In re Garofalo's Finer Foods, Inc.
| Citation | 164 BR 955 |
| Decision Date | 17 February 1994 |
| Docket Number | Bankruptcy No. 90 B 08112. Adv. No. 92 A 00108. |
| Parties | In re GAROFALO'S FINER FOODS, INCORPORATED, Debtor. Philip V. MARTINO, not individually, but solely as Trustee, Plaintiff, v. FIRST NATIONAL BANK IN HARVEY, Defendant. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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Earl S. Rappaport, Richard T. Reibman and Paul J. Gaynor, Schwartz, Cooper, Greenberger & Krause, Chicago, IL, for First Nat. Bank in Harvey.
F. John McGinnis, Keith A. Goldberg and Faye B. Feinstein, Altheimer & Gray, Chicago, IL, for Philip V. Martino, Trustee.
Philip V. Martino, Rudnick & Wolfe, Chicago, IL, Trustee.
This matter comes before the Court on the complaint of Philip V. Martino, as trustee (the "Trustee") of the estate of Garofalo Finer Foods, Inc. (the "Debtor"), against First National Bank in Harvey (the "Bank"). The ultimate question the Court must decide is whether the repayments made to the Bank as a result of extensions of overdraft credit made by the Bank to the Debtor, having been undertaken without notice to creditors or without Court approval, are avoidable and recoverable for the benefit of the estate. Prior to trial, the Trustee filed a motion for summary judgment on which the Court reserved ruling. For the reasons set forth herein, the Court, having considered the testimony, pleadings, exhibits, and affidavits, hereby denies the motion for summary judgment because of material factual issues. After consideration of all evidence adduced at trial, the Court finds that the Bank's post-petition extensions of overdraft credit to the Debtor and subsequent repayment of the sums with estate funds violated 11 U.S.C. §§ 362 and 364, as well as the provisions of prior extant cash collateral orders. These repayments are avoidable and recoverable under 11 U.S.C. §§ 549 and 550. Consequently, the Court enters judgment in favor of the Trustee and against the Bank in the sum of $2,315,901.22 plus costs. The Court denies the Trustee's request for damages and attorneys' fees pursuant to 11 U.S.C. § 362(h).
The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (K) and (O).
Philip V. Martino is the duly appointed, qualified and acting Trustee of the Debtor's estate. The Bank is a national banking corporation with its principal place of business in Harvey, Illinois. The Bank had a long prior banking relationship with the Debtor which maintained its principal checking accounts at the Bank. The Bank was also a pre-petition unsecured creditor of the Debtor in the sum of $102,000.00. On May 2, 1990, the Debtor filed a Chapter 11 petition. Pursuant to 11 U.S.C. §§ 1107 and 1108, the Debtor retained possession of its assets and operated its business as a debtor-in-possession during the Chapter 11 phase of this case.
As of the petition date, the Debtor had secured debt of approximately $1.7 million, of which approximately $1.3 million was owed to Scot Lad Foods, Inc. and The Midland Grocery Company (hereinafter collectively referred to as the "Suppliers"), with the balance owed to a junior lienholder, Beverly Bank Matteson ("Beverly Bank"). The Debtor's obligations to the Suppliers and Beverly Bank were secured by, inter alia, all of the Debtor's then owned and thereafter acquired inventory, supplies, cash, accounts, accounts receivable, furniture, fixtures, equipment and proceeds thereof. The Court entered two series of cash collateral orders authorizing the Debtor to use the cash collateral (as defined in 11 U.S.C. § 363(a)) of the Suppliers on the one hand, and Beverly Bank on the other, on a limited basis, pursuant to operating budgets submitted by the Debtor, and granting adequate protection to the Suppliers and Beverly Bank. See Plaintiff's Exhibit Nos. 1 and 20.
The last cash collateral order was entered on November 13, 1990, which authorized the Debtor to use cash collateral through the confirmation or rejection of the Debtor's amended plan of reorganization. Like the earlier orders, the last cash collateral order ratified and approved the terms of the documents evidencing the Debtor's indebtedness and security interests to the Suppliers and Beverly Bank. The last order also found that the pre-petition security interests granted were valid, perfected liens and security interests in and to the Debtor's pre-petition assets, not subject to any defenses. As adequate protection for the use of their cash collateral, the Court granted the Suppliers and Beverly Bank continuing liens and security interests in and to the Debtor's post-petition assets, whether then existing or thereafter acquired, including proceeds, products and accessions thereof, to the same extent and priority as their respective pre-petition liens and security interests.
The cash collateral orders also granted to the Suppliers, as adequate protection for the use of their cash collateral, an administrative expense under section 364(c)(1), with priority over all other costs and expensesincluding those arising under Chapter 7 of the Bankruptcy Code. Specifically, the cash collateral order of November 13, 1990 stated:
In consideration of Suppliers\' consent to the aforesaid use of cash collateral and to provide Suppliers with adequate protection pursuant to Sections 361 and 363(e) of the Code, Debtor shall grant to Suppliers a general and continuing lien upon and security interest, to the same extent and priority as Suppliers\' pre-petition liens and security interests in the post-petition collateral.
See Plaintiff's Exhibit No. 1, p. 8. Furthermore, both series of cash collateral orders provided for their provisions to survive any order of confirmation or conversion, and for the liens and security interests of the Suppliers' and Beverly Bank to maintain their priority until the Suppliers' and Beverly Bank's claims were satisfied. Id. at p. 18. Additionally, the cash collateral orders stated that their provisions "shall be binding upon . . . the other parties in interest in this Proceeding. . . ." Id. at p. 17. The Bank had actual notice of the pendency of the case and was represented by counsel who was involved, to some extent, in the hearings leading to the entry of the cash collateral orders. The Bank is a party in interest with actual knowledge of these proceedings as one of the Debtor's largest unsecured creditors. Indeed, the confirmed plan made specific provisions for another claim held by the Bank secured by an automobile.
The Debtor filed a plan of reorganization and a disclosure statement on November 5, 1990. The Debtor's plan was confirmed by consent on March 4, 1991. See Defendant's Exhibit No. 1. Approximately five weeks after confirmation, however, the Debtor presented a motion to vacate the order of confirmation. See Defendant's Exhibit No. 3. The Debtor alleged in the motion that it was unable to meet its projections and therefore could not make the proposed plan payments. The Court denied the motion to vacate the order and thereafter converted the case to Chapter 7 on April 11, 1991. Subsequently, the Trustee was appointed.
The Trustee investigated the facts surrounding the surprising failure of the reorganized Debtor. This investigation resulted in the Trustee's six-count second amended complaint, seeking the following relief: (1) Counts I through III alternatively allege that previously undisclosed overdraft credit was extended by the Bank to the Debtor post-petition and violated sections 364(b), 364(c) and 364(d) respectively, and the Trustee seeks to avoid and recover all such payments to the Bank under sections 549 and 550; (2) Count IV alleges that the repayment of the Bank's unauthorized post-petition extension of overdraft credit violated the cash collateral orders; (3) Count V seeks relief pursuant to sections 362(a)(3) and 362(a)(4) as the Bank's post-petition conduct in taking the Debtor's funds deposited into the Debtor's account at the Bank and applying such funds to repay itself for the overdraft credit constituted willful violations of the automatic stay under section 362(h), thus entitling the Trustee to actual damages, including costs, attorneys' fees and punitive damages. The Trustee voluntarily dismissed Count VI which sought relief pursuant to sections 362(a)(3) and 362(a)(6) for certain other transfers totalling $8,314.22.
The Trustee contends that the extensions of overdraft credit by the Bank were unsecured and outside the ordinary course of business under section 364(a), and therefore required notice to the creditors and Court approval under section 364(b)-(d), which was not obtained. The Trustee maintains that because Court authorization was not obtained for the extensions of credit or for repayment of the sums, the Trustee is entitled to recover the repayments of the overdrafts under sections 549 and 550. Further, the Trustee argues that in blatant and knowing disregard of the provisions of the cash collateral orders, the Bank extended overdraft credit to the Debtor and applied the Suppliers' cash collateral in repayment of the Debtor's overdraft obligation, while the Debtor's obligations to the Suppliers and other administrative claimants remained unpaid. Additionally, the Trustee contends that the Bank's actions of so applying the Debtor's funds to repayment of the unauthorized extensions of overdraft credit constituted violations of the automatic stay under sections 362(a)(3) and 362(a)(4).
The Bank argues that the extensions of overdraft credit were made in the ordinary course of business. Thus, according to the Bank, no court authorization was necessary pursuant to section 364...
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