{"id":32731,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/secured-creditor-surcharged-for-agreeing-to-debtor-s-continued.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"secured-creditor-surcharged-for-agreeing-to-debtor-s-continued","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/finance\/secured-creditor-surcharged-for-agreeing-to-debtor-s-continued.html","title":{"rendered":"Secured Creditor Surcharged For Agreeing To Debtor’s Continued Operation"},"content":{"rendered":"
\n
\n

This article was edited and reviewed by FindLaw Attorney Writers<\/a><\/em><\/p>\n\n | Last reviewed\n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n\n

If an Eighth Circuit decision remains good law, creditors may lose some of their collateral in a debtor's property by allowing the debtor to continue in operation. Early this summer, in Hartford Underwriters Insurance Company v. Magna Bank, N.A. (In re Hen House Interstate, Inc.)<\/i>, a three-judge panel affirmed the bankruptcy court's order granting a surcharge on the collateral of Magna Bank ("Magna") for the payment of workers' compensation insurance premiums.<\/p>

Magna was owed about $4.1 million at the inception of the Chapter 11 case and had a security interest in all of the debtor's assets. The debtor and Magna agreed to terms for a financing and cash collateral order permitting the payment of "all ordinary and necessary expenses of operation . . . which are allowed in the Budget." The Budget included workers' compensation premiums. The order also prohibited the surcharge of Magna's collateral pursuant to §506(c) without Magna's written consent, and no consent could be implied.<\/p>

Reorganization efforts failed, and the debtor liquidated most of its assets. Hartford, who had continued to provide workers' compensation insurance despite the fact that the debtor had failed to pay over $50,000 in premiums, sought allowance and payment of its claim.<\/p>

The Eighth Circuit determined that this case presented the same circumstances as its prior case, U.S. v. Boatmen's First National Bank of Kansas City<\/i> ("Boatmen's"): Magna consented to the continued operation of the debtor's business.<\/p>

Magna countered that Boatmen's<\/i> was clearly distinguishable because the creditor in that case had agreed to subordinate its security interest to administrative expense claims. In doing so, the secured creditor in Boatmen's<\/i> had consented to be surcharged. Furthermore, the Boatmen's<\/i> bankruptcy court had found a direct benefit to the secured creditor. The Eight Circuit was not persuaded. It found that the decision in Boatmen's<\/i> turned solely on the fact that the creditor consented to the continuation of the business. Magna's consent to the debtor staying in business was consent to payment of these premiums and therefore Magna's collateral was subject to surcharge.<\/p>

The danger in the Eighth Circuit's opinion is that it creates a disincentive for creditors to agree to a debtor continuing in business. Lenders will be less willing to agree to debtors continuing in business and will instead opt for liquidation.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

If an Eighth Circuit decision remains good law, creditors may lose some of their collateral in a debtor’s property by allowing the debtor to continue in operation. Early this summer, in Hartford Underwriters Insurance Company v. Magna Bank, N.A. (In …<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_categories":[6480,6479],"class_list":["post-32731","corporate","type-corporate","status-publish","hentry","corporate_categories-finance__bankruptcy","corporate_categories-finance"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate\/32731","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=32731"}],"wp:term":[{"taxonomy":"corporate_categories","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_categories?post=32731"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}