Court Opinion

ID: 8956281
Source: CourtListenerOpinion
Date Created: 2022-11-27 09:15:41.832585+00
Date Added: 2024-06-11T17:10:05.269598
License: Public Domain

MERRITT, Circuit Judge,
dissenting.
This case presents a rather simple issue: What is the scope and purpose of section 364(e) of the Bankruptcy Code? This section requires the issuance of a stay pending appeal before there can be a “reversal or modification on appeal” of a bankruptcy order granting a creditor “superpriority” in exchange for making an emergency extension of credit to a chapter 11 creditor. The purpose of the subsection is to deny unsecured creditors the right of appeal and thereby deny their right to upset a lien given superpriority unless the closing and completion of the credit transaction has been delayed by a stay granted by the Bankruptcy Court. This speeds the extension of emergency credit because lenders are assured that their security for the loan — the superpriority — will not be taken away after the funds have been advanced. If the security for such loans could be upset on appeal after the debtor has received the loan proceeds, there would be little incentive for a lender to make loans that keep chapter 11 debtors afloat.
In the case at bar, the banks made a $60,000 superpriority loan supplemented with a $175,000 letter of credit in order to allow the debtors to supply their customers living on the upper peninsula in Michigan with heating oil in the dead of winter. Obviously the loan and letter of credit are covered by section 364(e) and may not be challenged by the unsecured creditors because no stay was entered.
The more difficult question is whether the bankruptcy court’s action in making incontestable more than three million dollars in prepetition loans made by the banks is likewise within section 364(e), thereby denying the unsecured creditors a right to appeal the Bankruptcy Court’s ruling in this respect. I would hold that the right to appeal this aspect of the ruling is not cut off by section 364(e). This section is not designed to cut off the right to appeal rulings on prepetition matters, such as fraudulent conveyances and preferences, but only affects authorized postpetition loans and liens to secure such loans. Lenders should not be permitted to use their leverage in making emergency loans in order to insulate their prepetition claims from attack. The banks here should not be permitted to make several million dollars in prepetition loans secure and uncontestable at the expense of the other creditors by the simple expedient of making a section 364 postpetition loan. The statute does not contemplate denying the right of appeal in such situations, and there is no authority permitting such a constraint on judicial review. I would therefore reverse the District Court’s ruling that the bank’s prepetition security interests are not subject to review and I would permit the unsecured creditors to pursue the fraudulent conveyance claim.