Article courtesy of Michael D. Robson (Greenberg Traurig)
In re Happy Jack’s Petroleum, Inc., 2019 wl 2281610, 67 BCD 77 (Bankr. D. Neb. 2019).
In a case of first impression before the U.S. Bankruptcy Court, District of Nebraska (the “Court”) analyzed whether the conversion of a bankruptcy case from a Chapter 11 bankruptcy (a “reorganization bankruptcy”) to a Chapter 7 bankruptcy (a “liquidation bankruptcy”) had any impact on the treatment of a “super priority” claim as defined under 11 U.S.C. §364(c)(1). A super priority claim is advantageous to lenders as it provides a priority claim over any or all administrative expenses of the kind specified in section 503(b) of the Bankruptcy Code (the “Code”). This provision encourages lenders to extend credit to debtors‑in‑possession as the higher priority claim means the lender has a greater chance of being paid. Following the conversion to Chapter 7, the Court had to decide whether the “super priority” status would be subjected to the priority provisions of 11 U.S.C. §726(b). The practical effect would be placing the “super priority” lender’s claims above those claims of the Chapter 7 trustee. The Court found that the conversion does not impact the priority of a Chapter 11 super‑priority claim granted under §364(c)(1) but that the creditor’s claim lacked standing nevertheless.
In the case at issue, Happy Jack’s Petroleum Inc. (“Debtor”) entered Chapter 11 protection in September 2016 and was granted an order under §364(c)(1) allowing it to incur debt for the purchase of certain gasoline products from Hansen’s Petroleum Products (“Creditor”). This order allowed Debtor to continue operating the gas station in order to better service its existing creditors. In September 2017, the Court converted the case to Chapter 7 on the Debtor’s unopposed motion. Following the conversion, Creditor filed a claim which was objected to by the Chapter 7 Trustee and several other creditors of the Debtor. In November 2018, the Court issued a ruling that Creditor’s claim was entitled to an unsecured super priority claim with priority over all administrative expenses incurred in Creditor’s provision of services to Debtor following the bankruptcy petition. Creditor moved for leave under §506(c) that would have provided for payments of its super priority expense claims. The parties moved for the Court to consider whether Creditor had standing to seek relief under §506(c), which is reserved for use by the trustee unless a creditor pursues a derivative standing when the trustee “is unable or unwilling to do so.” In re M & S Grading, Inc., 541 F.3d 859, 866 (8th Cir. 2008) (citing PW Enters. v. N.D. Racing Comm’n (In re Racing Servs.), 540 F.3d 892, 898 (8th Cir. 2008)).
While the Court found that Creditor’s super priority claim had priority over all §503(b) claims whenever and however created and that Creditor’s claim was an unsecured claim, the Court ruled that Creditor lacked standing to pursue relief under §506(c). Pursuant to the standard set forth by In re M & S Grading, Inc., derivative standing requires four elements: (1) the creditor’s petition to trustee to bring a claim has been refused, (2) the claims are colorable, (3) the creditor sought permission to initiate an adversarial proceeding and (4) the trustee refused to pursue such claims without justification. In the case of PW Enters. v. N.D. Racing Comm’n (In re Racing Servs.), 540 F.3d 892, 898 (8th Cir. 2008), the court provided that a creditor must provide specific reasons as to why the trustee’s refusal was unjustified. In the present case, the Court relied on two main factors to reject Creditor’s claim that the proceedings were unjustified to that point, despite Creditor’s willingness to fund the litigation. First, Creditor was paid for all fuel provided during the Chapter 7 proceedings. Second, after the conversion to a Chapter 11 proceeding, Creditor agreed to provide the fuel on a non‑secured basis on the hopes that the reorganization would be successful. The Court was unwilling to provide Creditor with this “back door” request after it was realized the reorganization would be unsuccessful.
The Court ended its review of the case by arguing that Creditor had failed to meet its burden under two of the threshold requirements set forth in the In re M & S Grading, Inc. case. Creditor had failed to show that its claim under §506(c) was colorable and Creditor failed to put forth any evidence that trustee’s actions were unjustified. The Court also provided additional policy rationale in that previous bankruptcy courts had been reticent in providing derivative standing too easily as this would upset the core tenet of bankruptcy proceedings.