In Re Blackwelder Furniture Co. of Statesville

Citations: 31 B.R. 878; 8 Collier Bankr. Cas. 2d 1379; 1983 Bankr. LEXIS 5762; 11 Bankr. Ct. Dec. (CRR) 767Docket: 18-31766

Court: United States Bankruptcy Court, W.D. North Carolina; July 21, 1983; Us Bankruptcy; United States Bankruptcy Court

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In the case of In re Blackwelder Furniture Company of Statesville, Inc., the United States Bankruptcy Court addressed thirteen crossclaims filed by the Trustee against NCNB National Bank regarding NCNB's status as a secured creditor. The Trustee sought to determine if NCNB's claim, amounting to $151,690.20 plus additional charges, was secured by inventory acquired by the Debtor after December 7, 1979, the date the Debtor filed its Chapter 11 petition. NCNB asserted its claim was secured by a first priority security interest in the Debtor’s inventory and also included a second mortgage on real property and a second priority security interest in the Debtor's office furniture, equipment, and fixtures, all based on a security agreement dated August 31, 1978. The hearings on the Trustee's claims occurred on November 30, 1982, and June 30, 1983, focusing on stipulated facts and specific legal issues. The resolution of whether NCNB's security interest extends to post-petition inventory hinges on the Debtor's confirmed reorganization plan and pertinent provisions of the Bankruptcy Code (11 U.S.C. § 552(a) and § 1124). The case's background includes the Debtor's Chapter 11 filing on December 7, 1979, and the subsequent confirmation of its reorganization plan on April 17, 1980, under which it continued operations with the Court retaining jurisdiction.

The Debtor operated under a reorganization plan until converting the case to Chapter 7 on January 27, 1982. Following the conversion, the Trustee was appointed to liquidate the Debtor's assets, resulting in funds that exceed the amounts necessary to satisfy NCNB's claim, provided NCNB's security interest attaches to inventory acquired after the original Chapter 11 petition. Both parties agree that NCNB's August 31, 1978, security agreement was properly perfected and created a standard 'floating lien' on both existing and after-acquired inventory. However, the operation of this lien was suspended upon the filing of the Chapter 11 petition on December 7, 1979, per 11 U.S.C. § 552(a), which states that property acquired after the case commencement is not subject to pre-petition security interests. This date is undisputed as the commencement for applying § 552(a), and the conversion to Chapter 7 did not change it. The value of the Debtor's pre-petition inventory was consistently sufficient to secure NCNB's claim multiple times over, with excess value remaining for the Debtor and the estate. While NCNB's security interest would extend to traceable proceeds from pre-petition inventory, the ability to trace these proceeds three years later is contested. The primary dispute focuses on whether the Debtor’s confirmed plan of reorganization reinstates NCNB's security interest in after-acquired inventory. It is agreed that NCNB was classified as a Class 1 creditor under the plan, defined as secured claims existing on the petition date and approved by the Court, with sufficient value in the Debtor’s assets. The treatment of Class 1 creditors was specified in Article II of the plan, indicating that classes 1, 2, 4, and 5 remain unaltered and unimpaired.

Differing interpretations of a provision regarding NCNB and other Class 1 creditors' status as 'unaltered and not impaired' are presented. NCNB asserts that, under 11 U.S.C. § 1124, the plan should ratify and revive its pre-petition security rights, including a security interest in after-acquired inventory. Conversely, the Trustee and ITI argue that the term 'impairment' is constrained by other sections of the Code, particularly § 552(a). Section 1124(1) states a class is impaired unless the plan preserves the rights of each claim holder, cures defaults, reinstates maturity, compensates for damages, and does not alter legal rights. The Debtor's plan did not treat NCNB as unimpaired under § 1124(3). A key contention arises over whether an unimpaired creditor retains rights as of the petition's filing or as they existed pre-bankruptcy, affected by § 552(a). This legal question is deemed one of first impression, though Senate Committee Report guidance suggests 'unimpaired' refers to a creditor’s pre-petition position. The Court concludes that restoration to a creditor's 'original position' relates to their status before bankruptcy, not altered by the bankruptcy process.

The interpretation of the relationship between Section 1124 and Section 552(a) aligns with the intent of the plan, as evidenced by the entirety of the document. Notably, Section VII outlines the execution means of the plan, highlighting a funding agreement between the Debtor and International Trading and Investment Company, approved by the Court and the Creditors' Committee. This agreement ensures a good faith deposit to secure distributions to Class 3 creditors and mandates implementation of the plan and funding agreement per their terms. The Debtor retains all property, and any defaults related to Class 1 creditors' Security Agreements will be remedied, maintaining the effectiveness of those contracts.

According to the funding agreement and the Court's approval, International Trading and Investment Company will provide the necessary funds for the Plan of Reorganization, receiving a security interest in Blackwelder Furniture Company, Inc.'s assets, subordinate to existing interests, and treated as an administrative expense. The language in the Funding Agreement, referenced in the plan, supports the inclusion of NCNB's pre-petition security agreement terms, including the after-acquired inventory clause, despite its absence in the plan's express mention.

The Court interprets the plan as not limiting the general provisions of Section VII, aligning with the broader scheme of the Bankruptcy Code. A contrary ruling could lead to adverse consequences for secured creditors, particularly those with floating liens, who could be deemed 'unimpaired' without the opportunity to protect their interests adequately during the reorganization process. In this case, NCNB was substantially oversecured throughout the Chapter 11 proceedings, potentially leaving it without the ability to contest the plan or invoke protections reserved for objecting creditors, thus losing its after-acquired property security interest under Section 552(a).

Payments made by the reorganized debtor to the secured creditor post-confirmation, as per the original debt terms, prevent default and the creditor's ability to act against remaining collateral. This allows the debtor to sell collateral without replacing it, potentially leaving the over-secured creditor unsecured before the debt is fully paid. The Court expresses concern that this outcome contradicts the intent of the Code to protect secured creditors during reorganization. It seeks clarification on whether the reinstatement of NCNB's after-acquired property lien is effective from the petition date or confirmation date, noting the brief interval may render this distinction moot. NCNB seeks a nunc pro tunc order to reinstate its security interest if the plan does not automatically achieve this, arguing the Court retains authority to aid plan implementation despite the case's conversion to Chapter 7. The Court, however, finds its authority insufficient for NCNB's request and indicates that if the plan does not reinstate the lien, NCNB's motion effectively seeks an unauthorized modification. Ultimately, the Court confirms that NCNB's floating lien on inventory is revived under the confirmed plan. NCNB's claim is allowed as secured up to the value of the inventory owned or acquired by the Debtor before December 7, 1979, or after April 17, 1980, before Chapter 7 conversion. The Court defers a decision on the treatment of inventory acquired after the Chapter 11 petition and before the confirmation. The parties are instructed to address any outstanding issues related to the Trustee's crossclaims within 60 days. A referenced footnote from a prior case highlights that post-petition interest generally does not apply to undersecured claims unless specific plan treatment is sought.