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In re Barbara K Enters. - No. 08-11474 (MG), 2008 Bankr. LEXIS 1917 (Bankr. S.D.N.Y. June 16, 2008)

Rule:

Even if there is a valid security interest in post-petition acquired property constituting the proceeds, products, offspring, or profits of pre-petition collateral, 11 U.S.C.S. § 552(b)(1) still allows a court to trump a pre-petition lien to this post-petition acquired property after notice and a hearing and based on the equities of the case. The equities of the case doctrine is intended to ensure that secured creditors do not receive a windfall benefit when a trustee uses assets of the estate, for example, to finish uncompleted inventory, and it is also used to adjust recovery by a secured creditor in situations where there is an improvement or decline in the post-petition collateral. 

Facts:

Debtor Barbara K. Enterprises, Inc. seeks approval pursuant to 11 U.S.C. §§ 105(a) and 364(c)(1)-(c)(3) of a three-month interim debtor-in-possession ("DIP") financing agreement with BK Acquisition, LLC ("BKA") that would grant BKA liens and superpriority administrative expense status. Level 10 Capital, LLC ("Level 10”). One of the Debtor's pre-petition secured creditors, objected to further interim and final approval of the DIP loan on various grounds, including that the proposed DIP facility would improperly prime its validly-asserted liens on certain post-petition assets of the estate. The proposed DIP loan would grant BKA senior liens on property of the estate acquired post-petition and junior liens on pre-petition property of the estate, but Level 10 argued that BKA may only obtain senior liens on certain post-petition property of the estate under 11 U.S.C. § 364(d)(1), since Level 10 asserted liens on any royalties obtained by post-petition licenses of Debtor's pre-petition patents, trademarks and trade names. As Debtor stated it is unable to obtain DIP financing without granting BKA these liens, both Debtor and Level 10 agreed that a determination as to the scope and validity of Level 10's liens on post-petition assets is a "threshold" issue for ruling on the interim DIP loan request.

Issue:

Should the motion for approval of a three-month interim debtor-in-possession (DIP) financing agreement, be granted?

Answer:

No.

Conclusion:

The court denied the motion because the proposal would prime the secured creditor's valid liens on post-petition assets and no adequate protection under 11 U.S.C.S. § 364(d)(1) was offered to compensate the creditor for the diminution in its interest. The court held that the creditor, pursuant to 11 U.S.C.S. § 552(b)(1) and the amended security agreement, could validly assert liens on post-petition assets, including proceeds, products, offspring, or profits stemming from the pre-petition collateral, which included the debtor's trademarks and intellectual property. The court found no basis for allowing superpriority status to the DIP lender secured by all post-petition assets because the debtor sought to force the use of collateral or wholly encumbered estate funds to fund a highly speculative reorganization plan. The court held that a successful reorganization was highly unlikely given the disarray of the debtor's books and records and absence of a projected revenue or meaningful business plan or budget going forward.

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