EEE Commercial Corp. v. Holmes (In re ASI Reactivation, Inc.)

A.S.I. Reactivation, Inc. (ASIR) (debtor) produced reactivated carbon used for pollution control. ASIR owed Citizen Bank of Weirton (the Bank) $196,000, which was represented by a note. As security, the Bank took an interest in ASIR’s equipment and fixtures (the collateral). In early 1985, the Bank threatened to foreclose on its interest in the collateral. Accordingly, Ram Narayanan (creditor), who had an active role in ASIR, paid the Bank $120,000 in exchange for an assignment of the note and the Bank’s security interest in the collateral. Once ASIR could no longer pay for the requisite permits to continue operations, Narayanan gave up on trying to save the company. Thus, Narayanan assigned certain equipment leases and leased equipment to a third-party. In May of 1985, ASIR filed for Chapter 7 Bankruptcy. Considering the unpaid note, Narayanan requested that the bankruptcy court modify the automatic stay to permit Narayanan to foreclose on its interest in the collateral. Narayanan argued that the debt exceeded the value of the collateral, rendering its interest under secured and, therefore, not adequately protected. EEE Commercial Corporation (EEE), a co-owner and secured creditor of ASIR, opposed Narayanan’s request and argued that Narayanan improperly transferred the collateral and remained adequately protected because he had control over the collateral. The bankruptcy court heard testimony, including an appraiser’s testimony, and concluded that the value of the collateral was, at most, $126,000. No alternative appraisal evidence was offered. The bankruptcy court concluded that ASIR lacked equity in the collateral and Narayanan’s interest lacked adequate protection. Accordingly, the bankruptcy court granted Narayanan’s request and refused to consider evidence filed with a motion to reconsider of a tentative offer to purchase the collateral for $300,000 by a creditor’s attorney. The district court affirmed.