AMR Adequate Protection Opinion

7/30/2019 AMR Adequate Protection Opinion

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

----xIn Re:AMR CORPORATION, e t a l . , 12 Civ. 3967

Debtors . OPINION---x

WILMINGTON TRUST COMPANY, asc o l l a t e r a l t r u s t e e , and U.s. BANKNATIONAL ASSOCIATION, as IndentureTrustee,

Appel lants ,-agains t -

AMR Corporat ion, e t IAppellee .

- - - - - - - - - - - - - - - - - - XAttorneys Appel lant Wilmington Trust Company MILBANK, TWEED, HADLEY & MCCLOY LLP1 Chase Manhattan PlazaNew York, NY 10005By: Tyson M. Lomazow, Esq.Attorneys Appel lantU.S. Bank National Associa t ionJONES DAY 555 South Flower St ree t Los Angeles, CA 90071 By: James O. Johnston , Esq.

11-15463-shl Doc 8200 Filed 05/20/13 Entered 05/20/13 15:33:25 Main DocumentPg 1 of 26


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FOLEY & LARDNER LLP90 Park AvenueNew York, NY 10016By: Mark L. Prager

Attorneys fo r AppelleeWElL, GOTSHAL & MANGES LLP767 Fif th Avenue 2 FloorNew York NY 10153By: Stephen Karotk in ,

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Sweet, D.J.

Wilmington Trus t Company, so le ly in i t s capac i ty asc o l l a t e r a l t rus t ee ( the "Col l a t e ra l Trustee") wi th respec t toc e r t a i n 7.5% Sen io r Secured Notes Due 2016 ( the "Senior SecuredNotes") i s sued by appel l ee American A ir l i n e s , Inc . ("American") ,and guaranteed by appel l ee AMR Corporat ion ("AMR"), and u.S .Bank Nat iona l Associat ion , so le ly in i t s capac i ty as indenturet rus t ee ( the " Inden ture Trustee" and, t oge the r with th eCol la te ra l Trustee , th e "Trus tees") with re spec t to th e SeniorSecured Notes, have appealed from an Order ente red March 12,2012 ( the "Order") by the United Sta tes Bankruptcy Court fo r theSouthern D is t r i c t of New York (the "Bankruptcy Court") denyingt he i r motion fo r adequate pro tec t ion , o r , in the a l t e rn a t i v e ,fo r r e l i e f from the automat ic s tay (the "Motion") , in re spec t oft he i r i n t e r e s t in the c o l l a t e r a l securing the Senior SecuredNotes ( the " C o l l a t e r a l " ) . Upon th e conclus ions se t fo r th below,the Order i s aff i rmed , and the appeal i s dismissed .

Ski l l ed advocates have ab ly p resen ted the i s suesra ised by t h i s appeal . The motion fo r adequate pro tec t ion andi t s a l t e rn a t i v e fo r r e l i e f from the automat ic s tay pre sen td i f fe r ing burdens of proof and fac tua l cons idera t ions which were

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presen ted to the Bankruptcy Court in i t s non-ev iden t i a ry OmnibusHearing. Appendix to Appel lan t s ' Opening Brie f ("Apx.") 7 a t 68.The nature of t ha t hear ing and the impl ica t ions of th e r e l i e fsought a re l a rge ly respons ib le fo r the conclus ions s t a t e d below.

Prior Proceedings

On March 15, 2011, l e s s than nine months before thecommencement of the bankruptcy cases t h a t give r i se to th ei n s t an t appeal , American i s sued the $1,000,000,000 SeniorSecured Notes pursuant to an Inden ture among American, AMR, andthe Trus tees (the "Inden tu re") . See Apx. 3 3.

The Senior Secured Notes are secured pursuan t to (a)the Inden ture , (b) the Col la te ra l Trus t Agreement, dated as ofMarch 15, 2011, among American, the othe r g ran to rs from t ime tot ime par ty the re to , the Trus tees , and Cit ibank (South Dakota) ,N.A., as jun io r l i e n r ep resen ta t ive (the "Col la te ra l Trus tAgreement"), (c) the Pr io r i t y Lien Secur i ty Agreement (S lo t s ,Gate Leaseholds and Route Author i t i e s ) , dated as of March 15,2011, between American and the C o l l a t e r a l Trustee ( the "Pr io r i tyLien Secur i ty Agreement"), and (d) the C o l l a t e r a l AccountContro l Agreement, dated as of March 15, 2011, among Americanand the Trus tees ( co l lec t ive ly with the Indenture , th e

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l a t Trus t Agreement, and the Pr ior i ty Lien Secur i ty, the "Note Documents"). Apx. 3.

As se t fo r th in the Note Documents, th e Senior SecuredNotes are by a va l id ly -g ran ted and proper ly-per fectedf i r s t ty secur i ty i n t e re s t in and l i en on the"Col lat which consis t s genera l ly of the fol lowing:I

a . can ' s current and fu ture r igh t , t i t l e andi f i ed Route Author i t i e s , S lo t s and

b. a l l of can ' s r igh t , t i t l e and i n t e re s t in ce r ta inco l l a t e ra l proceeds accounts and a l l cash, checks,money orders and o ther i tems American paid , deposi ted,credi ted o r holds re in ; and

c . a l l of American's , t i t l e and i n t e re s t in a l lproceeds of any kind with respec t to th e foregoing.

Apx. 3 a t 4. That Col la t es American to providei n t e rna t iona l "Scheduled Services" to London, Japan and Chinaand i s u t i l i zed by American day. Apx. 3; Apx. 5 1 .

In connect ion with can ' s i ssuance of the SeniorSecured Notes, the accounting firm Morton, & Agnew ("MBA")prepared an appra i sa l of the co l I as of February 16,2011 (the "February Appra isa l" ) . In t ha t i s a l , MBA opined

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t h a t the Col la te ra l had value of a t l e a s t $2.37 b i l l i on . SeeApx. 3 12.

On November 28, 2011, MBA prepared an updatedappra i sa l of the C o l l a t e r a l a t the reques t o f American (the"November Appra i sa l " ) . The November Appra isa l valued theCol la te ra l as low as $1.53 b i l l i on . See Apx. 3.

The next day, on November 29, 2011 (the "CommencementDate") , AMR and i t s re l a t ed deb tors 1 ( co l lec t ive ly , the"Debtors") each commenced a volun tary case under chap ter 11 ofthe Bankruptcy Code. Debtors ' Appendix 1.

On February 8, 2012, the Trus tees f i l e d the Motion,a l l eg ing t ha t the value of t h e i r i n t e r e s t in the C o l l a t e r a l wasa t r i sk of diminut ion " i f American f a i l s to u t i l i z e theCol la te ra l adequate ly o r i s no t otherwise in compliance with the

1 In add i t ion to AMR, the o t h e r deb tors are : AmericanAir l ines , Inc . ; American Air l ines Real ty (NYC) Holdings, I n c . ;AMR Eagle Holding Corpora t ion ; Americas Ground Serv ices , I n c . ;OPMA Investment Subsidiary , I n c . ; SC Inves tment , Inc . ; AmericanEagle Air l ines , I n c . ; Execut ive A ir l i n e s , Inc . ; Execut ive GroundServ ices , Inc . ; Eagle Avia t ion Serv ices , Inc . ; Admira ls Club,Inc . ; Business Express Air l ines , Inc . ; Reno Air , Inc . ; AA RealEsta te Holding GP LLC; AA Real Esta te Holding LP.; AmericanAir l ines Marketing Services LLC; American A ir l i n e s Vacat ionsLLC; American Avia t ion Supply LLC; and American Air l ines IPLicens ing Holding, LLC.

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app l icab le regula t ions" o r i f t he re was "a downturn in theprospec t s of the a i r l i n e indus t ry - o r , indeed, a downturn ingenera l globa l macroeconomic cond i t ions " Apx. 11. Insupport of t h i s conten t ion, the Trus tees noted t h a t the value ofthe Col la te ra l had dec l ined in value by over $840 mil l ion - o rmore than 35% of i t s t o t a l value - in th e nine months precedingthe Commencement Date. Id . 12.

The Motion sought tw o forms of r e l i e f . The Trus tees 'pr imary reques t , made pursuant to 11 U.S.C. 363(e)("363(e)") , was fo r the Bankruptcy Court to impose c e r t a i ncondi t ions 2 ( the "Condi t ions") governing th e Debtors ' cont inued

2 The Trustees sought an o rd e r requ i r ing th e Debtors to :( i ) comply with a l l laws, ord inances , orde rs , ru les ,

regu la t ions and requirements of av ia t ion a u t h o r i t i e stha t exerc ise j u r i s d i c t i on over the i ssuance o rau thor iza t ion re l a t ing to the Col la t e ra l ;

( i i ) maintain and preserve the C o l l a t e r a l pursuant to theau thor i ty gran ted by the appl icable av ia t iona u t h o r i t i e s ;

( i i i )u s e commercial ly reasonab le e f fo r t s to defend theC o l l a t e r a l aga ins t cla ims and demands of pa r t i e scla iming an i n t e r e s t in the C o l l a t e r a l t h a t i s adverseto the Trus tees or any o t h e r secured par ty under theNotes Documents;

(iv) make r egu la r ly scheduled p o s t -p e t i t i o n i n t e r e s tpayments to the secured pa r t i e s in accordance with thete rms of the Indenture and the Notes;6



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implemented during the Debtors ' chapter 11 cases ; ( i i i ) theTrus tees ' i n t e r e s t in the C o l l a t e r a l was al ready more thanadequately pro t ec t ed by an ample equi ty cushion; and (iv) theTrus tees were not en t i t l ed to adequate pro tec t ion to preserve o renhance t h e i r equi ty cushion . rd . ~ ~ 2 - 4 , 10 , 1 4 - 1 7 .

On February 24 , 2012, the Trus tees f i l e d t h e i r r ep lyto the Object ion ( the "Reply") . Apx. 5. The Trus tees concededthe Col la te ra l was worth more than the ou t s t and ing amount of theNotes, id . 7, but still claimed an en t i t l emen t t o t h e i rrequested adequate pro tec t ion package because , i n t e r a l ia , t he re"wi l l be no harm whatsoever from the provis ion of adequateprotec t ion" and Bankruptcy Courts " rou t ine ly gran t adequatepro tec t ion to secured l enders . " rd . ~ ~ 12, 15 .

On February 29 , 2012, the Motion was heard by theBankruptcy Court as one of 34 matte r s under cons ide ra t i on a t theomnibus hear ing held on t ha t da te ( the "Hearing") . See Apx. 7a t 1 - 7 .

Following argument on th e Motion, th e Bankruptcy Courtfound t ha t the Trus tees bore a prima fac ie burden to"demonstrate[] t ha t the value o f the co l l a t e ra l was decreas ingor l i ke ly to decrease during the pendency of these cases , " and

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concluded t h a t the Trus tees fa i l ed to meet t s burden. Id . a t75. In so decid ing , the Bankruptcy Court not t ha t : ( i ) theranges of values of the Col la te s t a t in th e NovemberAppra i sa l re f l ec ted a prepe t i t ion decl in the value of theCol la te ra l tha t was l e ss dramat ic than what the Trus tees a l legedin the Motioni ( i i) the Trus tees il to submit evidence ofp o s t -p e t i t i o n value of the C o l l a t e r a l i ( i i i ) the Debtorssubmit ted undisputed evidence Trus tees held a t l e a s t a50% equ i ty cushion in the ColI and (iv) the Trus teesfa i l ed to submit persuas t h a t th e Debtors would f a i lto u t i l i z e the Col la te ra l o r comply with app l i cab le fede ra lgovernment r egu la t ions . Id . a t 75-76.

In add i t ion , Bankruptcy Court dec l ined to accedeto the reques t of counse l fo r one of the Trus tees , who askedt h a t i f the Bankruptcy Cour t were inc l ined to deny th e Motion,it premise such a 1 upon an express f inding t ha t adequatepro tec t ion ex i s ted as a r e s u l t o f the exis tence of an equi tycushion to ensure Trus tees would be en t i t l ed to asuperp r io r i ty admin i s t ra t ive cla im under 11 U.S.C. 507(b)should th e adequate ion f a i l and the value o f t h e i ri n t e r e s t in the l a t e r a l be adverse ly af fec ted . See Apx. 7 a t63 i Appel lan t s ' Opening Brie f a t 19 . In r e j e c t i n g t h i sthe Bankruptcy Court noted th e r i sk of a f fec t ing subs tan t i

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i n t e r e s t s of th e pa r t i e s in the fu ture as a r e s u l t of makingsuch a pre l iminary ru l ing without engaging in a f u l l ev iden t i a ryhear ing. Apx. 7 a t 63-65.

On March 12, 2012, th e Bankruptcy Cour t en te red theOrder , which denied the Motion without pre jud ice fo r the reasonsse t fo r th on the record a t the Hearing. Apx. 9. On March 26,2012, the Trus tees f i l e d a Notice of Appeal from the Order.Apx. 10.

The Trus tee s ' appeal of th e Bankruptcy Cour t ' s den ia lof the Motion ( the "Appeal") was heard by t h i s Cour t and markedfu l ly submit ted on October 24, 2012.

Standard o f Review

A d i s t r i c t cour t reviews a bankruptcy c our t ' s f ind ingsof f ac t fo r c l e a r e r ro r . In re Adelphia Comms. Corp. , 367 B.R.84, 90-91 (S.D.N.Y. 2007) A f inding of f ac t i s c l e a r l yerroneous i f , a f t e r reviewing the e n t i r e ty of the evidence, " thereviewing cour t i s l e f t with the d e f i n i t e and firm conv ic t iont h a t a mistake has been committed." United Sta tes v. U.S.Gypsum Co., 333 U.S. 364, 395 (1948)

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In con t ras t , a d i s t r i c t cour t app l i e s de novo reviewto a bankruptcy c our t ' s conc lus ions of law. Adelphia , 367 B.R.a t 90-91. Accordingly, a bankruptcy c our t ' s i n t e rp re t a t i o n ofthe Bankruptcy Code, th e Federal Rules of Bankruptcy Procedure(the "Bankruptcy Rules" ) , and the l oca l bankruptcy ru les fo r th e

United Sta tes Bankruptcy Court fo r the Southern D i s t r i c t of NewYork ( the "Local Bankruptcy Rules") are subjec t to de novoreview. See In re Caldor Corp. , 303 F.3d 161, 166 (2d Cir .2002) .

A d i s t r i c t cour t reviews mat te rs wi th in a bankruptcyc our t ' s d i s c r e t i o n under an abuse of d i sc re t ion s tandard . In reCrysen/Montenay Energy Co., 16 6 B.R. 546, 549-50 (S.D.N.Y. 1994)( in te rna l c i t a t i ons omit ted) . "The s tandard to be app l ied i sthus , ' no t what t h i s Court would have done under the samecircumstances , but whether, in l i g h t of the record as a whole,the bankruptcy c our t ' s dec is ion was r easonab le . ' " Id . a t 550(quoting In re United Merchants and Mfrs . , Inc . , 12 6 B.R. 149,150 (S.D.N.Y. 1991)) .

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The Order Denying Adequate Protect ion and, in the Alternat ive ,Rel i e f from the Automatic Stay Was Fina l and ThereforeAppealable

t I e 28 of th e United Sta tes Code s e t s fo r th th erequi rements fo r th e exerc i se of sub jec t mat t e r j u r i sd i c t i o n bya s t c t Court over an appeal from a Bankruptcy Cour t order :

(a) The d i s t r i c t cour ts of United Sta tes sh a l l havej u r i sd i c t i o n to hear

(1) from f i n a l judgments , , and decrees ; [. . .] and

(3) with leave of th e cour t , from . . . in te r locu to ryo rd e r s and decrees .

28 U.S.C. 158 (a) (1) , (3) .

Accordingly, fo r s Cour t to cons ider the Appeal ,the Order must e i t h e r cons idered " f ina l" under sec t ion158 (a) (1 ) ("158 (a) (I) " ) , o r e l se must be of the na tu re t h a trenders it appropr ia te in te r locu to ry review pursuan t tosec t ion 158 (a ) (3 ) ("158 (a) (3 )") . See _I_n_r_e____ -""--"'--_--"-_.,80 B.R. 279, 285 (S.D.N.Y. 1987) .

As fo r T ru s t ee s ' a l t e rn a t i v e motion fo r r e l i e ffrom th e automat ic s tay pursuan t to 362(d) I Second C i r cu i t

s

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has unequivocal ly held t h a t a bankruptcy c our t ' s orde r denyingsuch a motion i s \\a f ina l ! appealable II In reChateaugay Corp.! 880 F.2d 1509 1 1511-12 (2d Cir . 1989). Whilethe re i s no such binding preceden t with respec t to th e Trus tees lprimary motion seeking adequate pro tec t ion pursuan t to 363(e)1d i s t c t cour t s in t h i s Circu i t have co n s i s t en t l y viewed ordersdenying such a reques t as f ina l and the re fo re appealablepursuan t to 158(a) (1). See Zink v. Vanmiddlesworth, 200 B.R.

394, 396 (N.D.N.Y. 2003) (not ing t h a t \ I[ iJn t h i s C i r c u i t .and order denying a motion fo r adequate protec t ion" i s \Ifand appealable") i In re Waste Convers ion Techs . , Inc . , 205 B.R.1004 1 1006 07 (D. Conn. 1997) i In re Best Prods. CO' I 149 B.R.346, 347 (S.D.N.Y. 1992) i In re Book Servo Inc ' l . Nos.- - - - - - - - ~ - - - - - - - - - - - - ~ ~ - - -B 89 424 (JAC) & B-89-425 (JAC) , 1989 WL 221311, a t *1 (D. Conn.Dec. 13 1 1989) . The same i t i on has been adopted by cour ts ina number of o t h e r c i r c u i t s . See In re O'Connor, 808 F.2d 1393,1395 n. 1 (10th Cir . 1987) i In re SankeYI 307 B.R. 674 1 677-78(D. Alaska 2004) ; Fed. Nat l l Ass/n v . Dacon~ ~ ~ ~ ~ ~ ~ - - ~ ~ - - - - - - - - - - ~ - - ~ ~

= B ~ o ~ l ~ l ~ ~ ~ ~ ~ A ~ s = s = o = c ~ s ~ . ~ ~ ~ ~ ~ ~ ~ ! 153 B.R. 204, 20 6 07 & 210-12(N.D. Ill. 1993) , In re Grant Broad. Of Phi l a . Inc . , 75 B.R.819! 821-22 (E.D. Pa. 1987) .

Although, as noted by the Debtors , t he re a re ins tanceswhere an order denying a motion fo r adequate t ion has been

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held to be in te r locu to ry ra the r than f i n a l fo r 158 purposes ,see .!ll. re Alchar Hardware, 730 F.2d 1386, 1388 (11th Cir . 1984) iIn re Kalian , 191 B.R. 275, 278 (D.R.I . 1996) , the weight of theau thor i ty -bo th overa l l , and pa r t i c u l a r ly within t h i s Ci t-suppor ts the cont ra ry pos ion . Accordingly, th e por t ion o f theOrder denying th e Trus tee s ' motion fo r adequate pro tec t ionpursuant to 363(e) i s considered a f ina l order t h a t i sappealable pursuant to 158(a) (1) .

Debtors contend t ha t , notwi ths tanding the above,the Bankruptcy Cour t ' s denia l of the motion fo r adequatepro tec t ion in t h i s pa r t i c u l a r case i s not f i n a l fo r 158purposes because the Bankruptcy Court express ly inv i ted theTrus tees to "come back when the re i s a change in ci rcumstances ."Apx. 7 a t 76. However, t ha t s ta tement by the Bankruptcy Courtwas merely a recap i tu la t ion of th e express language of 363(e),which provides t h a t a cour t sh a l l "a t any t ime, on reques t of ane n t i t y t ha t has an i n t e r e s t in proper ty used . by the[debtor] . as i s necessary to provide adequate pro tec t ion ofsuch i n t e re s t . " par ty may move fo r adequate p r o t ec t "a t anyt ime." Id . In o th e r words, was no a l s ign i f i canceto th e Bankruptcy Cour t ' s words In s case , as any denia l amotion fo r adequate pro tec t ion i s by ni t ion withoutpre judice , because th e s t a tu t e it f provides t ha t adequate

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p r o t ec t i s ava i lab le whenever th e c i rcumstances d i c t a t e aneed fo r I f , arguendo, the Debtors ' argument were to beaccepted , it would e f f e c t i v e l y mean t h a t no orde r denying amotion adequate pro tec t ion would ever be cons idered f i n a lfo r 158 purposes . cases c i t ed above, both from t h i sCircu i t and from othe rs , represent cons iderab le au thor i tyr e j e c t such a propos i t i on . Debto rs ' argument i s t he re fo reunavai l ing .

Since the Order i s f i n a l with re spec t to s den ia l ofthe Trus tees ' primary reques t fo r adequate pro tec t ion pursuantto 363(e) as well as i t s denial of the Trus tee s ' a l t e rn a t i v ereques t fo r re I f from the automat ic s tay pursuan t to 362(d),t h i s Cour t has j u r i s d i c t i on over appeal o f t Orderpursuant to 28 U.S.C. 158 (a) (1 ) .

The Bankruptcy Court's Misappl icat ion o f the Burden o f Proof inthe Motion for Adequate Protect ion was Harmless Error

In analyz ing th e Motion, th e Bankruptcy Cour t heldt h a t " the burden i s on the movants f i r s t to a pr ima faccase , and th e prima fac i e case i s t h a t you have to prove a

Ifin e in value o r a t h r e a t a dec l ine . Apx. 7 a t62. While s was cor rec t with respec t to Trus tee s '

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a l t e rna t ive motion pursuan t to 362(d), it was erroneous wi thr e s p ec t to the Trus tees ' pr imary motion pursuant to 363(e) .

A pa r ty seeking r e l i e f from an automat ic s tay pursuan tto 362(d) "has the burden of proof on the i ssue of the d eb to r ' sequ i ty in proper ty , [and] the pa r ty opposing such r e l i e f has theburden of proof on a l l othe r i s sues . " 11 U.S.C. 362(g) .Thus, in order fo r secured c red i to rs such as the Trus tees tomeet t h e i r i n i t i a l burden on a 362(d) motion, they must showtha t the re has been a dec l ine (or a t l e a s t t ha t t he re i s a r ea lt h r ea t of decl ine) in the value of the c o l l a t e r a l a t i s sue ; onlyupon such a showing does the burden s h i f t to the deb to r to provet h a t the c o l l a t e r a l a t i ssue i s not , i n f a c t , dec l in ing invalue . See In re Balco Equi t ies Ltd . , Inc . , 312 B.R. 734, 751(Bankr. S.D.N.Y. 2004) ( c i t ing In re Elmiro Litho, I n c . , 174B.R. 892, 902 (Bankr. S.D.N.Y. 1994)); In re Anthem Cmtys./RBG,LLC, 267 B.R. 867, 871 (Bankr. D. Colo. 2001) ; In re Obligo, 328B.R. 619, 651 (Bankr. E.D.N.Y. 2005); In re WorldCom, I n c . , No.02-13533 (AJG) , 2003 WL 22025051, a t *6 (Bankr. S.D.N.Y. Jan .30, 2003); In re Brutsche, No 11-11-13326 (SA), 2012 WL 526047,a t *3 (Bankr. D.N.M. Feb. 16, 2012) . The Bankruptcy Cour t ' sana lys is was t he re fo re cor rec t inso fa r as the Trus tee s ' reques tfo r r e l i e f from the automat ic s t ay .

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However, with respec t to th e Trus tee s ' pr imary motionfo r adequate pro tec t ion pursuant to 363(e) , the s t a tu t emandates t ha t " the [debtor] has the burden of proof on the l ssueof adequate pro tec t ion ; and the e n t i t y as s e r t i n g an i n t e r e s t inproperty has the burden of proof on the i ssue of va l id i t y ,p r io r i t y , or extent of such i n t e r e s t . " 11 U.S.C. 363 (p) . Thus,when a secured c red i to r moves fo r adequate pro tec t ion pursuantto 363(e) , it need only e s t a b l i sh the va l id i t y of i t s i n t e r e s tin the c o l l a t e r a l , while " the Debtor bears the i n i t i a l burden ofproof as to the i ssue of ' adequate pro t e c t ion . ' " In re Vi l l ageGreen I , GP, 435 B.R. 525, 530 (Bankr. W.D. Tenn. 2010) . Themovant on a 363(e) motion t he re fo re bears a much l i g h t e r burdenthan the movant on a 362(d) motion.

This d i sp a r i t y i s noted in Elmira Litho, 174 B.R. 892,which i s c i t ed by both pa r t i e s and i s the only case within t h i sCircu i t to d i r e c t ly address the i s sue . Elmira Li tho he ld t ha twhile the movant on a 362 (d) motion "must prove [a] dec l ine inva lue-or the t h r e a t of dec l ine - in order to e s t a b l i sh a primafacie case , " id . a t 902, " [ t ]he burden of proof on motion under363(e) i s governed by 363( [p]) , " which merely "requi res thepa r ty asse r t ing an i n t e r e s t in proper ty to prove the ' v a l i d i t y ,p r io r i t y , o r extent of such i n t e r e s t , and imposes on th e[debtor- in-possess ion] the 'burden of proof on the i s sue of

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adequate pro tec t ion . ' f f rd . a t 905 (quoting 11 U.S.C. 363 (p) ( I ) & (2)) (c i t a t ions omit ted) . 4

The Bankruptcy Court erred in i t s ana lys i s ofTrus tees 363(e) motion adequate pro tec t ion because ite f f e c t i v e l y placed the burden upon the Trus tees to make a primafac ie showing t h a t was no adequate pro tec t ion , see Apx. 7a t 62, when f ac t the Trus tees were merely requi red to

e s t a b l i sh the v a l ty of t h e i r i n t e r e s t the C o l l a t e r a l(which was uncha l lenged) , while Debtors had the burden o f

f i rmat ive ly demonstra t ing t h a t the Trus tee s ' i n t e r e s t in theCol la te ra l was adequate ly pro tec t ed without the cond i t ionssought by the Trus tees . See 11 U.S.C. 363(p} i Elmira tho ,174 B.R. a t 902 05.

The Bankruptcy Cour t ' s e r ro r , however, was harmless ,as the Debtors es tab l i shed th a t t h a t Trus tees wereadequately pro tec under the ex i s t ing condi t ions , and

4 The cases c by the Debtors in support of t h e i rpos i t ion t h a t , with re spec t to the 363(e) motion fo r adequatepro tec t ion , the Trus tees bore the i n i t i a l burden of proving anac tua l o r th rea tened dec l ine in C o l l a t e r a l value , see AnsweringBrief of AMR Corporat ion , e t a l . , In Opposi t ion to Appeal ofWilmington Trus t Company and U.S. Bank Nat ional Associa t ion a t12 13, are inappos i te , as they discuss the burden o f proofappl icable to a 362(d) motion fo r r e l i e f from an automat ics t ay .

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t he re fo re t h a t t he re was no need to implement th e Condi t ionssought by the Trus tees . As the Bankruptcy Court noted , theDebtors asser ted the exis tence of an equi ty cushion t h a t theyclaimed to be "a t l e a s t f i f t y percen t" of the C o l l a t e r a l , Apx. 7a t 75, and even the Trus tees acknowledged as being "nor th of thetwenty percen t t h a t i s of t en re l i ed upon by cour t s in makingt h e i r dete rmina t ion ." Apx. 7 a t 76. I t i s w e l l - s e t t l e d t h a tthe ex i s tence of an equi ty cushion can be s u f f i c i e n t , in and ofi t s e l f , to cons t i tu t e adequate pro tec t ion . See In re FortuneSmooth (U.S.) Ltd . , No. 93-40907 (JLG), 1993 WL 261478, a t *6(Bankr. S.D.N.Y. July 6, 1993); In re Mellor , 734 F.2d 1396,1400 (9th Cir . 1984) ("In f ac t , it has been held t ha t theex i s tence of an equi ty cushion, s tanding alone, can provideadequate p ro t e c t i o n . " ) ; Obligo, 328 B.R. a t 651; In re ElmiraLi tho , Inc . , 174 B.R. 892 ,904 (Bankr. S.D.N.Y. 1994)) ("Anequi ty cushion, t he re fo re , prov ides adequate pro tec t ion i f it i ss u f f i c i e n t ly l a rge to ensure t h a t the secured c re d i t o r wil l beab le to recover i t s e n t i r e debt from the s ecu r i t y a t thecomplet ion of the c a se . " ) ; In re Johnston , 38 B.R. 34, 36(Bankr. D. Vt. 1983) ( " I t i s wel l s e t t l e d t h a t an ' equ i tycushion ' or 'va lue cushion ' in and of i t s e l f may provideadequate pro tec t ion fo r a secured c re d i t o r " ) . Accordingly , theequ i ty cushion in the i n s t an t case - which a l l pa r t i e s agreedwas a t l e a s t "north of twenty percen t" of the C o l l a t e r a l , see

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Apx. 7 a t 75-76 - was a s u f f i c i e n t bas i s upon which to deny theTrus tees ' 363(e) motion fo r implementat ion of the Condi t ions .

" [ I ] t i s wel l -es tab l i shed t h a t , where both p a r t i e shave offe red evidence, and where t he re i s no ev iden t ia ry t i e ,any improper assignment of the burden of p roof i s harmless s incethe pa r ty supported by the weight of the evidence wil l p reva i lregardless of which pa r ty bore the burden of persuas ion , proof ,

o r preponderance." TransCanada Pipe l ines Ltd. V. USGen NewEngland, Inc . , 458 B.R. 195, 215 (D. Md. 2011) (quot ing Blodget tv . Comm'r, 394 F.2d 1020, 1039 (8th Cir . 2005)) (quotat ion marksomi t t ed) . Here, the Bankruptcy Cour t ' s erroneous assignment ofthe burden to the Trus tees was harmless , s ince the Debtorsasser ted the ex i s tence of an equi ty cushion t ha t was, by a l laccounts , "north of twenty percen t" of the C o l l a t e r a l - toes tab l i sh t h a t the Trus tees ' i n t e r e s t in the C o l l a t e r a l wasadequately pro tec t ed . See Fortune Smooth, 1993 WL 261478, a t*6; Elmira Li tho , 174 B.R. a t 904. Since the Bankruptcy Courtreached the cor rec t r e s u l t in denying the Trus tee s ' 363(e)motion reve rsa l of the dec is ion i s not requ i red . s

S The Trustees a lso contend t ha t the Bankruptcy Cour t ' sru l ing was erroneous because it fa i l ed to "express ly hold t ha tthe a l leged equi ty cushion cons t i tu ted adequate pro tec t ion ."Appel lan t s ' Opening Brie f a t 18. This argument i s unavai l ing .During the Hearing, the Bankruptcy Court gave numerous bases fo r

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An Evidentiary Hearing on the Motion Was Unnecessary

The Trustees contend t h a t th e Bankruptcy Cour t e r redin fa i l ing to hold an ev iden t ia ry hear ing on th e Motion.Appel lan t s ' Opening e f a t 20. In f ac t , no such hear ing wasreques ted , nor was one necessary .

The Trustees Motion i n i t i a t a "con tes ted mat te r"sub jec t to Bankruptcy Rule 9014. See . R. Bankr. P. 9014 &4001. I t i s unnecessary to conduct an ev iden t ia ry hear ing on acon tes ted mat te r un less t he re are d i spu ted i s sues of mater ia lfac t t h a t a Bankruptcy Court cannot decide based on the record .See Powers v. Am. Honda Fin . . , 216 B.R. 95, 97 (N.D.N.Y.1997) f i rming Bankruptcy Court deni of a hear ing on amotion to lift s tay under sec t ion 362(d) because no mater ia lf ac t s were in d i spu te ) ; In re 1 335 B.R. 1211 126-27- - - - - - - - - - - - - - ~ - -(B.A.P. 9th Cir . 2005) (not ing Bankruptcy Rule 9014 only

i t s dec i s ion , see Apx. 7 a t 74 76, and in the OrderBankruptcy Court express ly s t a t ed tha t th e Motion was denied fo rthe reasons se t fo r th on the record a t th e Hearing, see Apx. 9.The Trustees have fa i l ed to sen t any au thor i ty support ing thepos i t ion th a t the Bankruptcy Court ac ted improper ly in t h i sregard . Moreover, the Order was i s sued without pre jud ice seeApx. 9 1 so to th e extent t h a t the Trus tees be l i eve t h e i rr igh t s were not proper ly 1 they are f ree to f i l e

motion to amel the i s sue .21



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requi res an ev iden t i a ry t r i a l when i s a genuine f ac tua ldispute ) i see also Fed. R. Bankr. P. 9014(d)tes t imony of witnesses only fo r dispu ted mate r i a l f ac t i ssues) iAdvisory Committee Note to 2002 Amendment ( s t a t ing tha t anev iden t i a ry hear ing i s not requi red unless there i s a genuinef ac tua l d i spu te ) . Therefore , "[w] the pa r t i e s do not reques tan evident iary hear ing o r the core f ac t s a re not disputed , thebankruptcy cour t i s authorized to ermine contes ted mat te rs

. on the pleadings and arguments the pa r t i e s , drawingffnecessary infe rences from the In re Gonzalez-Ruiz, 341

B.R. 371, 381 (B.A.P. 1 s t Cir . 2006) .

As the Bankruptcy Court noted, the content ions of th eTrustees did not e s t a b l i sh a pos t pe t i t i on dec l ine in the va lueof the C o l l a t e r a l , and only r a i sed " in ferences" of a t h r e a t ofdec l ine t ha t were i n s u f f i c i e n t ly cogent to e s t a b l i sh th enecess i ty of 362(d) r e I f . Apx. 7 a t 74. Since the Trus teesfa i l ed to submit v i of a pos t -pe t i t i on dec l ine ort h rea t of dec l was no genuine f ac tua l dispute as towhether o r not they met t h e i r prima fac ie burden pursuant to362(d), and it was proper fo r the Bankruptcy Cour t to ru le onthe 362(d} mot without an ev iden t ia ry hear ing . See Powers,216 B.R. a t 97. l a r l y , with respec t to the 363(e) motthe re was no f ac tua l dispute as to whether a s f

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equi cushion ex is ted t as the exis tence a cushion of morethan twenty percen t of th e C o l l a t e r a l was uncontes ted t see Apx.7 a t 75 76 t so it was proper fo r the Bankruptcy Cour t to ru le on

363(e) motion without conduct an ev iden t i a ry hear ing .See Powers t 216 B.R. a t 87.

Moreover t s ince the Trus tees d id n ot af f i rmat ive lyreques t an ev iden t i a ry hear ing the Motion o r th e ReplYt theBankruptcy Court was under no ob l iga t ion to hold such a hear ing .See In re Bla i se t 219 B.R. 946 t 949 (B.A.P. 2d Cir . 1998)(general ly holding t h a t a Cour t did not e r r in denying a motionwithout an ev iden t i a ry hear ing because movant d id no ta i rmat ive ly reques t such a hear ing) . Trus tees ' counse l t sgenera l s ta tement t ha t "we're happy to put t h i s over anev iden t i a ry hear ing t ff Apx. 7 a t 62, does no t cons t i tu t eof a f f i rma t ive reques t necessary to t r i gge r an ob l iga t ion on thep a r t of the bankruptcy cour t . See Bla ise t 21 9 B.R. a t 949;Powers t 216 B.R. a t 97.

Fina l ly , Bankruptcy Court d id no t v io la t eTrus tees t due process r i g h t s . Due process requ i re s a personbe given not ice and an oppor tun i ty to be heard be ingdeprived of proper ty . ~ ~ __ ~ ~ t Jones v. Flowers t 54 7 U.S. 220 t223 (2006). In s case , the Trus tees were heard made

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arguments in support of the Motion a t th e Hear ing. TheBankruptcy Court cons idered the Trus tee s ' arguments , butul t ima te ly r e j ec t ed them. Apx. 7 a t 74-76. This cons t i tu t essu f f i c i e n t process to vind ica t e the Trus tees cons t i tu t iona lr i g h t s . See In re Bar t l e , 560 F.3d 724, 729 (7th Cir . 2009)("The pa r t i e s a re e n t i t l e d to an oppor tun i ty to be heard l no t toa pa r t i c u l a r type o f hear ing ." ) . The Trus tee s ' r e l i ance on Inre Ri os , 263 B.R. 382 (B.A.P. 1 s t Cir . 2001) , does not sa lvage

t he i r due process argument because, in t h a t case , the F i r s tCircu i t held t h a t the bankruptcy cour t denied deb to rs ' dueprocess r igh t s by ru l ing on t h e i r summary judgment motionwithout schedul ing o r holding an hear ing on th e motion o ro therwise affording the debtors an oppor tun i ty to pre sen tevidence in support of the motion. Id . a t 387. In con t ras t , inthe i n s t an t case , a hear ing was held which the Trus tees weregiven a f u l l and f a i r oppor tun i ty to be heard and to pre sen tevidence in support of t h e i r reques ts / so no due processv io l a t i o n occurred .

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Conclusion

Based on the conc lus ions se t for th above, the Order i saf f i rmed and the appeal dismissed

~ ! O r J NY~ I 2013tfYIV/

U.S.D.J .

25
