In Re: Equalnet Comm, et al

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.

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_________________________
Appeal from the United States District Court
for the Southern District of Texas
No H-01-2024
_________________________
September 30, 2002
Before HIGGINBOTHAM, SMITH, and
CLEMENT, Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
Equalnet Communications, Erudite Com-
munications, and Rident Communications
(“debtors”) appeal an order of the district
court reversing three orders of the bankruptcy
court that had required RFC Capital Corpora-
tion (“RFC”) to extend debtor-in-possession
financing without any security or administra-
tive priority. Agreeing with the district court
that RFC never agreed to such an obligation,
we affirm.
I.
RFC served as a primary lender to the debt-
ors before and after they filed a bankruptcy pe-
tition in August 2000. When the debtors filed
the petition, RFC had a secured claim against
them for $7,655,173.1 After the petition was
filed, the debtors could not obtain unsecured
credit for their ordinary operating expenses
under 11 U.S.C. § 364(a). In four debtor-in-
possession financing orders (“DIP orders”),
the bankruptcy court therefore authorized
additional credit from RFC to the debtors and
gave RFC administrative priority under 11
U.S.C. § 364(c)(1).
In March 2001, the bankruptcy court en-
tered a sale order authorizing the debtors to
sell their assets to CCC Globalcom Corp., Inc.
(“CCCG”), for $500,000 in cash and the as-
sumption of RFC’s pre-petition secured claim.
The sale order stated that RFC’s claims over
$7.5 million would be treated as unsecured
claims. In three subsequent funding orders,
the bankruptcy court ordered RFC to extend
post-petition credit to the debtors and, more
importantly, held that the sale order overrode
the DIP orders and stripped these post-petition
loans of their administrative priority status,
thereby making them general unsecured loans.
RFC appealed to the district court, which
reversed the funding orders. In a short opin-
ion, the district court concluded that the bank-
ruptcy court had misinterpreted the plain lang-
uage of the sale order. The district court held
that the section of the sale order limiting
RFC’s secured claims to $7.5 million referred
only to RFC’s pre-petition loans, not its post-
* Pursuant to 5TH CIR. R. 47.5, the court has
determined that this opinion should not be pub-
lished and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
1 The debtors’ unsecured creditors committees
disputed the amount of this claim and filed an ad-
versary proceeding in the bankruptcy court against
RFC.

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petition loans. The district court therefore re-
instated the administrative priority for these
post-petition loans. The debtors appeal this
ruling.2
II.
The parties agree on the basic standard of
review for a bankruptcy appeal. “The court
reviews the findings of fact by the bankruptcy
court under the clearly erroneous standard and
decides issues of law de novo.” Haber Oil Co.
v. Swinehart (In re Haber Oil Co.), 12 F.3d
426, 434 (5th Cir. 1994).
The parties disagree, though, on whether
and to what degree we should defer to the
bankruptcy court’s interpretation of its own
orders. RFC contends that we should review
the bankruptcy court’s interpretation wholly
de novo without any deference. The debtors
think we should defer to the bankruptcy
court’s interpretation of its orders.
We stated the “proper reconciliation of
these two positions” in New Nat’l Gypsum Co.
v. Nat’l Gypsum Co. Settlement Trust (In re
Nat’l Gypsum Co.), 219 F.3d 478, 484 (5th
Cir. 2000). “[W]e should review de novo the
purely legal issues . . . but should defer to the
bankruptcy court’s reasonable resolution of
any ambiguities in the [orders].” Id. At the
same time, we explained that textual inter-
pretation of a court order is ultimately a legal
question, so the order “must be truly am-
biguous . . . before we will defer.” Id.
As we explain below, the sale order is not
ambiguous, and “we will not defer to the bank-
ruptcy court’s interpretation of this un-
ambiguous text.” Id. at 489. We therefore re-
view the sale order and related documents
de novo.
III.
The sale order is a consent order that we
review according to ordinary principles of con-
tractual interpretation. United States v. ITT
Cont’l Baking Co., 420 U.S. 223, 236 (1975);
Eaton v. Courtaulds of N. Am., Inc., 578 F.2d
87, 90 (5th Cir. 1978). “Even in bankruptcy
proceedings, the courts of appeals look to
state law to decide contractual issues.” River
Prod. Co. v. Webb (In re Topco, Inc.), 894
F.2d 727, 738 (5th Cir. 1990).
Texas contract law provides the guiding in-
terpretive principles for this case. Most im-
portantly, “[i]n the interpretation of contracts
the primary concern of the courts is to ascer-
tain and to give effect to the intentions of the
parties as expressed in the instrument.” R&P
Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596
S.W.2d 517, 518 (Tex. 1980). Moreover,
“[t]his court is bound to read all parts of the
contract together to ascertain the agreement of
the parties.
The contract must be considered as a
whole.” Forbau v. Aetna Life Ins. Co., 876
S.W.2d 132, 133 (Tex. 1994). If the contract
2 The debtors contend that the district court
lacked jurisdiction over RFC’s appeal because
RFC did not file the appeal within ten days of the
entry of judgment. See FED. R. BANKR. P. 8002.
Although RFC filed a notice of appeal within ten
days of each of the three funding orders, the debt-
ors argue that RFC really appeals the sale order,
not the funding orders.
This argument is unpersuasive. RFC had no
reason to think that it would be required to lend to
the debtors on an unsecured basis without adminis-
trative priority until the bankruptcy court entered
the funding orders. RFC therefore timely appealed,
and the district court properly exercised jurisdic-
tion over that appeal.

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

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

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