Opinion ID: 659
Heading Depth: 1
Heading Rank: 7

Heading: Cross-Appeal: Release Order

Text: The Contrarians and Beal Bank argue that the District Court erred in affirming the Bankruptcy Court's Release Order, which released the adequate protection payments held in escrow pursuant to the Escrow Stipulation to the Second Lien Lenders. Determining the validity of this claim requires review of three documents: the Escrow Stipulation, Adequate Protection Order, and Intercreditor Agreement. We review these documents de novo. See In re Duplan Corp., 212 F.3d at 151; see also Spallone, 399 F.3d at 423; supra Part II(A). We conclude that the adequate protection payments held in escrow were properly released to the Second Lien Lenders. We begin by observing that the Second Lien Lenders are entitled to adequate protection payments pursuant to the Intercreditor Agreement, Adequate Protection Order, and Escrow Stipulation. In bankruptcy proceedings, a secured creditor ordinarily has a statutory right to adequate protection payments to protect its interests against the diminution in value of its security. See 11 U.S.C. § 363(e); Bluebird Partners, L.P., 85 F.3d at 972. Here, that statutory right is referred to in the Intercreditor Agreement as an exception to the prohibition on the Second Lien Lenders from receiving any cash payments before the First Lien Lenders' claims are satisfied. In accordance with this understanding, the Bankruptcy Court entered its Adequate Protection Order implementing the rights of the Second Lien Lenders to receive adequate protection payments as protection from the diminishing value of the collateral securing its claims. The Escrow Stipulation, which was entered after the Intercreditor Agreement and the Adequate Protection Order, specifically provides that it does not affect the substantive rights of the parties to receive adequate protection: For avoidance of doubt, nothing in this [Escrow Stipulation] was intended or shall be deemed to affect or alter the entitlement of the First Lien Lenders or the Second Lien Lenders to adequate protection under the Adequate Protection Order. In sum, the Second Lien Lenders have a statutory right to adequate protection payments; these rights have not been restricted by the Intercreditor Agreement; the Adequate Protection Order implements the Second Lien Lenders' rights to adequate protection payments; and the Escrow Stipulation confirms that the Second Lien Lenders' rights to adequate protection payments have not been altered or otherwise undermined. Notwithstanding the above, Beal Bank raises several points in support of its argument that the Second Lien Lenders were not entitled to the escrowed adequate-protection payments. First, Beal Bank refers to the Adequate Protection Order, which includes two reservations to the grant of adequate protection to the secured creditors: (1) the First Lien Lenders have a right to commence an adversary proceeding to challenge the right of the Second Lien Lenders to receive adequate protection payments to be applied toward interest rather than principal, and (2) either the First or Second Lien Lenders may seek additional or further adequate protection. To date, however, the First Lien Lenders have not commenced an adversary proceeding and, even if they did, their remedy would not be to terminate the right of the Second Lien Lenders to receive adequate protection but only to apply the Second Lien Lenders' adequate protection payments toward the Second Lien debt's principal rather than interest. Thus, the first reservation is of no importance in discerning the basis upon which the First Lien Lenders may terminate the rights of the Second Lien Lenders to receive adequate protection. With respect to the second reservation, the First Lien Lenders have not presented to the Bankruptcy Court a diminution in value [that] had occurred in the First Lien Lenders' collateral that would have entitled the First Lien Lenders to any form of `additional or further adequate protection.' Moreover, assuming arguendo that the First Lien Lenders were entitled to additional adequate protection, it does not necessarily follow that the form of such adequate protection would have consisted of depriving the Second Lien Lenders of their right to adequate protection granted under the Adequate Protection Order. See 3 Collier on Bankruptcy § 361.02 (15th ed. rev.1999) ([W]hen property on which the entity has a lien is to be used as collateral for a loan, the entity is entitled to adequate protection as a matter of right, not merely as a matter of discretion. (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 340, 343-44 (1977))). Second, Beal Bank argues that sections 2.4(g) and 2.13 of the Intercreditor Agreement provide a right to the Second Lien Lenders to retain and apply cash payments for adequate protection but not a right to receive adequate protection payments. Thus, according to Beal Bank, where, as here, the payments are held in escrow and not yet made, there are no adequate protection payments to which the Second Lien Lenders have a right to retain and apply. This argument, however, must be rejected. Adequate protection is a statutory right that is taken very seriously, and a secured creditor will not be found to have waived its right to adequate protection unless there is more than an ambiguous waiver of that right. See, e.g., In re Blackwood Assocs., L.P., 153 F.3d at 68-69 (finding that the secured creditor did not waive its rights to adequate protection where the stipulation was not so clear as to constitute a waiver of this right). Here, the Intercreditor Agreement makes no specific reference that the retain and apply provision is a limit on the Second Lien Lenders' statutory right to receive adequate protection payments. To the contrary, section 2.4(g) of the Intercreditor Agreement provides that the Second Lien Lenders may assert their rights to adequate protection ... in accordance with Sections 361 through 364 of the Bankruptcy Code. Our conclusion is further supported by section 2.13 of the Intercreditor Agreement, which prohibits the Second Lien Lenders from receiv[ing] any payments until the First Lien Lenders are satisfied in full and in cash. (emphasis added). Because the adequate protection payments are an exception to the general prohibition of cash payments to the Second Lien Lenders, it follows that the Second Lien Lenders would be permitted to receive adequate protection payments should the exception apply. Third, Beal Bank relies on its erroneous reading of the Intercreditor Agreement to argue that the Escrow Stipulation placed the adequate protection payments in escrow and thus were not made to the Second Lien Lenders. Because the payments were not made, Beal Bank argues, the Second Lien Lenders have no right to retain and apply such payments. Although this argument is irrelevant in light of the above, we take note that the Escrow Stipulation demonstrates that the parties were capable of using language to release the escrowed funds to the Second Lien Lenders only after the First Lien Lenders' claims had been satisfied. Paragraph 5(a)(iii), (iv) of the Escrow Stipulation expressly provides that the priority claims of the priming liens be satisfied before the escrowed funds are released to the Second Lien Lenders The absence of a similar provision preserving the priority rights of the First Lien Lenders with respect to the escrowed funds strongly suggests that the escrowed funds were in fact adequate protection payments contemplated by the Intercreditor Agreement as an exception to the First Lien Lenders' priority rights to cash satisfaction. Furthermore, the Escrow Stipulation's intent was to maintain the status quo as of the date of execution of this [Escrow Stipulation]. As of the date of the execution of the Escrow Stipulation, the Second Lien Lenders were receiving their statutorily authorized adequate protection payments. To be sure, paragraph 3 of the Escrow Stipulation does provide that the adequate protection payments deposited in escrow shall not constitute `cash payments made by [the Debtor] as adequate protection' to the Second Lien Lenders, such that the ... Second Lien Lenders would be `entitled to retain and apply' such payments to indebtedness under the Second Lien Credit Facility. ... That provision, however, is immediately qualified,  unless and until the Release Order ... authorizes the release of funds held [in escrow]. (emphasis added). Thus, the Escrow Stipulation does not terminate the Second Lien Lenders' rights to adequate protection but, as the Bankruptcy Court summarized, simply deferred and conditioned the delivery of the Second Lien Interest Payments on the entry of a further Court order. ... Finally, the parties make an issue of whether a lien had attached to the escrowed funds or not. Given the terms of the Release Order, however, we see no significance in these arguments. In our view, the lien was useful insofar as it provided a legal hook by which the escrowed funds might have been distributed to the First Lien Lenders in the event that it was later determined that there was a proper basis for making such a distribution. Because the subsequent court order here released the funds to the Second Lien Lenders, however, any lien that may have attached to the funds while they were in escrow would be inapplicable when those funds were released to the Second Lien Lenders as adequate protection payments. This reading of the Bankruptcy Court's orders is consistent with the Escrow Stipulation's unless and until provision noted above and, as well, the Escrow Stipulation's purpose of maintaining the status quo with respect to the Second Lien Lenders' rights to adequate protection. If the liens continued to attach even after a determination that the Second Lien Lenders were entitled to the adequate protection payments held in escrow, then the Second Lien Lenders' rights to adequate protection payments would have fundamentally changed. Therefore, upon review of the Intercreditor Agreement, Adequate Protection Order, and the Escrow Stipulation, we find no error in the District Court's affirmance of the Bankruptcy Court's Release Order. We find Beal Bank's remaining arguments to be without merit.