In re Glover, Inc.
| Decision Date | 11 October 1984 |
| Docket Number | Bankruptcy No. 80-00711 M R. |
| Citation | 43 BR 322 |
| Parties | In re GLOVER, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
Robert A. Johnson, Albuquerque, N.M., and Paul A. Cooter, Roswell, N.M., for debtor.
Paul Fish, Albuquerque, N.M., for Albuquerque Nat. Bank.
Bill J. Sholer, Albuquerque, N.M., for First Bank of Billings.
This matter comes before the Court on remand from the District Court for further proceedings in which this Court is to reconsider, in light of several cited cases, whether the circumstances warrant treatment of First Bank of Billings, Montana's claim as an administrative expense priority claim.
The basic facts are set forth in the District Court's Memorandum Opinion and Order entered May 24, 1982. Suffice it to say that Glover, Inc., a Roswell, New Mexico meat packer, kept a "remote disbursement account" at the Bank, allowing Glover to "float" checks. By agreement, Glover was required to maintain an account balance of $202,000. When checks made their way to Montana and were presented, normal procedure called for the Bank to request and receive wire transfers of funds from Glover, sufficient to maintain the balance, prior to honoring the checks.
In this case, checks were issued by Glover pre-petition,1 and presented beginning July 7, 1980, after Glover filed its Chapter 11 Petition.2 For unknown reasons (the Bank officer involved testified in deposition that be had no memory as to what had transpired) the Bank did not receive a wire transfer, but did not dishonor the checks within its 24-hour rule dead-line (midnight of the second business day after presentment). The result of this failure was that the Bank was forced to honor the checks and to make what amounted to an inadvertent loan to Glover, since the account was overdrawn at the time. The Bank received notice of the bankruptcy July 14, 1980. Glover converted to Chapter 7 March 13, 1981.
Attempting to salvage what it could, the Bank asked that the loan be accorded administrative expense priority. It later amended its request to include funds which were transferred from the Bank at Glover's request on July 1, 1980 to pay insurance premiums.3 After a hearing, Judge Puccini on July 24, 1981 denied the request. On appeal, the District Court remanded the case to consider if there were unusual circumstances which might justify a nunc pro tunc award; on further appeal, the Tenth Circuit determined that the District Court's order of remand was not appealable.
The cases cited by the District Court4 are Bankruptcy Act cases in which generally either the creditor advanced the debtor's estate more funds than the court had actually authorized, or the creditor had knowingly advanced funds to a bankrupt estate under circumstances in which the creditor could have believed the court had authorized the borrowing; circumstances under which the courts involved found it equitable to provide nunc pro tunc authorization and priority status.
Enactment of the Bankruptcy Code altered the conduct of reorganizations. Formerly, in Chapter XI and XII arrangements, court authorization and court supervision were required if the trustee or debtor-in-possession was to be permitted to operate the business. Now, under 11 U.S.C. § 1108,5 the debtor automatically remains in business without interruptions. Under 11 U.S.C. § 1107, the debtor-in-possession is given all the rights and powers of the trustee, and unless sufficient cause is shown, there will be no trustee involved in the reorganization, 11 U.S.C. § 1104.
Thus, there is no longer a clearly defined demarcation between the pre-petition operating entity and the post-petition operating entity. There is no hiatus while the reorganizing entity awaits operating authority; it continues its pre-petition business activities with its pre-petition personnel, albeit with the rights, powers and privileges granted by the Code. Hence, the possibility arises that a creditor which has extended credit to a financially troubled entity may, because notice of the bankruptcy has not been received, continue to extend credit to a post-petition entity on the same basis. Without such notice, the creditor may have no knowledge of any business reason to alter its credit policy.6
Creditors are often loathe to knowingly extend credit to entities in reorganization. Apart from the onus of bankruptcy, payments may be deferred months or years even if the reorganization is a complete success. If the reorganization fails, and the case is converted to Chapter 7, claims arising post-petition, pre-conversion are treated under 11 U.S.C. 348(d),7 as pre-petition claims. This type of claim is entitled only to a pro-rata share of the assets distributed, unless it is a valid administrative expense.
Recognizing this reluctance, Congress, in Code § 364 structured an escalating series of inducements which the debtor-in-possession may offer while attempting to obtain credit for use in the reorganization.8 First, under § 364(a) the debtor may obtain unsecured credit needed in the ordinary course of business, and accord that credit administrative expense priority, simply by offering the priority.9 If the creditor is reluctant to advance credit, a super-priority, or liens junior to other encumbrances on property of the estate, may be offered, subject to court approval, under § 364(c). For the most recalcitrant and necessary creditors, the court, under § 346(d) may authorize the obtaining of credit secured by liens senior to or of equal priority to existing liens on property of the estate, as long as the existing lien holders are adequately protected.10
Thus, under the Code, it is possible that some post-petition creditors, upon conversion to Chapter 7, will enjoy administrative expense priority, and some will not. Mere post-petition incurrence is no longer in itself a guarantee of administrative priority. Applying the Act's automatic administrative expense priority to claims incurred by the Chapter 11 entity prior to conversion to Chapter 7 would render § 348(d) meaningless. The section does not distinguish between the origins of claims, only whether they have administrative expense priority. Therefore, it is unlikely that a damage claim of the type dealt with in Brown would be given priority today.
A recent Seventh Circuit decision, In the Matter of Jartran, Inc., 732 F.2d 584 (1984) upheld the Bankruptcy Court's denial of administrative expense priority in circumstances similar to this case. There Jartran, a truck rental firm, placed an order for yellow-pages advertisements with two advertising agencies. No payment from Jartran was required at the time. Before payment was due, Jartran filed a Chapter 11 petition. Because of the nature of the business, the advertisements could not be cancelled, and they duly appeared post-petition. The agencies themselves were liable on the bill, over $1,000,000, and requested their claims be granted administrative priority in that the advertisements assisted Jartran's reorganization. The Circuit's opinion made clear that the purpose of administrative priority is to give the debtor-in-possession a bargaining chip with which to induce creditors or third parties to extend further credit:
The policies underlying the provisions of § 503 ... are not hard to discern. If a reorganization is to succeed, creditors asked to extend credit after the petition is filed must be given priority so they will be moved to furnish the necessary credit to enable the bankrupt to function ... Thus, when third parties are induced to supply goods or services to the debtor-in-possession ... the purposes of § 503 plainly require that their claims be afforded priority.
Id. at 586 (citations omitted). The Court went on to state:
To serve the policy of the priority, inducement of the creditor\'s performance by the debtor-in-possession is crucial to a claim for administrative priority in the context of the furnishing of goods or services to the debtor.
Id. at 587. The Jartran panel found no inducement by the debtor-in-possession and affirmed the denial of the request.
As one bankruptcy court put it:
The clear intent of § 364(a) is to allow the trustee or debtor-in-possession to use the administrative priority of § 507(a)(1) as an inducement to lenders after the commencement of the case to open lines of credit to the debtor for purposes of reorganization.
In re Allen Carpet Shops, Inc., 27 B.R. 354 (Bankr. E.D.N.Y.1983) at 358 (emphasis in original).
The question put to this Court by the...
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