In re General Oil Distributors, Inc., Bankruptcy No. 882-80516-20.

Decision Date08 June 1982
Docket NumberBankruptcy No. 882-80516-20.
Citation20 BR 873
PartiesIn re GENERAL OIL DISTRIBUTORS, INC., et al., Debtors.
CourtU.S. Bankruptcy Court — Eastern District of New York

Levin & Weintraub, New York City, for debtor; Barry Seidel and Myron Trepper, P.C., New York City, of counsel.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for Marine Midland Bank; Gerald Feller, New York City, of counsel.

Brener, Wallack & Hill, Princeton, N.J., for Royal Petroleum; Nathan M. Edelstein, Newark, N.J., of counsel.

Cable, McDaniel, Bowie & Bond, Baltimore, Md., for Crown Central Petroleum; Morton A. Sacks, Baltimore, Md., of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Northville Caribbean; Jay Himes, New York City, of counsel.

Gordon, Hurwitz, Butowsky, Baker, Weitzen & Shalov, New York City, for Koch Fuels, Tipco Products, Mount Airy Trading, and Augsbury Corp.; Kent T. Stauffer, New York City, of counsel.

Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for Creditors Committee; Glenn B. Rice, New York City, of counsel.

Mattson, Madden & Polito, Newark, N.J., for Cities Service; Frank D. Angelastro and Frank Giantomas, Newark, N.J., of counsel.

ROBERT JOHN HALL, Bankruptcy Judge.

Crown Central Petroleum Corporation ("Crown") and Royal Petroleum Corp. ("Royal")1 (collectively "Crown-Royal") move this Court to reconsider and vacate its prior order of 10 March 1982, and by implication, its order of 29 March 1982 which confirmed and ratified in part and modified in part the March 10 order. Upon reconsideration, the Court, with such reservations as are hereinafter noted, reconfirms its 29 March 1982 order.

For the factual background of this case, the reader is referred to this Court's prior opinion, In re General Oil Distributors, Inc., published at 18 B.R. 654 (Bkrtcy., E.D.N.Y. 1982). For the purposes of this motion, suffice it to say that prior to the commencement of these cases, General Oil Distributors, Inc. ("General") had been financing itself through the factoring of its accounts receivable through Marine Midland Bank, N.A. ("Marine") who retained as collateral a continuing security interest in all of General's receivables as well as the guarantees, inter alia, of Southville Industries Corporation ("Southville") and Inwood Trucking Corporation ("Inwood"), which are related corporations which are now also operating under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (Supp. IV 1980).

Thereafter, on 10 March 1982 (which was five days after General's conversion from an involuntary chapter 7 to the present chapter 11) General submitted to this Court, ex parte, a proposed order which both scheduled a hearing for approval of a financing package it had negotiated with Marine and authorized General to borrow $300,000 immediately under the terms of that package.

The original package provided that Marine would loan General $700,000 ($300,000 upon the Court's signing of the ex parte order and an additional $400,000 upon the Court's approval of the package after the scheduled hearing) and would continue factoring General's accounts receivable as it had prepetition. In return, Marine was to receive as additional collateral:

(1) a continuing security interest in all of General's postpetition accounts receivable;

(2) a security interest in all of General's other unencumbered assets;

(3) the guarantees of Southville and Inwood;

(4) a second mortgage on the Inwood facility; and

(5) the guarantees of the brothers Allen and Gerald Wechler (who are the sole shareholders of the parent holding company of the debtor corporations involved herein).

In addition, the package provided that all of the above collateral would also secure General's prepetition obligations to Marine (the so-called "cross-collateralization" provision) and that if the collateral proved insufficient to cover Marine's advances, the claim would be accorded a super priority under section 364(c)(1). Finally, the package provided that General would execute all of the customary documents (notes, security agreements, etc.) which contained the usual boilerplate language granting Marine broad rights of enforcement.

Based on General's representations that Marine was fully secured prepetition and that a financial emergency existed, the Court signed the 10 March 1982 order whereupon Marine advanced General $300,000, all of the provisions of the package (including the cross-collateralization provision) became operative and a hearing on notice was scheduled for 15 March 1982 to gain Court approval of the remainder of the package.

At the March 15 hearing, the unsecured creditors present were unanimous in their opposition to the package notwithstanding General's warnings that its denial meant an immediate liquidation which would hurt all. Ironically, the issue was resolved when the Court was forced to deny General the authority to assume its executory contract for the delivery of oil to New York City based on General's inability to give adequate assurance of future performance. See In re General Oil Distributors, Inc., 18 B.R. 654 (Bkrtcy., E.D.N.Y.1982). Inasmuch as that assumption was apparently a condition precedent to Marine's obligation to perform under the financing package, General was forced to withdraw the package. Id. This, however, left Marine in the enviable position of having received substantial collateral as security for loans only a small part of which would have to be made (i.e., the $300,000 already advanced).

Accordingly, Crown and Royal moved this Court by an order to show cause returnable on 29 March 1982 to reconsider and vacate the March 10 order. In addition to the reasons stated above, Crown and Royal argued that:

(1) the cross-collateral provisions were prohibited by In re Texlon Corporation, 596 F.2d 1092 (2d Cir. 1979);

(2) the boilerplate provisions of the various security agreements violated this Court's jurisdiction by impermissibly delegating control of General to Marine; and

(3) the order might be read to reorder priorities between entities "not before the Court" and was therefore improper.

On the March 29 return date, again without notice,2 General proffered its second financing package.

This second package rather than providing for additional loans to be made to General provided instead that General might use Marine's cash collateral under the following general conditions:

(1) General was to deposit all of the proceeds of its accounts receivable and general intangibles with Marine;

(2) General could then withdraw and use the first $550,000 of such;

(3) thereafter, for up to four weeks after the entry of the order, General could withdraw up to 90% of the money it had deposited provided it had generated at least that amount of new receivables;

(4) Marine, on the other hand, could retain the remaining 10% and apply it to reduce General's prepetition and then postpetition indebtedness;

(5) at the end of the first four weeks the arrangement was to continue as above based on a 85%—15% split for an additional four weeks;

(6) whereupon unless continued by an order of this Court, the arrangement would cease and Marine would be entitled to apply all the funds still on deposit against General's pre and postpetition debt. Additionally, other than the possible rights of cross-collateralization in General's accounts receivable that this arrangement defined, Marine released such rights in General's other assets. Moreover, Marine agreed that once $550,000 of new receivables had been created under this arrangement the cross-collateralization rights it held in the other related debtors-in-possession would also be released. Otherwise, however, the March 29 package "confirmed and ratified" the March 10 ex parte order.

At the March 29 hearing, the creditors' committee, who were seeing this package for the first time, asked for an adjournment that it might be more fully studied. In addition, Royal and Crown renewed their objections arguing that to the extent this package ratified those elements of the first package that were invalid, it too was invalid. General countered by arguing that the March 10 order was not invalid, if it were invalid, this package cured it, and that time was of the essence. Whereupon testimony was taken which indicated that General was in default on many of its major contracts and that these customers were presently or about to purchase products elsewhere destroying not only General's only source of income but also its good will.

Based thereon, the Court conditionally approved the second package. Such approval, however, was...

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