Selling to a Chapter 11 Debtor: "Watch It Now"
Just reading this one causes all twelve of my hairs to stand on end. The case is
Debtor files Chapter 11, and wants to fund continued operations with cash collateral and files a motion seeking court approval. The creditor secured in the cash collateral objects vehemently. The bankruptcy court takes about 3 weeks to rule, at which point it denies the debtor's motion to use cash collateral. In the meantime, the debtor has been purchasing product from Marathon, and paying for it (with the cash collateral), all post- petition. The case eventually converts to Chapter 7 (without cash collateral, the Chapter 11 case was toast), and the Chapter 7 trustee seeks recovery of the approximately $1.9 million paid to Marathon by debtor for the purchase of post-petition goods. The bankruptcy court agrees, holding that the payments were unauthorized post-petition transfers of estate property avoidable under Sections 549(a) and 363(c)(2). Score one (a big one) for the trustee; the11th Circuit affirms.
Section 549 of the Bankruptcy Code is an avoidance section specifically directed to post-petition transfers. It allows the trustee to avoid a post-petition transfer "that is authorized only under section 303(f) or 542(c) OR "that is not authorized under this title or by the court." Since the bankruptcy court did not approve the use of cash collateral, and did not authorize the the post-petition business arrangement with Marathon, the payments made to Marathon were recoverable by the Chapter 7 Trustee.
The lesson here was a tough one: if you want to sell to a Chapter 11 debtor, be sure to call creditor's counsel first, and avoid a very nasty learning experience. Post-petition transfers of estate property must be court authorized.
