On Appeal From the United States District Court For the District of New Jersey. (D.C. Civil Action No. 93-cv-04519).
Before: Stapleton, Roth and Lewis, Circuit Judges.
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.*fn1 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.*fn2 We will 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.
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 ("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.*fn3 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 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 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.*fn4 Thereafter, CalFed filed a motion to strike certain documents 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.*fn5 Second, the district court determined that of the $1.1 million post-petition payments made by the 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, 98 L. Ed. 2d 740, 108 S. Ct. 626 (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.*fn6 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.*fn7 As a result, CalFed was only oversecured by approximately $145,000 and thus, under 11 U.S.C. § 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 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.*fn8 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 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.
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, 830 (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 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.
In relevant part, the current version*fn9 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 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 ...