In Re Devlin
1995 Bankr. LEXIS 1102, 9 Fla. L. Weekly Fed. B 76, 185 B.R. 376 (1995)
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Rule of Law:
Under 11 U.S.C. § 364(d)(1), a bankruptcy court may authorize a debtor to obtain financing secured by a senior lien on any property of the estate, including property in which the debtor holds only an equitable interest, provided the debtor cannot obtain credit otherwise and the interests of existing lienholders are adequately protected.
Facts:
- The Debtor operates The Desert Inn Resort Motel, a 220-room facility in Daytona Beach, Florida.
- The resort's centralized air conditioning system, boiler, and hot water heaters, installed in 1967, were non-functional or antiquated and required immediate replacement at a minimum cost of $123,920.
- The Debtor did not have sufficient cash flow to pay for the replacement equipment and needed to obtain outside financing.
- The Debtor's mother, Irene L. Devlin, agreed to finance the replacements on the condition that she receive a first priority lien on the resort's real property.
- The Debtor did not hold legal title to the resort; its interest was an equitable one derived from an executory purchase and sale contract with the legal owner, Nat Max & Associates.
- The property was already subject to a first priority mortgage lien of approximately $2.3 million held by the Resolution Trust Corporation (RTC).
Procedural Posture:
- The operator of The Desert Inn Resort Motel filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court.
- The Debtor filed a motion for authority to incur secured debt with superpriority status pursuant to 11 U.S.C. § 364(d)(1).
- Notice of the motion was provided to all creditors, and no written objections were filed within the specified time.
- At the hearing on the motion, Nat Max & Associates, the legal title holder, made an oral objection for the first time.
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Issue:
Does 11 U.S.C. § 364(d)(1) authorize a bankruptcy court to grant a senior, superpriority lien on real property in which the debtor-in-possession holds only an equitable interest under an executory contract, rather than full legal title?
Opinions:
Majority - Judge Jerry A. Funk
Yes. Section 364(d)(1) authorizes a court to grant a senior lien on any property of the estate, which includes a debtor's equitable interests. The court reasoned that the bankruptcy estate, as defined by 11 U.S.C. § 541, is comprised of all of a debtor's legal and equitable property interests. Under Florida law, the Debtor's rights under the executory purchase contract constitute an equitable interest in the resort, making it property of the estate. Because § 364(d)(1) permits a senior lien on any property of the estate, the court has the authority to grant such a lien on the Debtor's equitable interest. The court further found that the statutory requirements were met: the Debtor was unable to obtain credit otherwise, and the RTC's existing lien was adequately protected because the essential repairs would preserve or enhance the value of the collateral, benefiting all parties. The RTC did not object to the motion.
Analysis:
This order clarifies the broad scope of a bankruptcy court's authority to approve debtor-in-possession financing under § 364(d). It establishes that the court's power to grant a priming lien is not limited to assets to which the debtor holds full legal title, but extends to any property interest, including equitable interests under a contract for sale. This provides a critical tool for debtors whose main asset is held through such an arrangement, allowing them to secure financing to preserve the asset's value during reorganization. The decision reinforces the expansive definition of 'property of the estate' and prioritizes the pragmatic goal of preserving value for all creditors over formalistic objections about title.
