Court Opinion

ID: 4540166
Source: CourtListenerOpinion
Date Created: 2020-06-09 20:01:34.552694+00
Date Added: 2024-06-11T12:45:51.556791
License: Public Domain

NOT FOR PUBLICATION                         FILED
                    UNITED STATES COURT OF APPEALS                        JUN 9 2020
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

In the Matter of: VERITY HEALTH                 No.    19-55997
SYSTEM OF CALIFORNIA, INC.,
                                                D.C. No.
                Debtor,                         2:18-cv-10675-RGK

OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF VERITY                   MEMORANDUM*
HEALTH SYSTEM OF CALIFORNIA,
INC.,

                Appellant,

 v.

VERITY HEALTH SYSTEM OF
CALIFORNIA, INC.; et al.,

                Appellees.

                   Appeal from the United States District Court
                      for the Central District of California
                   R. Gary Klausner, District Judge, Presiding

                          Argued and Submitted June 2, 2020
                                Pasadena, California

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Before: FERNANDEZ and OWENS, Circuit Judges, and AMON,*** District
Judge.

      The Official Committee of Unsecured Creditors of Verity Health System of

California, Inc. (the Committee) appeals from the district court’s dismissal of the

Committee’s appeal from the bankruptcy court. The Committee argues the

waivers under 11 U.S.C. § 506(c) and 11 U.S.C. § 552(b) in the bankruptcy court’s

Final Debtor-in-Possession Order (Final DIP Order) prejudice unsecured creditors

and unduly benefit secured creditors (Prepetition Secured Creditors). As the

parties are familiar with the facts, we do not recount them here. We have

jurisdiction under 28 U.S.C. § 158(d)(1), and we affirm.

      The district court properly dismissed the Committee’s appeal as statutorily

moot under 11 U.S.C. § 364(e). Section 364(e) provides as follows:

      The reversal or modification on appeal of an authorization under this
      section to obtain credit or incur debt, or of a grant under this section
      of a priority or a lien, does not affect the validity of any debt so
      incurred, or any priority or lien so granted, to an entity that extended
      such credit in good faith, whether or not such entity knew of the
      pendency of the appeal, unless such authorization and the incurring of
      such debt, or the granting of such priority or lien, were stayed pending
      appeal.

11 U.S.C. § 364(e). This court has held that § 364(e) “broadly protects any

requirement or obligation that was part of a post-petition creditor’s agreement to

      ***
             The Honorable Carol Bagley Amon, Senior United States District
Judge for the Eastern District of New York, sitting by designation.

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finance.” Weinstein, Eisen & Weiss, LLP v. Gill (In re Cooper Commons, LLC),

430 F.3d 1215, 1219 (9th Cir. 2005), cert. denied, 546 U.S. 1174 (2006); see id. at

1219–20 (holding that “any provisions of the financing agreement that [a

postpetition creditor] might have bargained for or that helped to motivate its

extension of credit are protected by § 364(e)”); Burchinal v. Cent. Wash. Bank (In

re Adams Apple, Inc.), 829 F.2d 1484, 1488 (9th Cir. 1987).

      Here, the waivers are included in the Final DIP Order—a postpetition

financing arrangement authorized under § 364.1 The DIP Lender required the

Prepetition Secured Creditors’ consent to the Final DIP Order as a precondition to

its obligation to make the revolving loans. In turn, the Prepetition Secured

Creditors conditioned their consent on, among other things, the inclusion of the

waivers in the adequate protection package. Therefore, the waivers were “part of a

post-petition creditor’s agreement to finance” and “helped to motivate [the DIP

Lender’s] extension of credit.” Cooper Commons, 430 F.3d at 1219–20. As the

Committee does not dispute that it did not obtain (or seek) a stay pending appeal

and that the DIP Lender acted in good faith, the removal of the waivers from the

      1
              The Committee’s contention that the Prepetition Secured Creditors are
not entitled to § 364(e)’s protections because the adequate protection package was
authorized under 11 U.S.C. § 361 is meritless. The adequate protection package,
although not expressly included in § 364, is protected by § 364(e) because the
package is part of Ally Financial, Inc.’s (the DIP Lender) agreement to finance.
See Adams Apple, 829 F.2d at 1488.

                                          3
Final DIP Order would constitute a modification of an authorization to obtain

credit to which § 364(e) applies.

      The Committee argues § 364(e) is irrelevant here because it stipulated with

the DIP Lender that all rights and protections granted to the DIP Lender shall

remain in full force and effect even if the Committee is successful in its appeal.

Because we conclude the Prepetition Secured Creditors are also entitled to

§ 364(e)’s protections, this stipulation does not change the analysis.2

      The Committee additionally relies on the bankruptcy court’s order that

authorized Verity Health System of California, Inc. and its subsidiaries (the

Debtors) to use the proceeds from the sales of its hospitals to repay in full the

amounts outstanding to the DIP Lender (the Supplemental Cash Collateral Order).3

      2
             Further, the stipulation’s force should be limited because only the
Committee and the DIP Lender agreed to it and the bankruptcy court never
approved it.
      3
             The Committee has filed a motion to supplement the record with the
Supplemental Cash Collateral Order, which the Debtors and Prepetition Secured
Creditors oppose. While this court generally does not allow parties to supplement
the record on appeal with documents not before the district court, it has recognized
that supplementing the record may be necessary when engaging in a mootness
analysis. Lowry v. Barnhart, 329 F.3d 1019, 1024 (9th Cir. 2003). Therefore, we
grant the motion as to the Supplemental Cash Collateral Order.
       The Committee also asks this court to supplement the record with filings in
two challenge actions against the Prepetition Secured Creditors. Because the
challenge actions are not relevant to this court’s mootness inquiry, we deny the
motion to supplement as moot as to the challenge actions.

                                           4
The Committee argues that because the DIP Lender has been fully repaid,

§ 364(e)’s protections are no longer relevant. However, the Supplemental Cash

Collateral Order does not “terminate, restrict or modify the adequate protection

granted to the Prepetition Secured Creditors pursuant to the Final DIP Order.” It

indicates that “[n]othing herein shall alter any rights, claims, entitlements or

defenses of the Debtors, the Prepetition Secured Creditors or the Committee.”

Moreover, the Final DIP Order explicitly states that it will survive any subsequent

orders issued by the bankruptcy court. Therefore, the Supplemental Cash

Collateral Order does not affect the protections flowing to the Prepetition Secured

Creditors through the Final DIP Order.

      Thus, the district court properly dismissed the Committee’s appeal as

statutorily moot under § 364(e).4

      AFFIRMED.

      4
            The Committee contends that the district court erred by not addressing
equitable mootness. We disagree. A court may dismiss an appeal as statutorily
moot under § 364(e) without addressing the separate doctrine of equitable
mootness, as we do here. See Adams Apple, 829 F.2d at 1488–91.

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