Opinion ID: 796969
Heading Depth: 2
Heading Rank: 1

Heading: Whose Money Was It: In re SPM

Text: 17 The Lenders (and the Committee) argue that the roughly $130 million in Cash Fund Number One is actually the Lenders' property to do with as they see fit, including distributing $37.5 million to the ILLLC as seed money to pursue Motorola in hopes of realizing something more than a one-sixth return on its $800 million loan. Noting that Motorola does not contest the validity of the liens, the Lenders and the Committee point to the reasoning of a First Circuit case, Official, Unsecured Creditors' Comm. v. Stern (In re SPM Mfg. Corp.), 984 F.2d 1305, 1307, 1312 (1st Cir.1993), for support. 18 SPM stands for the proposition that in a Chapter 7 liquidation proceeding, an under-secured lender with a conclusively determined and uncontested perfected, first security interest in all of a debtor's assets may, through a settlement, share or gift some of those proceeds to a junior, unsecured creditor, even though a priority creditor will go unpaid. Id. at 1307, 1312. The Lenders and the Committee ask us to expand SPM to Chapter 11 settlements and then apply it here for the first time. 19 The Lenders and the Committee assert that SPM stands for the proposition that if the cash on hand at [Chase] was perfected collateral of the Secured Lenders for valid debt, the Secured Lenders had the right to dispose of such cash in any manner that they chose so long as the cash did not exceed the debt owed to the Secured Lenders. (emphasis added). In their view, the cash belongs to the Lenders, not the Estate, and the Lenders can dispose of that cash as they wish. 20 Here, the Settlement perfected and validated the Lenders' liens only upon the entry of an order approving the Settlement and only to the extent authorized by the Settlement. 11 Until the Settlement was approved, then, the Lenders' liens were contested and the money held by the Lenders was an asset of the Estate. 12 This case is quite different from SPM, where the creditor had an uncontested, perfected, first security interest in all of SPM's assets except certain real estate. Id. at 1307. 21 Thus, we need not decide if SPM could ever apply to Chapter 11 settlements, because it is clear that the Lenders did not actually have a perfected interest in the cash on hand. Id. at 1312. While the approval of the Settlement eliminates the disputes regarding the Lenders' rights to some of the money, it also provides for the distribution of the balance for a number of purposes, most notably, the Motorola litigation. Bankruptcy Rule 9019 provides the appropriate scale on which to weigh the settlement.