1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-25-1995

IN RE: Indian Palms

Precedential or Non-Precedential:

Docket 94-5265

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1995

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1995 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"IN RE: Indian Palms" (1995). 1995 Decisions. Paper 197.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/197
1 
2 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

N0. 94-5265 

 

 IN RE: INDIAN PALMS ASSOCIATES, LTD., 

B.C. 90-25765 (WFT) 

NANTUCKET INVESTORS II 

v. 

CALIFORNIA FEDERAL BANK; INDIAN PALMS ASSOCIATES, LTD. 

OFFICE OF UNITED STATES TRUSTEE 

*Argo Loan Limited Partnership 

Appellant 

*(Pursuant to Court's 9/12/94 order) 

 

On Appeal From the United States District Court 

For the District of New Jersey 

(D.C. Civil Action No. 93-cv-04519) 

 

Argued: December 7, 1994 

BEFORE: STAPLETON, ROTH and LEWIS, Circuit Judges

(Opinion Filed July 25, 1995) 

 

 

Jonathan E. Polonsky (Argued) 

Thomas P. Higgins 

Thelen, Marrin, Johnson & Bridges 

330 Madison Avenue, Suite 1100 

New York, New York 10017-5001 

 Attorneys for Appellee 

Paul Kizel (Argued) 
2 

Ravin, Sarasohn, Cook, Baumgarten, 

Fisch & Baime 

103 Eisenhower Parkway 

Roseland, NJ 07068 

 Attorneys for Appellant 
3 

 

OPINION OF THE COURT

 

STAPLETON, Circuit Judge: 

 Creditor California Federal Bank ("CalFed"), holder of 

a first mortgage against the debtor partnership's primary asset 

("the property"), seeks relief from the automatic stay in a 

Chapter 11 bankruptcy proceeding in order to initiate foreclosure 

proceedings.0 Nantucket Investors II ("Nantucket Investors"), 

who holds a second mortgage against the property, opposes the 

lifting of the stay. 

 The bankruptcy court granted CalFed relief from the 

stay under 11 U.S.C. § 362(d)(1), finding that CalFed's interest 

in the property was not being adequately protected during the 

pendency of the bankruptcy proceedings. The district court 

reversed, finding that CalFed's current claim, having been 

reduced by post-petition payments, was less than the bankruptcy 

court had determined and was adequately protected. The district 

court also found that the debtor retained equity in the property 

and that relief from the automatic stay would therefore be 

unavailable under 11 U.S.C. § 362(d)(2) as well.0 We will 

 

0 Following the district court's disposition of this 

matter, CalFed assigned its claim to Argo Loan Limited 

Partnership who was substituted as the named appellant in this 

matter. For ease of discussion, we will refer to both CalFed and 

Argo Loan Limited Partnership as CalFed. 

0 The bankruptcy court had jurisdiction pursuant to 28 

U.S.C. § 1334(b) and 28 U.S.C. § 157(b)(1)-(2), which confers 
4 

reverse the order of the district court and remand with 

instructions to return this matter to the bankruptcy court for 

further proceedings consistent with this opinion. 

I. 

 Indian Palms Associates, the debtor partnership, was 

formed to acquire a 176-unit garden apartment complex located in 

Florida. The debtor purchased that property from Nantucket 

Investors in 1983, and it is the debtor's primary asset. In 1984 

the debtor executed a promissory note of $3.9 million in favor of 

CalFed, and a mortgage and security agreement to secure payment 

of the note. Pursuant to the mortgage and note, CalFed also 

received an assignment of the property's leases, rents, and 

income. 

 On December 13, 1990, the debtor filed for relief under 

Chapter 11 of the Bankruptcy Code, triggering the automatic stay 

imposed by 11 U.S.C. § 362(a). At that time, CalFed held a first 

mortgage against the property, which, with accrued interest and 

late charges, totalled approximately $4.5 million. Nantucket 

Investors held a second mortgage on the property of approximately 

$500,000, and a third mortgage was held by FEC Mortgage Company 

 

jurisdiction over core proceedings arising under Title 11, 

including a motion for relief from the automatic stay. The 

district court had jurisdiction to entertain an appeal from the 

bankruptcy court's granting of relief from the stay pursuant to 

28 U.S.C. § 158(a). This court has jurisdiction to entertain the 

instant appeal pursuant to 28 U.S.C. § 158(d) as the district 

court entered a final order reversing the bankruptcy court's 

order. CalFed filed a timely notice of appeal following the 

district court's denial of its motion for rehearing. See Fed. R. 

App. P. 6(b)(2)(i). 
5 

("FEC") in the amount of $1.6 million. FEC was, and remains, an 

affiliate of the debtor. At the time of the bankruptcy filing, 

there was also a property tax lien against the property of 

between $92,000 and $300,000.0 The parties agree that the tax 

lien has priority over CalFed's first mortgage. At the time of 

the bankruptcy filing, the value of the property was between 

$4.65 and $5.25 million. 

 During the course of the bankruptcy proceedings, the 

debtor filed a series of plans of reorganization which were not 

confirmed. CalFed consented to both the second and third amended 

plans, but the debtor withdrew the third amended plan when CalFed 

refused to agree to certain amendments that were necessary to 

ensure the plan's confirmation. CalFed then moved for relief 

from the automatic stay under sections 362(d)(1) and (d)(2) of 

the Bankruptcy Code so that it could institute foreclosure 

proceedings against the property. In opposition to that motion, 

the debtor submitted a letter memorandum with a proposed fourth 

amended plan of reorganization. 

 The debtor's fourth amended plan proposed the 

following: (1) the continuance of CalFed's lien on the property 

in the full amount of its claim with annual interest payments 

based on an interest rate of 7.75%, plus payments of excess cash 

flow after the first two years, and a balloon payment for the 

 

0 The debtor's Disclosure Statement of Financial Affairs 

indicated that the tax liens at the time of the bankruptcy filing 

were $92,000, but the district court noted that material in the 

record suggested that tax liens as of the filing date could have 

been as high as $300,000. 
6 

remaining mortgage balance five years after confirmation, (2) the 

payment in full of all real estate taxes and arrearages, (3) an 

initial $50,000 payment to Nantucket Investors on its second 

mortgage with various payments to follow, and (4) the infusion of 

$425,000 in new capital by the debtor's partners for capital 

improvements on and maintenance of the property. 

 The bankruptcy court held a hearing on CalFed's motion 

to vacate the stay. At the hearing, Nantucket Investors joined 

the debtor in actively opposing the proposed lifting of the stay. 

The bankruptcy court granted CalFed's motion. In its oral 

ruling, the bankruptcy court explained that the debtor had failed 

to show that CalFed's interest in the property was adequately 

protected because the value of the property had been steadily 

declining since the bankruptcy petition was filed and the debtor 

had submitted no evidence to demonstrate that the value would not 

continue to decline if the stay were not lifted. The bankruptcy 

court thus found that the lifting of the stay could be granted 

under section 362(d)(1) which provides that "the court shall 

grant relief from the [automatic] stay . . . for cause, including 

the lack of adequate protection of an interest in property of 

such party in interest." 11 U.S.C. § 362(d)(1). 

 Based on what it understood to be a concession by the 

debtor, the bankruptcy court determined that the $1.1 million in 

post-petition payments made by the debtor to CalFed had been 

interest payments rather than payments on the principal debt. 

Thus, in reaching the conclusion that CalFed was inadequately 

protected, the bankruptcy court did not reduce the principal debt 
7 

by the amount of these post-petition payments and concluded that 

CalFed was owed just over $4.5 million. As a result, the 

debtor's secured indebtedness to CalFed was found to be slightly 

greater than the property's value at the time of the hearing, 

which was stipulated to be $4.5 million. 

 The bankruptcy court's discussion of the liens 

outstanding against the property led to an implicit finding that 

the total liens exceeded the current stipulated value of the 

property and that the debtor therefore had no equity in the 

property -- a factor supporting relief from the stay under 

section 362(d)(2). Although the court noted that its resolution 

of the issues under section 362(d)(1) meant that it need not 

consider the factors necessary for relief from the stay under 

section 362(d)(2), the court went on to discuss the second 

section 362(d)(2) factor -- whether the property is necessary to 

an effective reorganization. The court concluded that the 

proposed fourth plan would not be confirmable without CalFed's 

consent because it improperly extended the original maturity date 

of CalFed's loan. According to the bankruptcy court, section 

362(d)(2) thus provided an alternate basis for granting relief 

from the automatic stay. The court entered an order lifting the 

stay and allowing CalFed to institute a foreclosure action 

against the debtor. 

 Nantucket Investors appealed to the district court.0

Thereafter, CalFed filed a motion to strike certain documents 

 

0 The debtor did not participate in that appeal and is 

not participating in the appeal to this court. 
8 

that Nantucket Investors had designated as part of the record on 

appeal. The district court denied CalFed's motion to strike the 

documents and reversed the bankruptcy court's order lifting the 

stay. 

 With respect to CalFed's motion to strike, the district 

court concluded that the documents, while not submitted to or 

reviewed by the bankruptcy court, had all been filed with the 

bankruptcy court as part of the debtor's Chapter 11 proceeding, 

and were therefore part of the bankruptcy court record. The 

district court found it immaterial whether the bankruptcy court 

had actually considered any of these documents because they had 

all been available to the bankruptcy court for its consideration. 

As to Nantucket's appeal, the district court found clearly 

erroneous the bankruptcy court's finding of an agreement among 

the parties that the post-petition payments of $1.1 million 

represented interest payments. First, the district court noted 

that the debtor had argued to the contrary in the hearing before 

the bankruptcy court.0 Second, the district court determined 

that of the $1.1 million post-petition payments made by the 

 

0 Counsel for the debtor had stated that it did not 

concede that the post-petition payments represented payments of 

interest, and argued that they were payments on the aggregate 

debt owed. App. 326. However, in its letter memorandum to the 

bankruptcy court in opposition to CalFed's motion for relief from 

the stay, the debtor noted that in the proposed fourth plan it 

elected not to apply the post-petition payments to reduce its 

outstanding indebtedness to CalFed. App. 296. The bankruptcy 

court apparently understood the debtor's position to be that the 

post-petition payments were not to be applied against the 

principal portion of CalFed's lien. At the hearing, CalFed 

argued that the payments represented interest or were in the 

nature of adequate protection payments. App. 327-28. 
9 

debtor to CalFed, at least $955,000 should have been attributed 

to payments on principal rather than interest. Relying on United 

States Savings Ass'n of Texas v. Timbers of Inwood Forest 

Assocs., Ltd., 484 U.S. 365 (1988), the district court concluded 

that section 506(b) of the Bankruptcy Code limits post-petition 

interest to oversecured claims and only to the extent of their 

oversecurity at the time the bankruptcy petition is filed.0 Based 

on the parties's appraisals, the district court estimated that 

the value of the property at the time of filing was approximately 

$4.75 million. It further found that CalFed's claim at that time 

was approximately $4.513 million subordinated to tax liens of 

$92,000.00.0 As a result, CalFed was only oversecured by 

approximately $145,000 and thus, under 11 U.S.C. 

 

0 The Bankruptcy Code does not speak of secured and 

unsecured creditors, but of allowed secured and unsecured claims. 

11 U.S.C. § 506(a). An allowed claim is secured to the extent 

the value of the collateral equals the claim. To the extent a 

claim exceeds the value of the collateral securing it, it becomes 

an unsecured claim in the bankruptcy case. Thus, an undersecured 

claim becomes bifurcated under § 506(a) into two claims, one 

secured and one unsecured. Because the bankruptcy court 

concluded that CalFed's claim was oversecured, its claim was 

considered a fully secured claim for purposes of determining the 

accrual of interest under § 506(b). 

0 The parties disputed the value of the property on the 

date the bankruptcy petition was filed. The earliest appraisal 

presented to the bankruptcy court set the value of the property 

at $4.65 million as of June 1, 1991. The debtor also had an 

appraisal showing the value of the property to be $5.2 million as 

of July 1991, although the debtor indicated that that appraisal 

had been revised to $4.9 million three months later. App. 330-

33. The district court used the compromise figure of $4.75 

million to represent the value of the property at the time of 

filing, and also used $92,000 as the filing date tax lien figure, 

although the evidence indicated that figure might have been 

higher. See supra note 3. The court noted that on remand the 

bankruptcy court was free to make more accurate findings as to 

the value of the property and the amount of the tax lien on the 
10 

§ 506(b), the full $1.1 million in post-petition payments could 

not have represented payments on interest. Rather, at most, only 

$145,000 of the post-petition payments were payments of interest. 

Allocating the balance of these payments to payments on principal 

left CalFed with a claim of approximately $3.558 million. 

Comparing this figure to the current value of the property (which 

for purposes of this motion the parties stipulated to be $4.5 

million), less the outstanding value of the senior tax lien 

($250,000), left CalFed with a $700,000 "equity cushion." The 

district court determined that this difference was sufficient to 

protect CalFed's interest, and held that CalFed was therefore not 

entitled to relief under section 362(d)(1). 

 The district court went on to determine whether relief 

could be granted under section 362(d)(2). The district court 

rejected the bankruptcy court's implicit comparison between the 

value of the property and the total liens against the property, 

and accepted Nantucket Investors's argument that only the 

difference between CalFed's claim and the property's current 

value (less the current value of the senior tax lien) should be 

considered. This left the debtor with an equity interest worth 

approximately $700,000. The court found this analysis 

appropriate under the circumstances because both junior lien 

holders, Nantucket Investors and the debtor's affiliate FEC, 

opposed the lifting of the stay and were willing to accept under 

 

filing date, but concluded that the outcome of its calculations 

would not change even if figures more generous to CalFed's 

position were used. 
11 

the fourth plan of reorganization a drastic impairment of their 

claims, which the court found had the effect of increasing the 

debtor's interest in the property.0 The district court found it 

equitable under these circumstances to disregard their claims in 

determining whether the debtor had equity in the property. The 

district court thus found that the stay could not be lifted under 

section 362(d)(2). 

 The district court also reached the issue whether the 

property was necessary to an effective reorganization, the second 

prerequisite to the granting of relief under section 362(d)(2). 

It rejected the bankruptcy court's view that a "cram down" which 

extended the terms of a mortgage was unreasonable as a matter of 

law. The district court stated that, if its ruling on the 

existence of equity were reversed on appeal, the matter should be 

remanded to the bankruptcy court for a determination as to 

whether the debtor had proposed an effective reorganization such 

 

0 The debtor and Nantucket testified before the 

bankruptcy court regarding modifications to the fourth plan to 

which the creditors had recently agreed. Under the revised 

fourth plan, Nantucket would get a payment of $50,000 upon 

confirmation of the plan, and a $150,000 lien which would accrue 

interest at the rate of 8%, would be paid in full in five years, 

and would be subordinated to CalFed's claim and the tax lien. The 

balance of its claim, $350,000, would accrue at 8% and would be 

subordinated to the debtor's limited partners receiving four 

times its investment capital of $425,000. App. 342-43. The FEC 

mortgage, held by the debtor's general partner, would be 

subordinated to all other claims, including the unsecured claims 

and the equity interest holders receiving ten times the value of 

their $425,000 new capital infusion. App. 343. The tax lien, 

which had been converted to a tax certificate and sold to another 

party with whom the debtor negotiated a reduction in interest, 

would be reduced from $300,000 to $250,000 and accrue interest at 

the negotiated rate of 10% instead of at the former 18% interest 

rate. 
12 

that relief under § 362(d)(2) would be foreclosed. The district 

court entered an order remanding to the bankruptcy court for 

entry of an order denying CalFed's motion and for further 

proceedings consistent with its opinion. The "further 

proceedings" apparently referred to the bankruptcy court's 

ability to determine the actual amount of the tax liens and the 

actual value of the property as of the filing date. See supra

note 7. CalFed filed a motion for rehearing, which the district 

court, in an unpublished opinion, denied. CalFed filed a timely 

appeal and subsequently assigned its claim to Argo Loan Limited 

Partnership. 

II. 

 Argo Loan Limited Partnership, as assignee of 

CalFed's claim, raises three issues on appeal: (1) whether the 

district court erred in denying CalFed's motion to strike 

documents not presented to or considered by the bankruptcy court 

in connection with CalFed's motion to lift the stay; (2) whether 

the district court erred in determining that the debtor had 

equity in the property for purposes of 11 U.S.C. § 362(d)(2)(A), 

and (3) whether the district court exceeded its scope of 

appellate review by making factual findings with regard to the 

proper allocation of the $1.1 million post-petition payments. We 

review the bankruptcy court's factual findings under the clearly 

erroneous standard. Landon v. Hunt, 977 F.2d 829, 840 (3d Cir. 

1992); Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir. 

1988). The district court's and the bankruptcy court's legal 
13 

conclusions are subject to plenary review. In re Sharon Steel 

Corp., 871 F.2d 1217 (3d Cir. 1989). 

 We conclude that CalFed's motion to strike was properly 

denied because the documents which CalFed sought to strike from 

the appellate record, having been filed in the bankruptcy case 

record, were part of the relevant record in this contested 

matter. However, we disagree with the district court's 

application of the standards for determining the debtor's equity 

in the property and conclude that the debtor did not have equity 

in the property under the correct legal standard. We will 

therefore reverse and remand so that the bankruptcy court may 

determine whether relief from the automatic stay should be 

granted under section 362(d)(2). We also conclude that the 

district court did not engage in any impermissible factfinding in 

determining the proper allocation of the post-petition payments, 

but simply applied the law to the record developed before the 

bankruptcy court. 

III. 

 In relevant part, the current version0 of Bankruptcy 

Rule 8006 provides: 

 Within 10 days after filing the notice 

of appeal . . . the appellant shall file with 

the clerk [of the bankruptcy court] and serve 

on the appellee a designation of the items to 

 

0 Subsequent to the district court's disposition of this 

appeal, Bankruptcy Rule 8006 was amended, but the changes 

relevant to this appeal were stylistic only. See Fed. R. Bankr. 

P. 8006 advisory committee's note (1994 amendment). 
14 

be included in the record on appeal and a 

statement of the issues to be presented. 

Within 10 days after the service of the 

appellant's statement the appellee may file 

and serve on the appellant a designation of 

additional items to be included in the record 

on appeal and, if the appellee has filed a 

cross appeal, the appellee as cross appellant 

shall file and serve a statement of the 

issues to be presented on the cross appeal 

and a designation of additional items to be 

included in the record. A cross appellee 

may, within 10 days of service of the cross 

appellant's statement, file and serve on the 

cross appellant a designation of additional 

items to be included in the record. The 

record on appeal shall include the items so 

designated by the parties, the notice of 

appeal, the judgment, order, or decree 

appealed from, and any opinion, findings of 

fact, and conclusions of law of the court.

Fed. R. Bankr. P. 8006 (emphasis added). Pursuant to Bankruptcy 

Rule 8006, Nantucket Investors designated as part of the record 

on appeal fourteen documents that CalFed promptly moved to 

strike. These included the Chapter 11 petition, the debtor's 

statement of financial affairs and schedules, the debtor's second 

and third amended plans and disclosure statements, a prior motion 

of CalFed to lift the automatic stay, and a number of briefs with 

accompanying certifications that had been filed in the bankruptcy 

case. 

 In its motion to strike these documents from the 

appellate record, CalFed took the position that these fourteen 

documents could not be properly designated under Rule 8006 

because they had not been submitted to the bankruptcy court for 

its consideration in connection with the instant motion to lift 

the stay. The district court declined to strike the documents. 
15 

It subsequently relied upon some of these documents for the 

purpose of showing the position CalFed took before the bankruptcy 

court in connection with a prior motion to lift the stay.0 It 

did not use any of these documents for any other purpose. 

Notably, it did not, for example, look to the debtor's statement 

of affairs and schedules for the purpose of establishing the 

value of assets at the time of filing. Rather, the district 

court remanded for the purpose of having the bankruptcy court 

consider this and other similar matters. 

 The issue thus presented is whether a party designating 

the record on appeal under Bankruptcy Rule 8006 can draw only 

from the record created in connection with the motion that 

initiated a contested matter0 or whether that party can draw from 

the record of the bankruptcy case. 

 

0 This was relevant in the context of a waiver issue. See

infra part VI. 

0 Disputes litigated in the bankruptcy court are divided 

into adversary proceedings and contested matters. Ten types of 

disputes are designated as adversary proceedings in Bankruptcy 

Rule 7001. These include most proceedings to recover money or 

property (including recoveries under the trustee's avoiding 

powers); proceedings to determine the validity, priority, or 

extent of a lien; proceedings to determine the dischargeability 

of a debt; proceedings to revoke a confirmed plan of 

reorganization; proceedings to determine a claim or cause of 

action removed to the bankruptcy court; and others. Adversary 

proceedings are governed by more formal rules of procedure than 

contested matters and must be instituted by the filing of a 

complaint. Pursuant to Chapter VII of the Bankruptcy Rules, many 

of the Federal Rules of Civil Procedure are applicable and these 

proceedings are thus conducted much like ordinary civil 

litigation. 

 Other disputes that arise in connection with the 

bankruptcy case, including requests for relief from the automatic 

stay, are contested matters. See Fed. R. Bankr. P. 9014 advisory 

committee note (1983 adoption) (a contested matter is "an actual 

dispute, other than an adversary proceeding, before the 
16 

 We have previously held that a bankruptcy judge 

deciding an adversary proceeding, which is an independent 

litigation, and an appellate court reviewing that decision, 

cannot properly use documents filed only in the underlying 

bankruptcy case unless that use can be justified under the 

judicial notice doctrine. In re Aughenbaugh, 125 F.2d 887, 889 

(3d Cir. 1942).0 The district court in this case regarded this 

contested matter to be sufficiently associated with the general 

administration of the debtor's estate that the relevant record 

 

bankruptcy court"). They are generally initiated by motion and 

do not require a responsive pleading (unless the bankruptcy court 

directs that an answer be served). Only certain of the rules 

governing adversary proceedings apply to the resolution of 

contested matters and the court may direct that these rules will 

not apply in the litigation of a particular contested matter or 

that other rules will apply. See Fed. R. Bankr. P. 9014. The 

procedures governing contested matters are thus less formal. 

0 We held in that case that in determining the issue of 

insolvency in an action by the trustee to avoid a transfer as a 

preference, the referee could not rely on the bankruptcy 

schedules, official appraisals, proofs of claims, and other items 

on file in the bankruptcy case when they had not been introduced 

into evidence in the trustee's preference action. In re 

Aughenbaugh, 125 F.2d at 890. We stated: 

If the trustee desired to rely upon any 

papers already on file in the bankruptcy 

proceeding it was incumbent upon him to offer 

them at the hearing of his exceptions in 

order that the mortgagee might know that they 

were being ruled upon and might have an 

opportunity to meet them with such other 

evidence as might be available to it. 

Id. at 889. We noted further that the doctrine of judicial 

notice did not provide a basis for the referee's use of the 

challenged documents in that case. Id. at 890 ("[T]he facts to 

which [the previously filed documents] related, being disputed in 

the very controversy under consideration, were not the sort of 

facts of which the referee was entitled to take judicial 

notice."). 
17 

should include the case file as well as the documents submitted 

in connection with the motion to lift the stay. We, and most of 

the courts that have heretofore considered the matter, agree. 

See, e.g., In re Chateaugay Corp., 64 B.R. 990, 995 (S.D.N.Y. 

1986); In re T. Michaelis Corvette Supplies, Inc., 14 B.R. 365, 

367 (Bankr. N.D. Ohio 1981); Saco Local Dev. Corp. v. Armstrong 

(In re Saco Local Dev. Corp.), 13 B.R. 226, 229-30 (Bankr. D. Me. 

1981). 

 We hasten to add that the fact that a document is 

included in the relevant record does not mean that the bankruptcy 

judge, or the reviewing district court judge, is entitled to use 

it for any purpose. Just as with documents in the record of a 

civil action filed in a district court, there are principles that 

limit its use. 

 One limitation is the rule that each litigant should be 

given a fair opportunity to rebut and put into perspective the 

evidence admitted against its position. It is understood, for 

example, that the facts relating to the merits of the case will 

be decided on the basis of evidence admitted into the trial

record. Andrews v. Bechtel Power Corp., 780 F.2d 124, 142 (1st 

Cir. 1985), cert. denied, 476 U.S. 1172 (1986). Thus, for 

example, an admission of a party previously made in the record 

should normally be tendered and admitted into evidence at the 

trial, before the judge in a bench trial can use it to resolve 

the factual merits of the case. 

 Another limitation is the rule requiring evidentiary 

competence. Under this rule, a document cannot be put to a 
18 

hearsay use for most purposes, and for this reason, a previously 

filed court document will generally not be competent evidence of 

the truth of the matters asserted therein. 

 Neither of these limitations means, however, that when 

the course and timing of proceedings, or the positions previously 

taken by the parties in the case, become relevant for any reason, 

a trial or appellate judge may not look to any document in the 

case record to establish the relevant fact. Documents in the 

case record will be relevant to many issues, including waiver, 

estoppel, preservation of an issue for appeal, the fact and 

length of litigation delay, limitations issues, prejudice to an 

opposing party, and the like. The use of documents in the case 

record for such purposes does not offend the limitations 

discussed above because the documents are not being used to 

determine disputed facts relating to the merits of the case and 

their use thus does not impose on a party's ability to meet the 

evidence against it. Similarly, it is not seriously questioned 

that the filing of documents in the case record provides 

competent evidence of certain facts -- that a specific document 

was filed, that a party took a certain position, that certain 

judicial findings, allegations, or admissions were made. See In 

re Bestway Prods., 151 B.R. 530, 540-41 (Bankr. E.D. Cal. 1993), 

aff'd, 165 B.R. 339 (9th Cir. B.A.P. 1994), and aff'd sub nom. In 

re Wetherbee, 165 B.R. 339 (9th Cir. B.A.P. 1994). 

 Here the district court properly looked to the record 

of the underlying bankruptcy case. Documents outside the record 

developed on CalFed's lift stay motion were used for the sole 
19 

purpose of determining whether CalFed had waived an argument it 

sought to make in its motion for reconsideration. This purpose 

comports with the rules we have discussed. 

 Even if we were to accept CalFed's view of the limited 

source from which a party may designate the record under 

Bankruptcy Rule 8006, however, we could not fault the district 

court in denying CalFed's motion to strike. Nantucket Investors 

argues that the doctrine of judicial notice provides an 

additional basis on which to affirm the district court's denial 

of CalFed's motion to strike. Federal Rule of Evidence 201 

authorizes a court to take judicial notice of an adjudicative 

fact if that fact is "not subject to reasonable dispute." Fed. 

R. Evid. 201(b). "Judicial notice may be taken at any stage of 

the proceeding," Fed. R. Evid. 201(f), including on appeal, id.

advisory committee's note (1972 proposed rules), as long as it is 

not unfair to a party to do so and does not undermine the trial 

court's factfinding authority. Charles Alan Wright & Kenneth W. 

Graham, 21 Federal Practice and Procedure, § 5110, at 525 (1977); 

cf. Zell v. Jacoby-Bender, Inc., 542 F.2d 34, 38 (7th Cir. 1976) 

(refusing to take judicial notice of documents filed in companion 

case to undermine trial court's findings where to do so would 

violate rule that appellate court must consider only record 

before the trial court and exception for "new developments" was 

not met). 

 Nantucket Investors' designation of the appellate 

record can be viewed as a request that the district court take 

judicial notice of certain portions of the record in the 
20 

underlying bankruptcy case. When so viewed, we think the 

district court's response to CalFed's motion to strike was 

authorized by Federal Rule of Evidence 201.0 See, e.g., Job v. 

Calder (In re Calder), 907 F.2d 953, 955 n.2 (10th Cir. 1990) 

(upholding bankruptcy court's taking judicial notice of omissions 

in debtor's previously filed statement of affairs and schedule of 

assets as evidence that debtor had made a false oath); In re 

Strathatos, 163 B.R. 83 (N.D. Tex. 1993) (taking judicial notice 

of bankruptcy court's findings of facts). 

IV. 

 

0 The district court's use of the challenged documents 

conformed to the standards for judicial notice because the 

noticed facts were facts not subject to reasonable dispute and 

CalFed was given an opportunity to be heard. See Fed. R. Evid. 

201(e) (upon request a party must be given an opportunity to be 

heard regarding both the propriety of taking judicial notice and 

the "tenor" of the matter noticed). In light of the fact that 

the court may take judicial notice of adjudicative facts on its 

own initiative, the Rule provides that the opportunity to be 

heard may occur after judicial notice has been taken. Fed. R. 

Evid. 201(e); see also id. advisory committee's note (1972 

proposed rules) ("No formal scheme of giving notice is provided. 

An adversely affected party may learn in advance that judicial 

notice is in contemplation . . . [o]r he may have no advance 

notice at all."). CalFed had an opportunity to oppose the 

propriety of the district court's consideration of these 

documents, and in fact did so, by filing its motion to strike the 

documents and by presenting argument in support of that motion to 

the district court. Moreover, Nantucket Investors argued in its 

brief to this court that judicial notice provided an alternative 

basis on which to affirm the district court's denial of CalFed's 

motion to strike. Thus, CalFed had the opportunity to address 

before us the propriety of the district court's taking judicial 

notice of these documents. Accordingly, the failure of the 

district court to give CalFed an opportunity to oppose the taking 

of judicial notice is at worst a harmless error. 
21 

 When a debtor files for protection under Chapter 11 of 

the Bankruptcy Code, section 362(a) provides an automatic stay of 

most actions against the debtor's property, including actions to 

realize the value of collateral securing an obligation of the 

debtor. 11 U.S.C. § 362(a). Because a secured creditor risks 

losing the benefit of its security interest if it is unable to 

foreclose against the property, the Bankruptcy Code permits a 

creditor to seek such relief by filing a motion for relief from 

the automatic stay under 11 U.S.C. § 362(d). That section 

provides: 

On request of a party in interest and after 

notice and a hearing, the court shall grant 

relief from the [automatic] stay . . ., such 

as by terminating, annulling, modifying, or 

conditioning such stay-- 

(1) for cause, including the lack of 

adequate protection of an interest in 

property of such party in interest; or 

(2) with respect to a stay of an act against 

property under subsection (a) of this 

section, if-- 

(A) the debtor does not have 

an equity in such 

property; and 

(B) such property is not 

necessary to an effective 

reorganization. 

Section 362(d) is thus intended to balance the interests of the 

creditors and the debtor. 

 CalFed sought relief from the automatic stay under both 

subsections (d)(1) and (d)(2) of section 362(d). We first review 
22 

the district court's conclusion that the debtor retained equity 

in the property. We conclude that the district court committed 

an error of law. 

A. 

 The classic test for determining equity under section 

362(d)(2) focuses on a comparison between the total liens against 

the property and the property's current value. Stewart v. 

Gurley, 745 F.2d 1194, 1195 (9th Cir. 1984) (citing cases); In re 

Hanley, 102 B.R. 36, 37 (W.D. Pa. 1989); In re Colonial Ctr., 

Inc., 156 B.R. 452, 460 (Bankr. E.D. Pa. 1993); La Jolla Mortg. 

Fund v. Rancho El Cajon Assocs., 18 B.R. 283, 290 (Bankr. S.D. 

Calif. 1982); State Employee Retirement Fund v. Gardner (In re 

Gardner), 14 B.R. 455, 456 (Bankr. E.D. Pa. 1981); North East 

Fed. Savs. & Loan Assoc. v. Mikole Devels., Inc. (In re Mikole 

Devels., Inc.), 14 B.R. 524, 524 (Bankr. E.D. Pa. 1981). "All 

encumbrances are totalled to determine equity whether or not all 

lienholders have requested relief from the stay." Nazareth Nat'l 

Bank & Trust Co. v. Trina-Dee, Inc. (In re Trina-Dee, Inc.), 26 

B.R. 152, 154 (Bankr. E.D. Pa. 1983), aff'd, 731 F.2d 170 (3d 

Cir. 1984). The district court chose not to apply this formula, 

finding it appropriate under the circumstances to exclude 

consideration of the junior secured claims held by Nantucket and 

FEC. Nantucket Investors argues that the district court properly 

excluded the interests of it and FEC because both agreed to 

compromise their interests in a subordination agreement in order 
23 

to avoid foreclosure.0 We find that the following factors weigh 

against Nantucket Investors' position: (1) the plain language of 

section 362(d)(2)(A); (2) the legislative history and policies 

behind the Bankruptcy Code; and (3) the fact that the Code 

provides other means by which the interests of junior lienholders 

may be protected. 

B. 

 The Bankruptcy Code does not define the term "equity" 

in section 362(d)(2)(A) or in any other section. Nor does the 

legislative history shine any direct light on the intended 

meaning of this term. When Congress enacted the present-day 

Bankruptcy Code, however, the generally understood meaning of 

equity interest was the value of a property above all secured 

liens. See Black's Law Dictionary 634 (4th ed. 1968) (defining 

equity for purposes of real estate transactions as: "The 

remaining interest belonging to one who has pledged or mortgaged 

his property, or the surplus of value which may remain after the 

property has been disposed of for the satisfaction of liens. The 

amount or value of a property above the total liens or 

charges."). We must assume that Congress was cognizant of this 

traditional meaning when it enacted section 362(d)(2)(A) without 

 

0 The treatment of the junior lienholders' claims under 

the proposed fourth plan is discussed supra note 8. We do not 

question the propriety or enforceability of the subordination 

agreements involving Nantucket Investors' and FEC's claims, 11 

U.S.C. § 510(a); we simply reject the argument that the 

subordination agreements can be used to determine the debtor's 

equity interest. 
24 

a controlling definition. See Walter E. Heller Western, Inc. v. 

Faires (In re Faires), 34 B.R. 549, 552 (Bankr. W.D. Wash. 1983). 

 Nantucket Investors argues that the term equity in 

section 362(d)(2) is ambiguous because equity is accorded a 

different meaning when the creditor's "equity cushion" is 

calculated in determining whether the creditor's interest is 

adequately protected under section 362(d)(1). The text of 

section 362(d)(1), which governs relief from the automatic stay 

for good cause including lack of adequate protection, does not 

contain the term "equity." However, in determining whether a 

secured creditor's interest is adequately protected, most courts 

engage in an analysis of the property's "equity cushion" -- the 

value of the property after deducting the claim of the creditor 

seeking relief from the automatic stay and all senior claims. 

See, e.g., In re Colonial Center, Inc., 156 B.R. 452, 459 (Bankr. 

E.D. Pa. 1993); La Jolla Mortg. Fund v. Rancho El Cajon Assocs., 

18 B.R. 283, 289 (Bankr. S.D. Calif. 1982). Junior liens are 

disregarded for "equity cushion" analysis because the secured 

creditor is entitled to adequate protection only as to its claim; 

it may not claim protection for others. La Jolla Mortgage Fund, 

18 B.R. at 289. In contrast, all liens are considered in 

calculating the equity retained by the debtor under section 

362(d)(2), because the equity analysis in that section focuses on 

"the value, above all secured claims against the property, that 

can be realized from the sale of the property for the benefit of 

all unsecured creditors." Pistole v. Mellor (In re Mellor), 734 

F.2d 1396, 1400 n.2 (9th Cir. 1984). Thus, the analysis of the 
25 

creditor's "equity cushion" under section 362(d)(1) differs from 

a calculation of the debtor's equity under section 362(d)(2) and 

does not render the term "equity" ambiguous. E.g., Mellor, 734 

F.2d at 1400 n.2 (noting that "equity cushion" differs from 

"equity" in that the former is concerned with the value of the 

property above the amount owed to the creditor with a secured 

claim and the latter is concerned with the value above all 

secured claims against the property); In re Colonial Ctr., Inc., 

156 B.R. 452, 459-60 (Bankr. E.D. Pa. 1993); In re South County 

Realty, Inc. II, 69 B.R. 611, 614 (Bankr. M.D. Fla. 1987); In re 

Dunes Casino Hotel, 69 B.R. 784, 793-94 (Bankr. D.N.J. 1986). 

C. 

 We recognize that some bankruptcy courts have rejected 

the standard definition of equity for purposes of section 

362(d)(2) analysis when junior lienholders protest the lifting of 

the automatic stay to permit foreclosure. See Cote v. United 

Finance Co. (In re Cote), 27 B.R. 510, 513 (Bankr. D. Or. 1983); 

Asquino v. Palmer River Realty, Inc. (In re Palmer River Realty, 

Inc.), 26 B.R. 138, 140 (Bankr. D.R.I. 1983); Central Fla. Prod. 

Credit Assoc. v. Spring Garden Foliage, Inc. (In re Spring Garden 

Foliage, Inc.), 15 B.R. 140, 143 (Bankr. M.D. Fla. 1981). 

Nantucket Investors urges us to adopt that rule, but we decline 

to do so. 

 We find no hint in the language or legislative history 

of section 362(d), and the interests balancing it incorporates, 

that authorizes excluding the junior lienholders' claims from the 

equity calculation when their interests diverge from the senior 
26 

lienholder's.0 As the Court of Appeals for the Ninth Circuit has 

explained: 

The language of the statute simply refers to 

the debtor's "equity," which has been defined 

as 'the amount or value of a property above 

the total liens or charges.' The statute 

does not refer to the debtor's equity as 

against the only plaintiff-lienholder seeking 

to lift the stay or persons holding liens 

senior to that of the plaintiff-lienholder. 

The minority view improperly focuses upon the 

interests of junior lienholders . . . . 

Stewart v. Gurley, 745 F.2d at 1196 (quoting Walter E. Heller 

Western, Inc. v. Faires (In re Faires), 34 B.R. 549, 552 (Bankr. 

W.D. Wash. 1983)). 

 A definition of equity that requires consideration of 

all secured liens comports with the purpose of section 362(d)(2) 

analysis and strikes the proper balance among the secured 

creditors', the unsecured creditors', and the debtor's interests. 

The basic purpose behind Chapter 11 of the Bankruptcy Code is to 

offer protection to the insolvent debtor who seeks rehabilitation 

through a plan of reorganization. To the extent that property is 

of no benefit to the debtor, because the debtor retains no equity 

in it and the property is unnecessary to an effective 

reorganization, only the junior lienholders will benefit by 

 

0 To the extent we have located any legislative history 

that shines light on this issue, it appears that section 

362(d)(2)(A) was intended to protect a creditor's right to 

foreclosure. In a joint explanatory statement prepared by the 

floor managers on the ultimately enacted compromise bill, it was 

noted that "section [362(d)(2)] is intended to solve the problem 

of real property mortgage foreclosures of property where the 

bankruptcy petition is filed on the eve of foreclosure." 124 

Cong. Rec. H11047, H11092-93; 124 Cong. Rec. S17403, S17409. 

Excluding the junior lienholders' claims when they oppose 

foreclosure would not further this intent. 
27 

avoiding foreclosure, at the expense of senior lienholders. See

Stewart v. Gurley, 745 F.2d at 1196 ("Unless the debtor can 

demonstrate that the property is necessary to an effective 

reorganization, the property is of no value to him. Refusing to 

grant relief from the automatic stay under those circumstances 

would only promote the junior lienholders' interests over those 

of the senior lienholder."). 

 Furthermore, we note that the language of section 

362(d)(2) is mandatory, when both factors necessary for relief 

under section 362(d)(2) are met "the court shall grant relief." 

11 U.S.C. § 362(d)(2). Excluding the claims of objecting junior 

lienholders from the equity calculation when the subsection 

(d)(2) factors are otherwise met would thus contravene the plain 

language of that provision. 

D. 

 Our refusal to adopt Nantucket Investors' position does 

not prevent the bankruptcy court from otherwise considering the 

interests of objecting junior lienholders. On the contrary, when 

a senior lienholder successfully petitions the bankruptcy court 

for relief from the automatic stay in order to proceed with a 

foreclosure action, junior lienholders may protect their 

interests by bidding at foreclosure in order to retain their 

secured interest in the property. Additionally, it is 

appropriate for the bankruptcy court to consider the interests of 

junior lienholders in determining whether an effective 
28 

reorganization is possible without the encumbered property. See

In re Mellor, 734 F.2d at 1401; 2 Collier on Bankruptcy, 

§ 362.07[2], at 362-69 & n.15a (Lawrence P. King ed., 15th ed. 

1994). Thus for example, in this case the bankruptcy court may 

properly consider the junior lienholders' subordination 

agreements in determining whether an effective reorganization is 

possible and whether the property is necessary to that end. 

Because we find that there are other means by which the 

bankruptcy court may consider the interests of junior lienholders 

in determining whether relief from the automatic stay is proper, 

we find no need to adopt a changeable definition of equity that 

excludes consideration of protesting junior lienholders' 

interests under certain circumstances.0

 We will therefore reverse the district court insofar as 

it determined that the debtor has equity in the property, and 

will remand with instructions to return this matter to the 

bankruptcy court so that it may consider the second factor 

necessary for relief under section 362(d)(2), namely whether the 

property is necessary to an effective reorganization.0

 

0 We reject Nantucket Investors' argument that its 

willingness to cede a portion of its secured claim to the debtor 

to defeat lifting of the stay under § 362(d)(2) should be 

considered in calculating the debtor's equity. Nantucket 

Investors has not in fact ceded any portion of its claim to the 

debtor and we will not accept its willingness to do so as the 

equivalent. 

0 Under the proper equity calculation, the outstanding 

liens against the property exceed the current stipulated value of 

the property and the debtor thus retains no equity in the 

property. 
29 

V. 

 A final note regarding relief under § 362(d)(2) is 

necessary in light of our remand order. In a single-asset 

bankruptcy case like this one, the property will almost always be 

necessary for reorganization for the very reason that it is the 

debtor's sole asset, and relief under 362(d)(2)(B) will be 

available only if the bankruptcy court concludes that 

reorganization within a reasonable time is not feasible. See

United Savings Ass'n v. Timbers of Inwood Forest, 484 U.S. at 376 

(noting that the requirement that the property be "necessary to 

an effective reorganization" requires a showing that there is "a 

reasonable possibility of a successful reorganization within a 

reasonable time" (internal quotation omitted)); Ahlers v. Norwest 

Bank Worthington (In re Ahlers), 794 F.2d 388 (8th Cir. 1986), 

rev'd on other grounds, 485 U.S. 197 (1988). The bankruptcy 

court found that the debtor's fourth plan would not be 

confirmable under the Bankruptcy Code's cram down procedure,0

because it extended the maturity date of CalFed's mortgage beyond 

its original term. The district rejected the bankruptcy court's 

conclusion that there was any such per se rule. We agree. As 

the district court noted, the plain terms of the Bankruptcy Code 

refute the proposition that a plan may not extend the maturity 

date of a mortgage. See 11 U.S.C. 

 

0 Where the debtor cannot secure the acceptance of all 

classes of impaired claims, the Bankruptcy Code permits the 

confirmation of a plan over the objections of impaired classes 

under certain conditions through a procedure known as a cram 

down. 11 U.S.C. § 1129(a)(10), (b). 
30 

§ 1123(a)(5) ("[A] plan [of reorganization] shall . . . provide 

adequate means for the plan's implementation, such as . . . 

modification of any lien; . . . extension of a maturity date or a 

change in an interest rate or other term of outstanding 

securities."). There is no per se rule that a nonconsensual plan 

may not extend a secured lien beyond its original mortgage date. 

In re Crane Automotive, Inc., 88 B.R. 81, 83 (Bankr. W.D. Pa. 

1988); In re Martin, 66 B.R. 921, 930 (Bankr. D. Mont. 1986); In 

re Hollanger, 15 B.R. 35, 46-47 (Bankr. W.D. La. 1981). Therefore 

on considering whether relief from the stay is warranted under 

section 362(d)(2), the bankruptcy court may not find that 

reorganization is precluded as a matter of law solely because a 

proposed plan extends the maturity date on CalFed's mortgage. 

VI. 

 As noted, CalFed also sought relief from the automatic 

stay under section 362(d)(1) on the ground its claim was not 

adequately protected. The bankruptcy court granted relief on 

this ground and the district court reversed. On appeal, CalFed 

maintains that the district court engaged in impermissible fact 

finding in determining that the current value of its claim is 

less than the current stipulated value of the property, and that 

its claim is adequately protected by the remaining "equity 

cushion."0 

 

0 Under 28 U.S.C. § 158(a), the district court sits as an 

appellate court and is not authorized to engage in independent 

fact finding. Indeed, under the appropriate standards of review, 
31 

 Central to the determination of adequate protection in 

this case is the proper allocation of approximately $1.1 million 

in post-petition payments made by the debtor to CalFed. Although 

the bankruptcy court did not make a specific finding regarding 

the allocation of the post-petition payments, in finding that the 

current value of CalFed's claim was approximately $4.5 million 

(the same as the value of its claim when the bankruptcy petition 

was filed), the bankruptcy court must have allocated all of the 

post-petition payments to interest rather than to payments 

reducing the underlying debt.0 The district court, relying on 

the evidence adduced during the bankruptcy hearing, concluded 

that such an allocation was improper as a matter of law since, 

under the guiding legal principles, interest can accrue postpetition only to the extent that a creditor's secured claim 

exceeds the value of the property securing it. See 11 U.S.C. 

§ 506(b); Timbers, 384 U.S. at 372-73. Thus, the district court 

concluded that because, as of the petition date, CalFed's claim 

exceeded the estimated value petition date value of the property 

(less the estimated value of the tax lien) by only approximately 

$145,000, the bulk of the post-petition payments had to be 

allocated to payments on the principal debt, reducing the current 

value of CalFed's claim to a figure approximately $700,000 less 

than the current stipulated value of the property, and leaving 

 

the district court reviews the bankruptcy court's findings in a 

core proceeding only for clear error. Fed. R. Bankr. P. 8013. 

0 The basis for the bankruptcy court's conclusion that 

CalFed's claim had not been reduced by the $1.1 million postpetition payments is not entirely clear. See supra note 5. 
32 

CalFed's claim adequately protected against further erosion in 

the value of the property. CalFed maintains that after 

determining that the debtor and Nantucket Investors had not 

conceded that interest had accrued post-petition to the full 

extent of the post-petition payments, the district court should 

have remanded the issue to the bankruptcy court so that it could 

consider all relevant factors pertaining to the allocation of the 

post-petition payments, and could then determine the actual value 

of CalFed's current claim and whether its claim was adequately 

protected. 

 The heart of CalFed's argument is that one relevant 

factor that the bankruptcy and district courts have not yet 

considered is whether the assignment of rents gave CalFed a lien 

on the property's rental income when the bankruptcy petition was 

filed. CalFed maintains that if it had such an interest, the 

value of the collateral securing its claim would have been the 

sum of the petition date value of the property plus the present 

value of the future rental income, and that its claim would have 

been "oversecured" by an amount greater than the $145,000 figure 

used by the district court to determine under Timbers how much 

post-petition interest could have accrued. CalFed asserts that 

the district court's determination that the current stipulated 

value of the property exceeds the value of CalFed's current claim 

by nearly $700,000, and its conclusion that CalFed was thus 

adequately protected, therefore rested on an incomplete set of 

facts. We disagree. 
33 

 In the papers accompanying its motion for relief from 

the stay, CalFed asserted that its claim on the date the 

bankruptcy petition was filed was approximately $4.5 million, and 

that since the petition date, the amount outstanding under the 

note and mortgage had grown by approximately $1.59 million, 

including approximately $1.49 million in post-petition interest. 

App. 6 (declaration of bank vice-president). However, neither in 

its moving papers nor its accompanying brief did CalFed assert a 

legal basis for the accrual of this much post-petition interest.0

 The allocation of the post-petition payments became a 

contested issue at the hearing before the bankruptcy court. 

Indeed, the bankruptcy court noted that the proper allocation of 

these payments would likely determine whether CalFed's interest 

was adequately protected. As the hearing transcript 

demonstrates, however, the parties presented only two theories 

that would support the allocation of post-petition payments to 

something other than a reduction of the principal debt: CalFed's 

unsupported assertion that the payments may have been in the 

nature of adequate protection payments,0 and the debtor's 

contention that interest could have accrued post-petition only to 

the extent that CalFed's claim exceeded the value of the property 

 

0 CalFed's lack of adequate protection argument rested on 

the property's decline in value since the bankruptcy filing and 

the debtor's failure to propose a confirmable plan since that 

time. 

0 See 11 U.S.C. § 361(1). 
34 

as of the petition date, less the petition date value of the tax 

lien.0

 

0 Mr. Kitzel argued on behalf of CalFed. Mr. Bauer 

represented the debtor and Mr. Higgens represented Nantucket 

Investors. 

 THE COURT: Does the Debtor concede that 

interest accrued during the [Chapter] 11 or 

not? 

 MR. BAUER: No, your Honor. We do not 

concede. . . . 

 . . . . 

 THE COURT: One of the dispositive 

issues is going to be the amount of the 

short-fall. And so, therefore, we need to 

peg a value, and we need to peg what your 

pay-off figure is. 

 I mean, the Debtor made substantial 

payments in the [Chapter] 11 of over a 

million dollars. The question is, was there, 

also, the post-petition interest accrual of a 

million four [as CalFed asserted in the 

declaration of bank vice president Koehler 

which accompanied its motion]. 

. . . If interest continued to accrue, your 

debt increased by a half million. 

 If interest didn't accrue, and the 

Debtor tendered over a million dollars in 

payments, your balance [owing to CalFed] may 

be . . . substantially less than what it was 

when you filed. So, I mean, it becomes very 

critical as to whether interest continued to 

accrue or not under the Timbers case. 

 MR. KITZEL: Your Honor, the payment of 

the million dollars also is in the form of 

adequate protection payments. So it is not 

necessarily interest. 
35 

 

. . .I believe that that's the reason why --

the value of the property was decreasing, the 

payments . . . were made. 

 THE COURT: Well, what shows that in the 

record? Is there an order that memorializes 

that? 

 MR. BAUER: There is no cash collateral 

order. There's nothing that says that it was 

adequate protection payment. We paid them a 

million dollars during the course of this 

case, in excess of a million. That should be 

implied [sic] to the aggregate indebtedness 

owing to CalFed. . . . There is nothing that 

states it should be applied to interest. 

 . . . . 

 THE COURT: Wait. What does CalFed say 

the property was worth on the day the Chapter 

11 was filed? Isn't that what Timbers tells 

us? We have to look and see if you were over 

collateralized or under collateralized on the 

date of the filing to determine whether 

interest accrues or not; right? 

App. 326-29. 

 Following a discussion of the evidence regarding the 

value of the property as of the petition filing date the debtor 

conceded that the value of the property at that time was "in the 

ballpark" of $4.5 to $4.6 million. App. 333. CalFed had 

previously asserted that its claim on the petition date was 

approximately $4.5 million. App. 331. The discussion of the 

accrual of post-petition interest continued: 

 THE COURT: All right. So, therefore, 

interest accrued; right?. . . . 

 MR. BAUER: Only to the value of the 

property it could have accrued to. 

 It couldn't accrue in excess of the 

value of the property. . . . 

 . . . . 
36 

 Significantly, neither before the bankruptcy court nor 

in response to Nantucket Investors' appeal to the district court 

did CalFed raise its potential interest in the rental stream to 

explain how interest could have accrued beyond the extent of 

CalFed's facial oversecurity. CalFed presented this argument for 

the first time in connection with its motion for relief from the 

stay when it sought reconsideration from the district court 

following that court's reversal of the bankruptcy court's 

conclusion that CalFed was not adequately protected.0 On appeal 

to this court, it maintains that "[t]he rental income stream was 

the source of the post-petition payments." Appellant's Amended 

Brief at 35. However, for purposes of its motion for relief from 

the stay, CalFed has posited its rental stream theory too late. 

 

 There's also another piece of this 

puzzle that's missing, and that is, at the 

outset of this case, when it was filed, there 

were tax arrearages of approximately 

$300,000. 

 . . . . 

 If we're looking to see what they're 

entitled to by way of accruing interest, then 

that $300,000, which was a jump-ahead lien, 

has to be factored into the scenario. 

App. 333-34. CalFed responded by arguing that a recent letter 

from the debtor to the bank's representative admitting that the 

property "has greatly deteriorated over the past few years" 

established a prima facie case that CalFed's interest was not 

adequately protected. App. 335-37. 

0 CalFed had asserted an interest in the rental income in 

a 1991 motion in which it sought relief from the automatic stay 

and to prohibit the debtor from using cash collateral in the form 

of rents, which motion it withdrew upon consenting to the 

debtor's second proposed plan of reorganization. 
37 

 "Ordinarily, an appeals court will not consider issues 

not raised in the court below."0 Trailways Lines, Inc. v. 

Trailways, Inc. Joint Council of Amalgamated Transit Union, 785 

F.2d 101, 104 n.2 (3d Cir.), cert. denied, 479 U.s. 932 (1986). 

Having failed to raise its rental stream theory as a basis for 

allocating the post-petition payments to interest payments during 

the fact finding hearing before the bankruptcy court, CalFed has 

waived the argument that it has a lien on the rental income of 

the property for purposes of this motion for relief from the 

automatic stay. CalFed is therefore precluded from submitting 

new evidence on remand to establish the petition date value of 

its claim, other than within the parameters set forth by the 

district court.0 Whether CalFed will be estopped from asserting 

an interest in the rental stream during other proceedings in this 

Chapter 11 case will depend on the application of principles of 

res judicata, collateral estoppel, and law of the case as they 

 

0 Although an exception to this rule permits appellate 

review of an issue not raised in the trial court to serve the 

interests of justice, Trailways Lines, Inc., 785 F.2d at 104 n.2, 

the grounds for this exception are not met in this case. 

0 The district court carefully noted that certain 

relevant facts were not definitively established by the evidence 

before the bankruptcy court, including the petition date value of 

the tax lien and the petition date value of the property. Thus, 

the district court noted that on remand, the bankruptcy court 

could calculate these actual values in determining the precise 

amount of CalFed's "equity cushion." However, in light of the 

range in which these values would fall (based on the record 

evidence before it) the district court noted that the precise 

calculations would not have a legal effect on its conclusion that 

CalFed's claim was adequately protected by a significant equity 

cushion. 
38 

apply in bankruptcy proceedings.0 We express no view on that 

issue. The only issue currently before us is the effect CalFed's 

failure to raise its interest in the rental income has on the 

disposition of its present motion to lift the automatic stay. 

 The district court did not engage in independent fact 

finding. The court simply applied the law -- that interest can 

accrue post-petition only to the extent the value of the 

collateral securing a creditor's claim exceeds the petition date 

value of its claim -- to the record developed before the 

bankruptcy court. The only disputed facts regarding the 

allocation of the post-petition payments concerned the actual 

petition date value of the property and the actual petition date 

value of the tax lien, facts that the district court properly 

declined to ascertain. 

VII. 

 We reverse the district court's determination that the 

debtor has equity in the property within the meaning of section 

362(d)(2)(A) and remand with instructions to return this matter 

to the bankruptcy court so that it may determine whether the 

property is necessary to an effective reorganization, and thus 

whether relief from the automatic stay may be granted under 

section 362(d)(2). We affirm the district court's order in all 

other respects. 

 

0 See generally Hon. Barry Russell, Bankruptcy Evidence 

Manual, §§ 1-40 (1994). 
39 

In Re: Indian Palms v. California Federal

No. 94-5265 

----------------------------------------------------------------- 

ROTH, Circuit Judge, concurring in part and dissent

ing in part. 

 Although I concur with the majority in Parts I-III, V 

and VI of their opinion, I cannot agree with their conclusion in 

Part IV that the debtor did not retain equity in the property. I 

must therefore respectfully dissent from the reversal of the 

district court's determination in that regard. 

 The majority adopts the "classic test" for determining 

equity under § 362(d)(2): subtracting the value of all the 

secured liens on the property from the property's current value. 

They reject the district court's exclusion of the junior secured 

claims of Nantucket and FEC from the subtrahend of the 

calculation. However, if junior lienholders are willing to 

concede their secured position in such a way that the senior 

lienholder's interest is protected, the debtor may have actual, 

if not literal, equity in the property. I see no reason why that 

concession should not be permitted and "equity" be defined in a 

reorganization by the balance, reached by subtracting the 

security of concerned lienholders from the value of the property, 
40 

rather than from a calculation of figures that do not represent 

the reality of the commercial situation. 

 Nantucket urges the court to adopt the district court's 

reasoning that, pursuant to the Fourth Amended Plan, the junior 

lienholders effectively granted the Debtor a portion of their 

equity in the Property by subordinating part of their secured 

claims. I agree that such an interpretation of "equity" is 

reasonable and could permit a Chapter 11 reorganization to 

succeed in a situation where the junior lienholders were willing 

to step back, at least in part, from their secured positions. For 

example, in a single asset reorganization, junior lienholders may 

face the eradication of their interest in the debtor's property 

if a plan of reorganization cannot be developed. Their 

willingness to cooperate to save their own interest may be the 

factor which will permit the reorganization to succeed. 

 Adherents of the majority's interpretation of "equity" 

have criticized the subtraction of the amounts owed to junior 

lienholders from a determination of equity as "improperly 

focus[ing] upon the interests of junior lienholders as opposed to 

the interests of the debtor or senior lienholder." Stewart v. 

Gurley, 745 F.2d 1194, 1196 (9th Cir. 1984). The concern is that 

the interests of the junior lienholders will be promoted over 

those of the senior lienholder. Id. However, if the property is 

necessary to the reorganization and if the senior lienholder is 

adequately protected, it makes very good sense to me in a 

§362(d)(2)(A) calculation to credit the interests of the junior 

lienholders to equity. I would urge that we do so. 
3 

 In the present case, the district court found that if 

it were to uphold the bankruptcy court's grant of a stay, "the 

claims of both the Debtor and its affiliate FEC, along with the 

objecting lienholder Nantucket and all of the unsecured creditors 

[would] be wiped out." In re: Indian Palms Associates, Ltd. No. 

93-4519, slip op. at 13 (D.N.J. Feb. 8, 1994). That consequence 

surely accounts for Nantucket and FEC's concessions in the Fourth 

Amended Plan. If the junior lienholders are willing to make 

concessions, I can see no reason why they should not be permitted 

to subordinate or restructure their liens so that the senior 

lienholder is protected and the reorganization may then go 

through. 

 Moreover, as the district court stated, by recognizing 

the junior lienholders' concessions and finding that they gave 

the debtor equity in the property, the court would further "the 

objectives of the Bankruptcy Code of both preserving the liens of 

the secured creditors and, to the extent feasible, adopting plans 

which will protect the interests of junior lienholders, unsecured 

creditors and equity holders." Id. at 15. 

 Although they are in the minority, other courts have 

seen the logic of calculating "equity" without deducting the 

liens of junior lienholders who are willing to cooperate with the 

debtor. See, e.g., In re Palmer River Realty, Inc., 26 B.R. 138, 

139-40 (Bankr. D.R.I. 1983) (in calculating equity under 

§362(d)(2)(A), second mortgage had no relevance to question of 

equity where second mortgagee expressed desire to support 

reorganization attempt; "second mortgage should not be considered 
4 

in determining whether there is an equity cushion in the subject 

property."). 

 The majority also cites as a reason for adopting its 

construction of § 362(d) the "mandatory" language of the section: 

"the court shall grant relief from the stay". [Typescript at 27] 

Inherent in this reading of the statute is the interpretation of 

"equity" in the "classic" manner as was done by the majority. If, 

however, we were to interpret "equity" as we suggest above, the 

elements of subsection (d)(2)(A) might not be satisfied and the 

mandatory language would not then be triggered. 

 Moreover, the majority stops its reading of § 362(d) 

too soon. The section goes on to provide that the form of relief 

granted may be "such as by terminating, annulling, modifying, or 

conditioning such stay--". The fact that the relief requested of 

the bankruptcy court is termination does not preclude the court 

from granting other relief: for example, relief which will 

condition the continuation of the stay on concessions by the 

junior lienholders. A leading bankruptcy commentator agrees that 

this statutory language should be construed flexibly: 

 The flexibility of section 362 is 

underscored by the language of subsection (d) 

which provides that relief may be granted by 

"terminating, annulling, modifying, or 

conditioning" the stay. The effect is to 

permit the court to fashion the relief to the 

particular circumstances of the case. Thus 

modification or conditioning of the stay may 

be sufficient to protect the non debtor party 

by permitting the exercise of certain but not 

all of its rights. 

2 Collier on Bankruptcy, § 362.07, at 362-64 (Lawrence P. King 

ed., 15th ed. 1994). 
5 

 Finally, the majority comments that the junior 

lienholders here may be protected by demonstrating to the 

bankruptcy court that the property is necessary to an effective 

reorganization. I am unwilling, however, to rely on this element 

of subsection (d)(2)(B) for ensuring a remedy for a junior 

lienholder, such as Nantucket. There is the possibility for too 

much interplay between subsections (A) and (B) of § 362(d)(2). I 

can envision a scenario in which consideration of the 

requirements of subsections (A) and (B) are conflated into one 

exercise: the bankruptcy court finds a reorganization would not 

be possible because of the debtor's lack of classically construed 

"equity" in the property and decides to grant relief from the 

stay; the bankruptcy court would not then go on, as the majority 

discusses here, to consider whether the property was necessary 

for an effective reorganization and subsection (B) would not be 

available, in what might otherwise be a successful 

reorganization, to protect the interests of the junior 

lienholders. 

 For all the above reasons, I conclude that the language 

of § 362(d)(2) does not require the majority's "classic" 

interpretation of equity. I am persuaded instead that the 

interests of the Bankruptcy Code in protecting all lienholders 

should permit junior lienholders to concede their security in 

order to create equity for the debtor and to permit a 

reorganization to go forward where, lacking that concession, it 

would not.