Humboldt Creamery, LLC

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26 	1Leave is also sought to pay a small portion to non-Association farmers.
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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
HUMBOLDT CREAMERY, LLC, 	No. 09-11078
Debtor(s).
______________________________________/
Memorandum on Request to Immediately Pay Certain Priority Claims
_________________
Debtor Humboldt Creamery, LLC, filed its Chapter 11 petition on April 21, 2009. One day
later, it sought permission to pay approximately $1.7 million in prepetition debt to Humboldt
Creamery Association, a non-profit agricultural cooperative composed of 40 farmer-members who
have an average herd size of 300 milking cows.1 Humboldt Creamery Association also owns 75% of
the debtor. The U.S. Trustee objected, arguing that the court should defer a decision until a creditors
committee has been formed.
The request is governed by Rule 6003(b) of the Federal Rules of Bankruptcy Procedure. This
rule does not permit the payment of a claim which arose prepetition for the first 20 days of a
bankruptcy unless it is necessary to avoid immediate and irreparable harm.
The decision to allow the payments now is not an easy one for the court. The U.S. Trustee is
entirely correct in arguing that there is a significant risk of injustice if the court allows payment on
Entered on Docket
April 23, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-11078 Doc# 25 Filed: 04/23/09 Entered: 04/23/09 14:03:30 Page 1 of 3

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2Nothing in the Bankruptcy Code forbids payment on a prepetition debt before confirmation of
a plan, and Rule 6003(b) specifically contemplates such payments. The court concludes that
prepetition debt, and especially a priority debt, may be paid before confirmation if in the best interests
of the estate.
3The court notes that Rule 6003 allows the court to authorize payments on prepetition debt if
necessary to avoid immediate and irreparable harm, but does not require that such harm be to the
bankruptcy estate. The court finds that a delay in payment would result in immediate and irreparable
harm to both the dairy farmers and the debtor, and for this reason authorizes payment now.
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prepetition debt immediately upon the commencement of a bankruptcy case, when all parties except
the unsecured creditors have had a chance to organize, plan their strategies and prepare their arguments
to the court. This concern is especially compounded in this case since the payee is an insider of the
debtor.
However, in this case the court is convinced that immediate and irreparable harm will be
suffered by the debtor if the payments are not allowed. The payments are for milk clearly delivered
during the 20 days before bankruptcy, and are therefore entitled to priority under § 503(b)(9) of the
Bankruptcy Code.2 While the Association is an insider, it is composed by small dairy farmers who
cannot be expected to finance the debtor’s operations and cannot afford to wait for payment. The court
fears that any disruption of payment to the farmers would seriously prejudice the debtor’s ability to
continue normal operations while in Chapter 11.3
Lastly, the court believes that it can mitigate any possible damage to the bankruptcy estate by
providing that the payments shall be subject to recovery by the estate to the extent they prove to be
improvident or result in a higher dividend than the recipient is entitled to receive at the conclusion of
the case. Since the Association and its members will continue to do business with the debtor as a
result of payment, recovery should not prove overly difficult if future events show that the payments
should not have been authorized.
For the above reasons, the debtor will be granted leave to make the payments as prayed and
may submit a form of order to that effect.
Case: 09-11078 Doc# 25 Filed: 04/23/09 Entered: 04/23/09 14:03:30 Page 2 of 3

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Dated: April 23, 2009
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 09-11078 Doc# 25 Filed: 04/23/09 Entered: 04/23/09 14:03:30 Page 3 of 3