Nader Modanlo

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
IN RE: NADER MODANLO 	:
:
NADER MODANLO
:
v. 	: Civil Action No. DKC 2006-1181
:
MICHAEL H. AHAN, ET AL.
:
MEMORANDUM OPINION
This 	case 	is 	before 	the 	court 	on 	appeal 	from 	the 	order 	of
United 	States 	Bankruptcy 	Judge 	Nancy 	V. 	Alquist 	approving 	post-
petition 	financing 	in 	the 	Chapter 	11 	case 	filed 	by 	Nader 	Modanlo
(“Debtor”), Case no. 05-02-26549-NVA. 	(Paper 7). 	Oral argument is
deemed 	unnecessary 	because 	the 	facts 	and 	legal 	arguments 	are
presented adequately in the briefs and record, and the decisional
process 	would 	not 	be 	significantly 	aided 	by 	oral 	argument. 	See
Fed.R.Bankr.P. 8012. 	For the reasons that follow, the court will
affirm the bankruptcy court’s order.
I. 	Background
The court has recounted the facts in Debtor’s bankruptcy case
in two previous orders, Modanlo v. Ahan, Civ. Action No. DKC 2006-
0268 (D.Md. Apr. 17, 2006) and Modanlo v. Ahan, Civ. Action No. DKC
2006-0268 (D.Md. May 2, 2006), although some repetition is helpful
in order to understand the current posture of the case. 	Debtor has
been 	involved 	in 	ongoing 	litigation 	over 	the 	management 	of 	two
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1 In the papers, NYS also is referred to as New York Satellite
Industries, LLC (“NYSI”).
2 Ahan was a party to the Montgomery County litigation. 	He is
identified as a “third-party defendant/counterclaim-plaintiff.”
2
companies, 	Final 	Analysis, 	Inc. 	(“FAI”), 	and 	Final 	Analysis
Communications 	Services, 	Inc. 	(“FACS”), 	which 	he 	founded 	with
Michael 	Ahan 	(“Ahan”) 	in 	the 	early 	1990s. 	FAI 	is 	an 	engineering
company. 	FACS was established to develop and operate a worldwide
satellite 	telecommunications 	system. 	When 	FACS 	was 	formed, 	FAI
owned 100% of FACS’s voting shares.
In the late 1990s, disputes arose between Debtor and Ahan over
the management and direction of the companies. 	In 2001, FAI filed
an 	involuntary 	petition 	under 	Chapter 	11 	of 	the 	Bankruptcy 	Code.
As 	part 	of 	FAI’s 	bankruptcy, 	the 	bankruptcy 	court 	ordered 	FAI 	to
sell its assets, which included a majority of the outstanding stock
in FACS. 	A company solely owned by Debtor, New York Satellite, LLC
(“NYS”), was the successful bidder for the stock. 1
Debtor filed his petition under Chapter 11 of the Bankruptcy
Code on July 22, 2005.
Two 	cases 	currently 	on 	appeal 	are 	related 	to 	Debtor’s
bankruptcy. 	In 	2001, 	fourteen 	shareholders 	of 	FACS 	filed 	direct
and derivative claims against FACS, FAI, and Debtor in the Circuit
Court for Montgomery County, alleging misappropriation, fraud, and
breach 	of 	fiduciary 	duty 	on 	the 	part 	of 	Debtor 	and 	FAI. 2 	On
October 22, 2004, a jury found that Debtor had breached a fiduciary
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duty 	owed 	to 	Ahan 	and 	awarded 	him 	$103.93 	million 	(“state 	court
judgment”). 	The state court judgment is on appeal. 	As a result of
the judgment, Ahan is Debtor’s largest creditor.
Second, on September 6, 2005, FACS obtained a verdict in the
United States District Court for the District of Maryland against
General Dynamics, Case no. PJM 03-307 (“federal court judgment”).
The jury in the General Dynamics litigation originally awarded FACS
$129 million. 	The award was reduced to $11.87 million after Judge
Messitte granted in part a motion for judgment as a matter of law.
That case also is on appeal.
On 	January 	10, 	2006, 	the 	bankruptcy 	court 	approved 	the
appointment of a Trustee, Christopher B. Mead (“Trustee”). 	At an
initial 	meeting 	between 	Ahan 	and 	the 	Trustee, 	Ahan 	preliminarily
offered 	to 	make 	a 	$50,000 	loan 	to 	the 	estate. 	The 	offer 	was
followed by more negotiation sessions and resulted in the loan at
issue in the present appeal. 	The Trustee also attempted to obtain
a 	loan 	from 	other 	creditors 	to 	the 	estate, 	but 	his 	request 	was
denied.
On 	February 	16, 	2006, 	the 	Trustee 	sought 	the 	bankruptcy
court’s 	approval 	of 	the 	loan 	by 	filing 	a 	motion 	seeking 	approval
for post-petition financing pursuant to 11 U.S.C. § 364(c)(1). 	The
Trustee stated that the loan is needed so that he could fulfill his
duties, 	such 	as 	operating 	Debtor’s 	businesses, 	investigating 	the
financial affairs of Debtor, investigating and collecting property
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3 	According 	to 	proffered 	testimony, 	unless 	the 	Trustee
uncovered 	additional 	sources 	of 	assets, 	Debtor’s 	estate 	likely
would 	remain 	without 	funds 	unless 	funds 	were 	made 	available 	from
the two subsidiaries in which the Debtor owns all or a majority of
the interests (NYS and FACS).
4 	Thus, 	the 	maximum 	principal 	amount 	outstanding 	could 	be
increased to and capped at $250,000.
4
of 	the 	estate, 	reviewing 	claims 	of 	creditors, 	and, 	if 	advisable,
opposing 	the 	discharge 	of 	Debtor. 	The 	Trustee 	asserted 	that 	the
loan was necessary because Debtor’s estate lacks cash resources to
fund these expenses.
On March 9, 2006, the bankruptcy court held a hearing on the
Trustee’s 	motion. 	As 	of 	the 	date 	of 	the 	hearing, 	Debtor 	had 	at
least $110 million in claims against him and potentially no assets
to 	repay 	those 	claims. 3 	The 	only 	evidence 	introduced 	during 	the
hearing 	was 	the 	Trustee’s 	testimony 	by 	proffer. 	Debtor 	did 	not
cross-examine 	the 	Trustee 	and 	did 	not 	present 	any 	evidence 	in
support 	of 	his 	opposition. 	At 	the 	end 	of 	the 	hearing, 	the
bankruptcy court issued an oral ruling approving the loan, and on
April 12, 2006, the bankruptcy court issued a written order.
The terms of the loan approved by the bankruptcy court are as
follows. 	The initial principal amount is to be $50,000, with the
opportunity for Ahan, in his discretion, to advance an additional
$200,000. 4 	The interest rate is 6% per annum with default interest
at 8% per annum. 	The loan is secured by a first priority security
interest 	in 	all 	personal 	property 	of 	the 	estate 	now 	owned 	or
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5 	This 	last 	provision 	was 	discussed 	during 	the 	bankruptcy
court’s hearing. 	(Paper 1, Tr. 40).
5
hereafter 	acquired, 	including, 	without 	limitation, 	avoidance
actions 	under 	Chapter 	5 	of 	the 	Bankruptcy 	Code. 	The 	loan 	grants
Ahan 	a 	super-priority 	claim 	over 	any 	and 	all 	administrative
expenses 	of 	the 	estate, 	except 	that 	repayment 	of 	the 	loan 	is
subordinated 	in 	priority 	to 	the 	allowed 	professional 	fees 	and
expenses of the Trustee and the Trustee’s commissions (other than
fees, 	costs, 	expenses 	and 	commissions 	that 	constitute 	“Excluded
Uses” 	under 	the 	loan 	agreement). 	There 	are 	no 	closing 	or 	other
costs associated with the loan. 	The loan is to be repaid upon the
maturity date, which would occur (a) two years from the date of the
loan 	agreement, 	(b) 	in 	the 	occurrence 	of 	a 	default, 	or 	(c) 	the
resignation or replacement of the Trustee, whichever occurs first.
The loan may be pre-paid, although no payments are required before
the maturity date. 	The loan permits Ahan to examine and copy the
records and books of Debtor’s estate, but expressly states that the
Trustee is not required to provide any attorney-client work product
or information or documents that are privileged. 	The Trustee also
must 	provide 	a 	monthly 	statement 	to 	Ahan 	detailing 	his 	fees 	and
costs. 	Finally, 	if 	the 	Trustee 	decides 	to 	obtain 	a 	loan 	from
another source, the Trustee first would need to pay off the loan. 5
The loan carries one restriction: the Trustee may not use the
loan proceeds for any “Excluded Use(s),” which are defined as:
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6 	Joel 	Aronson 	is 	Debtor’s 	bankruptcy 	attorney. 	Sheppard
Mullin 	Richter 	& 	Hampton 	LLP 	has 	offered 	to 	take 	on 	the 	appeal
litigation 	relating 	to 	the 	state 	court 	judgment 	on 	a 	contingency
basis. 	(Paper 1, Tr. 22).
6
(1) fees, costs and/or expenses arising from,
or 	in 	connection 	with, 	investigation,
litigation, 	prosecution 	or 	defense 	of 	any
claim or cause of action by or against any of
the 	Lender, 	Protolex 	LLC, 	Starnew 	LLC 	or 	the
Shareholder 	Claimants, 	or 	any 	of 	their
respective 	agents, 	representatives 	or
professional 	persons; 	(2) 	fees, 	costs 	or
expenses 	incurred 	by 	or 	for 	any 	professional
person 	engaged 	by 	or 	at 	the 	request 	of 	the
Debtor, including, but not limited to, Joel S.
Aronson, 	Ridberg 	Sherbill 	& 	Aronson 	LLP, 	and
Sheppard Mullin Richter & Hampton LLP; (3) any
administrative 	expense 	or 	claim 	for
substantial 	contribution 	incurred 	by 	or 	on
behalf 	of 	any 	person 	other 	than 	the 	Trustee;
and 	(4) 	payment 	of 	any 	pre-petition 	claim 	in
connection with the Chapter 11 Case. [6]
(Paper 1, Loan and Security Agreement, § 1.01).
In 	the 	oral 	ruling, 	the 	bankruptcy 	court 	found 	that 	the
Trustee had “complied with Section 364 and has jumped through the
hoops 	that 	he 	is 	required 	to 	jump 	through 	to 	demonstrate 	that
financing 	in 	this 	case 	was 	not 	available 	to 	the 	estate 	on 	terms
less 	onerous 	than 	the 	financing 	that 	is 	being 	proposed” 	and 	that
the terms of the loan were “reasonable.” 	(Paper 1, Tr. 54). 	The
court expressed concern regarding the Excluded Uses but stated that
such 	a 	provision 	“is, 	in 	the 	Court’s 	experience, 	not 	an 	entirely
unusual 	one 	in 	debtor 	in 	possession 	loans.” 	Id. 	at 	55. 	The
bankruptcy court also noted that “[t]here is no prohibition on the
Trustee’s 	investigating 	and 	proceeding 	with 	action 	against 	any
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7 At the start of the hearing, the bankruptcy court identified
two 	concerns 	about 	the 	original 	form 	of 	the 	loan 	agreement: 	(1)
that the Trustee’s confidential information may be shared with Ahan
as a result of the loan and (2) the procedures Ahan would need to
go 	through 	to 	enforce 	his 	lien 	in 	the 	event 	of 	a 	default. 	The
Trustee 	told 	the 	bankruptcy 	court 	that 	there 	was 	no 	intention 	to
provide Ahan with privileged information, and the Loan and Security
Agreement has been amended to clarify this point. 	The bankruptcy
court 	also 	was 	told 	that 	in 	the 	event 	of 	default, 	Ahan 	would 	be
required to go through the requisite procedures to foreclose on his
collateral. 	In his appeal, Debtor has not raised concerns relating
to confidential information or the procedures Ahan must go through
to foreclose on the collateral if Ahan chose to do so.
7
creditor 	or 	any 	party 	in 	this 	case.” 	Id. 	The 	bankruptcy 	court
found 	that, 	as 	a 	matter 	of 	law, 	a 	trustee 	may 	make 	a 	loan 	from 	a
pre-petition creditor “as long as no express or implied conditions
exist 	that 	would 	impair 	the 	Trustee’s 	objectivity 	in 	using 	the
funds,” id. at 56, and that there were no such express or implied
conditions in the proposed loan. 7
Addressing Debtor’s concerns that the Trustee could not remain
disinterested based on the loan’s terms, the bankruptcy court found
that 	the 	loan 	did 	not 	result 	in 	the 	Trustee 	having 	a 	“material
adverse interest” to any party in the bankruptcy proceeding. 	The
court 	noted 	that 	if, 	in 	the 	future, 	the 	Trustee’s 	objectivity
became 	compromised, 	“there 	are 	remedies 	that 	may 	be 	pursued.”
(Paper 1, Tr. 57-58). 	The court also stated:
One 	of 	the 	issues 	raised 	by 	the 	debtor 	has
been that the lender, being a creditor in this
case and a litigant in this case, could simply
act 	arbitrarily 	and 	capriciously 	where 	he’s
become 	unhappy 	with 	the 	Chapter 	11 	Trustee’s
actions and fail to advance. 	Well, any lender
could 	do 	that 	presumably 	for 	- 	- 	under 	many
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debtor in possession facilities for almost any
reason.
But 	the 	Court’s 	concern 	was 	whether 	there’s
anything in this agreement that would preclude
the 	Chapter 	11 	Trustee 	from 	going 	elsewhere
for additional financing, should that happen.
And 	the 	facility, 	as 	proposed, 	does 	not
preclude the Trustee from going elsewhere and
obtaining 	another 	DIP 	loan, 	except 	to 	the
extent 	of 	the 	funds 	that 	have 	already 	been
drawn under the agreement. They would need to
be 	paid 	off 	first. 	But 	there 	is 	no 	other
prohibition.
Id. at 52-53.
In the written order, the bankruptcy court found that (1) the
Trustee was unable to obtain financing for the estate pursuant to
§ 364(a) and (b) without granting a super priority claim and first
priority lien; (2) good cause was shown based on, inter alia, the
Trustee’s 	need 	for 	financing 	for 	administrative 	expenses; 	(3)
although 	Ahan 	is 	asserting 	a 	large 	pre-petition 	claim 	against
Debtor, the loan was negotiated “in good faith and at arm’s length”
between 	the 	Trustee 	and 	Ahan; 	and 	(4) 	the 	loan 	is 	in 	the 	best
interests of Debtor’s estate.
II. 	Standard of Review
On appeal from the bankruptcy court, the district court acts
as an appellate court and reviews the bankruptcy court’s findings
of fact for clear error and conclusions of law de novo. 	See In re
Johnson, 	960 	F.2d 	396, 	399 	(4 th 	Cir. 	1992); 	Travelers 	Ins. 	Co. 	v.
Bryson Prop., XVIII (In re Bryson Prop., XVIII), 961 F.2d 496, 499
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9
(4 th 	Cir. 	1992), 	cert. 	denied 	sub 	nom., 	Bryson 	Prop., 	XVIII 	v.
Travelers Ins. Co., 506 U.S. 866 (1992).
III. 	Analysis
Debtor 	presents 	the 	following 	issue 	on 	appeal: 	“Did 	the
Bankruptcy Court err when it held that the bankruptcy trustee would
remain disinterested even if he were allowed to borrow money on the
stated 	terms 	from 	the 	estate’s 	largest 	creditor 	who 	holds 	a
disputed, contingent unsecured claim for nearly $104 million that
is the subject of a pending appeal?” 	(Paper 7, at 1-2).
Debtor’s appeal implicates several sections of the bankruptcy
code. 	First, 	11 	U.S.C. 	§ 	364, 	allows 	a 	trustee 	to 	obtain 	post-
petition credit on behalf of the estate. 	This section provides in
relevant part:
(a) 	If 	the 	trustee 	is 	authorized 	to 	operate
the business of the debtor under section 721,
1108, 	1203, 	1204, 	or 	1304 	of 	this 	title,
unless the court orders otherwise, the trustee
may 	obtain 	unsecured 	credit 	and 	incur
unsecured 	debt 	in 	the 	ordinary 	course 	of
business allowable under section 503(b)(1) of
this title as an administrative expense.
(b) The court, after notice and a hearing, may
authorize 	the 	trustee 	to 	obtain 	unsecured
credit 	or 	to 	incur 	unsecured 	debt 	other 	than
under 	subsection 	(a) 	of 	this 	section,
allowable 	under 	section 	503(b)(1) 	of 	this
title as an administrative expense.
(c) 	If 	the 	trustee 	is 	unable 	to 	obtain
unsecured 	credit 	allowable 	under 	section
503(b)(1) 	of 	this 	title 	as 	an 	administrative
expense, 	the 	court, 	after 	notice 	and 	a
hearing, may authorize the obtaining of credit
or the incurring of debt –
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(1) 	with 	priority 	over 	any 	or 	all
administrative 	expenses 	of 	the 	kind
specified in section 503(b) or 507(b) of
this title;
(2) 	secured 	by 	a 	lien 	on 	property 	of
the estate that is not otherwise subject
to a lien; . . .
Debtor’s argument also implicates 11 U.S.C. § 101(14) because
a trustee must be a “disinterested person.” 	Citing to 11 U.S.C. §
1104(d), the United States Court of Appeals for the Sixth Circuit
explained:
Given 	the 	sensitivity 	of 	these 	tasks 	and 	the
objectivity required to perform them, the Code
requires 	all 	examiners, 	like 	all 	Chapter 	11
trustees, to be “disinterested.” [11 U.S.C.] §
1104(d). 	A 	defined 	term, 	“disinterested
person” means a person who:
(A) 	is 	not 	a 	creditor, 	an 	equity
security holder, or an insider;
(B) is not and was not an investment
banker for any outstanding security
of the debtor;
(C) has not been, within three years
before the date of the filing of the
petition, an investment banker for a
security of the debtor . . . ;
(D) 	is 	not 	and 	was 	not, 	within 	two
years before the date of the filing
of 	the 	petition, 	a 	director,
officer, 	or 	employee 	of 	the 	debtor
or of an investment banker specified
in 	subparagraph 	(B) 	or 	(C) 	of 	this
paragraph; and
(E) 	does 	not 	have 	an 	interest
materially 	adverse 	to 	the 	interest
of 	the 	estate 	or 	of 	any 	class 	of
creditors 	or 	equity 	security
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holders, by reason of any direct or
indirect relationship to, connection
with, or interest in, the debtor or
an 	investment 	banker 	specified 	in
subparagraph 	(B) 	or 	(C) 	of 	this
paragraph, or for any other reason.
Id. § 101(14).
In re Big Rivers Elec. Corp., 355 F.3d 415, 429-30 (6 th Cir. 2004).
Furthermore, § 101(14)(E), the “catch all clause” in the definition
of 	“disinterested 	person,” 	implicates 	only 	personal 	interests 	of
the 	trustee, 	not 	actions 	undertaken 	as 	fiduciary. 	In 	re 	BH 	& 	P
Inc., 	949 	F.2d 	1300, 	1309-10 	(3 rd 	Cir. 	1991). 	See 	also 	In 	re
Dynamark, 	Ltd., 	137 	B.R. 	380, 	381 	(Bankr.S.D.Cal. 	1991)(stating
that 	a 	disinterested 	person 	is 	“one 	that 	can 	make 	unbiased
decisions, free from personal interest, in any matter pertaining to
the debtor’s estate”)(emphasis added).
Debtor 	does 	not 	appear 	to 	object 	to 	the 	bankruptcy 	court’s
findings that the Trustee has satisfied § 364(c). 	Rather, Debtor
objects to the bankruptcy’s court’s finding that the loan does not
impair the Trustee’s objectivity or disinterested status. 	As will
be explained below, the bankruptcy court found, properly, both that
the trustee’s request met the statutory requirements and that the
transaction 	would 	not 	undermine 	his 	status 	as 	a 	disinterested
person.
To obtain financing, the trustee must satisfy the following:
(1) that the trustee is “unable to obtain unsecured credit per 11
U.S.C. 	§ 	364(b),” 	(2) 	“The 	credit 	transaction 	is 	necessary 	to
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8 The statute also expressly requires notice and a hearing.
12
preserve 	the 	assets 	of 	the 	estate; 	and 	(3) 	The 	terms 	of 	the
transaction 	are 	fair, 	reasonable, 	and 	adequate, 	given 	the
circumstances of the debtor-borrower and the proposed lender.” 8 	In
re Crouse Group, Inc., 71 B.R. 544, 549 (Bankr.E.D.Pa. 1987).
Courts 	have 	recognized 	that 	pre-petition 	creditors 	are 	an
important source of post-petition secured loans to the debtors. 	A
bankruptcy court in In re FCX, Inc., 54 B.R. 833 (Bankr.N.C. 1985),
referred to such situations as “The Chapter 11 Dilemma.” 	The court
explained:
One 	of 	the 	first 	problems 	faced 	by 	a
chapter 	11 	debtor 	in 	possession 	is 	the 	need
for operating funds. 	The debtor is prohibited
from 	using 	cash 	collateral 	without 	court
approval 	or 	the 	consent 	of 	the 	secured
creditor (11 U.S.C. § 363(c)(2) ), and, if the
debtor’s 	assets 	are 	encumbered, 	obtaining
postpetition 	financing 	from 	a 	new 	lender, 	at
least 	at 	the 	beginning 	of 	the 	case, 	is
extremely difficult. 	The debtor may elect to
litigate with the secured lender to obtain the
use 	of 	cash 	collateral 	or 	to 	use 	the 	secured
creditor’s collateral to secure a loan from a
third party lender. 	The debtor’s other option
is 	to 	negotiate 	a 	postpetition 	financing
arrangement with the secured creditor.
Like 	the 	debtor, 	the 	secured 	lender 	is
also 	faced 	with 	a 	predicament 	concerning 	the
postpetition financing of debtor’s operations.
If postpetition financing is not provided, the
debtor’s 	business 	will 	close, 	the 	going
concern 	value 	of 	the 	creditor’s 	collateral
will be lost, and the creditor’s risk of loss
is 	increased. 	In 	spite 	of 	those 	factors,
however, 	creditors 	are 	understandably
reluctant 	to 	lend 	to 	a 	chapter 	11 	debtor 	in
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possession 	having 	the 	protection 	of 	the
automatic stay and possessing the powers of a
bankruptcy trustee.
Frequently, 	the 	result 	is 	a 	postpetition
financing 	agreement 	calling 	for 	substantial
concessions 	from 	the 	debtor, 	often 	at 	the
expense of the rights of unsecured creditors.
Section 	364 	of 	the 	Bankruptcy 	Code 	provides
that, 	if 	necessary, 	the 	post-petition 	lender
may be given security in the debtor’s assets,
and 	a 	priority 	ahead 	of 	all 	costs 	of
administration. 	Many 	lenders, 	however, 	want
more, 	and 	it 	is 	not 	uncommon 	for 	the 	debtor
and 	the 	secured 	creditor 	to 	ask 	the 	court 	to
approve a lending arrangement containing terms
favoring 	the 	lender 	which 	far 	exceed 	those
authorized by § 364.
Id. 	at 	838. 	See 	also 	Matter 	of 	Zech, 	185 	B.R. 	334, 	337
(Bankr.D.Neb. 	1995)(“Section 	364(c)(1) 	and 	(2) 	of 	the 	Bankruptcy
Code 	. 	. 	. 	are 	incentives 	for 	creditors 	to 	extend 	credit 	in 	the
post-petition period.”).
Where 	the 	proposed 	post-petition 	loan 	is 	provided 	by 	a 	pre-
petition creditor and the terms of the loan have the potential to
create a conflict of interest between the trustee and the creditor,
two 	courts 	have 	held 	that 	such 	loans 	are 	permissible 	unless 	the
proposed 	loan 	terms 	“attached 	unacceptable 	express 	or 	implied
conditions to its loan which might exert unacceptable control over
the 	Trustee 	in 	the 	exercise 	of 	his 	fiduciary 	duties.” 	In 	re
Hartley, 	39 	B.R. 	273, 	278 	(Bankr.W.D.Ohio 	1984); 	see 	also 	In 	re
McKenzie 	Energy 	Corp., 	228 	B.R. 	854, 	875 	(Bankr.S.D.Tex.
1998)(approving the loan from a pre-petition creditor where there
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9 	Other 	than 	listing 	this 	provision, 	Debtor’s 	argument 	does
not address specifically why he objects to this provision.
14
were “no limitations express or implied on the trustee’s ability to
act independently on behalf of his estates”).
Debtor 	argues 	that 	“[b]y 	borrowing 	money 	from 	a 	disputed,
contingent 	creditor, 	and 	especially 	by 	borrowing 	money 	on 	the
proposed 	terms, 	the 	Chapter 	11 	Trustee 	will 	no 	longer 	be
disinterested. 	He will, in fact, have an interest in serving the
needs 	of 	his 	financier, 	to 	the 	benefit 	of 	the 	financier, 	and 	the
detriment of all others.” 	(Paper 7, at 4). 	Specifically, Debtor
objects 	to 	the 	following 	loan 	terms: 	(1) 	that 	the 	lender 	may 	“in
his 	sole 	and 	absolute 	discretion, 	make 	one 	or 	more 	advances 	of
principal 	to 	the 	Borrower 	. 	. 	. 	[and] 	Lender 	shall 	have 	no
obligation to make any Further Advance” (paper 1, Loan and Security
Agreement § 2.01); (2) the provision involving excluded uses, id.
at § 2.06; (3) the provision that gives Ahan a super-priority lien,
id. at § 3.01; and (4) the remedies provision that allows Ahan to
take collateral in the event of a default, id. at § 8.05. 9
Debtor 	questions 	whether 	the 	Trustee 	will 	be 	able 	to 	remain
disinterested based on these terms:
What 	happens 	when 	the 	Trustee 	has 	to 	decide
whether 	to 	pursue 	the 	appeal 	of 	Mr. 	Ahan’s
judgment? 	Is 	his 	decision 	whether 	to 	pursue
the 	appeal 	or 	settle, 	and 	the 	terms 	of 	that
settlement, subject to undue influence due to
the 	fact 	that 	Mr. 	Ahan 	is 	both 	the 	largest
creditor and his financier? 	Will the Trustee
have to choose between pursuing an appeal and
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15
having his fees paid? 	Even if the Trustee is
successful 	in 	appealing 	Mr. 	Ahan’s 	judgment,
Mr. 	Ahan 	could 	gain 	control 	of 	New 	York
Satellite 	Industries, 	LLC 	through 	a 	loan
default. 	Will 	the 	Trustee 	be 	pressured 	to
pursue 	certain 	matters, 	or 	refrain 	from
pursuing 	others, 	because 	Mr. 	Ahan 	conditions
his loan advances, which are “in his sole and
absolute discretion”? 	L&S § 2.01. 	These are
questions that should not have to be asked of
a 	disinterested 	person 	acting 	in 	a 	fiduciary
capacity.
(Paper 7, at 8). 	In support, Debtor relies primarily on In re Big
Rivers 	Corp., 	355 	F.3d 	at 	434-35. 	Debtor 	also 	expresses 	concern
about the potential impact of the loan on the state court judgment.
“It 	is 	true 	that 	because 	the 	Trustee 	is 	forbidden 	from 	using 	Mr.
Ahan’s 	post-petition 	funds 	to 	perform 	this 	investigation, 	he 	can
use 	other 	funds 	of 	the 	estate 	for 	this 	investigation. 	In 	making
his 	decisions 	as 	to 	whether 	to 	go 	forward 	with 	that 	appeal,
however, the Trustee must decide between challenging claims against
the estate and appeasing his financier.” 	(Paper 7, at 10).
The Trustee argues that courts regularly approve post-petition
financing from interested parties. 	Courts also have approved post-
petition 	financing 	with 	terms 	that 	require 	a 	debtor 	to 	waive 	its
claims 	against 	the 	lender 	or 	to 	waive 	rights 	to 	contest 	the
lender’s 	existing 	claims. 	By 	contrast 	here, 	the 	trustee 	argues,
“no rights are being waived, taken away or altered by the DIP Order
or DIP loan, and there is no provision that precludes the Trustee
from 	investigating 	or 	proceeding 	with 	any 	action 	against 	any
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10 Ahan has joined in the Trustee’s brief. 	(Paper 11). 	Ahan
asserts 	that 	Debtor 	is 	trying 	to 	limit 	the 	effectiveness 	of 	the
Trustee 	by 	depriving 	the 	Trustee 	of 	necessary 	funds. 	He 	also
argues 	that 	the 	loan 	does 	not 	affect 	the 	Trustee’s 	status 	as 	a
disinterested person and that the Trustee is not Ahan’s “lackey.”
16
creditor, including the lender.” 10 	(Paper 10, at 12)(citing In re
Hartley and In re McKenzie Energy Corp.).
Debtor 	responds 	that 	the 	Trustee’s 	argument 	is 	based 	on 	an
assumption that a bankruptcy trustee is the equivalent of a debtor
in possession. 	Debtor does not dispute that courts have approved
loans similar to the proposed loan for debtors in possession, but
states 	that 	this 	case 	is 	different 	because 	it 	involves 	a 	loan
agreement 	with 	a 	trustee. 	The 	difference 	is 	that 	the 	bankruptcy
code 	requires 	a 	trustee 	to 	be 	disinterested, 	but 	it 	does 	not
require a debtor in possession to be disinterested. 	(Paper 12, at
2-3). 	Debtor 	also 	contends 	that 	In 	re 	Harley 	and 	In 	re 	McKenzie
Energy Corp. are distinguishable. 	Finally, Debtor disagrees that
there 	are 	no 	express 	or 	implied 	conditions 	placed 	upon 	the
financing and he argues that the loan is not in the best interests
of 	the 	estate 	because 	of 	the 	potential 	impact 	on 	the 	state 	court
judgment that is under appeal.
The 	bankruptcy 	court’s 	finding 	that 	the 	terms 	of 	the 	loan
would 	not 	impair 	the 	Trustee’ 	objectivity 	is 	supported 	by 	the
record. 	The 	Trustee 	was 	prepared 	to 	testify 	that 	nothing 	in 	the
loan 	agreement 	precluded 	him 	from 	carrying 	out 	his 	duties 	as
Trustee, 	conducting 	any 	investigation 	or 	litigation, 	or 	taking
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11 	The 	trustee 	later 	sought 	approval 	for 	funding 	pursuant 	to
11 U.S.C. § 364(b) instead of § 364(c). 	In re Harley, 39 B.R. at
277.
17
other 	actions 	with 	respect 	to 	the 	parties 	identified 	in 	the
Excluded 	Uses. 	(Paper 	1, 	Tr. 	21-22). 	He 	also 	was 	prepared 	to
testify 	that 	he 	already 	had 	begun 	to 	investigate 	the 	parties
identified 	in 	the 	Excluded 	Uses 	and 	that 	he 	would 	complete 	that
investigation. 	Id. 	at 	22. 	The 	court 	was 	told 	the 	Trustee 	could
still obtain future loans from other sources. 	Id. at 40. 	Debtor’s
argument that Ahan will be able to exert undue influence over the
Trustee 	because 	the 	Trustee 	may 	need 	additional 	funds 	is
unpersuasive 	because, 	as 	the 	bankruptcy 	court 	pointed 	out, 	the
terms of the loan agreement do not prevent the Trustee from seeking
funds from other sources.
Debtor contends that the bankruptcy court improperly relied on
In 	re 	Hartley 	and 	In 	re 	McKenzie. 	In 	In 	re 	Hartley, 	the 	trustee
filed a motion to obtain financing pursuant to § 364(c) in the form
of 	a 	$25,000 	loan 	from 	Union 	Oil, 	an 	unsecured, 	pre-petition
creditor. 11 	The 	only 	condition 	on 	the 	money 	was 	that 	the 	trustee
provide the creditor with periodic assessments on the progress of
the litigation. 	Three parties objected to the proposed borrowing
on 	grounds 	that 	included 	conflict 	of 	interest. 	The 	bankruptcy
court found that there was no evidence that the terms of the loan
provided 	express 	or 	implied 	conditions 	that 	“might 	exert
unacceptable 	control 	over 	the 	Trustee 	in 	the 	exercise 	of 	his
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18
fiduciary duties.” 	In re Hartley, 39 B.R. at 278. 	The court also
rejected 	the 	argument 	that 	the 	creditor 	might 	receive 	favorable
treatment because of the loan:
The 	implication, 	of 	course, 	is 	that 	the 	loan
is 	the 	quid 	pro 	quo 	for 	the 	Trustee’s 	not
asserting 	a 	similar 	claim 	against 	Union 	Oil.
As 	indicated 	previously, 	however, 	no
agreements have been made between the Trustee
and 	Union 	Oil 	and, 	specifically, 	the 	Trustee
has 	made 	no 	agreements 	not 	to 	pursue 	any
claims 	against 	Union 	Oil 	or 	any 	other
creditor.
Id. at 279 (emphasis added).
In 	the 	second 	case, 	In 	re 	McKenzie, 	the 	bankruptcy 	court
relied 	on 	In 	re 	Hartley 	to 	find 	that 	a 	post-petition 	financing
agreement 	did 	not 	create 	a 	conflict 	of 	interest 	for 	the 	trustee.
McKenzie, 228 B.R. at 875. 	The loan agreement required the trustee
to give the creditor a budget and to make available non-privileged
information concerning the administration of the estate in order to
obtain an advance under the loan agreement. 	Id. at 862. 	Several
parties objected to the loan agreement on grounds that included a
concern 	that 	“the 	trustee’s 	judgment 	would 	be 	clouded 	in 	the
exercise 	of 	his 	fiduciary 	duty 	to 	the 	other 	creditors.” 	Id. 	at
862. 	The court found the terms of the financing agreement created
“no limitations express or implied on the trustee’s ability to act
independently on behalf of his estates.” 	Id. at 875.
Here, the bankruptcy court considered whether there were any
express 	or 	implied 	conditions 	that 	might 	allow 	Ahan 	to 	exert
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12 	In 	McKenzie, 	the 	creditor 	arguably 	imposed 	greater 	limits
on the money because the Trustee had to give the creditor a budget.
19
control 	over 	the 	Trustee 	or 	to 	cloud 	the 	Trustee’s 	judgment.
Similar 	to 	the 	courts 	in 	In 	re 	Hartley 	and 	In 	re 	McKenzie 	Energy
Corp., the court found that there were no such conditions. 12
Debtor contends that these cases are distinguishable because
(1) 	the 	claims 	of 	the 	potential 	lenders 	were 	not 	in 	dispute, 	(2)
the loans in those cases did not have any restrictions on the use
of the funds, and (3) the receipt of future funds was not “at the
whim” of a contingent creditor. 	(Paper 7, at 11-12). 	In his reply
brief, he also contends that the cases are distinguishable because
those courts found that the financing agreements had no express or
implied conditions. 	Debtor’s arguments are unpersuasive. 	First,
the cases do not state expressly that the claims of the potential
lenders were not in dispute. 	Moreover, in Hartley, the court noted
that 	the 	Trustee 	had 	made 	no 	agreements 	not 	to 	pursue 	claims
against the lender, which indicates that the lender’s claim was in
dispute. 	In 	re 	Hartley, 	39 	B.R. 	at 	279. 	Second, 	the 	bankruptcy
court found that the Excluded Uses were reasonable, and Debtor has
provided 	no 	evidence 	or 	argument 	to 	dispute 	this 	finding. 	This
distinction, 	therefore, 	is 	immaterial. 	Third, 	as 	discussed
previously, the receipt of future funds are not at the whim of Ahan
but rather based on the Trustee’s ability to pursue other funding
sources. 	Fourth, Debtor’s argument that there were no express or
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20
implied conditions in Hartley and McKenzie misstates the holdings
in 	those 	cases. 	The 	courts 	did 	not 	find 	that 	there 	were 	no
“express 	or 	implied 	conditions” 	but 	rather 	that 	there 	were 	no
express 	or 	implied 	conditions 	that 	would 	allow 	the 	creditor 	to
exert 	unacceptable 	control 	over 	the 	Trustee. 	In 	re 	Hartley, 	39
B.R. at 278-79; In re McKenzie Energy Corp., 228 B.R. at 875. 	This
argument, therefore, is without merit.
Moreover, 	Debtor’s 	reliance 	on 	In 	re 	Big 	Rivers 	Corp. 	is
misplaced. 	As 	the 	bankruptcy 	court 	noted, 	this 	case 	did 	not
involve a post-petition finance loan pursuant to § 364. 	The case
involved 	an 	examiner 	who 	sought 	a 	“success 	fee” 	from 	several
unsecured 	creditors 	based 	on 	the 	“new 	value” 	he 	brought 	to 	the
estate. 	In 	re 	Big 	Rivers, 	355 	F.3d 	at 	423. 	The 	examiner 	sought
this personal compensation in secret, without the knowledge of the
debtor, 	the 	trustee, 	or 	other 	creditors. 	Although 	the 	Court 	of
Appeals for the Sixth Circuit spoke at length about the obligation
of an examiner to remain disinterested, the discussion arose from
the 	question 	of 	the 	proper 	sanction 	for 	the 	examiner’s 	conduct.
Id. 	at 	443. 	The 	case, 	therefore, 	has 	little 	application 	to 	the
issue presently before the court. 	Finally, it bears emphasis that
§ 101(14)(E) implicates only personal interests of the trustee, not
actions 	undertaken 	as 	fiduciary. 	In 	re 	BH 	& 	P 	Inc., 	949 	F.2d 	at
1309-10; In re Dynamark, Ltd., 137 B.R. at 381.
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Debtor’s 	remaining 	arguments 	are 	equally 	unpersuasive.
Debtor’s contention that the Trustee’s argument is based entirely
on cases involving debtors in possession is inaccurate. 	Although
the 	Trustee’s 	arguments 	identified 	the 	proposed 	loan 	as 	a 	“DIP
loan,” § 364 allows specifically empowers a trustee to pursue post-
petition loans. 	Moreover, the two cases the Trustee relies on, In
re Hartley and In re McKenzie Energy Corp., specifically involved
trustees 	who 	sought 	§ 	364 	financing. 	Debtor’s 	argument 	that 	the
interests 	of 	the 	estate 	and 	creditors 	are 	best 	served 	by 	the
Trustee 	prosecuting 	the 	state 	court 	appeal 	is 	irrelevant 	to 	the
issue of whether the loan makes the Trustee disinterested, in part
because 	there 	is 	no 	evidence 	that 	the 	Trustee 	has 	even 	made 	a
decision on the appeal, much less that this decision was influenced
by the proposed loan.
IV. 	Conclusion
For the reasons stated above, the court will affirm the ruling
of the bankruptcy court. 	A separate Order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
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