Court Opinion

ID: 9687024
Source: CourtListenerOpinion
Date Created: 2023-08-24 16:14:00.556995+00
Date Added: 2024-06-11T09:52:21.249501
License: Public Domain

PERRIS, Bankruptcy Judge,
dissenting.
I agree with the majority that neither § 549 nor § 365 supports the bankruptcy court’s decision in this case. However, because I conclude that § 364(c) required Debtors in possession to obtain approval for incurring secured debt postpetition, I dissent.
*832The issue on which I differ from the majority is whether the additional encumbrance on Debtors’ Property that resulted from postpetition advances by IFI to Fleet constituted the incurring of secured debt by Debtors postpetition. If, as I conclude, it does, then § 364(c) required Debtors to obtain court approval for the further encumbrance.
Subsection 364(c) provides that the trustee or debtor in possession may obtain secured credit or incur secured debt only with court approval. The majority says that Debtors did not incur any debt, because IFI made its advances to Fleet and not to Debtors. That conclusion cannot be reconciled with the clear language of the Bankruptcy Code. Under the Bankruptcy Code, “debt” is defined as “liability on a claim.” 11 U.S.C. § 101(12). A claim is a “right to payment.” 11 U.S.C. § 101(5). A lien is a right to payment, Colvin v. Petree (In re Dan Hixson Chevrolet Co.), 20 B.R. 108, 110 (Bankr.N.D.Tex.1982), and therefore is a claim. A claim against a debtor includes a claim against the debt- or’s property. 11 U.S.C. § 102(2). Because a hen is a claim, further encumbering property of the debtor constitutes the incurring of debt by the debtor. And, applying § 102(2), the liability of Debtors’ Property for Fleet’s debt also constitutes a debt of Debtors, regardless of what entity obtained the benefit of the advances.
The majority seems to recognize that, if the loan from IFI were made to Debtors and not to Fleet, § 364(c) would apply and require court approval for postpetition advances. Because a claim against property of the debtor is a claim against the debtor, there is no basis for distinguishing between a loan made to the debtor secured by estate property and a loan made to a third party secured by that same estate property.
The majority also says that the incurring of debt through additional encumbrances on Debtors’ Property caused by IFI’s postpetition advances to Fleet is not a postpetition debt. The majority reasons that, under Washington law, a hen securing future advances is effective as of the date of recording of the lien and its priority dates from the recording. Therefore, because the factoring agreement was entered into and the lien was perfected pre-petition, any encumbrance that arises as a result of the perfected hen must also be deemed to have occurred prepetition.
In my view, that reasoning misses the point. Section 364(c) prohibits the dissipation of the equity in property of the estate through the incurring of secured debt without court approval, thereby preserving the estate for the benefit of ah creditors. Thus, the issue is not whether the debt will be considered a prepetition or postpetition claim. The issue is whether the debt was incurred postpetition, ie. whether the liability arose postpetition, because the taking on of additional debt postpetition results in the dissipation of the estate to the detriment of the other creditors.
It is irrelevant for our purposes that a contingent prepetition claim existed with respect to the postpetition loan. Section 364(c) covers the incurring of any secured debt by the estate. See H.R.Rep. No. 95-595, 95th Cong., 1st Sess. at 346 (1977), U.S.Code Cong. & Admin. News p. 5963, reprinted in C L. King, Collier on Bankruptcy App. Pt. 4(d)(i), at 4-1480 (15th ed. rev.1999). A debt is incurred for purposes of § 364(c) when it is based on postpetition advances, other than the advances specifically recognized by § 506(b),15 that are secured by property of the estate.
*833There is no question that, in this case, the advances at issue were made postpetition. The additional encumbrance on Debtors’ Property constituted the postpetition incurring of a debt, which dissipated the assets of the estate. Debtors did not obtain court authorization to allow their Property to be further encumbered. As a result, the trustee is entitled to avoid the lien to the extent it purports to secure postpetition advances to Fleet.
The majority says that, if § 364(c) applies to Fleet’s receipt of credit, the result is that Fleet and Debtors are treated as one, and the estate is given the benefit of piercing the corporate veil without its burdens. Majority Memorandum at 11 n. 10. There is no piercing the corporate veil here. IFI agreed to secure its future advances to Fleet with assets that did not belong to Fleet. Far from piercing the corporate veil, my approach simply holds IFI to the consequences of the agreement into which it entered.
IFI was in a position to protect itself. The factoring agreement specifically provided that IFI was “not obligated to buy any accountf.]” Factoring Agreement ¶ 5.3. Debtors listed IFI in their schedules as a secured creditor, so IFI would have been notified of the bankruptcy filing. As a result, it would have had notice that Debtors’ residence, which provided a portion of the collateral for the purchase of accounts, was now under the authority of the bankruptcy court. IFI continued to purchase accounts without bankruptcy court approval, further encumbering Debtors’ residence, at its own risk.
The bankruptcy court was correct in concluding that Debtors could not further encumber property of the estate without the approval of the bankruptcy court. I would hold that the bankruptcy court did not err in holding that IFI’s hen does not secure postpetition advances, and that IFI is not entitled to share in the proceeds of the residence to repay postpetition advances.16
Accordingly, I dissent.

. IFI’s postpetition advances did not include certain postpetition items that can be included in a secured claim. Subsection 506(b) expressly recognizes that postpetition interest, attorney fees and charges can, in certain circumstances, be secured. Subsection 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, *833costs, or charges provided for under the agreement under which such claim arose.

. The issue of whether or not IFI has an allowable claim as a result of the postpetition advances is not before us.