## Facts

- Dennis B. Devlin (debtor), doing business as the Desert Inn Resort Motel, operated a 220-room resort motel at 900 North Atlantic Boulevard, Daytona Beach, Florida.
- Devlin filed a Chapter 11 case in the U.S. Bankruptcy Court for the Middle District of Florida (Jacksonville Division).
- The motel property was encumbered by a prepetition first-priority lien held by the Resolution Trust Corporation (RTC).
- The motel relied on a centralized air-conditioning system that was installed in 1967 and stopped working in 1993.
- After the central system failed, the debtor used two temporary 75-ton units, but they were inadequate and required immediate replacement.
- The boiler and hot-water systems were antiquated and subject to frequent breakdown; the debtor also sought to replace those systems.
- After obtaining bids, the debtor determined the minimum total cost to replace the air-conditioning, boiler, and hot-water systems was $123,920.
- The court found the debtor did not have sufficient funds to pay for the equipment and related work from available cash flow and needed outside financing.
- The debtor’s mother, Irene L. Devlin, agreed to provide the $123,920 postpetition loan only if she received a first-priority (priming) lien on the motel property.
- The debtor moved for authority under 11 U.S.C. § 364(d)(1) to incur the secured debt and grant Irene a lien senior to RTC’s existing lien.
- Notice of the proposed financing was sent to creditors and parties in interest, with 15 days to object; no written objections were filed.

## Issues

1. Whether, under 11 U.S.C. § 364(d)(1), the debtor could be authorized to obtain postpetition credit secured by a lien senior to RTC’s prepetition first-priority lien to fund immediate replacement of essential motel systems.
2. Whether the debtor showed it was unable to obtain the needed credit on any other terms without granting a priming lien.
3. Whether RTC’s interest in the motel property would be adequately protected despite being primed by the new postpetition lien.

## Decision

- The court granted the debtor’s motion for authority to incur secured debt with superpriority status under 11 U.S.C. § 364(d)(1).
- The debtor was authorized to borrow $123,920 from Irene L. Devlin to replace the motel’s air-conditioning, boiler, and hot-water systems.
- Irene L. Devlin was authorized to receive a priming lien senior to RTC’s existing lien on the motel property.

## Legal Principles

- Under 11 U.S.C. § 364(d)(1), a bankruptcy court may authorize a debtor-in-possession to obtain postpetition credit secured by a lien that is senior to existing liens only if:
  - the debtor is unable to obtain such credit otherwise; and
  - the existing lienholder’s interest in the collateral is adequately protected.
- The debtor bears the burden to show it cannot obtain the financing on less onerous terms, including without a priming lien.
- Adequate protection is evaluated in light of the secured creditor’s interest in the collateral; it may be satisfied when the proposed financing prevents deterioration of the property or maintains (or increases) the property’s operational value so that the primed creditor is not unfairly harmed.
- Postpetition financing may be approved even when the lender is an insider if the statutory requirements are met and parties in interest receive proper notice and an opportunity to object.
- Courts may consider the operational necessity of the proposed expenditures when assessing both the need for financing and whether the secured creditor is adequately protected, particularly where the expenditures are required to keep the business operating during Chapter 11.

## Conclusion

In re Devlin authorized a Chapter 11 motel operator to borrow $123,920 from the debtor’s mother and grant her a priming lien under § 364(d)(1) because the debtor lacked the cash to replace failed air-conditioning and hot-water/boiler systems, could not obtain financing without a senior lien, and the court found RTC’s lien would remain adequately protected given the role of the repairs in maintaining the property as an operating motel.


In re Devlin, 185 B.R. 376 (1995)