Opinion ID: 196328
Heading Depth: 2
Heading Rank: 2

Heading: The Bankruptcy Court Decision

Text: 6 The bankruptcy court ruled that the unauthorized prepetition transfer of MHFA cash collateral to retain chapter 11 counsel violated the Regulatory Agreement. In re Indian Motocycle Assocs. III Ltd. Partnership, 161 B.R. 865, 867-68 (Bankr.D.Mass.1994). 5 The court nonetheless denied the motion to compel the debtor to restore the $65,000 to MHFA, noting that Regulatory Agreement violations by the debtor were irrelevant, given that the motion to compel purported to assert MHFA's legal rights against the debtor only and that no adversary proceeding had yet been commenced against the debtor's general partners, attorneys or accountants, the transferees in possession. Id. at 868. 7 During the bankruptcy court proceedings, MHFA had relied on case law to the effect that a debtor's unauthorized prepetition disbursement of rents securing an NHA-insured loan warrants postpetition relief compelling the debtor and/or its attorneys to restore the encumbered funds to the debtor estate. Id. The bankruptcy court reasoned, however, that the requested relief would undermine the Bankruptcy Code distribution scheme by entitling $65,000 of the HUD/MHFA unsecured claim against the chapter 11 estate to super priority status. 8 On intermediate appeal, the district court reversed and remanded to the bankruptcy court for entry of an order compelling the [d]ebtor to restore the distributions diverted from the estate. Massachusetts Hous. Fin. Agency v. Indian Motocycle Assocs. III Ltd. Partnership (In re Indian Motocycle Assocs. III Ltd. Partnership), 174 B.R. 351, 357-58 (D.Mass.1994) (citing Bankruptcy Code Sec. 105(a), 11 U.S.C. Sec. 105(a) (empowering the court to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title)). II