legal nothte legeal sidesof aBl
t
he cases we have selected
for this issue of The Secured
Lender address several
interesting topics, including
“roll-ups” within the context
of DIP financing, potential
fraud claims against
accountants of a borrower
and taking a security interest
in commercial tort claims.
We hope you find these case
notes to be interesting and
instructive.
JONATHAN HELFAT
AND RICHARD KOHN
CFA CO-GENERAL COUNSEL
In re Berry Good, LLC, et al., 2008 WL
51114311 (Bankr. D. Ariz. Dec. 4, 2008)
(Lender fails to obtain Bankruptcy Court
approval to “roll up” its prepetition
debt into a post-petition DIP loan where
the lender committed to lend without
requiring it.)
Berry Good and its affiliates (
collectively, “Berry Good”) sold, serviced and
repaired motor homes and trailers. They
filed Chapter 11 bankruptcy cases on
November 18, 2008. Prior to the commencement of their Chapter 11 cases,
Berry Good had entered into floor plan
financing arrangements with GE. The obligations of Berry Good to GE pursuant
to such arrangements were secured by a
blanket lien on all personal property of
Berry Good.
Shortly after the commencement of
the Chapter 11 cases, Berry Good filed a
motion to obtain debtor-in-possession
financing from GE and, on November
21, 2008, the Bankruptcy Court entered
an order approving the motion on an
interim basis. At the time the interim
financing order was approved, Berry
Good, GE and Berry Good’s other secured
creditors were still negotiating the
terms of a budget. Consequentially,
while the interim financing order authorized Berry Good to immediately borrow
$350,000 (of a $750,000 interim loan) to
fund payroll expenses, it prohibited additional borrowing except pursuant to a
budget to be approved by Berry Good’s
other prepetition secured creditors.
As contemplated, Berry Good submitted a budget for approval to the
Bankruptcy Court pursuant to which
Berry Good proposed to borrow from GE
$288,000 and to use the proceeds of this
post-petition loan to repay a portion of
the outstanding prepetition loan due
to GE under the floor plan financing
facility. As a result of such payment,
$288,000 of GE’s prepetition debt would
be converted (or “rolled up”) into a
post-petition claim. Berry Good’s other
secured creditors objected to the budget
and, in particular, to the proposed payment to GE of $288,000 in respect of its
prepetition claim.
The interim financing order, which
contained very few substantive provisions, did not approve (or even mention)
any payment to GE in respect of its
prepetition debt. The Bankruptcy Court
therefore upheld the objection of the
other secured creditors to the budget
and ruled that the proceeds of the
post-petition loans could not be used to
repay GE’s prepetition claim under the
floor plan financing arrangements.
GE testified at the hearing on the
budget that it would not continue to
make post-petition loans to Berry Good
unless its prepetition debt was brought
current (by permitting Berry Good to pay
GE $288,000 from the proceeds of the
post-petition loans). However, the Bankruptcy Court found that GE had already
agreed to lend $750,000 (the amount of
the interim loan) with no such condition attached. If GE had not intended
to make any additional loans unless its
prepetition debt was paid, GE should
have made sure the interim financing
order provided for such a roll-up (or at
least permitted GE to stop lending if the
Bankruptcy Court did not subsequently
approve the roll-up).
Further, since GE had committed
itself to lend $750,000 in exchange for a
lien on real estate, the Bankruptcy Court
cautioned GE that it could be liable for
damages of at least $400,000, which was
the unfunded amount of the interim DIP
loan, if it stopped lending.
On its face, Berry Good is not a
favorable decision for secured lenders seeking to “roll” a prepetition loan
into a post-petition DIP loan. However,
the result in Berry Good may be more a
function of GE committing itself to lend
before it had a deal than anything else.
Unlike GE in Berry Good, a lender should
not commit to lend based on a budget
