In Re: Equalnet Comm

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT _______________

No 02-20137 Summary Calendar _______________

IN THE MATTER OF:

EQUALNET COMMUNICATIONS CORPORATION; ERUDITE COMMUNICATIONS, INC., FORMERLY KNOWN AS EQUALNET CORPORATION; RIDENT COMMUNICATIONS, INC., FORMERLY KNOWN AS USC TELECOM, INC.,

Debtors.

RFC CAPITAL CORPORATION,

Appellee,

VERSUS

EQUALNET COMMUNICATIONS CORPORATION; ERUDITE COMMUNICATIONS, INC., FORMERLY KNOWN AS EQUALNET CORPORATION; RIDENT COMMUNICATIONS, INC., FORMERLY KNOWN AS USC TELECOM, INC.,

Appellants.

_________________________

Appeal from the United States District Court for the Southern District of Texas No H-01-2024 _________________________ September 30, 2002

Before HIGGINBOTHAM, SMITH, and filed, the debtors could not obtain unsecured CLEMENT, Circuit Judges. credit for their ordinary operating expenses under 11 U.S.C. § 364(a). In four debtor-in- JERRY E. SMITH, Circuit Judge:* possession financing orders (“DIP orders”), the bankruptcy court therefore authorized Equalnet Communications, Erudite Com- additional credit from RFC to the debtors and munications, and Rident Communications gave RFC administrative priority under 11 (“debtors”) appeal an order of the district U.S.C. § 364(c)(1). court reversing three orders of the bankruptcy court that had required RFC Capital Corpora- In March 2001, the bankruptcy court en- tion (“RFC”) to extend debtor-in-possession tered a sale order authorizing the debtors to financing without any security or administra- sell their assets to CCC Globalcom Corp., Inc. tive priority. Agreeing with the district court (“CCCG”), for $500,000 in cash and the as- that RFC never agreed to such an obligation, sumption of RFC’s pre-petition secured claim. we affirm. The sale order stated that RFC’s claims over $7.5 million would be treated as unsecured I. claims. In three subsequent funding orders, RFC served as a primary lender to the debt- the bankruptcy court ordered RFC to extend ors before and after they filed a bankruptcy pe- post-petition credit to the debtors and, more tition in August 2000. When the debtors filed importantly, held that the sale order overrode the petition, RFC had a secured claim against the DIP orders and stripped these post-petition them for $7,655,173.1 After the petition was loans of their administrative priority status, thereby making them general unsecured loans.

* RFC appealed to the district court, which Pursuant to 5TH CIR. R. 47.5, the court has reversed the funding orders. In a short opin- determined that this opinion should not be pub- ion, the district court concluded that the bank- lished and is not precedent except under the limited ruptcy court had misinterpreted the plain lang- circumstances set forth in 5TH CIR. R. 47.5.4. uage of the sale order. The district court held 1 The debtors’ unsecured creditors committees that the section of the sale order limiting disputed the amount of this claim and filed an ad- RFC’s secured claims to $7.5 million referred versary proceeding in the bankruptcy court against only to RFC’s pre-petition loans, not its post- RFC.

petition loans. The district court therefore re- Cir. 2000). “[W]e should review de novo the instated the administrative priority for these purely legal issues . . . but should defer to the post-petition loans. The debtors appeal this bankruptcy court’s reasonable resolution of ruling.2 any ambiguities in the [orders].” Id. At the same time, we explained that textual inter- II. pretation of a court order is ultimately a legal The parties agree on the basic standard of question, so the order “must be truly am- review for a bankruptcy appeal. “The court biguous . . . before we will defer.” Id. reviews the findings of fact by the bankruptcy court under the clearly erroneous standard and As we explain below, the sale order is not decides issues of law de novo.” Haber Oil Co. ambiguous, and “we will not defer to the bank- v. Swinehart (In re Haber Oil Co.), 12 F.3d ruptcy court’s interpretation of this un- 426, 434 (5th Cir. 1994). ambiguous text.” Id. at 489. We therefore re- view the sale order and related documents The parties disagree, though, on whether de novo. and to what degree we should defer to the bankruptcy court’s interpretation of its own III. orders. RFC contends that we should review The sale order is a consent order that we the bankruptcy court’s interpretation wholly review according to ordinary principles of con- de novo without any deference. The debtors tractual interpretation. United States v. ITT think we should defer to the bankruptcy Cont’l Baking Co., 420 U.S. 223, 236 (1975); court’s interpretation of its orders. Eaton v. Courtaulds of N. Am., Inc., 578 F.2d 87, 90 (5th Cir. 1978). “Even in bankruptcy We stated the “proper reconciliation of proceedings, the courts of appeals look to these two positions” in New Nat’l Gypsum Co. state law to decide contractual issues.” River v. Nat’l Gypsum Co. Settlement Trust (In re Prod. Co. v. Webb (In re Topco, Inc.), 894 Nat’l Gypsum Co.), 219 F.3d 478, 484 (5th F.2d 727, 738 (5th Cir. 1990).

Texas contract law provides the guiding in- 2 The debtors contend that the district court terpretive principles for this case. Most im- lacked jurisdiction over RFC’s appeal because portantly, “[i]n the interpretation of contracts RFC did not file the appeal within ten days of the the primary concern of the courts is to ascer- entry of judgment. See FED. R. BANKR. P. 8002. tain and to give effect to the intentions of the Although RFC filed a notice of appeal within ten parties as expressed in the instrument.” R&P days of each of the three funding orders, the debt- Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 ors argue that RFC really appeals the sale order, S.W.2d 517, 518 (Tex. 1980). Moreover, not the funding orders. “[t]his court is bound to read all parts of the This argument is unpersuasive. RFC had no contract together to ascertain the agreement of reason to think that it would be required to lend to the parties. the debtors on an unsecured basis without adminis- trative priority until the bankruptcy court entered The contract must be considered as a the funding orders. RFC therefore timely appealed, whole.” Forbau v. Aetna Life Ins. Co., 876 and the district court properly exercised jurisdic- S.W.2d 132, 133 (Tex. 1994). If the contract tion over that appeal.

incorporates other documents by reference, we of facts states that “[t]he claim of RFC is must examine those documents, as well, to as- fixed, for the purposes of this Sale Order, at certain the parties’ intent. Owen v. Hendricks, $7,500,000” (emphasis added), without pre- 433 S.W.2d 164, 166 (Tex. 1968). Finally, a judicing in any way the adversary proceeding.3 contract contains an ambiguity only when its Likewise, section 2.2(c) of the Asset Purchase terms are objectively ambiguous, not simply Agreement (“APA”), which the sale order because the parties offer differing interpreta- incorporates by reference, limits RFC’s claim tions. Forbau, 876 S.W.2d at 134. to the lesser of $7.5 million or the amount determined in the adversary proceeding. With these principles in mind, we conclude Section 2.2(c) initially required the debtors to that the sale order is unambiguous and does request a final order from the bankruptcy court not strip RFC’s post-petition loans of admin- approving a compromise amount between the istrative priority status. The bankruptcy court unsecured creditors committees and RFC. relied on paragraph 25 of the sale order to Yet, once it appeared that the committees and conclude that the sale order overrode the DIP RFC would not settle the adversary proceed- orders and reduced RFC’s post-petition loans ing, the debtors and CCCG amended section to general unsecured status. Paragraph 25 2.2(c) expressly to disclaim any prejudice to states in pertinent part that “[t]o the extent the adversary proceeding. that RFC asserts that its claim against the Debtors is in excess of $7.5 million, RFC shall These contractual provisions demonstrate be permitted to assert a deficiency claim that paragraph 25 refers only to RFC’s pre- against the Debtors equal to the amount of its petition secured claim, not its post-petition ad- alleged claim less $7.5 million (‘the RFC ministrative priority claim. Paragraph 25 Deficiency Claim’). The RFC Deficiency merely carried out the deal-making compro- Claim, if allowed, shall only be allowed as a mise between the debtors and CCCG by allow- general unsecured claim.” ing CCCG to purchase debtors’ assets without the risk of an unexpectedly large claim by Paragraph 25 admittedly seems to limit RFC. RFC to a secured claim of $7.5 million, but the bankruptcy court failed to interpret paragraph A supplemental order concerning the pro- 25 in the context of the contract as a whole. cedures for the asset sale entered in April 2001 In this context, paragraph 25 limits only RFC’s also evidences that paragraph 25 did not strip pre-petition secured claim, not its post-petition RFC’s post-petition loans of administrative administrative priority claim. priority status. The order stated that CCCG’s assumption of RFC’s pre-petition loans “in the Uncertainty over the amount of RFC’s pre- approximate amount of $7.5 million . . . shall petition claim threatened the sale of the debt- ors’ assets to CCCG. The unsecured creditors committees had filed an adversary proceeding 3 The sale order contains two sets of sequen- to challenge the amount of RFC’s pre-petition tially numbered paragraphs. The first set express- secured claim. The parties set aside the dis- es the bankruptcy court’s findings of facts, the sec- pute for the sake of consummating the sale. ond set its order. We cite the latter by paragraph Thus, paragraph 33 of the sale order’s finding number alone and the former by paragraph number and the phrase “findings of fact.”

be treated as consideration to the Debtors’ RFC surely would not have agreed to sur- estates in the amount of $7.5 million solely for render its administrative priority claim for a the purposes of the sale of the Debtors’ general unsecured claim without some very assets” (emphasis added). The order also good reason, yet the debtors have singularly stated that “RFC shall comply with the various failed to adduce any such reason. This failure debtor-in-possession orders entered in this strongly suggests that RFC did not, in fact, case.” Although not a part of the sale order, ever surrender its administrative priority claim, this language from the supplemental order but rather lost the claim because of the demonstrates that the parties and the bank- mistaken interpretation of the bankruptcy ruptcy court believed that the DIP orders, i.e., court. As the district court explained, how- RFC’s obligation to loan to the debtors and its ever, “[t]he bankruptcy court cannot transform right to administrative priority, remained in the loans from an administrative expense into effect after the sale order. an unsecured interest without the lender’s con- sent.” The district court properly held that the The debtors also argue that paragraph 27 of loans made by RFC under the DIP orders have the sale order amends or vacates the DIP or- administrative priority. ders. Paragraph 27 states, in pertinent part, that “all orders of this court . . . shall be The judgment of the district court, re- deemed amended and/or vacated to the extent versing the orders of the bankruptcy court, is required to permit consummation of the Ac- AFFIRMED. quisition. To the extent such other . . . orders are inconsistent with this Order or the [APA], this Order and the [APA] shall in such cases govern.” As we have explained, however, par- agraph 25 unambiguously covers only RFC’s pre-petition claims, not its post-petition administrative priority claims. Thus, the sale order and the DIP orders do not conflict, and paragraph 27 does not amend or vacate the DIP orders.

Finally, we note the improbable nature of the debtors’ theory. A claim with administra- tive priority under § 364(c)(1) is one of the most valuable claims under the Bankruptcy Code; it takes priority over almost every other kind of claim, including administrative claims under § 503(b) and § 507(b). A general unse- cured claim, on the other hand, is one of the most worthless claims under the Code; un- secured creditors o ften receive mere pennies on the dollar, if that.