Opinion
NOT FOR PUBLICATION
ORDER ON USE OF BANK OF AMERICA'S CASH COLLATERAL
PETER W. BOWIE, Chief Judge, United States Bankruptcy Court.
This Chapter 11 case was filed on January 11, 2 010. Debtor promptly filed a First Day Motion seeking interim use of the Bank's cash collateral. An interim order was entered on January 14 authorizing use through January 28. Thereafter, authority was renewed on an interim basis, through a hearing set for February 17. The focus at the time was concerns of various landlords over adequate protection for their stub rent claims.
February 12 was the last date to object to the proposal to continue interim use of cash collateral. On or about February 11, the Bank was provided with a copy of Debtor's proposed budget going forward. The Bank timely filed a "Limited Objection", stating: "Generally, Bank of America does not oppose the Court's authorization of the Debtor's use of cash collateral on the same terms as the prior cash collateral orders entered by the Court." However, the Bank had a number of concerns over several line items. For present purposes, the relevant one was payment of interim professional fees from the Bank's cash collateral. The Bank objected to that provision, which allocated $420,000 for professional fees for the period February 18 through April 14.
On the eve of the February 17 hearing. Debtor filed a "Reply . . .." in it. Debtor explained its approach to managing the case, discussed its objectives and its efforts, and set out some theories on why not all its assets were subject to the Bank's security interest, both through application of § 552, and an argument based on a case captioned In re Cafeteria Operators. L.P., 299 B.R. 4 00 (Bankr. N.D.TX 2003) . Of course, no party had a chance to reply to Debtor's new arguments. In reply to the Bank's position regarding professional fees, the Debtor stated:
Professionals are working to protect and preserve the value of this estate and the Debtor has budgeted partial payments of professional fees for the law firms and financial advisors. Subject to the filing of fee applications and approval of this Court, payment of professional fees on an interim basis is necessary, appropriate and permitted by the Bankruptcy Code, as Bank of America and its counsel well know.
The OCC joined in the Debtor's position and asserted that not all the cash available to the Debtor was the Bank's cash collateral. The OCC noted that the Debtor "does not operate in a vacuum and requires the assistance of professionals to administer the estate."
At the hearing, Debtor and the OCC reiterated their arguments, and the Bank reiterated its willingness to agree to cash collateral use as in the prior orders. The Bank restated its position against interim use of collateral for professional fees. Counsel for Debtor responded:
I think that to basically say to the debtor and its professionals, "You have to hire an investment advisor today, or we're not going to allow for payment of professional fees" defeats the purpose of the bankruptcy code. It flies in the face of the exclusivity, and it basically says to the professionals, "Go out and build value for the estate and the bank, but we're not going to make sure that you get compensated on even any small amount."
Following argument, the Court was persuaded that authorization to use cash collateral should continue on the same terms as before. Then the Court stated:
So I think the real issue at this point in time is the payment of professionals. And I've got to say that I'm persuaded by the Cafeteria Operator's line of approach that there is in fact value added to the services to the funds that are generated by this debtor operating on a post-petition basis, and what that tells me is there is a non attached fund that's available to not only help pay professionals, but to provide adequate protection to B of A as well. And I think that that combined with the 12 0,000 payments over the five weeks is an appropriate form of adequate protection for the bank, along with appropriate replacement liens to the extent that the value of their actual collateral is diminished during that operating period of time. And so on that basis and with that, I will allow it, but -and the concern will be with respect to the 120,000 or so estimated professional fees which won't be expended in the interim because there won't have been fee apps submitted to me for review and approval and the rest of that on a notice basis anyway. But because of Cafeteria Operators with which I am persuaded, I do believe there will be a fund that's available to satisfy it regardless of whether it comes from B of A's collateral or not, but so the budget that has been submitted with respect to the final motion as adjusted would include that authorization.
That was followed by a colloquy between the Court and Bank's counsel, during which counsel addressed the Cafeteria Operator's issue and challenged whether this estate had such "free cash". He stated it would "be a very, very complicated analysis . . .." The Court responded: "And I'm hoping we won't get there." The parties then agreed to a further hearing date and use of cash collateral through that date. It was understood, and stated on the record that no professional fees could be paid unless there was an interim fee application. Counsel for the OCC noted that the Debtor was planning to file a motion for approval of an interim compensation procedure. Debtor has filed such a motion, and hearing on it has been continued. The Bank has filed a limited objection to preserve its position concerning whether such fees could be paid from its cash collateral.
Following the February 17 hearing, there was a skirmish over competing proposed orders, which the court resolved. Meanwhile, the Debtor gave "Notice of Continued Hearing Re First Day Motion by Debtor For Order (A) Authorizing Interim Use of Cash Collateral" for April 9. The Bank filed another limited objection, agreeing to the use of its cash collateral on the same terms as previously, but objected to the proposed payments of professional fees, which had risen to $680,000.
As part of its objection, the Bank pointed out that the replacement lien Debtor proposed extended to post-petition revenues generated by Debtor, so even if Cafeteria Operator's might otherwise be applicable, the replacement liens encumbered those revenues in favor of the Bank, at least to the extent the Bank's collateral was otherwise diminished.
The Debtor responded the next day, which was on the eve of the hearing. Debtor reiterated its view that: "To date, BofA has refused to realistically address the benefits to BofA that this Debtor and its professionals are providing." Debtor then argued decisions supporting authority under 11 U.S.C. § 506(c) to surcharge a creditor's collateral when expenses were "incurred primarily for the benefit of the secured creditor . . .." The Debtor concluded:
It is not in this Estate's interest to continue to incur administrative fees and costs for BofA's benefit, which BofA has refused to either acknowledge or pay. The Debtor is seeking approval for use of cash collateral based on the budget attached hereto as Exhibit A, which budgets for and provides for payment of professional fees.
The Court has not seen any fee applications to this point. From outward appearances, the Debtor's and the OCC's professionals seem to have accomplished some streamlining of the Debtor, and to have reached the important decision of the major approach for going forward, which will involve marketing the Debtor as a going concern, which is what the Bank wants, as well. While Debtor may not have reached that decision as quickly as the Bank would have liked, it was arrived at in less than three months from filing, which is not unreasonable. Moreover, the decision has the support of the OCC, which is important to making it happen. From what the Court has seen, both the Debtor and the OCC have been well represented.
That said, one of the difficulties in proceeding with such alacrity is the desire to resolve significant contested issues on little or no notice. As already noted, the Debtor raised its arguments under § 552 and Cafeteria Operators in its Reply filed the day before the February 17 hearing, and no one had a chance to review or oppose those arguments before the next-day hearing. Then, the day before the April 9 hearing, the Debtor filed another Reply, asserting its argument under § 506(c) for the authority to surcharge the Bank's collateral. Again, there has been no opportunity to tee up the issue with adequate opportunity for the Bank to respond.
The Court believes that the Debtor has raised significant issues under Cafeteria Operators, § 552, and § 506(c) which would support allowing compensation to the Debtor's and OCC's professionals if the requisite circumstances are found to exist. But those issues have not been set up for determination by raising them the day before a hearing in a Reply pleading, especially in the oblique context of a cash collateral motion. When the issues are squarely raised and briefed, the Court will address them.
In the meantime, the Court finds and concludes that interim use of the Bank of America's cash collateral may continue to and including May 13, 2010 on the same terms and conditions as in the prior orders in this case. That does not include payment from the Bank's cash collateral of the Debtor's or the OCC's professionals without prior consent of the Bank, or unless payment is from assets other than the Bank's collateral, and then only after approval by the Court of either appropriate fee applications or of a procedure for interim compensation pending such applications.
Debtor has also raised in its Reply its desire to use its financial advisor, CRG Partners Group to develop a book for marketing the Debtor as a going concern. The Bank has expressed its dissatisfaction with that selection. The Court does not have an application before it to expand CRG's scope of employment, nor have the Bank or other interested parties had an opportunity to address such a proposal. If and when such an application is filed and served, the Court will consider it.
IT IS SO ORDERED.