In re Claar Cellars LLC

In re: CLAAR CELLARS LLC, Debtor.

In re: RC FARMS LLC, Debtor.

Case No. 20-00044-WLH11

Case No. 20-00045-WLH11

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF WASHINGTON

March 13, 2020

FOR PUBLICATION

MEMORANDUM OPINION

The Bankruptcy Code contains many sections providing broad and flexible powers for courts to deploy to facilitate the rehabilitation of a given debtor based on the context of that debtor's case. Perhaps the most notable power (and probably the most incorrectly invoked) rests in Bankruptcy Code section 105(a)'s general enabling authority. There are myriad other broad grants of authority to be found, however, including in Bankruptcy Code section 363(b)(1).

In these related cases, a dispute arose requiring exploration of the relief available under section 363(b)(1)'s generalized authority for a debtor in possession to "use" estate assets "other than in the ordinary course of business" subject to court approval. At the final hearing regarding the debtors' motions to authorize the use of cash collateral, the court, among other relief, authorized over the objection of the debtors' primary secured creditor the "use" of estate assets to allow the partial payment of certain prepetition debt one debtor owed the other. The following provides the basis for the court's ruling.¹

BACKGROUND & PROCEDURAL POSTURE

This decision involves the affairs of two related but nonconsolidated debtors in chapter 11 bankruptcy cases - Claar Cellars LLC and RC Farms LLC. Claar and RC are both owned by the Whitelatch family and are part of a commercial enterprise that operates approximately 130 acres of vineyards, producing wines from the White Bluffs region of Washington.² Simplifying somewhat, the basic arrangement is that RC owns (or leases from a nondebtor trust affiliated with the Whitelatch family) and operates real estate on which several varietals of vinifera grapes are grown and harvested. Once RC picks the grapes, they are transferred to Claar. Claar then takes over the processing of grapes into finished wine and sells the resulting wine.

Pursuant to a grape purchase agreement executed in 1997 and since amended several times, Claar is obligated to repay RC for the grapes Claar receives. This economic arrangement has historically functioned in a fashion similar to a revolving demand note whereby a sum due RC is computed when Claar takes delivery of grapes and that sum is reduced as RC seeks repayment from Claar, which historically has roughly been on an "as needed" basis to enable RC to pay its separate expenses.

As of the January 9, 2020 petition dates for both debtors, RC asserts that it holds a secured claim of approximately $329,000 against Claar. After the petition dates, RC filed (then amended) a UCC-1 financing statement to protect its asserted security interest. RC contends this act is permitted under Bankruptcy Code sections 362(b)(3) and 546(b) in order to perfect or otherwise maintain lien rights arising under Washington state law.³

Before their bankruptcy filings, Claar and RC both owed secured debts to HomeStreet Bank. HomeStreet's prepetition collateral includes various personal property owned by both debtors as well as real property owned by RC and by the nondebtor Whitelatch trust. HomeStreet's collateral includes "cash collateral" (as defined in Bankruptcy Code section 363(a)) held by each debtor entity.

After the bankruptcy filings, both debtors moved the court to authorize the nonconsensual use of cash collateral pursuant to Bankruptcy Code section 363(c)(2)(B). The motions sought authority for the debtors to spend HomeStreet's cash collateral during the 2020 calendar year based on separate budgets containing monthly line-item expenditures (with permitted variances and roll-forward capacity as detailed in the interim and final orders). In general terms, HomeStreet's cash collateral would be used (i) by RC to produce a 2020 grape crop and to maintain its real property, (ii) by Claar to continue to preserve, market, and sell bulk and bottled wine inventory, and (iii) by both debtors to fund expenses arising from these bankruptcy cases.

One line item crossing the two budgets represented proposed payments from Claar to RC on account of "vintage grapes." Per the revised budgets presented to the court at the final cash collateral hearing, Claar proposes to make seven monthly payments to RC during 2020, resulting in an aggregate transfer of $163,235 on account of RC's asserted prepetition secured claim - which represents just under 50% of the total claimed amount. Claar proposes to address the remainder of RC's claim in the plan or claims-allowance process. RC's budget and testimony at the hearing established that RC would be unable to operate its business postpetition (i.e., unable to complete the 2020 grape crop and maintain its real estate) if RC did not receive the budgeted postpetition payments.

HomeStreet objected to the proposed use of cash collateral for two main reasons. HomeStreet first argued that the debtors were not adequately protecting HomeStreet's petition date interests in the two debtors' property as required by Bankruptcy Code section 363(e). The debtors disagreed on the basis that the aggregate value of the property collateralizing HomeStreet's loan substantially exceeded HomeStreet's approximately $2 million claim.⁴ The court ultimately didnot need to resolve this question because RC proposed to grant an additional lien pursuant to Bankruptcy Code section 361(2) on otherwise unencumbered real estate owned by RC and recently appraised at $1.7 million (this property is generally called the "Taylor Flats" parcel). The court found that the value of the overall adequate protection package - all petition date personal and real property, plus Taylor Flats - significantly exceeded the amount of HomeStreet's claim and hence the debtors satisfied their burden under Bankruptcy Code section 363(p)(1). Thus, HomeStreet's interests in Claar's property were adequately protected as a consequence of the RC estate's pledge of additional collateral for HomeStreet's benefit - Claar itself offered and provided no additional collateral.

HomeStreet's second main objection to the use of cash collateral focuses on Claar's proposed payments totaling $163,235 to RC. HomeStreet argues that these payments would improperly satisfy a prepetition debt outside the context of a confirmed bankruptcy plan. More foundationally, HomeStreet also questions the secured status of RC's asserted claim against Claar on various factual and legal grounds. Although HomeStreet concedes that RC likely has some sort of secured claim under RCW 60.13.038, HomeStreet challenges the amount of the claim and scope of the lien. Therefore, argues HomeStreet, the court cannot rely on the secured status of RC's claim to permit Claar's postpetition payments. To support this position, HomeStreet points to Federal Rule of Bankruptcy Procedure 7001(2), which mandates that disputes about "the validity, priority, or extent of a lien or other interest in property" be determined in an adversary proceeding.⁵

The court ultimately overruled HomeStreet's objections and granted the debtors' motions to use cash collateral on a final basis. Final cash collateral orders will soon be entered on both dockets.

DISCUSSION

Jurisdiction & Power

The court has subject matter jurisdiction regarding these bankruptcy cases and the debtors' motions pursuant to 28 U.S.C. §§ 157(a) & 1334(b) and LCivR 83.5(a) (E.D. Wash.). The parties' dispute regarding the application of Bankruptcy Code section 363 is statutorily "core" and "the action at issue stems from the bankruptcy itself."⁶ Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.

Bankruptcy Code Section 363(b)(1)

When working with the Bankruptcy Code, one must always start with the text.⁷ Here, the text of section 363(b) is straightforward: the relevant provision simply provides that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate."⁸ This plain text is generalized and sweeping; so long as the bankruptcy court approves a proposed transaction under defined standards discussed below, nearly any "use," "sale," or "lease" of property is permitted.

Section 363(b)(1) is, of course, not limitless. Its neighboring subsections impose restrictions in certain specified contexts.⁹ Other sections similarly cabin or complicate its utility.¹⁰ Applicable nonbankruptcy law also confines what might otherwise be permitted based solely on section 363(b)(1)'s text.¹¹ These assortedstatutory provisions throttle the force of section 363(b)(1), but what remains is an exceptionally powerful engine. This is undoubtedly by design insofar as section 363(b)(1) lies at the heart of a series of broad administrative powers sweeping widely to protect and maximize the bankruptcy estate for stakeholders.¹² And more notably, the provision codifies principles of long lineage in United States bankruptcy law - if an estate is to be maximized, then its representative must enjoy a flexible and broad mandate to use or sell the estate's assets to realize or create value.¹³

Advancing a step from the naked statutory text, one finds what seem to be judicially crafted limitations on section 363(b)(1). The best known of these limitations is the prohibition against using section 363 transactions to effectuate a "sub rosa plan" that evades chapter 11's detailed confirmation requirements.¹⁴ This limitation comports with decisions in other contexts teaching that the Bankruptcy Code's generalized powers cannot be used to reach results prohibited elsewhere in the statute.¹⁵ Indeed, the proscription may not be judge made after all insofar as principles of statutory construction require that the Bankruptcy Code be read as a whole¹⁶ and that its general provisions yield to its specific provisions,¹⁷ and hence the statutory scheme itself...