445 B.R. 483
Bankr. E.D. Pa.2010Background
- Keystone Surplus Metals, Inc. filed a voluntary Chapter 11 petition on October 3, 2008, with Movant Albert Kauffman signing as President and 50% owner.
- Wachovia held a broad lien on Keystone’s assets; early cash collateral use orders were entered and protected by adequate protection stipulations.
- Keystone moved to convert to Chapter 7 in March 2010; a Chapter 7 trustee was appointed and later sought to sell the business assets under §363.
- Movant asserted post-petition loans to Keystone totaling $215,969.26, evidenced only by checks; no promissory notes or loan documents were produced.
- Operating reports signed by Movant as Authorized Individual contained no reference to any loans, and the disclosure statement/plan did not mention such loans or any repayment plan.
- Keystone’s plan and disclosure statement indicated no ordinary-course administrative expenses post-petition; the loans were not disclosed until after conversion to Chapter 7.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post-petition advances qualify as ordinary-course admin expense under §364(a). | Kauffman contends the loans were ordinary-course debt. | Trustee argues the advances were not ordinary-course, insiders’ funding not properly documented. | No; movant failed to show ordinary-course status under §364(a). |
| Does vertical (reasonable expectations) analysis support ordinary-course status here? | Movant claims pre-petition loans created an expectation of repayment plus re-loaning. | Record shows no genuine expectation of repayment post-petition. | No; vertical analysis not satisfied. |
| Does horizontal (industry practice) analysis support ordinary-course status here? | Movant relies on his prior business practices of owner-funded loans. | Lack of evidence that such loans are typical in Keystone’s industry; movant offered no comparative proof. | No; horizontal analysis not satisfied. |
| Did insider status of Movant require stricter scrutiny of claims under §364(a)? | Movant is an insider, so his claim should be scrutinized for propriety. | Insider status necessitates careful examination; however, the evidence still does not establish ordinary-course debt. | Insider status does not overcome failure to prove ordinary-course loan treatment. |
| Are the movant’s post-petition advances properly evidenced and disclosed in operating reports, disclosures, and plan? | Advances evidenced by checks should be recognized as loans. | No documentary loan terms, no disclosure in operating reports or plan; evidence insufficient. | Not properly evidenced or disclosed; fails §364(a) criteria. |
Key Cases Cited
- In re Roth American, Inc., 975 F.2d 949 (3d Cir. 1992) (defines vertical and horizontal tests for ordinary-course analysis)
- In re Massetti, 95 B.R. 360 (Bankr.E.D.Pa. 1989) (movants must prove real estate partnerships typically borrow funds from general partners to pay operating expenses)
- In re Lodge America, Inc., 259 B.R. 728 (D. Kan. 2001) (framework for evaluating ordinary-course debt under §364(a))
- In re Ockerlund Construction Company, 308 B.R. 325 (Bankr.N.D. Ill. 2004) (post-petition advances characterized after-the-fact as loans raise problems under §364(a))
- Arney v. MRI Tanglewood Rental Investments, Inc. (In re The Alpha Corporation of Virginia), 979 F.2d 847 (4th Cir. 1992) (insider scrutiny under §364(a) for debtor-in-possession transactions)