Court: District Court, S.D. New York; September 18, 1985; Federal District Court
Frank Pezzo has requested an order for the operating trustee of Lockwood Enterprises, Inc., a Chapter 11 debtor, to pay him $12,000, which he claims was loaned to the debtor for payroll. The operating trustee disputes the validity of the loan. The court will treat Pezzo’s motion as a complaint as per Bankruptcy Rule 7001(1), which necessitates a summons and complaint for adversary proceedings.
Key findings include:
1. Lockwood Enterprises filed for Chapter 11 bankruptcy on January 20, 1984, and operates an adult residential home in New Rochelle, NY. Richard J. Sanchez was the sole shareholder, president, and administrator.
2. Pezzo holds a prepetition unsecured claim against the debtor for $1,259,400, asserting he loaned funds to Sanchez for the debtor’s operational expenses.
3. Following the appointment of Jules Teitelbaum as the operating trustee on September 17, 1984, Sanchez approached Pezzo in October 1984 for a $12,000 loan, promising repayment the following month.
4. Pezzo provided two checks totaling $12,000 to Sanchez, who had earlier taken social security checks meant for residents of the nursing home, promising to replace them with the loaned amount.
5. Pezzo was aware of the bankruptcy proceedings and the trustee's role when he made the loan, which lacked written documentation and court authorization.
6. There is no evidence that the transaction was customary for the debtor's business operations, and the trustee has refused to pay Pezzo's request for the funds.
Mr. Pezzo is attempting to recover $12,000 from the operating trustee of a Chapter 11 debtor, stemming from a personal transaction with Richard J. Sanchez, the former administrator of a nursing home. In December 1984, Sanchez requested the funds to cover payroll and operating expenses, despite the nursing home's Chapter 11 status and the appointment of an operating trustee. No written documentation supports this transaction, aside from two checks totaling $12,000 made out to the nursing home.
Key issues include the lack of evidence that the operating trustee was informed of Sanchez's actions or that he had authority to borrow on behalf of the debtor. Additionally, Mr. Pezzo's willingness to provide an unsecured loan without consulting the operating trustee raises questions. There is no court order approving this transaction or indicating that borrowing under these circumstances was considered.
Claims against a Chapter 11 debtor typically must predate the filing of the petition, per 11 U.S.C. 502(b), although necessary costs for preserving the estate can be allowed under 11 U.S.C. 503(b)(1)(A). Mr. Pezzo's claim does not qualify as an administrative expense but as unsecured credit for postpetition use. The trustee, under 11 U.S.C. 1108, can incur unsecured debts outside the ordinary course of business only with proper notice and a hearing, neither of which occurred in this case. Mr. Pezzo’s reliance on Sanchez’s perceived authority as an agent of the operating trustee is contested, given the procedural shortcomings surrounding the loan.
Mr. Pezzo engaged in a transaction involving a substantial loan of $12,000, purportedly for the payroll and operational expenses of a Chapter 11 debtor managed by a court-appointed operating trustee. He was aware of the operating trustee's identity and was not misled by Mr. Sanchez, the alleged agent who sought the funds. Legal precedent indicates that a party dealing with an agent does so at their own risk and must verify the agent's authority. If Mr. Pezzo had contacted the operating trustee prior to the loan, he would have discovered that Mr. Sanchez lacked the authority to borrow funds without court approval, as required under 11 U.S.C. 364(b). Additionally, Mr. Sanchez had misappropriated funds from the bookkeeper, indicating financial distress which the trustee could have communicated to Mr. Pezzo. Consequently, Mr. Pezzo cannot seek reimbursement from the debtor or the operating trustee for what appears to be a personal transaction with Mr. Sanchez. The court concludes that it possesses jurisdiction and finds that Mr. Pezzo has not proven that the debtor or the operating trustee is liable for the loan, resulting in the denial of his application for recovery of the $12,000. Relevant statutory provisions treat certain post-petition claims as pre-petition claims, which affects the recovery options available to Mr. Pezzo.
