EDC Holding Co., Matter of
| Decision Date | 11 May 1982 |
| Docket Number | No. 81-2711,81-2711 |
| Citation | 676 F.2d 945 |
| Parties | 94 Lab.Cas. P 13,530, 6 Collier Bankr.Cas.2d 882, 9 Bankr.Ct.Dec. 137, Bankr. L. Rep. P 68,654 In the Matter of EDC HOLDING COMPANY, et al., Debtors. Appeal of OFFICIAL CREDITORS' COMMITTEE OF WSC SALES COMPANY. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Howard L. Adelman, Schwartz, Cooper, Kolb & Gaynor, Chicago, Ill., for official creditors.
Henry L. Mason, III, Sidley & Austin, Chicago, Ill., for debtors.
Before WOOD, CUDAHY and POSNER, Circuit Judges.
Section 364 of the Bankruptcy Code empowers the bankruptcy judge to authorize the bankrupt to borrow money and give the lender priority over certain other creditors. Subsequent reversal, by the district court or the court of appeals, of the grant of priority does not affect the validity of the priority if it was granted "to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal," unless the transaction was stayed pending appeal. 11 U.S.C. § 364(e). We are required in this case to interpret and apply the term "in good faith."
Before Wisconsin Steel (as we shall refer jointly to the affiliated corporations that are the bankrupts in this case) went bankrupt, the Chase Manhattan Bank had loaned it money secured by a lien on inventory and by a bank account that the company maintained with Chase. Wisconsin Steel defaulted, and Chase set off against these defaults the funds in the account. Wisconsin Steel was accustomed to paying its employees with checks drawn on this account. Chase's set-off caused those checks to bounce, which induced Wisconsin Steel to petition for protection under Chapter 11 of the Bankruptcy Code.
The union representing Wisconsin Steel's workers filed a complaint in the bankruptcy court seeking payment to its members of their unpaid wages. Chase was named as a defendant along with Wisconsin Steel. The union claimed that it had a lien on the same inventory on which Chase claimed a lien. Although the bankruptcy court authorized Chase to take possession of the inventory, the union, by picketing Wisconsin Steel, prevented Chase from doing so. Eventually a settlement was reached by which Chase agreed to lend Wisconsin Steel some $1.7 million in exchange for the union's dropping its suit and allowing the inventory to be removed. The agreement stated that Wisconsin Steel would pay out of the proceeds of the loan $77,000 to the union to reimburse it for attorneys' fees and other legal expenses incurred in its suit, and the rest (except for some small amounts for various taxes) to the company's employees in settlement of their claims. The agreement further provided that the entire loan was to receive the priority that 11 U.S.C. § 507(a)(3) gives wage claims.
Since the proposed loan involved the grant of a special priority to the lender, the bankruptcy judge's approval was required by section 364. He gave it, over the objection of the Official Creditors' Committee of WSC Sales Company, representing the general creditors of Wisconsin Steel, that the priority should not extend to the $77,000 earmarked for the union's lawyers. The Committee appealed to the district court from this part of the bankruptcy judge's order but the district court dismissed the appeal as moot. The Committee appeals that dismissal to this court.
The bankruptcy judge's order was never stayed. Therefore, if in lending Wisconsin Steel $77,000 to pay the union's legal expenses Chase was acting in good faith, its priority could not be affected by the validity of the order and the issue of validity is therefore moot as the district court held. See, e.g., In re Dutch Inn of Orlando, Ltd., 614 F.2d 504, 506 (5th Cir. 1980). But if Chase was not acting in good faith, the Committee was entitled to have the merits of its objection to the grant of priority adjudicated.
Section 364(e) is explicit that knowledge of the pendency of an appeal from a bankruptcy judge's order granting a lender special priority does not forfeit the protections that the statute gives to a lender who is in good faith, even though such knowledge implies the further knowledge that there are objections to the order. Therefore the mere fact that Chase knew the Committee objected to its receiving a special priority with regard to that portion of the loan that was to pay the union's legal expenses does not show bad faith. See In re Rock Indus. Mach. Corp., 572 F.2d 1195, 1199 (7th Cir. 1978), dealing with a parallel provision relating to purchasers in good faith of a bankrupt's property. These provisions seek to overcome people's natural reluctance to deal with a bankrupt firm whether as purchaser or lender by assuring them that so long as they are relying in good faith on a bankruptcy judge's approval of the transaction they need not worry about their priority merely because some creditor is objecting to the transaction and is trying to get the district court or the court of appeals to reverse the bankruptcy judge. The proper recourse for the objecting creditor is to get the transaction stayed pending appeal. See, e.g., In re Roberts Farms, Inc., 652 F.2d 793, 796-98 (9th Cir. 1981).
But all this presupposes good faith. See, e.g., Local Jt. Exec. Bd., AFL-CIO v. Hotel Circle, Inc., 419 F.Supp. 778, 783 (S.D.Cal.1976), aff'd on other grounds, 613 F.2d 210 (9th Cir. 1980). And while it is clear as we have said that knowledge that there are objections to the transaction is not enough to constitute bad faith, we can find neither cases nor legislative history, pertaining either to good faith lenders to bankrupts or to good faith purchasers from bankrupts, that tell us what is enough. Chase argues that so long as the terms of the transaction are not misrepresented to the bankruptcy judge, as they were not here, the creditor may rely on the bankruptcy judge's order unless it is stayed, no matter how obviously erroneous the order is. But if this is what Congress intended, the words "in good faith" could have been deleted, as it would be perfectly clear even without them that an order obtained from a bankruptcy judge by fraud was ineffective to put the lender who...
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