## Facts

- Campbell Sod, Inc. (Campbell Sod) operated a sod-farming business and filed a Chapter 12 case in the U.S. Bankruptcy Court for the District of Kansas.
- Arthur L. Campbell, the principal owner of Campbell Sod, also filed a separate Chapter 12 case; the two cases were jointly administered.
- First National Bank of Wamego (the Bank) was the primary secured creditor and held liens on the debtors’ non-real-estate collateral, including accounts receivable and inventory.
- The debtors proposed a combined Chapter 12 plan that required additional working capital to fund operations and make the plan’s projected cash flow work.
- The debtors sought permission to borrow $200,000 postpetition from Irish, L.L.C. (Irish) as working-capital financing.
- The proposed Irish loan would be secured by a first-priority lien on accounts receivable and inventory—collateral already encumbered by the Bank—thereby priming the Bank’s lien on that collateral.
- The Bank objected to both the financing and plan confirmation, arguing the new loan was unnecessary and that the priming lien would not protect the Bank’s secured position.
- For purposes of the hearing, the parties stipulated that the Bank held an allowed secured claim of $1,595,000, while leaving final claim-allowance issues for later proceedings.
- Evidence presented on valuation showed the Bank’s collateral package exceeded the stipulated claim amount by a margin that could cover the $200,000 priming request, depending on valuation assumptions.
- The debtors presented cash-flow projections (through a financial consultant) indicating the plan would run short of cash without the $200,000 infusion; with it, the debtors expected to plant and produce more crop and generate more revenue.

## Issues

1. Whether the debtors could obtain authorization under 11 U.S.C. § 364(d)(1) to incur $200,000 in postpetition credit secured by a lien senior to the Bank’s existing lien on accounts receivable and inventory.
2. Whether, in light of the need for the working-capital loan, the combined Chapter 12 plan satisfied the feasibility requirement of 11 U.S.C. § 1225(a)(6).

## Decision

- The court approved the debtors’ request to borrow $200,000 from Irish under 11 U.S.C. § 364(d)(1) and granted Irish a first-priority (priming) lien on the specified collateral.
- The court found the debtors met § 364(d)(1)’s requirements: they could not obtain the needed credit on other terms, and the Bank’s interest was adequately protected.
- The court determined the plan was not feasible without the working-capital financing, but was feasible with the financing in place based on the debtors’ projections.
- With the financing approved and the remaining objections addressed, the court confirmed the combined Chapter 12 plan.

## Legal Principles

- Under 11 U.S.C. § 1225(a)(6), a Chapter 12 plan cannot be confirmed unless the debtor shows it will be able to make plan payments and comply with the plan; feasibility is evaluated using realistic cash-flow evidence, not certainty.
- Under 11 U.S.C. § 364(d)(1), a bankruptcy court may authorize postpetition credit secured by a lien senior to an existing lien only if (i) the debtor cannot obtain credit otherwise and (ii) the existing lienholder’s interest is adequately protected.
- Adequate protection for a primed creditor may be shown by an equity cushion (collateral value above the secured claim) and by evidence that the proposed borrowing is expected to maintain or raise the value of the collateral base supporting repayment.
- A secured creditor’s objection to being primed does not bar approval when the debtor proves the statutory elements for priming financing.

## Conclusion

In re Campbell Sod, Inc. approved $200,000 in Chapter 12 working-capital financing secured by a priming lien on receivables and inventory because the debtors showed they could not obtain the funds otherwise, the Bank remained adequately protected by collateral value in excess of its secured claim, and the plan was feasible only if the financing were authorized and used to support ongoing operations.


In re Campbell Sod, Inc., 378 B.R. 647 (2007)