In Re FCX, Inc.
1985 Bankr. LEXIS 4980, 54 B.R. 833 (1985)
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Rule of Law:
A bankruptcy court may approve debtor-in-possession financing terms, including cross-collateralization, under 11 U.S.C. § 364, if necessary for continued operations and unobtainable on other terms; however, it cannot grant administrative priority for pre-petition claims or compel the debtor to waive creditors' rights to challenge the secured lender's pre-petition claim or lien.
Facts:
- FCX, Inc., a North Carolina farmers’ purchasing and marketing cooperative, operated as a debtor.
- FCX owned 1,200,000 laying hens and 10,000 feeder pigs, which required ongoing care and feeding.
- Columbia Bank for Cooperatives (Bank) was FCX’s primary lender, holding a lien on virtually all of FCX’s assets.
- FCX urgently needed funds to purchase ingredients for feed to protect and preserve its poultry and livestock.
- The Bank was willing to provide 'requirements' financing for 60 days in an amount not to exceed $40 million to allow FCX's operations to continue.
- The Bank required specific terms for the loan, including a first lien on all of FCX's assets, a super priority for new advances, cross-collateralization for both pre-petition and post-petition debt, and concessions regarding the pre-petition debt's validity and amount.
- Unsecured creditors, including the Unsecured Creditors’ Committee, Texasgulf Chemicals Company, Inc., and Willis Hill, objected to several of these terms in the proposed financing agreement.
Procedural Posture:
- FCX, Inc. filed a voluntary petition under Chapter 11 of the Bankruptcy Code on September 17, 1985, thereby becoming a debtor in possession.
- On September 18, 1985, the bankruptcy court ex parte approved a 'Stipulation Regarding Use of Cash Collateral and Granting of Liens' between FCX and Columbia Bank for Cooperatives.
- Later on September 18, 1985, counsel for FCX and the Bank appeared ex parte before the bankruptcy court to present an outline of a debtor in possession financing arrangement.
- On September 18, 1985, the bankruptcy court verbally indicated from the bench that it would approve the financing arrangement, subject to notice being given to the largest creditors and subsequent hearings.
- Telephonic and mailgram notice of a hearing on September 23, 1985, was given to the 30 largest unsecured creditors.
- On September 19, 1985, an Unsecured Creditors’ Committee was appointed by the court.
- On September 23, 1985, after a hearing with notice to the 30 largest unsecured creditors, the bankruptcy court entered an 'Order Approving Debtor in Possession Financing and Guaranteeing Security Interests and Administrative Expense Priority Pursuant to 11 U.S.C. § 364'.
- Notice of the order approving the financing arrangement was subsequently given to all creditors.
- The Unsecured Creditors’ Committee, Texasgulf Chemicals Company, Inc., and Willis Hill filed objections to both the initial Stipulation and the later Loan Agreement.
- A hearing to consider these objections was held in Raleigh, North Carolina, on October 24, 1985.
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Issue:
Does a bankruptcy court have the authority to approve a debtor-in-possession financing agreement that includes cross-collateralization of pre-petition and post-petition debt, administrative priority for pre-petition debt, waiver of debtor's claims against the lender, and automatic stay lifting provisions, when such terms may prejudice the rights of unsecured creditors?
Opinions:
Majority - A. Thomas Small
Yes, a bankruptcy court has the authority to approve a debtor-in-possession financing agreement that includes cross-collateralization of pre-petition and post-petition debt, as well as certain automatic stay lifting provisions, if necessary for the debtor's continued operation and unobtainable otherwise. However, the court does not have the authority to grant administrative priority for pre-petition claims or to approve a waiver of creditors' rights to challenge the secured lender's pre-petition claim or lien, and it must ensure adequate notice to all creditors regarding such terms. The court approved the Bank's first lien on all of FCX's assets and a super priority for post-petition advances under 11 U.S.C. § 364(c)(1), finding an immediate need for financing that could not be obtained on other terms, and that continued operations were essential to preserve asset values for creditors. The court found cross-collateralization reasonable in this case because the Bank’s pre-petition claim was already fully secured by all of FCX's assets and the value of those assets exceeded the claim, eliminating the potential for preferential treatment over other unsecured creditors, an outcome often cautioned against (citing In re Texlon Corp. for ex parte disapproval and other cases for permissible circumstances). However, the court explicitly rejected granting a § 364(c)(1) super priority to pre-petition claims, stating that § 364(c)(1) applies only to post-petition loans and the court may not alter the Bankruptcy Code's established priorities (citing In re B & W Enterprises, Inc.). The court also modified the loan agreement to prevent the debtor from making unauthorized payments of pre-petition claims. Crucially, while the debtor could waive its own right to object to the Bank's pre-petition claim amount or lien validity, the court held that the debtor could not waive this right on behalf of other creditors. Consistent with due process requirements (Mullane v. Central Hanover Bank & Trust Company) and the right to object under § 502, the court allowed the Committee a reasonable period (30-60 days) to investigate and challenge the Bank's pre-petition claim, lien validity, and to raise claims against the Bank. The court permitted the addition of interest, fees, and costs to the secured debt under § 506(b) only if the collateral value was sufficient, subject to judicial scrutiny for reasonableness. Most specified events of default and the automatic lifting of the stay upon 10 days' notice were deemed reasonable, particularly given a provision allowing for court intervention to extend the stay 'for cause'. Finally, the court affirmed that the loan agreement should not prejudice the rights of reclaiming creditors under § 546(c).
Analysis:
This case highlights the critical balance bankruptcy courts must strike between facilitating debtor reorganization through necessary financing and protecting the rights of all creditors, particularly unsecured ones. It clarifies that while extraordinary measures like super priority liens and cross-collateralization may be approved under specific, exigent circumstances, core statutory protections, such as the hierarchy of claims and due process rights to challenge claim validity, cannot be abrogated by a financing agreement. The decision emphasizes the court's active role in scrutinizing such agreements for fairness and compliance with the Bankruptcy Code, setting limits on how much leverage a desperate debtor can concede to a lender. This ruling serves as precedent for future cases by establishing boundaries for debtor-in-possession financing terms that could otherwise severely prejudice unsecured creditors.
