In re Roblin Industries, Inc.
| Decision Date | 13 August 1985 |
| Docket Number | Bankruptcy No. 85-11161 C. |
| Citation | 52 BR 241 |
| Parties | In re ROBLIN INDUSTRIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Western District of New York |
Eugene Smolka, William Shapiro, James J. Tanous, Janet Burhyte, Jaeckle, Fleishmann & Mugel, Buffalo, N.Y., for debtor.
Robert M. Spaulding, John J. Hurley, Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, N.Y., for Marine Midland Bank.
David C. Horan, Albrecht, Maguire, Heffern & Gregg, Buffalo, N.Y., for Chemical Bank.
John J. Preefer, Wofsey, Certilman, Haft, Lebow & Balin, New York City, for U.S. Trust Co.
Ralph L. Halpern, Raichle, Banning, Weiss & Halpern, Buffalo, N.Y., for Brent Baird.
Jane B. Wolfe, U.S. Atty's Office, Buffalo, N.Y., for the U.S. Dept. of Commerce and the I.R.S.
Carl L. Bucki, Moot & Sprague, Buffalo, N.Y., for Envirogas, Inc.
Lawrence Feldman, New York City, for N.Y. Job Development Authority.
Michael L. Fayette, Kleiner & Fayette, Grand Rapids, Mich., for UAW Pension Fund.
Robert J. Feldman, William E. Storrs, Gross, Shuman, Silver, Laub & Gilfillan, Buffalo, N.Y., for CBT.
James Marvin, Damon & Morey, Buffalo, N.Y., for Bank of New York.
Gabriel Ferber, Davis, Nesper & McElvein, Buffalo, N.Y., for Austrian Bank.
Henry W. Cornell III, Mahoney, Berg & Cornell, Buffalo, N.Y., for Chase Manhattan Bank.
Michael Riley, for the U.S. Workers of America.
On July 1, 1985, Roblin Industries, Inc., filed its petition for relief under Chapter 11 of the Bankruptcy Code. 11 U.S.C. Chapter 11. At the same time, applications were filed and orders entered with respect to several matters, mostly of a routine nature. Among these were orders approving the employment of attorneys and accountants and the payment of pre-petition wages to some four hundred employees. Also filed at that time was a motion for court approval of a stipulation entered into between the debtor and Marine Midland Bank, N.A., and Chemical Bank (Banks). The stipulation sets forth the terms and conditions under which the Banks will loan the debtor up to twelve million dollars ($12,000,000) during the reorganization proceedings.
Roblin Industries, Inc., is engaged in the production of specialty steel and related products. At the time it filed its Chapter 11 petition it was without funds to pay salaries and wages, to purchase inventory, and to cover other daily operating expenses. Papers in support of the motion for an interim financing order demonstrate Roblin's pressing need for immediate borrowing to obviate a disruption of its manufacturing operations. Counsel for the debtor submitted a proposed financing order in connection with its motion. After a hearing conducted on shortened telephone notice to the debtor's twenty largest creditors, an order was entered on July 2, 1985, authorizing the requested financing on an interim basis. The order provided that a further hearing would be conducted on August 6, 1985, on notice to all creditors and other parties in interest. It provided further that certain provisions of the stipulation would not be effective should the Court not continue the order following the final hearing on August 6, 1985. The order authorized the debtor to borrow from the Banks up to a maximum of $12,000,000 secured by a lien on all of the debtor's pre-petition and post-petition property subject to certain enumerated security interests which were acknowledged to be senior. Provisions also were made for super-priority status under section 364(c) of the Code 11 U.S.C. § 364(c) and for cross-collateralization of pre-petition indebtedness.
For some years pre-petition Roblin has financed its operations not only with Marine and Chemical but also with Chase Manhattan Bank, N.A. Pursuant to that joint financing conducted under a series of agreements, the debtor's obligations as of June 24, 1985, amounted to $23,724,224.50. Under one of the agreements, the debtor had incurred debt of $7,371,912 for revolving credit. These obligations were secured by liens on all of the debtor's real and personal property, subject to certain senior interests mentioned in the order. Chase is not participating in the post-petition financing.
On August 6, 1985, the Court conducted the final hearing mandated by the order of July 2, 1985. Objections to the existence and continuation of the order of July 2, 1985, and to the stipulation dated July 1, 1985, were served and filed by United States Trust Company of New York (U.S. Trust). U.S. Trust is the indenture trustee of subordinated debentures held by approximately 400 persons. The objections were vigorously supported by counsel representing other unsecured creditors who appeared and actively participated in the hearing.
Specific objections are addressed to certain provisions of not only the order but also the stipulation. To the extent that the order approves the stipulation, its provisions are certainly relevant. To the extent that the objectionable provisions of the stipulation are not authorized by the Bankruptcy Code or by the Court, they do not bind the debtor's estate. Compare 11 U.S.C. § 549. (The section deals with transfers, not transactions in general.) The Court's duty here is not to dictate the terms of post-petition financing arrangements between the debtor and its lenders, but to deny its blessing of any transactions that are not appropriate.
Most repugnant to the objecting parties is provision numbered "2" of the stipulation which they characterize as a settlement of any and all controversies that may exist by virtue of pre-petition transactions between the debtor and its lenders, the Banks. Provision 2 states:
2. The Pre-Petition obligations are properly accelerated and demanded, the debtor waives any notice in connection therewith, and all such obligations are now due and payable and are not subject to any offset, claim, counterclaim or defense.
The Court is satisfied that the objection is well founded. While provision 2 is not effective under the terms of the July 2, 1985, interim financing order, it will become effective if the Court continues that order. The Banks argue that no sane financier will lend into a lawsuit and that such terms are common and are a part of the existing loan agreement. The Court cannot argue with the Banks' logic.
The commencement of the Chapter 11 case, however, in providing the debtor with an opportunity for financial relief, has also interdicted the rights of all those who have dealt with it in the past. We no longer have only the interests of the parties to a pre-petition credit agreement to consider. We now have a new entity "armed cap-a-pie with every right and power which is conferred by the law of the state upon its most favored creditor." In re Waynesboro Motor Co., 60 F.2d 668, 669 (S.D.Miss. 1932); cited in 4 Collier on Bankruptcy, ¶ 544.02 at 544-4, 544-5 (15th ed. 1985). See also, 11 U.S.C. § 1106. There are new intervening rights also provided for in the Code which are part of the quid pro quo. These legislatively created rights, available to a trustee or Code debtor, are intended to benefit all creditors. While U.S. Trust argues that approval of the stipulation would read section 510 out of Title 11, in the Court's view it would render useless any of the debtor's powers of avoidance. Furthermore, in the Court's view, if authorized it would bind any trustee who was appointed in the case.
As argued by counsel for U.S. Trust, the provision is in the nature of a settlement, which can only be approved on a proper showing. In re Lion Capital Group, 49 B.R. 163, 175 (Bankr.S.D.N.Y. 1985). Additionally, a debtor in possession, like a trustee, is a fiduciary of each creditor of the estate. As such, it must exercise that measure of care that an ordinarily prudent person would exercise under similar circumstances. In re Cochise College Park, Inc., 703 F.2d 1339, 1357 (9th Cir. 1983); Wolf v. Weinstein, 372 U.S. 633, 650, 83 S.Ct. 969, 979, 10 L.Ed.2d 33, 47 (1963); Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir.1982). A blanket waiver of unspecified rights in the early stages of a complex corporate reorganization would not appear to manifest prudent judgment.
Also objectionable to U.S. Trust is that provision which stipulates that "the Banks hold a valid, duly perfected security interest in the Pre-Petition Collateral to secure the payment of the Pre-Petition Obligations." (Provision numbered "1".) Such a finding, whether by virtue of the stipulation or by reference to the multitude of voluminous documents submitted at the hearing, would be in the same nature as the waiver of defenses. To the extent that this is the purpose of the provision, it is inappropriate at this point without an opportunity for more comprehensive scrutiny by interested parties. It would be improper for the Court to make such a finding in the face of creditor objections. To adjudicate the validity, priority, or extent of a lien requires the commencement of an adversary proceeding. Rule 7001, Rules of Bankruptcy Procedure. On the basis of these two objections alone, the Court cannot give final approval to the stipulation.
Further provisions of the stipulation and/or order that U.S. Trust finds objectionable are those relating to cross-collateralization, the super-priority provided for in section 364(c), and the adequacy of the Banks' pre-petition collateral. U.S. Trust argues that before authorizing cross-collateralization, the Court must find inter alia that the proposed financing is in the best interest of creditors generally. In support, the creditor cites In re Texlon Corp., 596 F.2d 1092 (2d Cir.1979) and In re Vanguard Diversified, Inc., 31 B.R. 364, 366 (Bankr.E.D.N.Y.1983). At first blush, Texlon appears to stand for a more limited proposition. As the court states at 1098:
In order to decide this case we are not obliged, however, to say that under no conceivable circumstances could "cross-collatera...
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