Matter of London, Inc., Bankruptcy No. 83-00080

• Decision Date: 09 February 1987
• Docket Number: Adv. No. 84-0467.,Bankruptcy No. 83-00080
• Citation: 70 BR 63
• Parties: In the Matter of LONDON, INC., Debtor. Howard and Emily BRADSHAW, Plaintiffs, v. John WALDSCHMIDT, Trustee of London, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

70 B.R. 63 (1987)

In the Matter of LONDON, INC., Debtor Howard and Emily BRADSHAW, Plaintiffs, v. John WALDSCHMIDT, Trustee of London, Inc., Defendant.

Bankruptcy No. 83-00080, Adv. No. 84-0467.

United States Bankruptcy Court, E.D. Wisconsin.

February 9, 1987.

Jack U. Shlimovitz, Ludwig & Shlimovitz, S.C., Milwaukee, Wis., for plaintiffs.

John F. Waldschmidt, trustee, Milwaukee, Wis., for defendant.

MEMORANDUM DECISION ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

C.N. CLEVERT, Chief Judge.

Howard and Emily Bradshaw brought this adversary proceeding against London, Inc. ("London" or "debtor") to have the court invoke its equitable powers and impose a superpriority lien against London's assets, pursuant to 11 U.S.C. § 364(c). When the complaint was filed, London was a debtor in possession under Chapter 11 of the Bankruptcy Code. However, before the issues were joined, London converted its case to a liquidation bankruptcy under Chapter 7 of the Code. Thereafter, London's Chapter 7 trustee, John Waldschmidt, appeared in this proceeding and filed a general denial. Waldschmidt has now asked the court to grant his motion for summary judgment and to dismiss the complaint.

FACTS

Since London's inception, Howard and Emily Bradshaw have been among its major stockholders and directors. At various times they have assisted the corporation in obtaining loans from the Northridge Bank by giving the bank their personal guarantees and collateralized pledges.

When London defaulted on its bank loan in 1982 and failed to pay the accelerated loan balance, the bank asked the Bradshaws to honor their guarantees. After London filed its voluntary Chapter 11 petition on January 12, 1983, the Bradshaws made three payments to the bank totalling $167,340.81. However, the Bradshaws never sought the court's or London's approval of these payments, nor did the payments result in the bank extending any additional credit to London.

During the course of the Chapter 11, London's assets were substantially liquidated and when the case was converted to Chapter 7, Waldschmidt was transferred liquidation sale proceeds of $28,792.09 plus bank account balances of $6,203.55.

DISCUSSION

Waldschmidt's argument in support of his motion for summary judgment is that the Bradshaws' claim for a superpriority lien is not supported by statutory or case authority. The Bradshaws, on the other hand, assert that their payments benefitted London by enabling it to continue its attempts to effectuate a Chapter 11 plan and by reducing the possibility that the bank would seek conversion of its case to a Chapter 7. Thus, they contend that their claim satisfies the administrative priority test set forth in In re Jartran, Inc., 732 F.2d 584, 587 (7th Cir.1984) and In re Mammoth Mart, Inc., 536 F.2d 950, 954 (1st Cir.1976) which allows certain claims to be advanced for payment when they arise from transactions with a debtor in possession and are beneficial to the operation of the debtor's business.

1. Unavailability of Credit and Notice Requirement of 11 U.S.C. § 364(c)

Consideration of the issues presented begins by reviewing 11 U.S.C. § 364(c), which reads in pertinent part as follows:

If the trustee is unable to obtain unsecured credit allowable under section 503(b)(1) of this title as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt—

(1) with priority over any or all administrative expenses of the kind specified in section 503(b) or 507(b) of this title;

The first requirement for obtaining a superpriority lien under § 364(c) is a showing that the debtor is unable to obtain unsecured credit. Here the Bradshaws have not shown either by reference to stipulated facts or documents on file that unsecured credit was not available to London.

The Bradshaws have also failed to meet the notice and hearing requirements under 11 U.S.C. § 364(c). The meaning of the phrase "after notice and a hearing," is stated in 11 U.S.C. § 102(1), as

(A) . . . after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances; but

(B) authorizes an act without an actual hearing if such notice is given properly and if —

(i) such a hearing is not requested timely by a party in interest; or

(ii) there is insufficient time for a hearing to be commenced before such act must be done, and the court authorizes such act;

Although this section of the Bankruptcy Code recognizes that there are some instances when it may be necessary to dispense with an evidentiary hearing, the necessity of doing so is dependent upon the facts and circumstances in a particular case. In re Monach Circuit Industries, Inc., 41 B.R. 859, 861 (Bkrtcy.E.D.Pa.1984); In re Sullivan Ford Sales, 2 B.R. 350, 355 (Bkrtcy.D.Maine 1980).

The Bradshaws' request for a retroactive lien in this case ignores the notice requirement of § 364(c)(1). Nearly six months elapsed between the filing of London's petition and the Bradshaw's first payment to the bank, and another six months passed between the first payment and the last. Yet, the facts fail to allege any exigent circumstances that would justify dispensing with the § 364(c) notice requirements during this approximately twelve month period.

2. Retroactive Grant of Priority Status

In general, courts have expressed reluctance to grant priority status to claims. They are even more reluctant to do so retroactively. See, e.g., In re Cascade Oil Co., Inc., 51 B.R. 877, 883 (Bkrtcy.D.Kan. 1985); In re Alafia Land Development Corp., 40 B.R. 1, 5 (Bkrtcy.M.D.Fla.1984). In In re Alafia Land Development Corp. the court stated:

It is the opinion of this Court . . . that one who lends money to a debtor in possession without prior approval of the Court is not even entitled to the status of a general unsecured claim. . . . To hold otherwise is to jeopardize the integrity of administration of estates by debtors which is of paramount importance. To ratify unauthorized borrowings or out of the ordinary course of business transactions, except under . . . exceptional circumstances . . . would create a dangerous precedent which may likely produce pernicious results, hostile and inimical to any legitimate and recognized goals and rehabilitative aims of the Bankruptcy Code. (citations omitted). Id. at 5.

A nunc pro tunc order validating post-petition borrowing should not be entered unless the judge

is confident that he would have authorized the borrowing if timely application had been made, and unless, in addition,

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