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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

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

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

to consolidate the debtors' estates but instead
court's order is a substantive consolidation, we
argues that that court performed a "de facto
do not address the issue whether the court
substantive consolidation."6 Bergemann cites
conducted a sufficient inquiry into its
no persuasive authority supporting that theory,
necessity.
however.7 Because we do not agree that the
The bankruptcy court's order authorized
only a pre-confirmation financing arrangement
6 The bankruptcy court did administratively
involving all the debtors and from which each
consolidate the debtors' estates. Administrative
of the debtors benefits.8 As the district court
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
7(...continued)
subject to heightened judicial scrutiny. 1 WILLIAM
Tex. 1994), the court refused the Internal Revenue
L. NORTON, supra, § 20:5.
Service's invitation to interpret state community
property laws as creating a de facto substantive
7 We addressed a similar theorySSalbeit under
consolidation of the bankruptcy estates of husband
different factsSSin Matter of Tex. Extrusion Corp.,
and wife debtors. In In re Murray Industries., 119
844 F.2d 1142, 1161-62 (5th Cir. 1988), in which
B.R. 820, 826 (Bankr. M.D. Fla. 1990), the court
we refused to find a substantive consolidation
opined in dictum that the sale of substantially all of
where the bankruptcy court had entered no order of
the assets of a group of affiliated companies
consolidation. Research reveals three cases
without allocating the purchase price among the
mentioning the term "de facto substantive
various companies "appeared to be a de facto
consolidation," of which only one is even remotely
substantial consolidation."
applicable to the facts of this case. In In re
Dynaco Corp., 158 B.R. 552, 553-54 (Bankr.
8 In support of the DIP financing motion, the
D.N.H. 1993), the court refused to approve an
debtors introduced an affidavit by B&W's Chief
emergency motion for post-petition financing in a
Restructuring Officer, who testified that the DIP
parent/subsidiary bankruptcy, holding that the
financing agreement was critical to the continued
complexity of the financing transaction precluded
vitality of each of the Debtors. Bergemann notes
approval of the agreement without a hearing. The
that the debtors failed to present evidence that
court noted in passing that "[t]here are . . .
Diamond Power, apart from the other debtors,
provisions in the Post-Petition Credit Agreement
needed to obtain credit under the DIP financing
that arguably may accomplish a de facto
agreement and argues from that premise that the
substantive consolidation of these estates." Id. The
bankruptcy court erred in authorizing the
court failed, however, to describe the agreement in
agreement. In its written objection to the DIP
any detail or to identify the aspects of the
financing motion, however, Bergemann failed to
agreement it found objectionable. Moreover, the
argue the need for any such individualized
court's statement, which arguably was dictum, was
showing, other than stating that "Diamond Power
not supported by reasoning or citation of authority.
did not require the $300 million in working capital"
We find such a conclusory pronouncement
available under the agreement.
unpersuasive.
While probably true, that assertion fails to ac-
The other two cases to use the term bear no
count for the other benefits described in the af-
reasonable relationship to the facts of this case. In
fidavit, including each debtor's need for letters of
In re Knobel, 167 B.R. 436, 441-42 (Bankr. W.D.
creditSSwhich the agreement would provideSSto
(continued...)
(continued...)
4

noted, "[a]t most, what has happened here is
share equal to that of the other unsecured
that the lender-creditors under the DIP
creditors. Almost none of the elements
financing agreement could have access to the
characteristic of a substantive consolidation
assets of debtors like Diamond Power in ex-
order is present in the bankruptcy court's
cess of the amount that Diamond Power
order. Thus, the order does not effect a
benefitted from the agreement." Moreover, to
substantive consolidation, de facto or
the extent that Diamond Power is required to
otherwise.
pay an amount disproportionate to funds it
obtains through the agreement, its interests are
B.
protected by a super-priority claim against the
Bergemann argues that the DIP financing
other debtors under 11 U.S.C. § 364(c)(2).
order is invalid because it violates the absolute
While the availability of a § 364(c)(2) claim
priority rule, embodied by 11 U.S.C. § 1129-
may not fully protect Diamond Power's
(b)(2)(B), which outlines the requirements for
creditors,9 it does maintain the critical
confirming a chapter 11 plan:
distinction between Diamond Power's assets
and liabilities and those of the other debtors,
The court shall confirm a plan only if all
negating the lynchpin of any substantive
of the following requirements are met:
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.
With respect to a class of unsecured
claimsSS
Moreover, the order fails to exhibit any oth-
er properties commonly characterizing sub-
(i) the plan provides that each holder
stantive consolidation: It neither extinguishes
of a claim of such class receive or
inter-debtor claims nor combines each debtor's
retain on account of such claim
creditors for purposes of voting on a re-
property of a value, as of the
organization plan. Bergemann's claim has not
effective date of the plan, equal to
been consolidated with those of the other debt-
the allowed amount of such claim;
ors' unsecured creditors, and Bergemann's
or
recovery has not been limited to a pro-rata
(ii) the holder of any claim or interest
that is junior to the claims of such
8(...continued)
class will not receive or retain
continue doing business. Weighing Bergemann's
under the plan on account of such
lone, unsupported assertion against the debtors'
junior claim or interest any
detailed affidavit, we cannot say the bankruptcy
property.
court committed clear error in finding that
Diamond Power, like the other Debtors, would
(Emphasis added.) By its plain text, the ab-
benefit under the agreement.
solute priority rule applies only to the
9
confirmation of a chapter 11 planSSsection
Whether Bergemann is adequately protected
pursuant to the bankruptcy court's order is not
1129 is entitled "Confirmation of plan"SSand
relevant to the issues addressed in this appeal. See
therefore is inapplicable to the pre-
infra note 12.
5

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

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

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.
8