ecogni zes t hat a debt or maynot own t he ent i r e i nt er est i n t he col l at er al and t hat ot hercr edi t or s may hol d seni or l i ens on t hat same col l at er al . "A debt ormay own onl y a par t i nt er est i n t he pr oper t y pl edged as col l at er al ,i n whi ch case t he cour t wi l l be r equi r ed t o ascer t ai n t he ' est at e' s

-16-


17/51

t hat t he val ue of such cr edi t or ' s i nt er est . . . i s l esst han t he amount of such al l owed cl ai m. Such val ue shal lbe det er mi ned i n l i ght of t he pur pose of t he val uat i onand of t he pr oposed di sposi t i on or use of such pr oper t y,and i n conj unct i on wi t h any hear i ng on such di sposi t i onor use or on a pl an af f ect i ng such credi t or s i nt er est .

11 U. S. C. 506( a) ( 1) . 8 Thus, a cl ai m may be bi f ur cat ed i nt o

secur ed and unsecur ed port i ons dependi ng on the val ue of t he

col l at er al . Next , 506( b) def i nes an over secur ed credi t or ' s

ent i t l ement t o post - pet i t i on i nt er est :

To t he ext ent t hat an al l owed secur ed cl ai mi s secur ed bypr oper t y the val ue of whi ch, af t er any recover y undersubsect i on ( c) of t hi s sect i on, i s gr eat er t han t heamount of such cl ai m, t her e shal l be al l owed t o t hehol der of such cl ai m, i nt er est on such cl ai m, and anyr easonabl e f ees, cost s, or char ges pr ovi ded f or under t heagr eement or St at e st at ut e under whi ch such cl ai mar ose.

i nt er est ' i n t he col l at er al . Or , a credi t or may hol d a j uni or orsubor di nat e l i en, whi ch woul d r equi r e t he cour t t o ascer t ai n t he

credi t or ' s i nt er est i n t he col l at er al . " Assocs. Commer ci al Cor p.v. Rash, 520 U. S. 953, 961 ( 1997) . Her e, Prudent i al i s t he seni orcr edi t or , so i t s i nt er est i n t he col l at er al i s undi mi ni shed. I naddi t i on, al t hough t he par t i es di sput e whet her t he var i ous Debt or s'col l at er al shoul d be aggr egat ed f or pur poses of t he over secur i t ydet er mi nat i on, each Debt or ' s i nt er est i n t he col l at er al i t pl edgedi s undi vi ded. The cumber some st at ut or y l anguage t hus di st i l l s to"val ue of t he col l at er al . "

8 I n addi t i on t o ent i t l ement t o post - pet i t i on i nt er est , a 506( a) det er mi nat i on of secur ed st at us t r i gger s sever al r i ght sand pr ot ect i ons f or t he cl ai mhol der . See 4 Col l i er on Bankrupt cy

506. 02 ( Al an N. Resni ck & Henr y J . Sommer, eds. , 16t h ed. )( not i ng t hat t he hol der of a secur ed cl ai m may be ent i t l ed t oadequat e pr ot ect i on r el i ef , l i f t i ng of t he aut omat i c bankr upt cyst ay, and gr eat er pr ot ect i on i n cr amdown si t uat i ons) . The 506( a)det er mi nat i on may di f f er dependi ng on t he pur pose of t he val uat i on.Her e we ar e concer ned sol el y wi t h val uat i ons f or t he pur pose ofdet er mi ni ng ent i t l ement t o post - pet i t i on i nt er est .

-17-


18/51

I d. 506( b) . Thus, i f t he col l at er al i s wor t h mor e t han t he

amount of t he secur ed cl ai m, t he cr edi t or i s ent i t l ed t o

post- pet i t i on i nt er est on i t s cl ai m9 up t o t he amount of t he

di f f er ence i n val ues ( t hi s di f f er ence i s r ef er r ed t o as an "equi t y

cushi on" or " secur i t y cushi on") . See Baybank- Mi ddl esex v. Ral ar

Di st r i bs. , I nc. , 69 F. 3d 1200, 1202 ( 1st Ci r . 1995) ( "A credi t or i s

over secur ed when t he val ue of i t s col l at er al exceeds t he amount of

i t s [ al l owed secur ed] cl ai m; post pet i t i on i nt er est and f ees ar e

al l owabl e onl y t o t he ext ent of t hat over secur i t y. ") ; see al so

Ti mber s, 484 U. S. at 372 ( not i ng t hat 506( b) "per mi t s

post pet i t i on i nt er est t o be pai d onl y out of t he ' secur i t y

cushi on' ") . Post - pet i t i on i nt er est accr ues unt i l t he secur ed cl ai m

i s pai d or unt i l t he ef f ect i ve dat e of t he pl an. Rake v. Wade, 508

U. S. 464, 468 ( 1993) , super seded by st at ut e on ot her gr ounds, 11

U. S. C. 1322( e) .

The par t i es agr ee t hat Pr udent i al was oversecur ed dur i ng

at l east par t of t he bankrupt cy pr oceedi ng and t her ef or e i s

9 Prudent i al al so sought appr oxi mat el y $750, 000 i n post -pet i t i on f ees and cost s. The bankrupt cy cour t deni ed t hi s request ,not i ng t hat Pr udent i al f ai l ed t o expl ai n or i t emi ze t hi s amount off ees and cost s or t o i ndi cat e what pr ovi si on( s) of t he r el evantcont r act s pr ovi ded f or t hem. The BAP not ed t hat Pr udent i al "di dnot br i ef any i ssues r el at i ng t o t he bankr upt cy cour t ' s r ul i ng, "

and deemed t he i ssue wai ved. Si mi l ar l y, her e, Pr udent i al r ef er ssever al t i mes t o i t s ent i t l ement t o post - pet i t i on cost s and f ees i ni t s br i ef , but of f er s no ar gument t hat t he bankrupt cy cour t er r ed.Li ke t he BAP, we consi der t hi s i ssue wai ved. See Uni t ed St at es v.Zanni no, 895 F. 2d 1, 17 ( 1st Ci r . 1990) ( " [ I ] ssues adver t ed t o i na per f unct ory manner , unaccompani ed by some ef f or t at devel opedargument at i on, are deemed wai ved. " ) .

-18-


19/51

ent i t l ed t o some amount of post - pet i t i on i nt er est , but t hey di f f er

as t o how t o determi ne oversecur ed st atus, when Pr udent i al became

over secur ed, and t he appl i cabl e i nt er est r at e and t ype.

1. Determination of Oversecurity

We r evi ew t he bankrupt cy cour t ' s i nt er pr et at i on of 506

de novo, and i t s f act ual f i ndi ng as t o when Prudent i al became

over secur ed f or cl ear err or . See Hi l l , 562 F. 3d at 32.

i. Flexible Versus Single-Valuation Approach

Al t hough 506( a) di ct ates how cour t s shoul d det er mi ne

secur ed st at us and col l at er al val ue, i t does not speci f y t he t i me

as of whi ch these determi nat i ons shoul d be made. 10 See Fi n. Sec.

Assurance I nc. v. T- H New Or l eans Lt d. P' shi p ( I n r e T- H New

Or l eans Lt d. P' shi p) , 116 F. 3d 790, 798 ( 5t h Ci r . 1997) . Wher e

t hese f i gur es r emai n r el at i vel y const ant , t he choi ce of measur i ng

date may not mat t er . But where, as here, t he amount of t he cl ai m

has decr eased si gni f i cant l y and t he val ue of t he col l at er al has

i ncr eased dur i ng t he cour se of t he bankr upt cy, t he choi ce can make

t he di f f er ence bet ween a f i ndi ng of over secur i t y or under secur i t y.

10 We r ecogni ze t hat " t i mi ng of t he val uat i on" and si mi l ar

l anguage coul d be read t o ref er ei t her t o the t i me the cour tact ual l y render s t he val uat i on det er mi nat i on or t o t he val ue of t hecol l at er al at some par t i cul ar poi nt i n t i me. For t he pur poses oft hi s opi ni on, we use t he t er ms " t i mi ng of t he val uat i on" and"measur i ng dat e" t o ref er t o t he val ue of col l at er al as of apar t i cul ar dat e, wi t hout r egar d t o when t he cour t r ender s i t sdet er mi nat i on.

-19-


20/51

Cour t s have spl i t on t he t i mi ng i ssue. Sever al have

adopt ed a "si ngl e- val uat i on" appr oach, wher e t he det er mi nat i on of

over secur i t y f or 506( b) pur poses al ways occur s at a f i xed poi nt

i n t i me ( gener al l y ei t her t he pet i t i on dat e or t he conf i r mat i on

dat e) . See, e. g. , Or i x Cr edi t Al l i ance, I nc. v. Del t a Res. , I nc.

( I n r e Del t a Res. , I nc. ) , 54 F. 3d 722, 729 ( 11t h Ci r . 1995) ( per

cur i am) ( "[ T] he over secur ed credi t or ' s al l owed secur ed cl ai m f or

post pet i t i on i nt er est i s l i mi t ed t o t he amount t hat a credi t or was

over secur ed at t he t i me of f i l i ng. " ) . Ot her s have adopt ed a

"f l exi bl e" appr oach, gi vi ng t he bankr upt cy cour t di scret i on t o

determi ne t he appr opr i ate measur i ng date based on t he ci r cumst ances

of t he case. See, e. g. , T- H New Or l eans, 116 F. 3d at 798 ( " [ F] or

pur poses of det er mi ni ng whet her a cr edi t or i s ent i t l ed t o accrue

i nt er est under 506( b) i n t he ci r cumst ance wher e t he col l at er al ' s

val ue i s i ncr easi ng and/ or t he cr edi t or ' s al l owed cl ai mhas been or

i s bei ng r educed by cash col l at er al payment s, such t hat at some

poi nt i n t i me pr i or t o conf i r mat i on of t he debt or ' s pl an t he

cr edi t or may become over secur ed, val uat i on of t he col l at er al and

t he credi t or ' s cl ai mshoul d be f l exi bl e and not l i mi t ed t o a si ngl e

poi nt i n t i me, such as t he pet i t i on dat e or conf i r mat i on dat e. ") .

The bankrupt cy cour t provi ded a t hor ough r evi ew of t he spl i t i n

aut hor i t y, see I n r e SW Hot el Vent ur e, LLC, 460 B. R. 4, 2731

( Bankr . D. Mass. 2011) , and we need not r epeat i t here.

-20-


21/51

The bankrupt cy cour t and t he BAP bot h adopt ed t he

f l exi bl e appr oach, al t hough t hei r appl i cat i ons of i t di f f er ed. The

bankrupt cy cour t f ound t hat t he hot el sal e pr i ce pr ovi ded t he best

evi dence of t he hot el ' s val ue as of t he sal e dat e, but concl uded

t hat t he sal e pr i ce was not r ef l ect i ve of i t s val ue at any ear l i er

poi nt i n t i me due t o t he pr evi ousl y out st andi ng cont i ngenci es. The

BAP agr eed t hat t he sal e pr i ce was t he best evi dence of val ue, but

concl uded t hat t he sal e pr i ce est abl i shed t hat Pr udent i al was

oversecur ed t hr oughout t he pendency of t he bankr upt cy pr oceedi ngs.

The Debt or s and t he Ci t y urge us t o uphol d t he bankrupt cy

cour t ' s appl i cat i on of t he f l exi bl e appr oach i n t hi s case.

Pr udent i al ' s ar gument i s t wo- pr onged. Pr udent i al ur ges us t o adopt

a si ngl e- val uat i on appr oach usi ng t he conf i r mat i on dat e as t he

measur i ng dat e, and t o hol d t hat , as a mat t er of l aw, i t s

over secur i t y at conf i r mat i on di ctat es t hat i t r ecei ve post - pet i t i on

i nt er est f r om t he pet i t i on dat e r egar dl ess of whet her i t was

under secur ed at any poi nt pr i or t o that dat e. 11 I t al so ar gues

t hat , even i f t he f l exi bl e appr oach wer e appr opr i at e, t he

bankrupt cy cour t er r ed i n appl yi ng i t , and t hat we shoul d af f i r m

11 We not e t hat i t t ook opposi t e posi t i ons bef or e t he

bankr upt cy cour t . I n i t s 506( b) mot i on, Pr udent i al expl i ci t l yar gued t hat " t he appr opr i at e t i me at whi ch t o val ue t he secur edcredi t or ' s i nt erest i n t he col l at eral i s . . . f l exi bl e, " and "t ot he ext ent a secur ed credi t or ' s cl ai m f l uct uat es bet ween bei ngoversecur ed and undersecur ed dur i ng t he cour se of a bankr upt cycase, t he credi t or i s ent i t l ed t o accr ue post - pet i t i on i nt er estdur i ng t he per i od whi ch i t i s over secur ed. "

-21-


22/51

t he BAP' s concl usi on t hat t he hot el sal e pr i ce est abl i shed t hat i t

was over secur ed t hr oughout t he bankr upt cy.

I n a hel pf ul ami cus br i ef , t he Mor t gage Banker s

Associ at i on ( "Mor t g. B. A. ") ar gues t hat t he t i mi ng of t he val uat i on

must , by st at ut e, be t et her ed t o t he pur pose f or whi ch t he

val uat i on i s made, and t hat t he si ngl e val uat i on appr oach i s over l y

si mpl i st i c because i t r equi r es t he same measur i ng dat e regar dl ess

of t he pur pose of t he val uat i on. However , not i ng t hat an open-

ended f l exi bl e appr oach coul d r equi r e pot ent i al l y l i mi t l ess

r edet er mi nat i ons i n cases of f l uct uat i ng val ue, i t caut i ons t hat

any r ul e must avoi d ser i ous pr act i cal consequences: i f t he f l exi bl e

appr oach pr ovi des t hat a pr e- conf i r mat i on val uat i on i s not onl y

r el evant but al so essent i al t o det er mi ni ng credi t or s' secur ed

st at us at conf i r mat i on, t hat may undul y bur den cr edi t or s or ,

conver sel y, be used t o har ass debt or s by encour agi ng aggr essi ve

act i on by cr edi t or s. We do not bel i eve our r esol ut i on of t hi s case

r ai ses t hose concer ns.

We agr ee wi t h t he bankr upt cy cour t and t he BAP t hat , at

l east i n the ci r cumst ances pr esent ed her e, a bankrupt cy cour t may,

i n i t s di scret i on, adopt a f l exi bl e appr oach.

We have pr evi ousl y recogni zed t hat t he st at ut or y

di r ect i ve t o det er mi ne col l at er al ' s val ue "i n l i ght of t he pur pose

of t he val uat i on and of t he pr oposed di sposi t i on or use of such

pr oper t y, " 506( a) , af f or ds bankr upt cy cour t s f l exi bi l i t y i n

-22-


23/51

det er mi ni ng t he appr opr i at e val uat i on met hod, gi ven t he par t i cul ar

f act s of t he case at hand. Wi nt hr op Ol d Far m, 50 F. 3d at 7374;

see al so I n r e Her i t age Hi ghgat e, I nc. , 679 F. 3d 132, 141 ( 3d Ci r .

2012) ( " [ I n t he 506( a) cont ext ] , Congr ess envi si oned a f l exi bl e

appr oach t o val uat i on whereby bankr upt cy cour t s woul d choose t he

st andar d t hat best f i t s t he ci r cumst ances of a par t i cul ar case. ") .

But we have not yet addr essed whet her t hi s same f l exi bi l i t y extends

t o sel ect i ng a measur i ng dat e. Sever al consi der at i ons convi nce us

t hat , i n appr opr i at e ci r cumst ances, i t does.

Fi r st , nei t her 506( b) ' s l anguage, nor i t s l egi sl at i ve

hi st or y, nor t he bankrupt cy rul es def i ne t he measur i ng dat e f or

pur poses of post - pet i t i on i nt er est , suggest i ng f l exi bi l i t y. See T-

H New Or l eans, 116 F. 3d at 798. The l anguage of 506( a) al so

suggest s t hat Congr ess i nt ended bankr upt cy cour t s t o have

f l exi bi l i t y. Whi l e 506( a) ( 1) set s out a gener al r ul e t hat

col l at er al val ue "shal l be det er mi ned i n l i ght of t he pur pose of

t he val uat i on and of t he pr oposed di sposi t i on or use of such

pr oper t y, " 506( a) ( 2) cr eat es an except i on t o the gener al r ul e:

I f t he debt or i s an i ndi vi dual i n a case under chapt er 7or 13, such val ue wi t h r espect t o per sonal pr oper t ysecur i ng an al l owed cl ai m shal l be det er mi ned based ont he repl acement val ue of such pr oper t y as of t he dat e oft he f i l i ng of t he pet i t i on wi t hout deduct i on f or cost s of

sal e or mar ket i ng. Wi t h r espect t o pr oper t y acqui r ed f orper sonal , f ami l y, or househol d pur poses, r epl acementval ue shal l mean t he pr i ce a r et ai l mer chant woul d char gef or pr oper t y of t hat ki nd consi der i ng t he age andcondi t i on of t he pr oper t y at t he t i me val ue i sdet ermi ned.

-23-


24/51

506( a) ( 2) ( emphasi s added) . The f act t hat Congr ess mandated

par t i cul ar measur i ng dat es i n t he except i on wi t hout mandat i ng a

par t i cul ar measur i ng dat e i n t he gener al r ul e suggest s t hat i t

i nt ended f l exi bi l i t y under 506( a) ( 1) . See Russel l o v. Uni t ed

St at es, 464 U. S. 16, 23 ( 1983) ( "Wher e Congr ess i ncl udes par t i cul ar

l anguage i n one sect i on of a st at ut e but omi t s i t i n anot her

sect i on of t he same Act , i t i s gener al l y pr esumed t hat Congr ess

act s i nt ent i onal l y and pur posel y i n t he di spar at e i ncl usi on or

excl usi on. ") ( al t er at i on and i nt er nal quot at i on mar ks omi t t ed) ; see

al so I n r e Ur ban Communi cators PCS Lt d. P' shi p, 379 B. R. 232, 243

( Bankr . S. D. N. Y. 2007) ( "The st at ut or y gui dance appear i ng as par t

of sect i on 506( a) i s t he ant i t hesi s of a har d- and- f ast r ul e, and

i nst ead embodi es a mor e f unct i onal appr oach. " ) , af f ' d i n par t ,

r ev' d i n par t on ot her grounds sub nom. Ur ban Communi cat ors PCS

Ltd. P' shi p v. Gabr i el Capi t al , L. P. , 394 B. R. 325 ( S. D. N. Y. 2008) .

Second, t he consi der at i ons t hat suppor t ed af f or di ng

f l exi bi l i t y i n sel ect i ng a val uat i on met hod i n Wi nt hr op Ol d Far m

appl y equal l y t o sel ect i ng a val uat i on t i me. Ther e, we not ed t hat

al l owi ng bankrupt cy cour t s t o sel ect t he appr opr i at e val uat i on

met hod on a case- by- case basi s " al l ows t he bankrupt cy cour t , usi ng

i t s i nf or med di scret i on and appl yi ng hi st or i c pr i nci pl es of equi t y,

t o adopt i n each case the val uat i on met hod t hat i s f ai r est gi ven

t he pr evai l i ng ci r cumst ances. " 50 F. 3d at 7576; see al so Her i t age

Hi ghgate, 679 F. 3d at 142 n. 7 ( "Li ke t he appr opr i ate measur e of

-24-


25/51

f ai r mar ket val ue, t he appr opr i at e t i me as of whi ch t o val ue

col l at er al may di f f er dependi ng on t he f act s pr esent ed. As wi t h

t he r epl acement val uat i on t echni que, bankrupt cy cour t s are best

si t uat ed t o deter mi ne when i s t he appr opr i at e t i me t o val ue

col l at er al i n t he f i r st i nst ance. ") ( ci t at i on omi t t ed) ; T- H New

Or l eans, 116 F. 3d at 798 ( not i ng t hat a f l exi bl e st andar d

"r ecogni zes t he di scr et i onar y nat ur e of bankrupt cy cour t s as cour t s

of equi t y . . . [ and] t he equi t abl e nat ur e of bankrupt cy i n seeki ng

a bal ance bet ween debt or s and cr edi t or s ( debt or ' s r i ght t o a f r esh

st ar t ver sus t he credi t or ' s r i ght t o t he val ue of i t s cl ai m) ") .

Thi r d, r at her t han yi el di ng t he f ai r est r esul t , a r i gi d

si ngl e- val uat i on appr oach guar ant ees an al l - or - not hi ng r esul t t hat

hi nges mor e on f or t ui t y t han r eal i t y. For exampl e, i f t he pet i t i on

dat e wer e t he r equi r ed measur i ng dat e, a cr edi t or t hat f i r st became

over secur ed even one day l at er woul d be al l owed no post - pet i t i on

i nt er est , even t hough i t was over secur ed t hr oughout al most t he

ent i r e bankr upt cy and even t hough i t coul d r ecei ve subst ant i al

post - pet i t i on i nt er est under a f l exi bl e appr oach. Conver sel y, i f

t he conf i r mat i on dat e wer e t he r equi r ed measur i ng dat e, a cr edi t or

t hat f i r st became over secur ed j ust one day ear l i er woul d be al l owed

post - pet i t i on i nt er est f or t he ent i r et y of t he bankr upt cy

pr oceedi ng ( up t o t he amount of t he equi t y cushi on) . 12 We do not

12 Thi s case wel l demonst r at es t he pr obl em wi t h Pr udent i al ' spr oposed si ngl e- val uat i onat - conf i r mat i on appr oach. As wi l l bedi scussed bel ow, Prudent i al onl y became over secur ed as a resul t of

-25-


26/51

bel i eve t hat Congr ess i nt ended ent i t l ement t o post - pet i t i on

i nt erest t o depend so heavi l y on chance. Nor do we bel i eve t hat

Congr ess i nt ended t o r est r i ct t he bankrupt cy cour t s' equi t abl e

di scr et i on wi t hout expl i ci t l y sayi ng so. The avai l abi l i t y of a

f l exi bl e appr oach st r i kes us as mor e l i kel y t o pr oduce f ai r

out comes t han al l owi ng post - pet i t i on i nt er est f or t he ent i r e

bankrupt cy, or not at al l , based on a r i gi dl y def i ned one- shot

vant age poi nt .

I n suppor t of i t s ar gument t hat t he conf i r mat i on dat e

must be the measur i ng dat e, Pr udent i al not es t hat t he col l at er al

val ue must be cal cul at ed at conf i r mat i on because, by def i ni t i on,

t he est at e can onl y di st r i but e what val ue t he debt or s act ual l y have

at t hat t i me. Thus, i t s ent i t l ement t o post - pet i t i on i nt er est ( or ,

mor e pr eci sel y, whet her i t s r ecei pt of post - pet i t i on i nt er est t o

whi ch i t woul d ot her wi se be ent i t l ed wi l l be l i mi t ed because the

equi t y cushi on i s i nsuf f i ci ent t o cover i t ) can onl y be known at

conf i r mat i on. Si mi l ar l y, t he exi st ence and ext ent of over secur i t y

can onl y be concl usi vel y determi ned once the amount of any recover y

under 506( c) i s known, whi ch al so, by necessi t y, i s at

conf i r mat i on. These consi der at i ons expl ai n why a cr edi t or does not

t he Debt or s' cont i nued ef f or t s t o compl et e t he W pr oj ect andcont i nue sel l i ng condomi ni umuni t s - - successf ul ef f or t s t hat wer ef unded i n l ar ge par t by a cash i nf usi on made by t he Ci t y. Equi t ydoes not r equi r e t hat a seni or secur ed cr edi t or be al l owed t ovacuum up al l t he upsi de of appr eci at i on of i t s col l at er al wher et hat appr eci at i on was onl y r eal i zed due to f undi ng pr ovi ded by aj uni or cr edi t or .

-26-


27/51

r ecei ve accr ued post - pet i t i on i nt er est unt i l conf i r mat i on. See

Uni t ed Sav. Ass' n of Tex. v. Ti mber s of I nwood For est Assocs. ( I n

r e Ti mber s of I nwood For est Assocs. ) , 793 F. 2d 1380, 1407 ( 5t h Ci r .

1986) . But we see not hi ng i ncongr uous about f i ndi ng t hat a

credi t or became ent i t l ed t o post - pet i t i on i nt er est at one poi nt i n

t he pr oceedi ngs and det er mi ni ng whet her t hat i nt er est wi l l be

l i mi t ed by the si ze of t he equi t y cushi on at a di f f er ent poi nt

( namel y, t he t i me of conf i r mat i on) . See T- H New Or l eans, 116 F. 3d

at 799 ( " [ A] secur ed cr edi t or ' s ent i t l ement t o accrue i nt er est

under 506( b) mat ur es at t hat poi nt i n t i me wher e the cr edi t or ' s

cl ai m becomes over secur ed. However , as Ti mber s di ct at es, accr ued

i nt er est under 506( b) i s not pai d t o an over secur ed cr edi t or

unt i l t he pl an' s conf i r mat i on or i t s ef f ect i ve dat e, whi chever i s

l at er . ") ( f oot not e omi t t ed) .

For t hese reasons, we hol d t hat , under t he par t i cul ar

f act s pr esent ed i n t hi s case, t he bankrupt cy cour t di d not er r i n

adopt i ng a f l exi bl e appr oach f or det er mi ni ng over secur ed st at us. 13

13 We do not suggest t hat bankr upt cy cour t s must , or evenshoul d, adopt t he f l exi bl e appr oach whenever col l at er al val uesand/ or cl ai m amount s f l uct uat e. We si mpl y r ecogni ze t hat abankrupt cy cour t may, i n t he exer ci se of i t s di scr et i on, det er mi net hat , on t he par t i cul ar f act s bef or e i t , equi t y and f ai r ness woul dbe best served by appl i cat i on of a f l exi bl e appr oach.

-27-


28/51

ii. Application of the Flexible Approach

a. Standard of Review

The bankrupt cy cour t det er mi ned t hat Pr udent i al became

over secur ed as of t he dat e the hot el sal e cl osed and was ent i t l ed

t o post - pet i t i on i nt er est f r om t hat dat e t hr ough t he ef f ect i ve

dat e. Al t hough t hi s i s a f act ual det er mi nat i on t o whi ch t he cl ear -

er r or st andar d woul d nor mal l y appl y, cf . Baybank- Mi ddl esex, 69 F. 3d

at 1203 ( r evi ewi ng f or cl ear er r or a det er mi nat i on t hat t he

cr edi t or was under secur ed f or adequat e- pr ot ect i on pur poses) ,

Pr udent i al ar gues t hat t hat st andar d i s i nappr opr i at e her e because

t he bankrupt cy cour t ' s f act ual det er mi nat i on was i nf ect ed by l egal

er r or , see Wi nt hr op Ol d Far m, 50 F. 3d at 73, i n t hat t he bankrupt cy

cour t wr ongl y el evat ed Pr udent i al ' s bur den of pr oof i n est abl i shi ng

over secur i t y. We f i nd no such er r or .

The par t i es agr ee t hat , ul t i mat el y, t he bur den was on

Prudent i al t o show by a pr eponderance of t he evi dence that i t was

oversecur ed, 14but Pr udent i al ar gues t hat t he bankrupt cy cour t er r ed

14Prudent i al advocat es f or a bur den- shi f t i ng appr oach by whi chi t s bur den was not t r i gger ed unl ess and unt i l t he Debt or s r ef ut edt he pr esumed val i di t y of i t s pr oof of cl ai m by i nt r oduci ngsuf f i ci ent evi dence t hat t he col l at er al was wor t h l ess t han t heamount of t he secur ed cl ai mpl us i nt er est . See Her i t age Hi ghgat e,679 F. 3d at 13940, 145 ( di scuss i ng var i ed appr oaches, and adopt i ng

a bur den- shi f t i ng f r amewor k f or det er mi ni ng t he ext ent t o whi ch acl ai mi s secur ed under 506( a) ) . Regar dl ess of t he mer i t s of t hi sappr oach, Pr udent i al di d not r equest i t s appl i cat i on bel ow and di dnot chal l enge t he Debt or s' ci t at i on t o a l ong st r i ng of caseshol di ng t hat t he cr edi t or bear s t he bur den of est abl i shi ngover secur ed st at us. See, e. g. , T- H New Or l eans, 116 F. 3d at 798( hol di ng t hat , al t hough t he bur den t o mot i on f or a 506( b)

-28-


29/51

i n hol di ng i t t o a much hi gher st andar d. I n r ul i ng t hat t he sal e

cl osi ng dat e was t he appr opr i at e t i me t o f i x Pr udent i al ' s

over secur ed st at us, t he bankrupt cy cour t st at ed t hat , " [ o] n t hat

dat e, i t was unequi vocal l y est abl i shed and beyond di sput e t hat

Pr udent i al was an over secur ed cr edi t or . " SW Hot el Vent ur e, 460

B. R. at 32. We do not agr ee wi t h Prudent i al t hat t hi s passage

means t hat t he bankr upt cy cour t r epl aced t he pr eponderance st andard

wi t h a newl y creat ed "unequi vocal and beyond di sput e" st andard.

The bankr upt cy cour t cor r ect l y r eci t ed t he preponder ance st andar d

t hr ee separ at e t i mes i n i t s compr ehensi ve 506( b) r ul i ng. We r ead

t he "beyond di sput e" l anguage as a comment on t he cer t ai nt y of t he

over secur i t y f i ndi ng, and see absol ut el y not hi ng i n t he bankrupt cy

cour t ' s r easoni ng or concl usi ons t o suggest t hat i t was appl yi ng

anythi ng ot her t han t he cor r ect s t andar d. Because t he bankrupt cy

det er mi nat i on l i es wi t h whi chever par t y cont ends t hat t her e i s adi sput e about ent i t l ement t o post - pet i t i on i nt er est , "[ t ] hecr edi t or . . . bear s t he ul t i mat e bur den t o pr ove by apr eponder ance of evi dence i t s ent i t l ement t o post pet i t i on i nt er est ,t hat i s, t hat i t s cl ai m was over secur ed, t o what ext ent , and f orwhat per i od of t i me") . The Debt or s can har dl y be f aul t ed f orpur por t edl y f ai l i ng t o make a showi ng t hat no bi ndi ng pr ecedentr equi r ed t hat t hey make and t hat t hey were never asked t o make.

I n addi t i on, Pr udent i al appar ent l y f ai l ed t o submi t copi es oft he r el evant document at i on ( t he note, mort gage, and CLA) al ong wi t h

i t s pr oof of cl ai m, despi t e t he pr oof - of - cl ai m f or m' s speci f i ci nst r uct i ons t o do so and cont r ar y t o t he r equi r ement s ofBankrupt cy Rul e 3001. Ther ef or e, even i f t he bur den- shi f t i ngappr oach had appl i ed, i t i s hi ghl y quest i onabl e whet her Pr udent i alwas ent i t l ed t o t he pr esumed val i di t y t hat at t aches t o a "pr oof ofcl ai m execut ed and f i l ed i n accor dance wi t h [ Rul e 3001] , " Fed. R.Bankr. P. 3001( f ) .

-29-


30/51

cour t ' s anal ysi s was not i nf ect ed by l egal er r or , t he cl ear - er r or

st andar d appl i es.

b. Measuring Date

The bankrupt cy cour t consi der ed several possi bl e

measur i ng dat es ( t he pet i t i on dat e, t he dat e of t he l i f t - st ay

deci si on, t he dat e SW Bost on si gned t he hot el P&S and f i l ed i t s

mot i on f or appr oval of t he sal e, t he dat e t he cour t appr oved t he

sal e mot i on, t he hot el sal e dat e, and t he dat e of t he conf i r mat i on

hear i ng) , and det er mi ned t hat t he sal e cl osi ng dat e was t he

ear l i est t hat Pr udent i al had est abl i shed over secur ed st at us. 15

As f or t he pet i t i on dat e, t he cour t not ed t hat Pr udent i al

had submi t t ed no evi dence that i t was over secur ed at t hat t i me, and

t hat i t i nst ead r el i ed on t he Debt or s' schedul es of asset s, whi ch

i ndi cat ed t hat t he val ue of Pr udent i al ' s col l at er al , i n t he

aggr egat e, was subst ant i al l y mor e t han i t s t ot al pr e- pet i t i on

cl ai m. As Pr udent i al poi nt s out , t hese schedul es wer e compl et ed

under penal t y of per j ur y. But , as the Debt or s poi nt out , t he

schedul es al so speci f i cal l y i ndi cat ed t hat t he l i st ed val ues wer e

book val ues t hat may not r ef l ect t he f ai r mar ket val ue of t he

15 The bankrupt cy cour t r el i ed on st i pul at ed val ues f or t he

r emai ni ng condomi ni ums and other col l ateral . These val ues are notdi sput ed on appeal . The par t i es l i kewi se st i pul at ed t o t he met hodf or cal cul at i ng Pr udent i al ' s cl ai m, i n l i ght of t he ongoi ngcondomi ni umsal es and appl i cat i on of t hose pr oceeds t o Pr udent i al ' scl ai m. The onl y r eal f act ual di sput e i s wi t h r espect t o t hehot el ' s val ue over t i me, cul mi nat i ng i n i t s f i nal sal e pr i ce of$89. 5 mi l l i on.

-30-


31/51

Debt or s' i nt er est i n t he r el evant pr oper t y. See Lawson v. For d

Mot or Co. ( I n r e Robl i n I ndus. , I nc. ) , 78 F. 3d 30, 36 ( 2d Ci r .

1996) ( " [ B] ook val ues ar e not or di nar i l y an accur at e r ef l ect i on of

t he mar ket val ue of an asset . " ) . The bankrupt cy cour t di d not r el y

on t hese val ues because t hey were not subst ant i ated by any

evi dence. We per cei ve no er r or , cl ear or other wi se.

As f or t he l i f t - st ay deci si on, t he Debt or s cor r ect l y not e

t hat t he mai n i ssue there was whether t he W was necessary t o an

ef f ect i ve r eor gani zat i on. The Bankrupt cy Code pr ovi des t hat t he

bankr upt cy cour t "shal l gr ant r el i ef f r om t he st ay" of an act

agai nst pr oper t y i f :

( A) t he debt or does not have an equi t y i n such pr oper t y;and( B) such pr oper t y i s not necessar y to an ef f ect i ver eor gani zat i on.

11 U. S. C. 362( d) ( 2) . 16 SW Bost on conceded t hat i t di d not have

equi t y i n i t s asset s al one, and t he bankr upt cy cour t r ej ect ed i t s

ar gument t hat t he combi ned col l at er al pl edged by al l of t he Debt or s

16 I n i t s l i f t - st ay mot i on, Pr udent i al al so moved f or r el i efunder 362( d) ( 1) ( gr ant i ng r el i ef f r om a st ay "f or cause,i ncl udi ng t he l ack of adequat e pr ot ect i on of an i nt er est i npr oper t y of such par t y i n i nt er est " ) , but appear s t o have abandonedt hat gr ound i n i t s post - t r i al br i ef i ng. The bankr upt cy cour t

consi der ed i t anyway, and det er mi ned t hat Pr udent i al had f ai l ed t oshow cause f or r el i ef because: ( 1) i t pr oduced no evi dence t hat i twas not adequat el y pr ot ect ed and f ai l ed t o addr ess i t i n i t s br i ef ;( 2) i t had an equi t y cushi on of $19 mi l l i on when i t s r emai ni ngcl ai mwas compar ed t o t he ent i r e col l at er al package; ( 3) SWBost onwas r educi ng t he amount owed t o Pr udent i al t hr ough condomi ni umsal epr oceeds; and ( 4) t he val ue of i t s secur ed cl ai mwas not decl i ni ng.

-31-


32/51

shoul d be consi dered i n determi ni ng whether i t had equi t y under

362( d) ( 2) ( A) . See I n r e SWBos. Hot el Vent ur e LLC, 449 B. R. 156,

17778 ( Bankr. D. Mass. 2011) ( di scussi ng spl i t of aut hor i t y,

det er mi ni ng t hat al l l i ens, i ncl udi ng t he Ci t y' s, shoul d be

compar ed onl y t o t he val ue of t he pr oper t y t hat was t he subj ect of

t he credi t or ' s l i f t - st ay r equest , and not i ng t hat consi der at i on of

ot her col l at er al i s r el evant f or ot her pur poses, i ncl udi ng

362( d) ( 1) and ( 2) ( B) ) . Thus, t he pr i mar y quest i on was whet her an

ef f ect i ve r eor gani zat i on was i n pr ospect and, i f so, whet her t he W

was necessar y t o t hat r eor gani zat i on. See 11 U. S. C.

362( d) ( 2) ( B) . Af t er a det ai l ed eval uat i on of each si de' s

evi dence and exper t t est i mony, t he cour t concl uded t hat SW Bost on

was " maki ng suf f i ci ent pr ogr ess t owar ds a r eal i st i c goal such t hat

i t s ef f or t s shoul d be al l owed t o cont i nue wi t hout t he t hr eat of

f or ecl osur e by Pr udent i al . " SW Bos. Hot el Vent ur e, 449 B. R. at

182. I t t hus deni ed Pr udent i al ' s mot i on f or r el i ef f r om t he st ay.

Poi nt i ng t o t he bankr upt cy cour t ' s f i ndi ng t hat , al t hough

Pr udent i al was under secur ed as t o SW Bost on al one, i t was

over secur ed by appr oxi mat el y $19 mi l l i on when al l of t he Debt or s'

col l at er al was consi der ed i n t he aggr egat e, Pr udent i al ar gues t hat ,

under Baybank- Mi ddl esex, t he bankr upt cy cour t ' s subsequent

"di smi ss[ al ] " or " di sregar d" of t hi s ear l i er f i ndi ng i s "a pr acti ce

not count enanced" i n t hi s ci r cui t . Pr udent i al mi sst at es bot h t he

f act s of t he case and t he r el evant l aw.

-32-


33/51

Fi r st , t he bankrupt cy cour t di d not di smi ss or di sr egar d

i t s ear l i er f i ndi ngs; i nst ead, i t sur veyed t he ent i r e l i f espan of

t he case, i ncor por at i ng subsequent devel opment s i nt o i t s anal ysi s

of t he ear l i er val uat i on, and det er mi ned t hat Pr udent i al had not

met i t s bur den of showi ng over secur i t y f or 506( b) pur poses at any

t i me bef or e t he sal e dat e. The bankrupt cy cour t di d not si mpl y

i gnor e i t s ear l i er val uat i on; i t expl i ci t l y consi der ed i t s ear l i er

val uat i on and expl ai ned i n det ai l why t hat val uat i on di d not

cont r ol . And, as we wi l l di scuss bel ow, t hat det er mi nat i on was not

cl ear l y er r oneous.

Second, whi l e Baybank- Mi ddl esex not ed that a val uat i on

made at an adequate- pr otect i on hear i ng was not di ct a, as t he

val uat i on was a f act ual f i ndi ng t hat const i t ut ed a "l ogi cal st ep i n

maki ng an adequat e pr ot ect i on det er mi nat i on, " 69 F. 3d at 1203, i t

pl ai nl y does not r equi r e an ear l i er val uat i on f or one pur pose to be

bi ndi ng f or some other pur pose. Nor woul d such a r equi r ement

squar e wi t h t he st at ut or y di r ect i ve t hat col l at er al ' s val ue "shal l

be det er mi ned i n l i ght of t he pur pose of t he val uat i on and of t he

pr oposed di sposi t i on or use of such pr oper t y. " 11 U. S. C. 506( a) .

We have not expr ess l y r ul ed on the quest i on, but ot her cour t s have

gener al l y hel d t hat a val uat i on at one poi nt i n t he pr oceedi ngs has

no bi ndi ng ef f ect on val uat i ons per f or med at ot her poi nt s and f or

-33-


34/51


35/51

pr i ce i s f ai r and i s t he r esul t of an ar m' s- l engt h t r ansact i on,

cour t s shoul d use t he sal e pr i ce, not some ear l i er hypot het i cal

val uat i on, t o det er mi ne whet her a credi t or i s over secur ed and t hus

ent i t l ed t o post pet i t i on i nt er est under 506( b) . " Dobbi ns, 35

F. 3d at 870; see al so Taki saki v. Al pi ne Gr p. , I nc. ( I n r e Al pi ne

Gr p. , I nc. ) , 151 B. R. 931, 93536 ( B. A. P. 9t h Ci r . 1993) . We have

no qui bbl e wi t h t he pr oposi t i on t hat an ar m' s- l engt h sal e gener al l y

pr ovi des bet t er evi dence of val ue at a gi ven t i me than does an

appr ai sal of i t s val ue at t hat same t i me. But t hat does not mean

t hat a sal e pr i ce at one t i me necessar i l y est abl i shes t he

col l at er al ' s val ue at some ot her t i me. Wher e t he val ue of

col l at er al i s changi ng, a one- s i ze- f i t s- al l val uat i on poor l y

ref l ect s that real i t y.

Her e, t he bankrupt cy cour t di d not e t hat t he pr i ce

obt ai ned at t he ar m' s- l engt h sal e pr ovi ded t he best i ndi cat or of

t he hot el ' s val ue, and i t acknowl edged t hat t he pr i ce ( $89. 5

mi l l i on) st r ongl y suggest ed t hat t he appr ai sed val ues r el i ed upon

at t he l i f t - st ay hear i ng ( $55 mi l l i on and $65. 6 mi l l i on) wer e

conser vat i ve, suppor t i ng Pr udent i al ' s ar gument t hat i t was

over secur ed at l east as of t he appr ai sal dat es. However , t he

bankrupt cy cour t went on t o not e t hat sever al cont i ngenci es "coul d

have der ai l ed t he sal e, " even af t er i t gr ant ed t he hot el sal e

mot i on ( about t wo weeks bef or e t he act ual sal e) . I t hel d t hat i t

was onl y when t he l ast i mpr ovement s were compl eted, al l out st andi ng

-35-


36/51

cont i ngenci es wer e r esol ved ( i ncl udi ng r esol vi ng i ssues wi t h t he

St ar wood cont r act , a cont i ngency t hat Pr udent i al i t sel f descr i bed

as " an essent i al el ement t o t he success of t he [ W] " ) , and t he sal e

actual l y cl osed t hat t he sal e pr i ce accur at el y r ef l ected i t s val ue.

The cour t t hus f ound t hat Pr udent i al had not shown t hat i t was

over secur ed as of t he dat e SW Bost on si gned the hot el P&S or t he

date the cour t appr oved t he sal e mot i on. 18 I t seems pl ausi bl e t hat

Pr udent i al ' s decl i ni ng cl ai m and t he hot el ' s i ncr easi ng val ue may

have cr ossed pat hs at some poi nt bef or e the hot el cl osi ng dat e, but

Pr udent i al di d not meet i t s bur den t o est abl i sh when t hat cr oss-

over may have occur r ed. On t hi s r ecor d, we cannot say t hat t he

bankrupt cy cour t cl ear l y er r ed i n det ermi ni ng when Prudent i al

became over secur ed.

The BAP hel d t hat t he bankrupt cy cour t er r ed i n not

appl yi ng t he sal e pr i ce t o t he ent i r et y of t he bankrupt cy

pr oceedi ng based on i t s vi ew of t he reasoni ng i n Ur ban

Communi cat ors, 379 B. R. at 24344. We ar e unper suaded t hat t he

r easoni ng i n Ur ban Communi cat ors l eads t o the out come Pr udent i al

seeks. Ther e, t he secur ed cr edi t or l oaned f unds t o t he debt or s f or

t he pur chase of r adi o wave spect r um l i censes. Dur i ng a subsequent

bankr upt cy, t he Federal Communi cat i ons Commi ss i on cancel l ed t he

18 Havi ng f ound t hat Prudent i al was over secur ed as of t he sal edat e, and i n l i ght of t he par t i es' agr eement t hat Pr udent i al wasover secur ed as of t he conf i r mat i on dat e, t he bankrupt cy cour t di dnot separ at el y consi der usi ng t he conf i r mat i on dat e as t hemeasur i ng dat e.

-36-


37/51

debt or s' l i censes - - unl awf ul l y so, as l i t i gat i on bet ween t he FCC

and a di f f er ent l i cense- hol der woul d l at er make cl ear . I d. at 238.

Af t er t he FCC "ef f ect i vel y und[ i d] i t s cancel l at i on or at t empt ed

cancel l at i on" of t he debt or s' l i censes, i d. at 239, t he debt or s

sol d t hem, wi t h t he sal e pr i ce est abl i shi ng t hat t he cr edi t or was

over secur ed, i d. at 239240. However , t he debt or s ar gued t hat , at

l east dur i ng t he f i ve- year cancel l at i on per i od, t he col l at er al

package was wor t h si gni f i cant l y l ess and t he cr edi t or was

under secur ed. I d. at 20441. The cour t di sagr eed, not i ng t hat , i n

addi t i on t o t he l i censes t hemsel ves, t he credi t or ' s l i en at t ached

t o pr oceeds f r omt he sal e of t he l i censes, t he debt or s' l i t i gat i on

r i ght s agai nst t he FCC, and capi t al st ock of t he debt or s'

subsi di ar i es. I d. at 244. The cour t det er mi ned t hat t he sal e

pr i ce act ual l y di d r ef l ect t he col l at er al ' s ear l i er val ue, as t he

debt or s had "mai nt ai ned l i t i gat i on r i ght s agai nst t he FCC f or t hi s

wr ongf ul cancel l at i on, whose val ue i s now appar ent . " I d. Thus,

even t hough i t may have been uncer t ai n f or a t i me whet her t he

l i censes coul d event ual l y be sol d and t he pr oceeds t ur ned over t o

t he cr edi t or , subsequent event s made cl ear t hat t he col l at er al

package - - i ncl udi ng l i t i gat i on r i ght s - - al ways was suf f i ci ent t o

r ender t he credi t or over secur ed. Thi s i s pl ai nl y di st i ngui shabl e

f r om t he si t uat i on her e, wher e t he act ual val ue of t he hot el

i ncr eased over t i me. To t he ext ent t hat one can r ead Ur ban

Communi cator s t o hol d that a sal e pr i ce aut omat i cal l y and al ways

-37-


38/51

r el at es back t o t he pet i t i on dat e r egar dl ess of i nt er veni ng event s

- - and we doubt ver y much t hat i t can be so r ead, see i d. at 243

( not i ng t hat , even under t he f l exi bl e appr oach, cour t s shoul d

gener al l y use t he sal e pr i ce as " t he best avai l abl e evi dence of

col l at er al val ue except wher e the ci r cumst ances di ct at e a di f f er ent

appr oach" ) ( emphasi s added) - - we di sagr ee wi t h i t .

I n addi t i on, i n r ej ect i ng t he bankr upt cy cour t ' s f act ual

det er mi nat i on, t he BAP ut t er l y i gnor ed bot h t he r el evant cl ear -

er r or st andar d and t he bankrupt cy cour t ' s r el i ance on t he

i mpr ovement s and cont i ngenci es t hat , i n i t s est i mat i on, r ender ed

t he event ual sal e pr i ce a poor i ndi cat or of ear l i er val ue.

2. Computation of Interest

Havi ng est abl i shed t hat t he bankr upt cy cour t di d not

cl ear l y er r i n det er mi ni ng when Pr udent i al ' s post - pet i t i on i nt er est

began t o accr ue, we now t ur n t o two quest i ons r egardi ng how t hat

i nt er est accrued: at what r at e, and whet her t he i nt er est i s si mpl e

or compound.

Sect i on 506( b) does not speci f y how t o comput e post -

pet i t i on i nt er est . The Supr eme Cour t , const r ui ng 506( b) , has

hel d t hat t he phr ase "pr ovi ded f or under t he agr eement or St at e

st at ut e under whi ch such cl ai m ar ose" modi f i es onl y " r easonabl e

f ees, cost s, or char ges, " and not " i nt er est on such cl ai m. " Uni t ed

St at es v. Ron Pai r Ent er s. , I nc. , 489 U. S. 235, 241 ( 1989) . Thus,

t he st at ut or y l anguage does not di ct at e t hat bankrupt cy cour t s l ook

-38-


39/51

t o t he appl i cabl e cont r act pr ovi si ons, i f any, when comput i ng post -

pet i t i on i nt er est . However , cour t s ar e l ar gel y i n agr eement t hat ,

al t hough t he "appr opr i at e r at e of pendency i nt er est i s . . . wi t hi n

t he l i mi t ed di scret i on of t he cour t , " Key Bank Nat ' l Ass' n v.

Mi l ham ( I n r e Mi l ham) , 141 F. 3d 420, 423 ( 2d Ci r . 1998) , wher e the

par t i es have cont r act ual l y agr eed t o i nt er est t er ms, t hose t er ms

shoul d pr esumpt i vel y appl y so l ong as t hey are enf orceabl e under

st at e l aw and equi t abl e consi der at i ons do not di ct at e ot her wi se,

see, e. g. , Gen. El ect r i c Capi t al Cor p. v. Fut ur e Medi a Pr ods. I nc. ,

536 F. 3d 969, 974 ( 9t h Ci r . 2008) ( adopt i ng t he rul e "adopt ed by

t he maj or i t y of f eder al cour t s" t hat t he "bankrupt cy cour t shoul d

appl y a pr esumpt i on of al l owabi l i t y f or t he cont r act ed f or def aul t

r at e, pr ovi ded t hat t he r at e i s not unenf or ceabl e under appl i cabl e

nonbankrupt cy l aw") ( i nt er nal quot at i on mar ks omi t t ed) ; I n r e Ter r y

Lt d. P' shi p, 27 F. 3d 241, 243 ( 7t h Ci r . 1994) ( "What emer ges f r om

t he post - Ron Pai r deci si ons i s a pr esumpt i on i n f avor of t he

cont r act r at e subj ect t o rebut t al based upon equi t abl e

consi der at i ons. ") ; 4 Col l i er on Bankr upt cy 506. 04[ 2] [ b] ( st at i ng

t hat i nt er est , i ncl udi ng al l owance of cont r act ual def aul t r at e and

compoundi ng, shoul d be determi ned by r ef erence t o appl i cabl e

nonbankrupt cy l aw) . As the Gener al El ect r i c Capi t al cour t not ed,

enf or ci ng t he cont r act i s consi st ent wi t h t he gener al pr emi se that

"cr edi t or s' ent i t l ement s i n bankr upt cy ar i se i n t he f i r st i nst ance

f r om t he under l yi ng subst ant i ve l aw creat i ng t he debt or ' s

-39-


40/51

obl i gat i on, subj ect t o any qual i f yi ng or cont r ar y pr ovi si ons of t he

Bankrupt cy Code. " 536 F. 3d at 973 ( al t er at i on omi t t ed) ( quot i ng

Tr avel er s Cas. & Sur . Co. of Am. v. Pac. Gas & El ect r i c Co. , 549

U. S. 443, 450 ( 2007) ) ( i nt er nal quot at i on mar ks omi t t ed) ; see al so

I n r e Lapi ana, 909 F. 2d 221, 223 ( 7t h Ci r . 1990) ( " [ B] ankrupt cy,

despi t e i t s equi t y pedi gr ee, i s a pr ocedur e f or enf or ci ng

pr e- bankrupt cy ent i t l ement s under speci f i ed t er ms and condi t i ons

r at her t han a f l i ght of r edi st r i but i ve f ancy . . . . ") .

i. Interest Rate

The bankrupt cy cour t and t he BAP bot h hel d t hat

Pr udent i al was ent i t l ed t o i nt er est at 14. 5%, t he def aul t r at e

speci f i ed i n t he CLA. 19 Ther e i s no di sput e t hat SW Bost on

def aul t ed under t he t erms of t he CLA. However , t he Debt ors argue

t hat t he bankrupt cy cour t er r ed by consi der i ng t he enf or ceabi l i t y

of t he def aul t r at e onl y under f eder al l aw, when what was r equi r ed

was a t wo- st ep anal ysi s, f i r st f ocusi ng on i t s enf or ceabi l i t y under

Massachuset t s l aw20 bef or e t ur ni ng t o f eder al l aw. Whi l e t he above

19 Sect i on 2. 3. 3 of t he CLA pr ovi des: " I n t he event t hat , andf or so l ong as, any Event of Def aul t shal l have occur r ed and becont i nui ng, t he out st andi ng pr i nci pal bal ance of t he Loan and, t ot he extent per mi t t ed by appl i cabl e Legal Requi r ement s, over duei nt er est i n r espect of t he Loan, shal l accr ue i nt er est at t heDef aul t Rat e . . . . " The Def aul t Rat e i s def i ned as "a r at e per

annum equal t o t he l esser of ( i ) t he maxi mum r at e per mi t t ed byappl i cabl e l aw, or ( i i ) f i ve per cent ( 5%) above t he Appl i cabl eI nt er est Rat e. " The Appl i cabl e I nt er est Rat e, i n t ur n, i s def i nedas " 9. 50% per annum, compoundi ng mont hl y. "

20 The par t i es agr ee that t he cont r act i s gover ned byMassachuset t s l aw.

-40-


41/51

anal ysi s suggest s t hat , i n al l cases, t he pr esumpt i on i n f avor of

appl yi ng a cont r act ual i nt er est pr ovi si on can be rebut t ed by

showi ng t hat i s unenf orceabl e under st ate l aw, we need not r each

t hat i ssue t oday. Her e, t he CLA' s def aul t i nt er est pr ovi si on

di r ect s t he cour t ' s i nqui r y to Massachuset t s l aw, as t he r at e i s

l i mi t ed t o t he l esser of t he def aul t r at e or t he "maxi mum r at e

per mi t t ed by appl i cabl e l aw. " However , we do not bel i eve t hat t he

Debt or s have shown t hat t he def aul t r at e exceeds t hat t hr eshol d.

Under Massachuset t s l aw, t he cour t must determi ne whether

t he def aul t i nt er est pr ovi si on const i t ut es al l owabl e l i qui dat ed

damages or an unenf orceabl e penal t y. See OneUni t ed Bank v. Char l es

St . Af r i can Met hodi st Epi scopal Chur ch of Bos. , 501 B. R. 1, 10 ( D.

Mass. 2013) . The part y chal l engi ng a l i qui dat ed damages pr ovi si on

bear s t he bur den of showi ng t hat i t const i t ut es an unenf or ceabl e

penal t y, and al l r easonabl e doubt s are r esol ved i n f avor of

enf orcement . See NPS, LLC v. Mi ni hane, 886 N. E. 2d 670, 673 ( Mass.

2008) . A l i qui dat ed damages pr ovi si on wi l l be enf or ced pr ovi ded,

" f i r st , t hat at t he t i me of cont r act i ng t he act ual damages f l owi ng

f r oma br each wer e di f f i cul t t o ascer t ai n; and second, t hat t he sum

agr eed on as l i qui dated damages r epr esent s a r easonabl e f orecast of

damages expect ed t o occur i n t he event of a br each. " I d. ( i nt er nal

quot at i on mar ks omi t t ed) . I t was t he Debt or s' "bur den t o show t hat

t he amount of l i qui dated damages [ was] unr easonabl y and gr ossl y

di spr opor t i onat e t o t he r eal damages f r om a br each or

-41-


42/51

unconsci onabl y excessi ve. " I d. at 421 ( i nt er nal quot at i on mar ks

omi t t ed) .

Her e, t he Debt or s est abl i shed onl y t hat J oanna Mul f or d,

a Vi ce Pr esi dent of Pr udent i al , di d not per sonal l y engage i n any

anal ysi s of Pr udent i al ' s ant i ci pat ed damages i n t he event of a

br each, nor was she aware of whether anyone el se had done so. I f

t he bur den had been on Pr udent i al t o est abl i sh t he enf or ceabi l i t y

of def aul t i nt er est , per haps t hi s anal ysi s woul d come out

di f f er ent l y. As i t i s, however , t hi s par t i al admi ssi on does not

di schar ge t he Debt or s' bur den t o show t hat t he def aul t r at e was not

r easonabl y rel at ed t o ant i ci pat ed damages and, i n f act , was so

gr ossl y di spr opor t i onat e t o ant i ci pat ed damages or ot her wi se

unconsci onabl e as t o be unenf orceabl e under Massachuset t s l aw.

We al so f i nd no er r or i n t he bankrupt cy cour t ' s anal ysi s

under f eder al equi t abl e pr i nci pl es. Af t er di scussi ng and appl yi ng

f act or s t hat bankrupt cy cour t s have used i n bal anci ng t he equi t i es,

see I n r e Gen. Gr owt h Props. , I nc. , No. 09- 11977, 2011 WL 2974305,

at *4 ( Bankr . S. D. N. Y. J ul y 20, 2011) ( set t i ng out f our - f act or

t est ) ; I n r e J ack Kl i ne Co. , 440 B. R. 712, 74546 ( Bankr. S. D. Tex.

2010) ( set t i ng out seven- f actor t est , pl us addi t i onal cat chal l

f act or ) , t he cour t det er mi ned t hat appl i cat i on of t he def aul t r at e

woul d not be i nequi t abl e. Speci f i cal l y, t he cour t not ed t hat : ( 1)

other cr edi t ors woul d not be harmed because t he pl an cont empl ated

payment of al l credi t or s i n f ul l ; ( 2) al t hough Pr udent i al was qui t e

-42-


43/51

l i t i gi ous, "r ai si ng mul t i pl e obj ecti ons t o vi r t ual l y ever y mot i on

made by t he Debt or s, " SWHot el Vent ur e, 460 B. R. at 36, i t s conduct

di d not r i se t o t he l evel of obst r uct i on of t he bankrupt cy pr ocess

or ot her mi sconduct ; ( 3) t he Debt or s di d not r ebut Pr udent i al ' s

evi dence t hat t he CLA' s def aul t r at e was consi st ent wi t h def aul t

r at es of si mi l ar l oans i n t he mar ket , i ncl udi ng wher e Pr udent i al

was ei t her t he l ender or t he bor r ower ; and ( 4) cour t s have appr oved

l ar ger spreads bet ween base and def aul t i nt er est r at es. We f i nd no

er r or i n t he bankrupt cy cour t ' s concl usi on t hat t he Debt or s had

f ai l ed t o r ebut t he pr esumpt i on i n f avor of enf or ci ng t he

cont r act ual pr ovi si on. 21

21 The Debt or s al so submi t t hat , under 506( b) , def aul ti nt er est i s act ual l y a "f ee" or "char ge" ( t o whi ch t he "r easonabl e"modi f i er does appl y) r at her t han i nt er est ( t o whi ch i t does not ) .They have some suppor t f or t hi s char act er i zat i on. See I n r e AEHot el Vent ur e, 321 B. R. 209, 215 ( Bankr. N. D. I l l . 2005) ( t r eat i ngdef aul t i nt er est as a char ge because, " [ g] ener al l y speaki ng,

i nt er est compensat es f or t he del ay i n recei vi ng money owed: t hel oss of t he t i me val ue of money. [ The cr edi t or ] ar r i ved at t hei nt er est r at e i t bel i eved woul d compensat e f or t hat l oss i n t heNot e: a r at e of 9. 72%. That bei ng so, t he di f f er ence bet ween t heor i gi nal r at e and t he 14. 72% def aul t r at e - - a di f f er ence of 5% - -coul d not have been meant t o per f or m t he usual f unct i on ofi nt er est . The t i me val ue of [ t he credi t or ' s] money, af t er al l , di dnot magi cal l y i ncr ease by 5% once [ t he debt or ] def aul t ed. " )( ci t at i ons and i nt er nal quot at i on mar ks omi t t ed) ; Fi scher Ent er s. ,I nc. v. Ger emi a ( I n r e Kal i an) , 178 B. R. 308, 31314 ( Bankr. D. R. I .1995) ( "Label i ng a cont r act t er m an i nt er est pr ovi si on does notmake i t so. I f , t hough l abel ed i nt er est , i t exact s a penal t y or

sets l i qui dat ed damages i n an i mper mi ssi bl e manner , i t wi l l not beenf or ced. Mor eover , i f t he t er m i s r eal l y a ' char ge, ' 506( b)r equi r es t hat i t be r easonabl e. The par t i es may not i nsul at e i tf rom scrut i ny by af f i xi ng t he ' i nt erest ' l abel . " ) ( f oot not esomi t t ed) . But see Hepner v. PWP Gol den Eagl e Tree, LLC ( I n r e K &J Pr ops. , I nc. ) , 338 B. R. 450, 458 ( Bankr . D

Prudential Insurance Company v. SW Boston Hotel Venture, LLC, 1st Cir. (2014)

Documents