542 B.R. 317
Bankr. W.D.N.Y.2015Background
- Debtor Robert G. Reilly (dentist) filed Chapter 11 on Nov 24, 2014; significant secured tax and bank debts and a domestic support obligation were outstanding.
- As debtor in possession, Reilly agreed to make monthly adequate protection payments to IRS and Community Bank and continued paying domestic support.
- In Feb 2015 Reilly obtained an unauthorized $25,000 loan from his brother, Warren W. Reilly, to cover adequate protection, domestic support, and estimated post-petition taxes.
- Reilly repaid $10,000 of that loan in Apr 2015, also without prior court authorization.
- Debtor’s counsel later moved for nunc pro tunc approval of the loan and its partial repayment; the U.S. Trustee opposed nunc pro tunc relief, arguing §364(b) requires prospective approval after notice and hearing.
- The court treated the motion instead as a request to allow an administrative expense under §503(b)(1) and considered whether the unauthorized loan should receive administrative priority.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court can retroactively authorize (nunc pro tunc) a post-petition loan under §364(b) | Reilly: court should approve the loan nunc pro tunc because it was necessary to preserve the estate | U.S. Trustee: §364(b) permits only prospective approval after notice and a hearing; nunc pro tunc would circumvent that requirement | Court: §364(b) does not authorize retroactive approval; nunc pro tunc under §364(b) denied |
| Whether an unauthorized post-petition loan can be allowed as an administrative expense under §503(b)(1) | Reilly: even if retroactive §364 relief is unavailable, the loan is an actual and necessary cost of preserving the estate and warrants administrative priority | U.S. Trustee: nunc pro tunc relief is improper; extraordinary circumstances not shown for retroactive approval | Court: Treating the motion as one under §503(b)(1), the loan is allowed as an administrative expense (priority) because it was actual and necessary to preserve the estate |
| Effect of partial repayment made without authorization | Reilly: repayment was part of the transaction and should be validated | U.S. Trustee: unauthorized repayment should not be automatically validated | Court: The allowance of the administrative claim does not necessarily legitimize the $10,000 repayment; that issue remains open for future consideration |
| Standard for allowing priority for unauthorized advances | Reilly: necessity and lack of creditor harm justify priority | U.S. Trustee: retroactive priority should be reserved for extraordinary cases only | Court: Applies historical standard — priority may be allowed if the court is satisfied it would have authorized the loan timely and creditors were not harmed; here those conditions are met |
Key Cases Cited
- Standard Capital Corporation v. Saper, 115 F.2d 383 (2d Cir. 1940) (unauthorized loan may nonetheless be treated as an administrative expense in unusual circumstances)
- In re American Cooler Co., 125 F.2d 496 (2d Cir. 1942) (court should allow priority for unauthorized advances only if it would have authorized the loan had timely application been made and creditors were not harmed)