Opinion
Case No. 02-13533 (AJG) Jointly Administered
January 30, 2003
ORDER CONDITIONALLY GRANTING MOTION BY BANK OF AMERICA, N.A. FOR RELIEF FROM THE AUTOMATIC STAY TO EXERCISE RIGHTS AS SECURED CREDITOR
Before the Court is a motion by Bank of America, N.A. ("BOA" or "Movant") seeking relief from the automatic stay (the "Motion") to exercise its rights as a secured creditor to apply cash Collateral to matured obligations of the above-captioned debtors (the "Debtors" or "WorldCom"). Movant requests an order terminating the automatic stay pursuant to 11 U.S.C. § 362(d)(1) (d)(2).
At the hearing on the Motion, the parties resolved and refined certain issues raised in the Motion.
I. Jurisdiction
The Court has subject matter jurisdiction of this matter under 28 U.S.C. § 1334(b) and 157(a) and the "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court, dated July 10, 1984 (Ward, Acting C.J.). This is a core proceeding as that term is defined by 28 U.S.C. § 157(b)(2)(G).
II. General Background
On July 21, 2002, Debtors and substantially all of its direct and indirect domestic subsidiaries commenced cases under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to 11 U.S.C. § 1107(a) and 1108 of the Bankruptcy Code.
III. Factual Background
Unless otherwise indicated, the following facts are undisputed. NationsBank, now BOA, issued a letter of credit (the "Letter of Credit") in connection with a financing transaction that involved the issuance of certain bonds for Mississippi College ("the M.C. Bonds"). The Mississippi Finance Authority issued the M.C. Bonds and Norwest Bank, now Wells Fargo, was the beneficiary of the Letter of Credit.
In the fall of 2000, WorldCom provided BOA with a guarantee of certain obligations including those arising under the Letter of Credit. The guarantee was amended from time to time and on February 12, 2001 (the "First Guaranty") was amended in connection with an Omnibus Amendment to Loan Documents (the "Omnibus Amendment") between BOA and Mr. Bernard Ebbers, WorldCom's former CEO and Chairman, and certain other companies. On January 25, 2002, the First Guaranty was reaffirmed and modified ("the Second Guaranty") in connection with a second restructuring of certain loans pursuant to a Second Omnibus Amendment to Loan Documents (the "Second Omnibus Amendment").
On February 5, 2002, WorldCom wired BOA approximately $34,500,000 as cash collateral for the Letter of Credit. Additional cash collateral in the amount of $1,996,273.97 was received on April 24, 2002.
The cash collateral is held in an investment account (the "Investment Account" and together with all cash collateral in the Investment Account the "Investment Account Funds") maintained at BOA pursuant to a pledge agreement between the parties dated as of February 5, 2002 (the "Pledge Agreement"). The Pledge Agreement entitles BOA to, among other things, shift funds out of the Investment Account in order to reimburse itself for any and all draws under the Letter of Credit. On December 17, 2002, the indenture trustee under the M.C. Bonds (the "Indenture Trustee") caused the bonds to be redeemed through a draw on the Letter of Credit. Accordingly, BOA honored a draw on the Letter of Credit in the amount of $34,516,257.53 on December 17, 2002. There is a positive $2.5 million difference between the Investment Account Funds and the Indenture Trustee's draw on the Letter of Credit.
At the hearing, Counsel to WorldCom stated that there is a fact issue regarding when the Pledge Agreement was actually executed by WorldCom. According to Counsel for WorldCom, the Pledge Agreement is dated in February but the Pledge Agreement may have been signed and delivered in April 2002. (Tr. at 58.)
The Investment Account Funds are invested in a Nations Funds Money Market Mutual Fund Services Account. The Investment Account is in the name of Bank of America as secured party collateral account for WorldCom. The Investment Account earned a seven day yield of 1.58% and a thirty day yield of 1.573% as of September 30, 2002 and a seven day yield of 1.15% and a thirty day yield of 1.18% as of December 31, 2002 (the "Yields"). Shares in a Money Market Mutual Account such as the Investment Account are not assets of Bank of America, are not on deposit with Bank of America, and Bank of America receives no direct monetary benefit from this account other than its collateral value as a pledged asset. The Investment Account can earn no more than the Yields in the Investment Account which are reinvested in the Investment Account.
A. The Automatic Stay Relief From The Automatic Stay
The filing of a bankruptcy petition operates as a stay applicable to all entities regarding any act to obtain possession of property of the estate. See 11 U.S.C. § 362(a).
The automatic stay . . . promote[s] two principal purposes of the Bankruptcy Code. First, the automatic stay provides the debtor with a breathing spell from . . . creditors. [Second,] the automatic stay allows the bankruptcy court to centralize all disputes concerning property of the debtor's estate in the bankruptcy court so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.
Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir. 1990) (internal citations and quotation marks omitted). Stated another way, the automatic stay reflects a Congressional concern for alleviating a debtor's financial pressures to promote rational choices and for preventing the distributional prejudice incurred by a creditors' race to the courthouse. See H.R. REP. NO. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97; cf. S. REP. NO. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840-41.
The House Report provides, in relevant part, that:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from . . . creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove [the debtor] into bankruptcy.
The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of [their] claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor's assets prevents that.
In chapter 11 reorganization cases, the:
[automatic] stay is particularly important in maintaining the status quo and permitting the debtor in possession or trustee to attempt to formulate a plan of reorganization. Without the stay, the debtor's assets might well be dismembered, and its business destroyed, before the debtor has an opportunity to put forward a plan for future operations. Secured creditors and judgment creditors might race to seize and sell the debtor's assets in order to obtain satisfaction of their claims, without regard to the interests of other creditors or the value of keeping assets together in an operating business. The stay prevents this piecemeal liquidation, offering the chance to maximize the value of the business.
3 ALAN N. RESNICK FRANK J. SOMMER, COLLIER ON BANKRUPTCY § 362.03[2] (15th ed. rev. 2002); see also In re Johns-Manville Corp., 57 B.R. 680, 685 (Bankr.S.D.N.Y. 1986) ("[T]he automatic stay is a crucial Congressionally-mandated tool necessary to the larger goal of rendering a total disposition of all claims in a reorganization proceeding.").
Notwithstanding these concerns, the Bankruptcy Code empowers the bankruptcy court to provide relief from the automatic stay. Section 362(d) provides, in relevant part, that:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property under subsection (a) of this section, if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective organization.
Sections 362(d)(1) and (d)(2) are disjunctive, In re Elmira Litho, Inc., 174 B.R. 892, 900 (Bankr.S.D.N.Y. 1994), and mandatory. See In re Zeoli, 249 B.R. 61, 63 (Bankr.S.D.N.Y. 2000). This means that if the movant can prevail under either section of the Code, the Court must grant relief from the automatic stay. In re Elmira Litho, Inc., 174 B.R. at 900.
Section 362(g) allocates the burden of proof on a motion for relief from stay. Section 362(g) provides, in part, that:
In any hearing under subsection (d) . . . of this section concerning relief from the stay of any act under subsection (a) of this section —
(1) the party requesting such relief has the burden of proof on the issue of the debtor's equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
While section 362(g) allocates the ultimate burden of persuasion under both sections 362(d)(1) or (d)(2), the movant must still make a prima facie case that the movant is entitled to the relief that it seeks. In re Eatman, 182 B.R. 386, 390 (Bankr.S.D.N.Y. 1995). If the movant fails to make a prima facie showing, the Court will dismiss the motion without requiring the party that bears the ultimate burden of persuasion to offer any evidence. In re Elmira Litho, Inc., 174 B.R. at 900. The non-moving party bears the ultimate burden of persuasion on all issues except for questions involving the debtor's equity in property. 11 U.S.C. § 362(g). The Court will discuss these issues below beginning with section 362(d)(2).
(i) Section 362(d)(2)
Under section 362(d)(2), the moving party has the burden to prove that the debtor lacks equity in the property and the debtor has the burden to prove that the property is necessary to an effective reorganization. 11 U.S.C. § 362(g); In re Kaplan Breslaw Ash, LLC, 264 B.R. 309, 322 (Bankr. S.D.N.Y. 2001). Both prongs of section 362(d)(2) must be met in order to justify relief. In order to establish a prima facie case under section 362(d)(2), the moving party must demonstrate (1) the amount of its claim; (2) that its claim is secured by a valid, perfected lien in property of the estate; and (3) that the debtor lacks equity in the property. See In re Elmira Litho, Inc., 174 B.R. at 900-01. Under § 362(d)(2), a debtor lacks equity in the property where the value of the property is less than the total amount of claims that the property secures. In re Kleinman, 156 B.R. 131, 136 (Bankr.S.D.N.Y. 1993).
Here, Movant initially argued that BOA is entitled to relief from the automatic stay under 362(d)(2) because WorldCom has no equity in that portion of the Investment Account that secures BOA's claim and these funds are not necessary to an effective reorganization. BOA further argued that WorldCom has made no request for use of cash collateral and has other sources of cash for its operations. According to BOA, WorldCom has over $2 billion in cash apart from the Investment Account Funds.
After BOA filed its initial submissions, both parties agree, however, that WorldCom has $2.5 million of equity in the Investment Account. (Tr. 48-9; Debtors' Obj. at ¶ 18.) This number is the difference between the total amount of Investment Account Funds and the total amount of claims that the Investment Account Funds secure. Thus, BOA has failed to demonstrate a necessary element of BOA's prima facie case because BOA had the burden to prove that WorldCom lacked equity in the Investment Account Funds. Because BOA failed to meet its prima facie burden, the Court does not need to address the effective reorganization prong of 362(d)(2). The Court will address 362(d)(1).
(ii) Section 362(d)(1)
Section 362(d)(1) provides relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property . . ." BOA asserts two grounds for establishing cause. First, BOA argues that WorldCom has failed to provide adequate protection of BOA's interest in the Investment Account. Second, BOA argues that WorldCom will be using the Investment Account Funds as a weapon for WorldCom's anticipated lawsuit against BOA and therefore there is sufficient cause to terminate the automatic stay. The Court will address these issues in turn.
Adequate Protection
Section 362(d)(1) provides relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property. . . ." The Bankruptcy Code does not define the term "for cause" but the Bankruptcy Code does provide a non-exclusive description of adequate protection. Section 361 of the Bankruptcy Code provides, in part, that:
When adequate protection is required under section 362 . . . of this title of an interest of an entity in property, such adequate protection may be provided by —
(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under section 362 of this title . . . results in a decrease in the value of such entity's interest in such property;
(2) providing to such entity an additional or replacement lien to the extent that such stay . . . results in a decrease in the value of such entity's interest in such property; or
(3) granting such other relief, other than entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property.
In addition to these forms of adequate protection, courts have recognized that an equity cushion can provide adequate protection. See, e.g., Baybank-Middlesex v. Ralar Distributors, Inc., 69 F.3d 1200, 1203 (1st Cir. 1995) (reasoning that a sufficient equity cushion is a recognized form of adequate protection). An equity cushion is "the value of the property, above the amount owed to the creditor with a secured claim, that will shield that interest from loss due to any decrease in the value of the property during the time the automatic stay remains in effect." In re New Era Co., 125 B.R. 725, 728-29 (S.D.N.Y. 1991) (internal quotation marks omitted). Unlike the analysis under section 362(d)(2) which requires subtracting all available liens and interests in order to arrive at the debtor's equity in property, an equity cushion under 362(d)(1) focuses solely on the creditor's interest without regard to junior claims. Elmira Litho, Inc., 174 B.R. at 904. Hence, even in situations where a debtor lacks equity in property, a secured creditor can actually enjoy a substantial equity cushion.
In order to establish a prima facie case under section 362(d)(1), a secured creditor lacks adequate protection if the value of its collateral is declining as a result of the automatic stay. See Elmira Litho, Inc., 174 B.R. at 902. The existence of an equity cushion is not part to the secured creditor's prima facie case. Id. at 904. As part of the prima facie case, secured creditors must prove a decline in value — or the threat of a decline — during the term of the automatic stay. Id. at 902. A secured creditor can prove this decline in value — or the threat of a decline — by either quantitative or qualitative methods. Elmira Litho, Inc., 174 B.R. at 903.
"Once the movant satisfies this initial burden, the burden shifts to the debtor to go forward with evidence, and ultimately, to prove that the collateral is not declining in value, or that the secured party is adequately protected through periodic payments, an equity cushion, additional or replacement liens or good prospects for a successful reorganization." Elmira Litho, Inc., 174 B.R. at 902.
Here, BOA is not entitled to adequate protection for two reasons. First, BOA failed to meet its prima facie burden to establish a decline or threatened decline in the value of BOA's collateral. A secured creditor can prove this decline in value — or the threat of a decline — by either quantitative or qualitative methods. Elmira Litho, Inc., 174 B.R. 903. BOA failed to do either of these things. Quantitatively, it is undisputed that the funds in the Investment Account are increasing, rather than decreasing, in value. According to the Supplemental Reply Declaration of Thomas J. Elkins, sworn to on January 22, 2003, the Investment Account Funds are accruing interest. Hence, BOA's collateral is increasing in value during the pendency of the automatic stay. Qualitatively, BOA has failed to demonstrate what, if any, payments WorldCom should have made post-petition. On this basis, the Court finds that BOA has not met its prima facie burden to establish cause for relief from the automatic stay because BOA does not allege, much less substantiate, that the value of the Investment Account Funds is decreasing as a result of the automatic stay or that WorldCom has failed to make post-petition payments.
It does not appear that BOA has argued that BOA is entitled to adequate protection of the equity cushion. The Court is not called upon to decide the issue but some courts have held that where the secured creditor enjoys an equity cushion that the secured creditor is not entitled to adequate protection of that equity cushion. See In re Dunes Hotel Assocs., 188 B.R. 162, 174 (Bankr.D.S.C. 1995) (collecting cases).
Second, even if BOA met its prima facie burden, BOA does not appear to dispute that BOA is adequately protected by a $2.5 million equity cushion. (Tr. at 66.) "Whether an equity cushion provides adequate protection to a creditor is determined on a case-by-case basis rather than by a mechanical application of a formula." Kost v. First Interstate Bank (In re Kost), 102 B.R. 829, 831 (D.Wyo. 1989) (finding, however, that an equity cushion of less than 11% is generally insufficient to constitute adequate protection). Although, BOA suggests in their Reply papers (albeit without analysis of this particular issue) that BOA's equity cushion is being diminished through the accrual of postpetition interest presumably at a rate greater than the interest earned on the Investment Account Funds, at the hearing BOA retreated from this contention. (Tr. at 66.) On this basis, the Court finds that even if BOA met its prima facie burden, that the equity cushion in this case is sufficient to shield BOA's interest during the time the automatic stay remains in effect because BOA's equity cushion is not diminishing as a result of the automatic stay.
Other Cause for Relief from the Automatic Stay
The remaining issue before the Court is whether BOA has demonstrated other cause (other than a lack of adequate protection) under section 362(d)(1) for relief from the automatic stay. The Bankruptcy Code does not define cause. E.g., Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 110 (2d Cir. 2002). The decision to lift the automatic stay is within the discretion of the bankruptcy court. In re Kaplan Breslaw Ash, LLC, 264 B.R. at 321. "The ultimate determination of whether to lift a stay depends upon the facts underlying a given motion." Bogdanovich, 292 F.3d at 110.
It does not appear that BOA is seeking relief from the automatic stay in order to commence litigation against WorldCom in another forum to foreclose on the collateral. See, e.g., Sonnax Indus., Inc. v. Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1286 (2d Cir. 1990) (adopting twelve factors to consider for determining whether there is cause to modify the automatic stay in order to allow litigation to proceed in another forum). It is on this basis that the Court does not apply the standard enunciated in Sonnax.
The burden of proof on a motion to lift or modify the automatic stay is a shifting one. Section 362(d)(1) requires an initial showing of cause by the movant, while Section 362(g) places the burden of proof on the debtor for all issues other than the debtor's equity in property. . . . If the movant fails to make an initial showing of cause, however, the court should deny relief without requiring any showing from the debtor that it is entitled to continued protection.
Sonnax Indus., Inc. v. Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1285 (2d Cir. 1990) (citations and internal quotation marks omitted). If the movant succeeds in making an initial showing, then the burden shifts to the debtor under section 362(g) to show that the debtor is entitled to the continued protections of the automatic stay. See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr.S.D.N.Y. 1997).
Here, BOA argues that WorldCom will be using the Investment Account as a weapon for WorldCom's anticipated lawsuit against BOA. (Tr. at 49.) BOA contends that WorldCom's desire to maintain the status quo is analogous to a preliminary injunction if WorldCom intends to secure itself against a future judgment against BOA. BOA raised these arguments in response to WorldCom's objection to BOA's Motion (the "Objection"). There, WorldCom maintained, among other things, that WorldCom believes that BOA and Bernie Ebbers utilized WorldCom's corporate treasury to help Ebbers pay personal debts to BOA. On this basis, WorldCom believes that the transfer of money to the Investment Account is avoidable and recoverable from BOA as a preference and/or fraudulent transfer under Bankruptcy Code sections 544, 547, 548, 550 and 28 U.S.C. § 3301 et. seq. Based upon these theories, WorldCom intends to initiate an adversary proceeding. Hence, WorldCom contends that BOA's ultimate rights to the Investment Account Funds are not yet determined and that this Court should consider WorldCom's intention to challenge the validity of the underlying debt in deciding whether to lift the automatic stay.
WorldCom directs this Court to authorities for the proposition that this Court can consider defenses that question the validity of an underlying debt in a motion for relief from the automatic stay. See, e.g., In re Poughkeepsie Hotel Assocs. Joint Venture, 132 B.R. 287, 291-92 (Bankr. S.D.N.Y. 1991) (holding that the affirmative defense of equitable subordination could be considered as a defense to a motion for relief from the automatic stay) (discussed and followed by In re Kaplan Breslaw Ash, LLC, 264 B.R. at 326-27) (considering fraudulent conveyance theory as a defense to a motion for relief from stay)). The bankruptcy court in Poughkeepsie Hotels noted that it is within the Court's discretion whether or not a particular defense or counterclaim is properly asserted in stay litigation. In re Poughkeepsie Hotel Assocs., 132 B.R. at 291. Despite initial doubts, BOA ultimately agreed with WorldCom that this Court can consider a debtor's defenses based upon potential fraudulent conveyance or similar actions. (Tr. at 54.) The Court understands BOA's remaining argument as questioning the value of considering WorldCom's defenses here because of the complexity of WorldCom's intended claims. Hence, BOA still contends that there is cause to terminate the automatic stay because even if this Court considers WorldCom's defenses, upon balancing the equities here, there is still no justification for the continued imposition of the automatic stay.
At the hearing, WorldCom argued, among other things, that WorldCom, the Official Committee of Unsecured Creditors, and the WorldCom Examiner, are working towards filing an adversary complaint against BOA by the middle of May 2003. (Tr. at 59-60.) WorldCom argued that because there is always a possibility that BOA may not be solvent at the conclusion of any litigation, that WorldCom is entitled to the protection of having the Investment Account Funds segregated until the conclusion of the litigation. (Tr. at 63-4.)
The Court need not adjudicate the merits of these issues because the Court finds that BOA has established a prima facie case for relief from the automatic stay. Although it is arguable that denying BOA's motion for relief from the automatic stay would promote the creditor protections incorporated under the automatic stay because the automatic stay prevents secured creditors, like BOA, from seizing and selling the debtor's assets without regard to the interests of other creditors, in this particular instance it does not appear that allowing BOA to liquidate the funds in the Investment Account would harm the interests of WorldCom's creditors. To the contrary, WorldCom will receive $2.5 million dollars now, and will still have the prospective benefit of obtaining a judgment against BOA. WorldCom has offered no evidence to establish that any such judgment would be uncollectible against BOA. Nevertheless, the Court balances this finding with the concern that WorldCom may be foregoing substantive rights if BOA is permitted to liquidate the Investment Account Funds before WorldCom has had the opportunity to meaningfully assess and litigate the merits involving the Investment Account Funds. In order to resolve these concerns, the Court will grant BOA's motion for relief from the automatic stay to permit BOA to exercise BOA's rights as a secured creditor upon the express condition that BOA consent to this Court's jurisdiction to enter final orders regarding matters related to the anticipated litigation involving the Investment Account Funds.
V. Conclusion
Upon consideration of all the arguments raised by the parties, Movant has demonstrated cause for relief from the automatic stay under section 362(d)(1). WorldCom has not carried its burden under section 362(g) to show that WorldCom is entitled to the continued protections of the automatic stay. Thus, Movant's request for a modification of the automatic stay is GRANTED, upon the express condition that BOA consent to this Court's jurisdiction to enter final orders regarding matters related to the anticipated litigation involving the Investment Account Funds. By February 7, 2003, BOA shall advise chambers in writing whether BOA consents to the terms set forth herein. In the event BOA does not consent, the Court will issue a final order at that time.
SO ORDERED