FILED
NOV 20 2018
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-18-1105-LSF
BOSS LITHO, INC., Bk. No. 2:18-bk-11454-SK
Debtor.
BOSS LITHO, INC.,
Appellant,
v. MEMORANDUM*
BANK OF HOPE,
Appellee.
Argued and Submitted on October 25, 2018
at Pasadena, California
Filed – November 20, 2018
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Sandra R. Klein, Bankruptcy Judge, Presiding
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Appearances: Michael S. Kogan of Kogan Law Firm, APC, argued for
Appellant.
Before: LAFFERTY, SPRAKER, and FARIS, Bankruptcy Judges.
INTRODUCTION
Boss Litho, Inc. (“Debtor”) appeals the bankruptcy court’s order
denying retroactive approval of postpetition unsecured financing. The
court denied approval because Debtor did not provide an adequate
explanation for its failure to obtain prior approval.
Finding no abuse of discretion in the bankruptcy court’s ruling, we
AFFIRM.
FACTUAL BACKGROUND
Debtor filed its chapter 111 petition on February 9, 2018. About a
month later, it filed a “Motion for Order Approving Financing as
Unsecured Credit Allowable as an Administrative Expense” (the
“Motion”). In the Motion, Debtor sought court approval of a financing
agreement between Debtor and its principal, Jean Paul Nataf, under which
Mr. Nataf agreed to loan Debtor up to $250,000 to provide funds for
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
payments to vendors and maintenance of Debtor’s business operations.
Any amounts loaned under the agreement would be due on the later of
(I) July 30, 2018, (ii) the date a plan of reorganization was confirmed,
(iii) upon court approval of a sale of the assets, or (iv) conversion to chapter
7.
According to the Motion and Mr. Nataf’s supporting declaration,
Mr. Nataf had already advanced, postpetition, approximately $19,000 to
Debtor “to meet immediate cash and operating needs of the Debtor.”
Debtor requested that the amounts previously advanced be retroactively
approved under the terms of the financing agreement.
Secured creditor Bank of Hope (the “Bank”) filed a conditional
objection to the Motion. The Bank did not object to the financing, but it
requested that certain conditions be imposed. The Bank specifically
objected to approval of the unauthorized postpetition advances because
Debtor had not explained its failure to seek prior authorization.
Debtor filed a reply in which it pointed out that at a hearing on the
use of the Bank’s cash collateral, held a week after the petition was filed,
Debtor’s counsel had stated in open court that Debtor might seek financing
from Mr. Nataf and that it had filed the Motion approximately one month
after the petition date on regular notice. Debtor stated that “certain
advances were made because the Debtor wanted to not lose business, fulfill
orders and ultimately enhance the bankruptcy estate for the benefit of
3
creditors including Bank of Hope.”
At the April 5, 2018 hearing on the Motion, the Bank’s counsel
indicated that most of its objections had been resolved or were in the
process of being resolved, and asked that if the bankruptcy court were
inclined to grant the motion, it do so on an interim basis with a final
hearing to be held approximately two weeks later. The Bank, however,
continued to object to the retroactive approval of the amounts Mr. Nataf
had already advanced to Debtor.2
The bankruptcy court approved the financing on an interim basis but
denied the motion for retroactive approval of amounts previously
advanced, remarking “I do not believe that you have established that
whatever has been expended so far should be approved retroactively. So, I
can go through the entire analysis, but that’s where I come out.” On April
11, 2018, the bankruptcy court entered an interim order that approved the
financing but denied, on a final basis, the retroactive approval of amounts
2
After this appeal was filed, on May 2, 2018, Debtor and the Bank entered into a
final stipulation for the use of cash collateral, which included a provision permitting
Debtor to repay the unapproved advances from the Bank’s cash collateral. According to
footnote 4 of Debtor’s opening brief, the bankruptcy court declined to approve that
provision. The bankruptcy court docket reflects that a modified stipulation omitting the
provision was approved by the court on May 18, 2018. Although Debtor included a
copy of the May 2 stipulation in its excerpts of record, it did not include the
modification or the bankruptcy court’s order approving the stipulation. We have
exercised our discretion to review the bankruptcy court’s docket, as appropriate. See
Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP
2008).
4
previously advanced. The bankruptcy court entered a final order
approving the financing on May 22, 2018; that order also stated that
retroactive approval was denied. Debtor timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334
and 157(b)(2)(D). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion in denying retroactive
approval of postpetition financing?
STANDARD OF REVIEW
We review a bankruptcy court’s decision whether to grant retroactive
approval of postpetition financing for abuse of discretion. See Sherman v.
Harbin (In re Harbin), 486 F.3d 510, 517 (9th Cir. 2007). A bankruptcy court
abuses its discretion if it applies the wrong legal standard, misapplies the
correct legal standard, or makes factual findings that are illogical,
implausible, or without support in inferences that may be drawn from the
facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
(9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.
2009) (en banc)).
We may affirm on any basis supported by the record. Caviata Attached
Homes, LLC v. U.S. Bank, Nat’l Ass’n (In re Caviata Attached Homes, LLC), 481
B.R. 34, 44 (9th Cir. BAP 2012).
5
DISCUSSION
A debtor in possession must receive court approval to obtain
unsecured credit outside the ordinary course of business. See § 364(b).
Approval must be obtained before incurring the debt. See In re Harbin, 486
F.3d at 521 (discussing approval of secured debt under § 364(c)(2)).3 If a
debtor has not obtained court approval before incurring debt, the
bankruptcy court may retroactively approve the transaction. Id. at 521-22.
Such approval, however, is limited to situations in which exceptional
circumstances exist. Id. (citing Atkins v. Wain, Samuel & Co. (In re Atkins), 69
F.3d 970, 973-74 (9th Cir. 1995)). In determining whether to exercise its
discretion to grant retroactive approval of postpetition financing, the
bankruptcy court should consider:
(1) whether the financing transaction benefits the bankruptcy
estate; (2) whether the [debtor] has adequately explained its
failure to seek prior authorization or otherwise established that
it acted in good faith when it failed to seek prior authorization;
(3) whether there is full compliance with the requirements of
section 364[(b)]; and (4) whether the circumstances of the case
present one of those rare situations in which retroactive
authorization is appropriate.
Id. at 523.
3
Although Harbin involved the retroactive approval of secured financing under
§ 364(c), subsection (b), dealing with authorization for unsecured financing, also
requires notice and a hearing before the court may authorize such borrowing. Thus,
Harbin’s reasoning applies to retroactive approval of unsecured financing.
6
The bankruptcy court did not make specific findings as to the reasons
for its denial of retroactive approval. As noted, the court opted not to go
through the entire analysis but stated only that Debtor had not established
that amounts previously loaned should be approved retroactively. Debtor
argues that we cannot review the order on appeal because the bankruptcy
court did not specify the factual basis for its ruling. But we may still
conduct appellate review “if a complete understanding of the issues may
be obtained from the record as a whole or if there can be no genuine
dispute about omitted findings.” Veal v. Am. Home Mortg. Serv., Inc. (In re
Veal), 450 B.R. 897, 919–20 (9th Cir. BAP 2011) (citations omitted). Although
explicit findings would have been preferable, we are able to ascertain the
basis for the court’s ruling from the record before us.
In the Motion, Debtor stated, with respect to retroactive approval:
“Nataf in anticipation of approval of this Motion has advanced the Debtor
certain amounts on his credit card to meet immediate cash and operating
needs of the Debtor. By this Motion, Debtor requests that those loans be
approved on the terms and conditions contained in the Motion.” Debtor
cited no legal standard or factual basis for this request. In its opposition,
the Bank cited the above-quoted legal standard from Harbin and argued
that Debtor had not adequately explained why it had not sought prior
approval. In its reply, Debtor seemed to argue that its mention of the
possibility of seeking finance from Mr. Nataf at a prior hearing sufficed as a
7
request for approval. Debtor ignored the Ninth Circuit authority cited by
the Bank and urged the bankruptcy court to apply the legal standard from
the Second Circuit, which requires consideration of (1) whether the
financing would have been approved if timely application were made;
(2) whether creditors have been harmed by a continuation of the business
made possible by the loan; and (3) whether the debtor and lender honestly
believed that they had authority to enter into the transaction. In re Am.
Cooler Co., 125 F.2d 496, 497 (2d Cir. 1942). Debtor also cited two other cases
from the Second Circuit–In re Reilly, 542 B.R. 317 (Bankr. W.D.N.Y. 2015),
and Standard Capital Corp. v. Saper, 115 F.2d 383, 385 (2d Cir. 1940)–as
support for its argument that the court should grant retroactive approval,
positing that “[m]ost of the cases on this issue have dealt with situations
that were far longer in duration, converted cases or situations were [sic]
priming liens were obtained.”
On appeal, Debtor cites the same Second Circuit authorities for the
appropriate legal standard.4 But we (and the bankruptcy court) are bound
to follow Ninth Circuit precedent unless that precedent is overturned by
the Supreme Court. Deitz v. Ford (In re Deitz), 469 B.R. 11, 22 (9th Cir. BAP
4
At oral argument, Debtor’s counsel represented that he had cited Harbin in his
moving papers and that the Harbin standards had been met. Although counsel cited
Harbin in the Motion, he did so only in support of the proposition that the bankruptcy
court’s § 105(a) powers include the ability to grant retroactive approval of postpetition
financing. But he cited American Cooler, a 1942 Second Circuit case, for the standard to
be applied for retroactive approval.
8
2012) (citing United States v. Martinez-Rodriguez, 472 F.3d 1087, 1093 (9th
Cir. 2007)).
Applying that standard to the record before us, we see no abuse of
discretion by the bankruptcy court. In basing its denial on Debtor’s failure
to provide an adequate explanation for not seeking prior approval, the
bankruptcy court implicitly applied the correct legal standard. And Debtor
has not shown that the bankruptcy court’s conclusion that the standard
was not met was illogical, implausible, or without support in inferences to
be drawn from the record. Debtor did not provide an adequate explanation
for its failure to seek prior authorization or demonstrate that “the
circumstances of the case present one of those rare situations in which
retroactive authorization is appropriate.” In re Harbin, 486 F.3d at 523.
Debtor’s mere mention, at a prior hearing, of the possibility of seeking
financing from Mr. Nataf did not suffice as a request for approval of that
financing. As noted by the bankruptcy court, “mentioning something at a
hearing and actually seeing the substance of the motion are different.” On
this record, then, we cannot conclude that the bankruptcy court abused its
discretion in denying the request for retroactive approval.
CONCLUSION
For these reasons, we AFFIRM.
9