Article by Alan P. Solow and Randall L. Klein
II. The perils of financing without court authorization
III. Prohibited terms in financing order: roll-over and section 506(c) waiver
IV. The use of future cash flows as present adequate protection
V. The limits of section 364(e) protection for good faith lenders
Section 364 governs credit obtained by the debtor in possession or trustee. Section 364 contains several clear statutory provisions, such as the requirement for court authorization to obtain credit outside the ordinary course of business (Sections 364(a), (b) and (c)), the provisions of granting administrative status or collateral to secure post-petition credit (Sections 364(b) and (c)), the authorization to "prime" existing lienholders if their interests are otherwise adequately protected (Section 364(d)), and the protection of post-petition liens from reversal or modification on appeal of the financing order (Section 364(e)). The interstices of Section 364 are left to the courts. Issues not directly addressed by the express language of Section 364 include whether post-petition lenders are entitled to the benefits of Section 364 absent prior court authorization, what concessions and incentives a debtor or trustee may offer lenders to secure financing, what constitutes "adequate protection" for purposes of Section 364(d), and what the scope is of the protection afforded by Section 364(e). This Article addresses some of the significant or otherwise interesting decisions recently decided regarding the foregoing issues.
II. THE PERILS OF FINANCING WITHOUT COURT AUTHORIZATION
Section 364(c) provides that "[i]f 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 . . . ." As this section requires court authorization for post-petition financing arrangements, the question arises as to the effect of arrangements made without court approval. The Code does not specify the consequences for unauthorized financing. Two Circuit courts recently addressed the issue -- reaching substantially different outcomes.
A. NINTH CIRCUIT: LIEN NOT AVOIDED BASED UPON EQUITIES
In In re James Delbert McConville1, the Ninth Circuit determined the effect of a post-petition lien granted on real property of the debtor without the court authorization otherwise required by Section 364(c)(2) or (c)(3).2 In McConville, prior to commencing their chapter 11 case, the debtors arranged for financing to purchase distressed apartments. The lenders funded the loan after the commencement of the case but, as the Court found, without actual knowledge of the case. The lenders also failed to require financial statements from the debtors, relying instead on the representations of third parties. The lenders secured the loan by a lien on property of the debtors' estate. One month later, the debtors' case was converted to a case under chapter 7. Sometime during the preceding month, the lenders must have become aware of the debtors' bankruptcy case, since they filed a motion for relief from the automatic stay in order to foreclose their mortgage. The chapter 7 trustee filed a complaint attacking the mortgage as a post-petition transfer voidable under Section 549(a).
The Bankruptcy Court held that the debtors violated Section 364, that the lenders violated the automatic stay (Section 362(a)(4)) by recording their mortgage, and that the mortgage was not a transfer to a "good faith purchaser" within the safe harbor provision of Section 549(c). As a result, the court declared that the lenders had no lien on the proceeds from the sale of the property. The lenders appealed, arguing that they should have been deemed "good faith purchasers" under Section 549(c). The District Court affirmed and the lender appealed.
Based on the language of the Code, the lenders argument was not without merit. Under Section 101(54), the term "transfer" is defined to include "retention of title as a security interest and foreclosure of the debtor's equity of redemption." Under Section 101(43), the term "purchaser" is defined as "transferee of a voluntary transfer." Section 549(c) provides that a trustee may not avoid "a transfer of real property to a good faith purchaser . . . ." Nevertheless, the Ninth Circuit held that the lenders' argument was blocked by precedent holding that the creation of a lien does not constitute a "transfer" under Section 549.3
The Court then analyzed the effect of the lenders not having obtained court authorization for their post-petition mortgage. The Court concluded that "[a]n appropriate remedy for this disregard [of Section 364(c)] is cancellation by the court of the transaction."4 However, the Court ruled that rescission of the transaction is not the exclusive remedy and that bankruptcy courts, as courts of equity, have the discretion to modify the remedy.5 In this case, the lenders' loan enabled the debtors to acquire the real estate that the trustee was selling. The issue of good faith, or knowledge, cut both ways. Although the lenders had no actual knowledge of the debtors' chapter 11 case, they had reason to investigate and, instead, engaged in "willful blindness."6 Based upon the facts of the case, the Ninth Circuit balanced the equities, permitting the lenders to retain a lien on the sale proceeds in an amount equal to the principal amount of the loan. The Court voided the lien to the extent it secured interest and fees.
B. SECOND CIRCUIT: LIEN AVOIDED WITHOUT REFERENCE TO EQUITIES
The lender in In re Braniff Int'l Airlines, Inc.7, gladly would have accepted the same fate as the lender in McConville. Post-petition, the lender advanced approximately $1 million to the debtor for the payment of airplane insurance premiums. Braniff, without court authorization, granted the lender a security interest in its unearned premiums. However, the subsequently appointed trustee sought to have the lender's security interest invalidated for failing to comply with Section 364(c)(2).8 The Bankruptcy Court ruled in the debtor's favor and voided the lender's lien. The District Court affirmed without opinion. The Second Circuit affirmed, adopting the reasoning of the Bankruptcy Court which denied nunc pro tunc approval of the financing.9
III. PROHIBITED TERMS IN FINANCING ORDER: ROLL-OVER AND SECTION 506(C) WAIVER
A. COURT DISALLOWS "ROLL-OVER" OF PREPETITION DEBT
In contrast to cases involving insufficient court authorization are the cases involving lenders who sought court approval of too much. In In re Willingham Investments, Inc.10, the lender and the debtor entered into a consensual cash collateral/financing agreement. One month later, the court appointed a chapter 11 trustee who objected to certain provisions of the agreed order, including the provisions which required that all "Prepetition Indebtedness" and "Post Petition Indebtedness" (as defined in the agreed order) shall be due upon demand, as administrative claims, with priority over all other administrative claims.11 Further the trustee objected to the provision prohibiting any third party costs or expenses from being imposed against the lender or its collateral.12 As the Bankruptcy Court observed, "the language of the Order, interpreted without reference to § § 364(c) and 507(b), results in a priority position applicable to the bank's prepetition and potential postpetition claims."
First, the Court concluded, the breadth of the agreed order improperly granted superpriority status to prepetition debt13 -- otherwise known as a "roll-over" of prepetition debt into postpetition debt. Accordingly, the Court eliminated those aspects of the agreed order that would have "elevate[d] [the lender's] undersecured prepetition claim above similarly situated prepetition creditors or above postpetition creditors holding administrative claims."14 It appears that, beyond the attempt of the lender to roll prepetition into postpetition debt, the Court was displeased by certain of the lender's other conduct. Specifically, the Court sanctioned the lender for attempting to "control" the auction of its collateral. The lender recommended an auctioneer15 and entered into an agreement to "carve-out" $25,000 of collateral proceeds to pay the trustee's approved fees16. Although the opinion did not address the specifics of the alleged sanctionable conduct, in the context of agreed orders "carve-outs" are not uncommon nor are provisions giving the lender the right to approve third party liquidators selected by the debtor.
B. COURT DISALLOWS SECTION 506(C) WAIVER
With the lender's prior conduct having been sanctioned by the Court, and with its roll-over provision having been invalidated, the Court addressed another aspect of the financing order that it found inappropriate: waiver of Section 506(c) charges with respect to prepetition secured claims. The Court focused on the modifying language in Section 552(b) which provides that postpetition proceeds of prepetition collateral are subject to Section 506(c)17. The collateral in this case appears to have consisted of used car inventory.18 The trustee, therefore, would either auction the inventory on a liquidation basis, or attempt to transfer the debtor's business as a going concern. In either case, to the extent that administrative claims are incurred for the benefit of preserving or disposing of the lender's collateral, the Court concluded that the lender's lien on the Section 552(b) sales proceeds would necessarily be subject to payment of such administrative claims19.
C. AN ARGUMENT IN FAVOR OF SECTION 506(C) WAIVERS
It cannot be said that the Willingham Investments case was wrongly decided, particularly given the alleged sanctionable conduct by the lender and the lack of any true "new money" advanced to the estate pursuant to Section 36420. However, we do not view the waiver of Section 506(c) charges in the same class as prohibited cross-collateralization. Depending upon the facts of a particular case, and the nature of the Section 506(c) waiver, courts should have the discretion to approve such waivers as part of the debtor's business judgment in agreeing to the terms of a financing arrangement. For example, in the context of an orderly liquidation, whereby the lender consents to the use of its cash collateral, or makes new advances, the lender needs to take into account all costs associated with such liquidation. If unpaid wages, for example, are deemed a valid Section 506(c) charge, then those wages must either be included in the budget or reserved by the lender as an accrued payable. If the expense is reserved, that amount would ordinarily be deducted from other funds available to finance the liquidation. Without the Section 506(c) waiver, the lender cannot adequately forecast its costs of liquidation. As a result, the conservative lender will reduce the amount of cash otherwise available to finance the debtor's operations. This is not a result that either the debtor or the lender would prefer. In most cases, creditors generally would be made better off if the lender maximized its amount of funding. Therefore, if the Section 506(c) waiver leads to greater certainty and increased financing, then, absent countervailing concerns, the waiver should be recognized as the proper exercise of the debtor's business judgment.21
In certain circumstances, Section 506(c) waivers may be limited to administrative charges accrued during the consensual use of cash collateral or voluntary postpetition financing. The provider of postpetition services may be deemed to have constructive knowledge of the contents of the agreed order or stipulation. If it lends on an unsecured basis, then it does so in reliance on the debtor's ability to pay its administrative claims or a separate "carve-out" in the financing order, and not on the ability to surcharge, directly or through the trustee, the lender's collateral. After an event of default and termination of the agreed upon financing order, or after the appointment of a chapter 11 or chapter 7 trustee, the waiver could provide that it is of no further force or effect with respect to thereafter accruing expenses. In other words, if the trustee takes possession of the debtor's business and property and disagrees with the terms of the financing order, it would be free to obtain other financing to liquidate its property in accordance with the other provisions of the Code.
Indeed, we submit that the Court in Willingham Investments need not have adopted a per se prohibition against Section 506(c) waivers. The lender in that case had in fact consented to the payment of certain operating expenses. No doubt, the lender viewed the continuation of the debtor's business as a going concern as beneficial to the lender's underlying collateral. The trustee, after his appointment, felt constrained by the Section 506(c) waiver and sought its elimination. If the trustee could succeed in a motion to use cash collateral over the prepetition lender's objection, and if the 506(c) recoveries were limited to thereafter accrued expenses, the lender would have received the benefit of the previously negotiated order and the trustee would have been relieved of the waiver on a going forward basis.
D. CLASH OF CODE SECTIONS: 507(b) VERSUS 506(c)
Finally, the Court in Willingham Investments noted that the lender could not receive a Section 507(b) priority solely by reason of the terms of the agreed cash collateral order; rather, such a priority is automatic upon a showing of lack of adequate protection22. Not discussed by the Court is the potential priority dispute between a subsequent Section 507(b) claim and a Section 506(c) charge. Under one view, a prerequisite to a Section 506(c) recovery is that the estate incurred an obligation to pay an administrative expense that provided a benefit to the secured creditor. Section 507(b), however, grants priority payment on an administrative basis over all other administrative creditors. Accordingly, the Section 507(b) claim would need to be paid before any creditor's administrative expense is reimbursed, whether by way of a Section 506(c) recovery or otherwise.23 If the estate were administratively insolvent, the lender's Section 507(b) claim would seem to trump the trustee's Section 506(c) claim. The competing view suggests that Section 506(c) claims are more in the nature of a surcharge against collateral, regardless of the rights of the lender to recover its Section 507(b) claim. Under this view, in the context of an insolvent estate, the Section 506(c) recovery would trump the Section 507(b) claim.
IV. THE USE OF FUTURE CASH FLOWS AS PRESENT ADEQUATE PROTECTION
As discussed above, the lack of adequate protection may create a superpriority administrative claim under Section 507(b). However, if the estate is insolvent and the Section 507(b) claim is worthless, the creditor would be irreparably harmed by the erroneous finding of adequate protection. Such irreparable harm is one of the risks inherent in "priming" liens pursuant to Section 364(d), which provides in relevant part: "the court, after notice and a hearing, may authorize . . . debt secured by a senior or equal lien on property of the estate that is subject to a lien only if . . . (B) there is adequate protection of the interest of the holder of the [pre-existing] lien. . . ."
Courts are reluctant to invade the rights of an existing lien holder unless the evidence of adequate protection of the existing lien is strong.24 Recognized forms of adequate protection, as provided in Section 361, include cash payments, replacement liens and the "indubitable equivalent" of the property rights taken. Cash, of course, is the ultimate form of adequate protection from the lender's perspective; however, if the debtor had available cash for that purpose it likely would not be seeking financing under Section 364(d). A more dangerous type of proffered adequate protection, at least from the lender's perspective, is an interest in future cash. In other words, the debtor asserts that the lender's interests are adequately protected based upon future projected cash flows. As the future cash flows fall short of projections, the lender's protection disappears.
In In re Nesser25, the debtor sought financing pursuant to Section 364(d). The lender required a first lien upon certain of the debtor's encumbered property. For adequate protection to the primed lender, the debtor offered substitute collateral comprised of future cash flows from a new business. The Court agreed that, under appropriate circumstances, "economic projections by the trustee as well as by independent consultants may be accepted as sufficient."26 However, "the court must be sure that an analysis of adequate protection includes an assessment of feasibility and consideration of contingencies."27 Under the facts in Nesser, the Court did not find sufficient evidence to replace the prepetition lender's existing collateral with future, speculative cash flows.28
V. THE LIMITS OF SECTION 364(e) PROTECTION FOR GOOD FAITH LENDERS
A. MARRS-WINN: SECTION 364(e) VERSUS FIFTH AMENDMENT
In In re Marrs-Winn Company, Inc.,29 the Seventh Circuit reminded lenders that even a court-approved financing order is only as good as the underlying collateral; and, as was the case in Marrs-Winn, the order is no good if the underlying collateral is not the debtor's property. In Marrs-Winn, the lender financed the debtor-subcontractor's performance in connection with the construction of the Trans-World Dome, stadium for the St. Louis Rams professional football team.30 The financing order, authorized by the Bankruptcy Court, granted the lender a first priority security interest in all of the debtor's present and after-acquired property, including accounts receivable, contract rights, cash and non-cash proceeds.31 In connection with the debtor's major asset, its subcontract to work on the St. Louis Rams stadium, the debtor established a bank account into which the general contractor deposited funds for the express purpose of enabling the debtor to satisfy its payroll obligations under the contract. The lender unilaterally seized such funds, asserting its security interest in all property of the debtor. The Bankruptcy Court, District Court and Seventh Circuit each ruled that the lender's security interest did not attach to the funds as they were "trust funds".
Notwithstanding the Court's conclusion that the funds constituted "trust funds", the lender argued that it was nevertheless denied the benefit of the financing order.32 The Seventh Circuit unequivocally rejected the lender's argument, stating that the financing order "cannot change the "trust fund" status of the monies in the [segregated account.]."33 Finally, the Court clarified that, although a lender may be entitled to rely on a financing order even if it is legally or factually erroneous,34 the benefits of Section 364(e) do not trump the due process rights of third parties.35
B. WESTERN PACIFIC: SECTION 364(e) VERSUS SECTIONS 365(f) AND 1110
The obvious defect of the lender's argument in Marrs-Winn was that the alleged collateral was not the debtor's property. But what if the collateral includes proceeds from the debtor's assumption and assignment of an executory contract arguably not assignable under Section 365(f)? That issue arose in In re Western Pacific Airlines, Inc.36 In that case, the Court authorized the assumption and assignment of aircraft leaseholds in conjunction with its authorization of $30 million of post-petition financing.37 Without the proceeds from the assumed leases, the likely result would have been no new financing, followed by the debtor's inability to satisfy its ongoing administrative expenses (including those under Section 1110) and the subsequent conversion or dismissal of the case.
One of the lessors, Boullioun, received $1.7 million from the proceeds of the post-petition loan; however, it appealed the financing order claiming violations of Sections 365(f) and 1110. The Court framed the question presented as whether the Bankruptcy Court erred in authorizing the debtor to collateralize its post-petition loans with leaseholds in contravention of the lessor's rights.38 The lessor did not seek to reverse the financing order; instead, it requested that its property be removed from the collateral granted to secure the post-petition loan. The lender demanded protection of its collateral pursuant to Section 364(e), arguing that the appeal was moot because the lessor had not obtained a stay pending appeal.
The lessor argued that its appeal was not moot, relying on In re Swedeland Dev. Group, Inc.39. The District Court found Swedeland to be distinguishable since in that case the loan had not been disbursed by the lender.40 Further, in Western Pacific, the appeal "involve[d] the altering and diminishment of the security upon which the lender ha[d] already relied to disburse millions of dollars in financing."41 In sum, applying the "mootness" doctrine involving Section 364(e), the District Court held that the collateral provisions granted under the unstayed financing order, trumped the lessors rights under Sections 365(f) and 1110.
Alternatively, Western Pacific could have been decided in connection with Section 365 and Rule 7062, not Section 364(e). In Western Pacific, the disputed property rights related to the debtor's right (or lack thereof) to assume and assign its aircraft lease. The assumption or assignment of an executory contract is subject to immediate appeal under Fed.R.Bankr.P. 7062, as amended in 1991.42 A party who fails to obtain a stay pending appeal of an order under Section 365 "risk[s] having the order become final and appeal from it declared moot."43 Therefore, what truly was rendered moot by Bouillioun's failure to obtain a stay was the bankruptcy court's authorization, in connection with the financing, of the assumption and assignment of Bouillion's lease. If the court had entered a separate order regarding the Section 365 issues (which it apparently did not), and if Boullioun had obtained a stay of only the order authorizing assumption and assignment, the underlying collateral (the leases) might have been subject to appeal even though the financing order was a final order.44
- 110 F.3d 47 (9th Cir. 1997).
- Section 364(c)(2) requires court authorization for a loan "secured by a lien on property of the estate that is not otherwise subject to a lien." Section 364(c)(3) requires court authorization for a loan "secured by a junior lien on property of the estate that is subject to a lien."
- Id., citing In re Schwartz, 954 F.2d 569, 574 (9th Cir. 1992) and In re Shamblin, 890 F.2d 123, 127 (9th Cir. 1989)("transfer" under § 549 "need not" include a lien created by tax sale since creation of lien violated § 362(a)(4)"). The Ninth Circuit in Schwartz, relying in part on Shamblin, ruled that acts in violation of the automatic stay are void, not merely voidable. Schwartz, 954 F.2d at 574. Further, Shamblin held that a post-petition lien granted without court authorization violated the automatic stay, § 362(a)(4). Shamblin, 890 F.2d 123 n.7. Therefore, the McConville, Court, relying on precedent, easily could have ruled that the lenders' lien, obtained in violation of § 362(a)(4), was void ab initio. Instead, as discussed above, the Court permitted the lien, notwithstanding violations of § § 362 and 364, based upon the equities of the case.
- Id. at 50.
- Id., citing Bank of Marin v. England, 385 U.S. 99, 103, 17 L.Ed. 2d 197, 87 S.Ct. 274 (1966).
- 1996 U.S. App. LEXIS 14183 (June 12, 1996) (unpublished opinion).
- Id., citing In re Braniff Int'l Airlines, Inc., 164 B.R. 820 (Bankr. E.D. N.Y. 1994)(relying upon multi-factor test for nunc pro tunc approval set forth in In re American Cooler, 125 F.2d 496 (2d Cir. 1942)). See generally, 1997-1998 Annual Survey of Bankruptcy Law, Section 364 -- Obtaining Credit at 277-279 (George N. Panagakis, Contributing Editor).
- 203 B.R. 75 (Bank. M.D. Tenn. 1996).
- Id. at 77.
- Citing In re Saybrook Mfg. Co., 963 F.2d 1490 (11th Cir. 1992) ("cross-collateralization is beyond the scope of the bankruptcy court's inherent equitable power because it is directly contrary to the fundamental priority scheme of the Bankruptcy Code"). In the context of a liquidating chapter 11, for administrative convenience it should be permissible for a lender to reduce its prepetition debt by applying proceeds of its prepetition collateral, and to re-advance proceeds under Section 364 secured by post-petition property. Contrasted to the Saybrook-type cross-collateralization which has the effect of securing unsecured claims, a roll-over of the type described above simply results in the early payment of a prepetition secured debt -- a "cost" of new financing.
- Willingham Investments, 203 B.R. at 79, citing In re Ellingsen MacLean Oil Co., 834 F.2d 599, 601, 607 (6th Cir. 1987) ("Lenders should not be permitted to use their leverage in making emergency loans in order to insulate their prepetition claims from attack") (Merritt, C.J., dissenting).
- Willingham Investments, Inc., 203 B.R. at 79 n.13.
- Id. at 76 n.4.
- Section 552(b) provides, in relevant part: "[e]xcept as provided in section . . . 506(c) . . ., such [prepetition] security interest extent to such proceeds . . . acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to the extent that the court, after notice and a hearing and based upon the equities of the case, orders otherwise.
- Willingham Investments, 203 B.R. at 79 n.13.
- Id. at 79-80.
- Id. at 78 n.11 ("First Tennessee has not extended any postpetition credit.").
- Compare IBI Security Service, Inc., 1998 WL 3843 (2nd Cir. (N.Y.)) (Jan. 8, 1998). In IBI Security Service, the trustee entered into a court-approved settlement with a secured creditor that provided for specific rights of distribution to the secured creditor from the proceeds of third party litigation. The trustee thereafter sought to surcharge the secured creditor's distribution based on the legal expenses incurred by the trustee in litigating the settlement. The Second Circuit prohibited the attempted Section 506(c) surcharge based upon the clear language of the settlement agreement. Therefore, the court-approved settlement agreement entered into by the trustee had the same effect as if the trustee had affirmatively waived its Section 506(c) rights in the settlement agreement.
- Compare In re Ben Franklin Retail Stores, Inc., et al., 210 B.R. 315, 318 n.4 (Bankr. N.D. Ill. 1997) ("Section 506(c) is a reimbursement provision for the benefit of the estate, not an independent compensation provision . . . .). In Ben Frankin, the debtor's counsel sought permission to "surcharge" the proceeds of accounts receivable for the costs of collection. The estate, however, likely was administratively insolvent. If the Bankruptcy Court allowed the direct surcharge, it would have had the effect of using Section 506(c) to elevate one administrative creditor (debtor's counsel) over all other administrative creditors. The Bankruptcy Court would not permit the direct surcharge, even with the lender's consent.
- See e.g., In re Mossello, 195 B.R. 277 (Bankr. S.D. N.Y. 1996), discussed in 1997-98 Annual Survey of Bankruptcy Law at 276.
- 206 B.R. 357 (Bankr. W.D. Pa. 1997).
- Id. at 370, citing In re Reading Tube Industries, 72 B.R. 329, 333 (Bankr. E.D. Pa. 1987).
- See also In re Swedeland Development Group, Inc., 16 F.3d 552, 567-68 (3rd Cir. 1994) (court reversed Section 364(d) order since debtor's projections were "belied by its historical performance"; cash flow projections were deficient as they were not discounted to present value). Presumably, the discount factor used to calculate the "present value" referred to in Swedeland would take into consideration the uncertainty and risk of the future cash flows.
- 103 F.3d 584 (7th Cir. 1996).
- Id. at 586.
- Id. at 587
- Id. at 594, citing Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1355 (7th Cir. 1990) (court could not "undo the priority granted by a financing order without first finding that the creditor acted in bad faith.").
- Marrs-Winn, 103 F.3d at 595. See also Sections 541(b)(1) and 541(d).
- Kham & Nates, 908 F.2d at 1355.
- Marrs-Winn, 103 F.3d at 595, citing In re Tek-Aids Indus., Inc., 145 B.R. 253, 258-59 (Bankr. N.D. Ill. 1992).
- __ B.R. ___ (D. Colo. 1998), 1998 WL 10598 (Jan. 12, 1998).
- 16 F.2d 552 (3d Cir. 1994).
- Western Pacific, 1998 WL 10598 at *2.
- Fed.R.Bankr.P. 7062 provides, in relevant part: "an order authorizing the assumption or assignment of any executory contract pursuant to § 365 shall be additional exceptions to Rule 62(a) [requiring the stay of enforcement of judgments for 10 days].
- See In re Rose's Stores, Inc., 52 F.3d 322, 1995 WL 215393 (4th Cir. (N.C.) 1995) (unpublished disposition); compare In re Joshua Slocum Ltd., 922 F.2d 1081 (3rd Cir. 1990) (decided under pre-1991 amendment) ("we decline to interpret the mootness principles in such a way that would, in effect, create a third situation where parties are required to seek a stay; i.e., the assignment of leases under § 365.").
- See e.g., In re Sun Runner Marine, Inc., 945 F.2d 1089, 1094 (9th Cir. 1991) (decided under pre-1991 amendments to Rule 7062). In Sun Runner, the lender, Transamerica, provided prepetition floor planning financing to the debtor. In connection with providing post-petition floor planning financing, Transamerica required the debtor to assume its prepetition financing agreement, thereby curing all prepetition arrearages. Citibank, the debtor's primary prepetition lender, appealed the Section 365 assumption order. Transamerica argued that its post-petition financing under Section 364 rendered moot the appeal of the Section 365 "cure". The Ninth Circuit disagreed, noting that "[section] 364 does not shield any cure payments from the effect of our reversal of the appealed order. . . . [T]he bankruptcy court ordered the cure payments under § 365, not § 364, and therefore those payments are not protected by § 364(e)."
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