Opinion ID: 663089
Heading Depth: 2
Heading Rank: 4

Heading: Personal Guarantees and Mortgage on Bowling Green

Text: 55 Finally, the bankruptcy court erred in concluding that the continued existence of the personal guarantees and the mortgage on the Bowling Green property constituted adequate protection. As with the cash collateral, Carteret was entitled to these anyway. Moreover, the lien on Bowling Green is worth only $6,715,000. Thus, even without the superpriority lien reducing Carteret's interest, this collateral undersecured Carteret. 56 In sum, even under the clearly erroneous standard, the district court correctly rejected the bankruptcy court's finding that there was adequate protection justifying the superpriority financing. It is clear that Swedeland failed to offer anything significant that would adequately protect Carteret. The law does not support the proposition that a creditor, particularly one like Carteret undersecured by many millions of dollars, may be adequately protected when a superpriority lien is created without the provision of additional collateral by the debtor. Based on all the above, the bankruptcy court erred in authorizing the post-petition financing on a superpriority basis. 57 We cannot close this portion of our opinion without pointing out that what happened here is quite disturbing. There, of course, is no doubt that the policy underlying Chapter 11 is quite important. Nevertheless, Congress did not contemplate that a creditor could find its priority position eroded and, as compensation for the erosion, be offered an opportunity to recoup dependent upon the success of a business with inherently risky prospects. We trust that in the future bankruptcy judges in this circuit will require that adequate protection be demonstrated more tangibly than was done in this case. 3. Relief from the Automatic Stay 58 Carteret moved for relief from the automatic stay pursuant to section 362(d). That section provides that relief from the stay should be granted: 59 (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or 60 (2) with respect to a stay of an act against property ..., if-- 61 (A) the debtor does not have an equity in such property; and 62 (B) such property is not necessary to an effective reorganization. 63 Inasmuch as there is no equity in the property, Swedeland had the burden to prove that the property was necessary to an effective reorganization to maintain the automatic stay. But it had to do more than make a mere assertion to that effect or show that there is conceivably to be an effective reorganization. United Savings Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988). Rather, it had to show that the property is essential for an effective reorganization that is in prospect. Id. at 376, 108 S.Ct. at 633 (emphasis in the original). From this requirement, it follows that [i]f no reorganization of the debtor is feasible, then no property of the debtor can be necessary for that end. In re Dublin Properties, 12 B.R. 77, 80 (Bankr.E.D.Pa.1981). The district court correctly found that Swedeland did not make a showing that an effective reorganization is in prospect. 18 64 The bankruptcy court concluded that Swedeland had the ability to reorganize because: (1) it demonstrated post-petition performance in accordance with its projections; (2) it obtained a commitment for post-petition financing; (3) it established that in eight years it could build out the project and satisfy Carteret's lien; (4) the projections were based on the historical costs of another project, Swedeland had been on target to date and its projections were credible; and (5) Swedeland had not acted in bad faith. 65 But Swedeland had fallen short on its sales projections. Furthermore, its ability to obtain post-petition financing should not be considered, inasmuch as that authorization was inappropriate and, with respect to First Fidelity, the larger source of financing, has been set aside. We will not hold that a debtor can achieve an effective reorganization by diminishing the value of its pre-petition creditor's lien interest. We also point out that Swedeland's evidence at the bankruptcy court hearing indicated that it could not obtain any financing except on a superpriority basis. As the attempt to obtain that financing should not have been successful, and now has been terminated, Swedeland cannot continue building. Additionally, Swedeland did not refute Carteret's evidence showing that the net present value of Swedeland's projected cumulative cash flow would be insufficient to satisfy Carteret's secured claim. Thus, there was no prospect of an effective reorganization in this case. 66 There is another reason why an effective reorganization was not in prospect. We recently held that the deficiency claim of an undersecured mortgagee could not be classified separately from the claims of other unsecured creditors of the debtor, and therefore when the mortgagee opposed the plan, there was no reasonable prospect of confirmation of a plan. John Hancock Mutual Life Ins. Co. v. Route 37 Business Park Assocs., 987 F.2d 154, 161 (3d Cir.1993). Here Carteret is undersecured by approximately $20 million. 19 The remaining unsecured claims against Swedeland in the aggregate are far less than that amount. 20 Thus, Swedeland cannot receive the necessary affirmative vote of the class of unsecured creditors without Carteret's acceptance of the plan. See 11 U.S.C. Sec. 1126(c) requiring acceptance by two-thirds in amount of claims in a class of interests. 67 Carteret asserts that it will oppose any proposed plan and cannot foresee that Swedeland will make any proposal which it would consider acceptable. Thus, for this reason alone, an effective reorganization of Swedeland is not realistically possible. Accordingly, the district court properly found the Swedeland has not carried its burden to prove that the property is necessary to an effective reorganization that is in prospect.