In re EDC Holding Co.

Wisconsin Steel (debtor) received a loan from Chase Manhattan Bank (Chase) (creditor) that was secured by Wisconsin Steel’s inventory and a bank account that Wisconsin Steel used to pay its employees. Wisconsin Steel later defaulted on the loan, and Chase took the funds in the account, causing employees’ paychecks to bounce. Wisconsin Steel filed for Chapter 11 bankruptcy. The steelworkers’ union (creditor) filed a complaint in bankruptcy court against Wisconsin Steel and Chase, seeking payment of the workers’ unpaid wages. The union also picketed Wisconsin Steel to prevent Chase from obtaining the inventory securing Chase’s loan. The parties reached a settlement under which the union agreed to stop picketing and Chase agreed to loan Wisconsin Steel $1.7 million to pay the workers. Of that amount, $77,000 was earmarked to reimburse the union for attorney fees and expenses, even though bankruptcy law generally prohibits creditors’ attorneys from recovering attorney fees from debtors. The settlement agreement provided that the entire loan would receive special wage-claim priority—a higher priority than claims from Wisconsin Steel’s general creditors. The general creditors objected to the $77,000 attorney-fee reimbursement receiving wage-claim priority, but the bankruptcy court ultimately approved the grant of special priority for the entire loan amount. The general creditors appealed in district court without seeking to stay the bankruptcy court’s order. The district court dismissed the appeal, recognizing that under § 11 U.S.C. 364(e), an appellate tribunal’s reversal of a bankruptcy court’s grant of priority does not affect the validity of a priority granted to a lender who extended credit in good faith, unless the order granting priority was stayed pending appeal. The district court found that because Chase had loaned Wisconsin Steel the $77,000 in good faith, Chase’s priority would be valid even if the district court reversed, which rendered the appeal moot. The general creditors appealed.