Legal News: Bankruptcy: Post-petition financing-Spouse

This Week's Decisions (Mass Lawyers Weekly Newspaper dated 2/3/2020)

Where a debtor has moved for authority to engage in post-petition borrowing from her husbnad, the motion should be denied because the debtor has not met her burden of showing that the proposed borrowing is in the best interest of the estate.

"The Debtor seeks authority to incur debt under 11 U.S.C. S364(b) and (c)...To establish its entitlement to such authorization, the debtor-in-possession - vested by 11 U.S.C. S1107 with the rights and powers of a trustee under S364 - bears the burden of establishing that (a) the borrowing facility is a sound exercise of the debtor-in-possession's business judgment as estate fiduciary and (b) that the resulting debt would constitute an administrative expense under 11 U.S.C. S503(b)(1); that is, it must constitute an actual and necessary cost or expense of preserving the estate. Because Christopher is an insider, 11U.S.C.S101(31)(A), the loan facility is subject to stricter scrutiny than would a loan with a non-insider.

"...What the Debtor proposes is to borrow from Christopher to pay her litigation expenses and the carrying costs on her residence and vacation properties. In return, Christopher will receive a lien on her 'free' assets, which would otherwise inure to the benefit of her unsecured creditors. By this facility, she would remove equity from the estate, reduce dollar for dollar the equity available to unsecured creditors in the event of a liquidation, and, on the same dollar for dollar basis, reduce the amount she would need to pay them in order to satisfy the requirement of S1129(a) in order to obtain confirmation of a chapter 11 plan. She is proposing to pay for this borrowing not with surplus monies but with the creditors' funds. ...

"...I am satisfied that the facility and the present motion have not been proposed in a good-faith exercise of a fiduciay's discretion to protect the estate. Certainly they do not serve that purpose. By transparent intent and design, they serve the interest of the Debtor and her husband at the expense of the estate and especially of the unsecured creditors."