In Re: C Bergemann

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
m 00-30904
_______________
IN THE MATTER OF:
THE BABCOCK AND WILCOX COMPANY; DIAMOND POWER INTERNATIONAL, INC.;
BABCOCK & WILCOX CONSTRUCTION CO., INC.; AND AMERICON, INC.,
Debtors.
CLYDE BERGEMANN, INC.,
Appellant,
VERSUS
THE BABCOCK AND WILCOX COMPANY; DIAMOND POWER INTERNATIONAL, INC.;
BABCOCK & WILCOX CONSTRUCTION CO., INC.; AMERICON, INC.;
AND CITICORP NORTH AMERICA, INC.,
Appellees.
_________________________
Appeal from the United States District Court
for the Eastern District of Louisiana
_________________________
May 23, 2001

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Before REYNALDO G. GARZA,
HIGGINBOTHAM, and SMITH,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Clyde Bergemann, Inc. (“Bergemann”), ap-
peals the district court’s affirmance of the
bankruptcy court’s order authorizing a post-
petition financing agreement between The
Babcock and Wilcox Company, Inc.
(“B&W”), Diamond Power International, Inc.
(“Diamond Power”), Babcock & Wilcox Con-
struction Co., Inc., Americon, Inc.
(collectively, the “debtors”), and Citicorp
North America, Inc. (“CNA”). Finding no
error, we affirm.
I.
Bergemann, a competitor of Diamond Pow-
er’s, filed in 1999 a patent infringement suit,
which is currently pending, seeking $52 million
damages. In February 2000, the debtors filed
voluntary chapter 11 petitions in response to
unrelated mass tort litigation,1 and the
bankruptcy court administratively consolidated
the debtors’ cases. At the same time they filed
the petitions, the debtors filed a motion (the
“DIP financing motion”) with the bankruptcy
court seeking authorization under 11 U.S.C.
§§ 105, 361, 362, 363, and 364(a) to enter
into a post-petition financing arrangement with
CNA, pursuant to a debtor-in-possession
revolving credit facility (the “DIP financing
agreement”).
Under that agreement, the debtors received
a $300 million line of credit and the ability to
procure letters of credit, which allowed them
to continue doing business. The agreement
gave CNA a security interest in the debtors’
assets: Any funds borrowed under the line of
credit would give rise to a claim against the
assets of all debtors, which claim would be
accorded super-priority administrative expense
status against all unsecured creditors of each
debtor.2
The bankruptcy court granted the DIP fi-
nancing motion in an interim order, to which
Bergemann objected on the grounds generally
that the interests of other creditors would be
unfairly subordinated to CNA and specifically
that the assets of Diamond Power might be
exposed to claims by CNA.3 In response to
1 Diamond Power, Americon, Inc., and Babcock
& Wilcox Construction Co., Inc., are subsidiaries
of B&W.
2 The security interest is authorized by
11 U.S.C. § 364(c), which specifies that
[i]f the trustee is unable to obtain unsecured
credit allowable under section 503(b)(1) of
this title as an administrative expense, the
court, after notice and a hearing, may
authorize the obtaining of credit or the
incurring of debtSS
(1) with priority over any or all
administrative expenses of the kind
specified in section 503(b) or 507(b) of
this title;
(2) secured by a lien on property of the
estate that is not otherwise subject to a
lien; or
(3) secured by a junior lien on property of
the estate that is subject to a lien.
3 Bergemann contends that Diamond Power
owns substantial assets outright; Bergemann thus
fears that the DIP financing agreement might allow
creditors of the other debtorsSSincluding CNASSto
reach assets that Diamond Power otherwise would
(continued...)

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Bergemann’s objection, the debtors amended
the agreement to include a clause providing
that, in the event Diamond Power (or any
other debtor) makes payments to CNA in ex-
cess of funds received by that debtor from
CNA, the debtor will receive a claim against
all other debtors, subordinate only to CNA’s
claim.4 Bergemann disagreed that this clause
adequately protected its interests and
continued to object to the DIP financing
agreement.
In March 2000, after a hearing, the
bankruptcy court issued a final order (the “DIP
financing order”) finding that the DIP
financing agreement was necessary to the col-
lective health of the debtors and that all the
debtors would benefit from the agreement and
authorizing the amended DIP financing
agreement over Bergemann’s objection.
Bergemann appealed to the district court,
which affirmed.
II.
We review a bankruptcy court’s
conclusions of law de novo and findings of fact
for clear error. Traina v. Whitney Nat’l Bank,
109 F.3d 244, 246 (5th Cir. 1997). “When the
district court has affirmed the bankruptcy
court’s findings, the review for clear error is
strict.” Id.
A.
Bergemann contends that the DIP financing
order is improper because it substantively con-
solidates the debtors without following
required procedures. Substantive
consolidation is one mechanism for
administering the bankruptcy estates of
multiple, related entities,5 and the issue of the
device’s propriety in a particular case normally
arises from a bankruptcy court’s express order
of consolidation. Bergemann admits that the
bankruptcy court did not purport substantively
3(...continued)
be able to use to satisfy a potential judgment in
Bergemann’s favor.
4 As amended, the DIP financing agreement
stipulates,
To the extent any Debtor (a “Funding Debt-
or”) makes aggregate payments to Lenders
in excess of the aggregate amount of all
loans and advances received by such
Funding Debtor from Lenders after the
Petition Date, then such Funding Debtor,
after the payment in full of the Obligations
and termination of the Commitments, shall
be entitled to a claim under Section
364(c)(1) of the Bankruptcy Code against
each other Debtor, in such amount as may
be determined by the Bankruptcy Court
taking into account the relative benefits
received by each such person, and such
claims shall be deemed to be an asset of the
Funding Debtor; provided that such claim
shall be subordinate and junior in all
respects to the superpriority claims of the
Lenders set forth herein.
5 Because it is a judicial creation, the contours
of substantive consolidation are indefinite; it “usu-
ally results in, inter alia, pooling the assets of, and
claims against, the two entities; satisfying liabilities
from the resultant common fund; eliminating
inter-company claims; and combining the creditors
of the two companies for purposes of voting on
reorganization plans.” In re Augie/Restivo Baking
Co., Ltd., 860 F.2d 515, 518 (2d Cir. 1988) (citing
5 COLLIER ON BANKRUPTCY § 1100.06, at 1100-
32 n.1 (L. King ed., 15th ed. 1988)).
Fundamentally, “[s]ubstantive consolidation occurs
when the assets and liabilities of separate and
distinct legal entities are combined in a single pool
and treated as if they belong to one entity.” 1
WILLIAM L. NORTON, JR., NORTON BANKRUPTCY
LAW AND PRACTICE § 20:3 (2d ed. 2000).

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to consolidate the debtors’ estates but instead
argues that that court performed a “de facto
substantive consolidation.”6 Bergemann cites
no persuasive authority supporting that theory,
however.7 Because we do not agree that the
court’s order is a substantive consolidation, we
do not address the issue whether the court
conducted a sufficient inquiry into its
necessity.
The bankruptcy court’s order authorized
only a pre-confirmation financing arrangement
involving all the debtors and from which each
of the debtors benefits.8 As the district court
6 The bankruptcy court did administratively
consolidate the debtors’ estates. Administrative
consolidation is merely a procedural devise used to
deal efficiently with multiple estates, however,
while substantive consolidation affects the
substantive rights of the parties and therefore is
subject to heightened judicial scrutiny. 1 WILLIAM
L. NORTON, supra, § 20:5.
7 We addressed a similar theorySSalbeit under
different factsSSin Matter of Tex. Extrusion Corp.,
844 F.2d 1142, 1161-62 (5th Cir. 1988), in which
we refused to find a substantive consolidation
where the bankruptcy court had entered no order of
consolidation. Research reveals three cases
mentioning the term “de facto substantive
consolidation,” of which only one is even remotely
applicable to the facts of this case. In In re
Dynaco Corp., 158 B.R. 552, 553-54 (Bankr.
D.N.H. 1993), the court refused to approve an
emergency motion for post-petition financing in a
parent/subsidiary bankruptcy, holding that the
complexity of the financing transaction precluded
approval of the agreement without a hearing. The
court noted in passing that “[t]here are . . .
provisions in the Post-Petition Credit Agreement
that arguably may accomplish a de facto
substantive consolidation of these estates.” Id. The
court failed, however, to describe the agreement in
any detail or to identify the aspects of the
agreement it found objectionable. Moreover, the
court’s statement, which arguably was dictum, was
not supported by reasoning or citation of authority.
We find such a conclusory pronouncement
unpersuasive.
The other two cases to use the term bear no
reasonable relationship to the facts of this case. In
In re Knobel, 167 B.R. 436, 441-42 (Bankr. W.D.
(continued...)
7(...continued)
Tex. 1994), the court refused the Internal Revenue
Service’s invitation to interpret state community
property laws as creating a de facto substantive
consolidation of the bankruptcy estates of husband
and wife debtors. In In re Murray Industries., 119
B.R. 820, 826 (Bankr. M.D. Fla. 1990), the court
opined in dictum that the sale of substantially all of
the assets of a group of affiliated companies
without allocating the purchase price among the
various companies “appeared to be a de facto
substantial consolidation.”
8 In support of the DIP financing motion, the
debtors introduced an affidavit by B&W’s Chief
Restructuring Officer, who testified that the DIP
financing agreement was critical to the continued
vitality of each of the Debtors. Bergemann notes
that the debtors failed to present evidence that
Diamond Power, apart from the other debtors,
needed to obtain credit under the DIP financing
agreement and argues from that premise that the
bankruptcy court erred in authorizing the
agreement. In its written objection to the DIP
financing motion, however, Bergemann failed to
argue the need for any such individualized
showing, other than stating that “Diamond Power
did not require the $300 million in working capital”
available under the agreement.
While probably true, that assertion fails to ac-
count for the other benefits described in the af-
fidavit, including each debtor’s need for letters of
creditSSwhich the agreement would provideSSto
(continued...)

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noted, “[a]t most, what has happened here is
that the lender-creditors under the DIP
financing agreement could have access to the
assets of debtors like Diamond Power in ex-
cess of the amount that Diamond Power
benefitted from the agreement.” Moreover, to
the extent that Diamond Power is required to
pay an amount disproportionate to funds it
obtains through the agreement, its interests are
protected by a super-priority claim against the
other debtors under 11 U.S.C. § 364(c)(2).
While the availability of a § 364(c)(2) claim
may not fully protect Diamond Power’s
creditors,9 it does maintain the critical
distinction between Diamond Power’s assets
and liabilities and those of the other debtors,
negating the lynchpin of any substantive
consolidation order: The DIP financing order
does not combine the assets or liabilities of the
debtors and does not establish a common pool
of funds to pay claims.
Moreover, the order fails to exhibit any oth-
er properties commonly characterizing sub-
stantive consolidation: It neither extinguishes
inter-debtor claims nor combines each debtor’s
creditors for purposes of voting on a re-
organization plan. Bergemann’s claim has not
been consolidated with those of the other debt-
ors’ unsecured creditors, and Bergemann’s
recovery has not been limited to a pro-rata
share equal to that of the other unsecured
creditors. Almost none of the elements
characteristic of a substantive consolidation
order is present in the bankruptcy court's
order. Thus, the order does not effect a
substantive consolidation, de facto or
otherwise.
B.
Bergemann argues that the DIP financing
order is invalid because it violates the absolute
priority rule, embodied by 11 U.S.C. § 1129-
(b)(2)(B), which outlines the requirements for
confirming a chapter 11 plan:
The court shall confirm a plan only if all
of the following requirements are met:
. . . .
With respect to a class of unsecured
claimsSS
(i) the plan provides that each holder
of a claim of such class receive or
retain on account of such claim
property of a value, as of the
effective date of the plan, equal to
the allowed amount of such claim;
or
(ii) the holder of any claim or interest
that is junior to the claims of such
class will not receive or retain
under the plan on account of such
junior claim or interest any
property.
(Emphasis added.) By its plain text, the ab-
solute priority rule applies only to the
confirmation of a chapter 11 planSSsection
1129 is entitled “Confirmation of plan”SSand
therefore is inapplicable to the pre-
8(...continued)
continue doing business. Weighing Bergemann’s
lone, unsupported assertion against the debtors’
detailed affidavit, we cannot say the bankruptcy
court committed clear error in finding that
Diamond Power, like the other Debtors, would
benefit under the agreement.
9 Whether Bergemann is adequately protected
pursuant to the bankruptcy court’s order is not
relevant to the issues addressed in this appeal. See
infra note 12.

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confirmation DIP financing order.
Bergemann avers that the bankruptcy court
attempted “to do outside a plan what it cannot
do in a plan,” citing In re Braniff Airways,
Inc., 700 F.2d 935, 940 (5th Cir. 1983), for
support. Bergemann reads Braniff too broad-
ly, however. There the bankruptcy court ap-
proved a transaction under 11 U.S.C. § 363(b)
that included the sale of substantially all the
assets and the exchange of $2.5 million of the
estate’s cash for restricted travel scrip. This
court reversed, finding that many of the
activities contemplated by the transaction fell
outside the provisions of § 363(b) authorizing
the trustee to “use, sell or lease” the debtor’s
assets; moreover, we reasoned that the
restricted nature of the travel scrip “had the
practical effect of dictating some of the terms
of any future reorganization plan,” and
concluded that after such a sale, “little would
remain [of the estate] save fixed based
equipment and little prospect or occasion for
further reorganization. . . . [T]his [proposed
sale] is in fact a reorganization.” Id. at 940.
Braniff stands merely for the proposition
that the provisions of § 363 permitting a
trustee to use, sell, or lease the assets do not
allow a debtor to gut the bankruptcy estate
before reorganization or to change the
fundamental nature of the estate’s assets in
such a way that limits a future reorganization
plan. The DIP financing agreement contem-
plates neither of those functions; it merely
allows the debtors to obtain the credit
necessary to their continued vitality as going
entities, pledging their assets as security for
the credit. It neither changes the fundamental
nature of the assets nor limits future
reorganization options. Braniff does not
compel application of the absolute priority rule
in this case.10
Bergemann cites two additional cases for
the proposition that the absolute priority rule
applies in the pre-confirmation context; neither
is persuasive.11 Instead, we agree that “[t]he
absolute priority rule is a confirmation
standard which does not apply to a pre-
confirmation contested matter involving a
debtor’s request to obtain senior credit.” In re
495 Cent. Park Ave. Corp., 136 B.R. 626, 632
(Bankr. S.D.N.Y. 1992).12 Neither the plain
language of the statute nor any persuasive
authority favors application of the absolute
priority rule before plan confirmation.
10 Notably, Braniff mentioned the absolute pri-
ority rule only when referring to the requirements
the parties must meet in “[a]ny future attempts to
specify the terms whereby a reorganization plan is
to be adopted.” Braniff, 700 F.2d at 940.
11 See In re Regency Holdings (Cayman), 216
B.R. 371, 374 (Bankr. S.D.N.Y. 1998)
(mentioning the absolute priority rule only in
passing, while discussing an asset transfer between
a subsidiary and its parent); In re Seaview Estates,
Inc., 213 B.R. 427, 431-32 (Bankr. E.D.N.Y.
1997) (refusing to interpret a confirmed plan in a
way that would violate the absolute priority rule).
12 Furthermore, 495 Central Park involved a
financing transaction under § 364(d), which re-
quires “adequate protection” of senior lienholders.
In contrast, the financing agreement in this case is
authorized by § 364(c), which does not require
adequate protection. See In re Garland Corp.,
6 B.R. 456, 462 (1st Cir. B.A.P. 1980). Likewise,
Bergemann is an unsecured creditor, not a senior
lienholder, and thus would not be entitled to ade-
quate protection even under § 364(d). See In re
Simasko Prod. Co., 47 B.R. 444, 448 (Bankr. D.
Colo. 1985). Thus, the rationale of 495 Central
Park applies even more strongly to the financing
agreement in this case.

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Even were we persuaded that the absolute
priority rule permissibly could be extended to
pre-confirmation financing arrangements, we
would decline to do so here. The debtors es-
tablished the necessity of the agreement, which
included a provision protectingSSat least in
partSSthe interests of the existing creditors. In
addition, Bergemann is an unsecured creditor
that has not yet even prevailed on the suit
underlying its claim. As the district court
noted, “it is speculative whether Bergemann’s
claim will exist by the time this case reaches
plan confirmation and whether the absolute
priority rule would ever be invoked in this
case.” Thus, the bankruptcy court did not err
in failing to apply the absolute priority rule.
C.
Bergemann contends the financing
agreement should not have been approved
because it is effectively a fraudulent
conveyance of Diamond Power’s assets. The
district court refused to address the merits of
the argument, finding it waived. We agree.
To preserve an issue for appeal, a party
must raise it before the trial court:
Citing cases that may contain a use-
ful argument is simply inadequate to
preserve that argument for appeal; “to
be preserved, an argument must be
pressed, and not merely intimated.” In
short, the argument must be raised to
such a degree that the trial court may
rule on itSSa standard that clearly was
not met in the instant case. The
argument here was not even identified
by name, much less advocated.
Matter of Fairchild Aircraft Corp., 6 F.3d
1119, 1128 (5th Cir. 1993) (quoting Hays v.
Sony Corp., 847 F.2d 412, 420 (7th Cir.
1988)) (footnotes omitted).
Bergemann’s brief to the bankruptcy court
plainly argued two distinct theories: that the
DIP financing agreement was a de facto
substantive consolidation and that the
agreement violated the absolute priority rule.
Although Bergemann contends that it raised
the issue of fraudulent conveyance sufficiently
to avoid waiver, it can point to no assertion
before the bankruptcy court that meets Fair-
child Aircraft’s strict standard. Bergemann
admits that it referred to the issue only in
passingSSas part of its substantive
consolidation argumentSSbut reasons
nonetheless that it preserved the issue by
quoting two cases in its bankruptcy court
brief: One expressed concern that “an
overagressive approach [to substantive
consolidation] could lead to a series of
fraudulent conveyances being considered a
commingling of assets that may justify
substantive consolidation”;13 the other stated
that “[t]ransfers made to benefit third parties
13 In re Creditors Serv. Corp., 195 B.R. 680,
689 n.5 (Bankr. S.D. Ohio 1996). The text quoted
in Bergemann’s brief to the bankruptcy court,
while mentioning the terms “fraudulent
conveyance” and “substantive consolidation,”
opined only that an overbroad view of the scope of
substantive consolidation presents the danger that
multiple fraudulent conveyances might serve as the
basis for an improper substantive consolidation.
Notably, neither the quoted text nor any other part
of the opinion stated that an alleged substantive
consolidation effectsSSor even presents the danger
ofSSa fraudulent conveyance. The mere fact that
the terms “fraudulent conveyance” and
“substantive consolidation” appear in the same
quoted sentence does not preserve the issue of
whether the DIP financing order is a fraudulent
conveyance.

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are clearly not made for ‘fair consideration,’”14
which statement Bergemann contends is the
definition of a fraudulent conveyance.
Neither quotation identified the issue of
fraudulent conveyance sufficiently for the
bankruptcy court to rule on itSSone quotation
used the term “fraudulent conveyance,” but in
an irrelevant context, and the other failed even
to identify the relevant legal theory.
Moreover, the quotations were accompanied
by no discussion regarding how that theory
applied to the DIP financing agreement.
Instead, the unexplained quotations were
buried in a section supporting a related, but
distinct, argument.
The bankruptcy court could not have been
expected to rule on the issue on the basis of
those quo tations alone. Bergemann waived
the issue of whether the DIP financing
agreement is a fraudulent conveyance.15
AFFIRMED.
14 In re Lawrence Paperboard Corp., 76 B.R.
866, 874 (Bankr. D. Mass 1987) (quoting Ruben
v. Mfrs. Hanover Trust, 661 F.2d 979, 981 (2d
Cir. 1981)).
15 Even if Bergemann had not waived the issue
of fraudulent conveyance, its argument, which is
premised on the proposition that Diamond Power
received no benefit from the DIP financing
agreement, is without merit. As discussed supra
note 8, the bankruptcy court properly found as a
matter of fact that Diamond Power needed and
benefited from the agreement.

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