Ninth Circuit Holds that Bankruptcy Section 364(e) Broadly Protects the Validity of Post-Petition Loans, Including Clauses Restricting the Use of Loan Proceeds
Ninth Circuit Court of Appeals recently issued its decision in Weinstein, Eisen & Weiss, LLP v. David A. Gill, Chapter 11 Trustee (In re Cooper Commons), 2005 U.S. App. LEXIS 19708 (9th Cir. September 13, 2005), holding that the provisions of an unstayed order approving a postpetition financing agreement could not be undone on appeal.
Cooper Commons, LLC had operated as a debtor in possession under Chapter 11 for several months, during which time it employed general counsel and other professionals. A Chapter 11 trustee was ultimately appointed, and the trustee sought approval of a financing agreement with Comerica Bank under which the estate was to borrow $4.25 million, of which approximately $888,000 was to be used to pay the trustee and his professionals. The debtor's now-former general counsel, who was not designated to receive payment from the loan funds, objected to the financing on the grounds that it violated the Bankruptcy Code's priority scheme. The bankruptcy court disagreed, and the general counsel appealed?but without obtaining a stay pending appeal.
The Ninth Circuit held that the general counsel's substantive argument was mooted by Bankruptcy Code section 364(e), which provides that?absent a stay pending appeal?reversal or modification of a court-approved financing agreement extended in good faith does not affect the validity of any debt incurred under the financing agreement. Relying on In re Adams Apple, Inc., 829 F.2d 1484 (9th Cir. 1987)?and rejecting the lower court's reliance on M Capital Corp., 290 B.R. 743 (9th Cir. BAP 2003)?the Ninth Circuit held that Comerica's good faith was to be presumed and that the fact that the provisions of the postpetition financing agreement differentiated among creditors whose claims were otherwise entitled to the same priority under the Bankruptcy Code was not sufficient to rebut this presumption. The Ninth Circuit therefore declined to invalidate the financing agreement.
The Ninth Circuit also declined to require that the $880,000 in question be distributed pro rata among all administrative claimants, including general counsel, or to require that Comerica Bank loan additional money sufficient to pay the general counsel's claims. Following In re Adams Apple, the Ninth Circuit held that Section 364(e) broadly protects any requirement or obligation that is part of a post-petition lender's financing agreement. This protection is intended to overcome a lender's reluctance to extend financing to a bankrupt by permitting reliance on the bankruptcy judge's approval of post-petition financing agreements. The Ninth Circuit therefore held that any provisions of the Comerica financing that Comerica bargained for or that might have helped motivate its extension of credit?such as limiting the use of loan proceeds to the payment of current, rather than former, professionals and limiting the total lending commitment?were just such provisions as are protected by Section 364(e).
PLEASE NOTE: This case has been amended since this blog posting. Click here to read our blog posting summarizing the changes.