## Facts

- EDC Holding Company and affiliates (collectively, Wisconsin Steel) filed for Chapter 11 after Chase Manhattan Bank set off funds in Wisconsin Steel’s Chase account, causing payroll checks to bounce.
- Before bankruptcy, Chase had lent Wisconsin Steel money secured by liens on inventory and the Chase checking account used for payroll.
- The steelworkers’ union sued in bankruptcy court for unpaid wages, asserted a lien on the same inventory, and picketed, preventing Chase from taking possession of the inventory despite court authorization.
- The parties settled: Chase agreed to lend about $1.7 million post-petition; the union agreed to dismiss its suit and stop picketing; most proceeds would pay wage claims (with some for taxes), and $77,000 would reimburse the union for attorneys’ fees and litigation expenses.
- The settlement provided that the entire loan would receive wage-claim priority under 11 U.S.C. § 507(a)(3), requiring bankruptcy-court approval of post-petition financing under 11 U.S.C. § 364.
- The bankruptcy court approved the financing and granted wage-claim priority to the full loan, including the $77,000 attorneys’ fee component.
- The Official Creditors’ Committee appealed but did not obtain a stay; Chase advanced the funds.
- The district court dismissed the appeal as moot under § 364(e), citing Chase’s good faith and the absence of a stay.

## Issues

1. Whether an appeal challenging a bankruptcy court’s § 364 financing order is moot under § 364(e) when no stay is obtained and the lender has advanced funds.
2. What “good faith” means under § 364(e), and whether a lender acts in good faith when part of a priority loan is earmarked for union attorneys’ fees given wage-claim priority.
3. Whether any effective appellate relief can be granted without impairing a good-faith lender’s protected priority.

## Decision

- The Seventh Circuit affirmed dismissal, explaining that § 364(e) limits available relief rather than eliminating appellate jurisdiction.
- The court held Chase acted in good faith under § 364(e); there was no showing of fraud, collusion, or an effort to take grossly unfair advantage of other creditors.
- Because § 364(e) protected the validity of Chase’s priority absent a stay, the court concluded no effective relief could be fashioned that would alter the challenged priority allocation without impairing Chase’s protected position.

## Legal Principles

- Under 11 U.S.C. § 364(e), reversal or modification of a financing authorization on appeal does not affect the validity of the debt or any priority or lien granted to a lender that extended credit in good faith, unless the authorization was stayed pending appeal.
- “Good faith” in § 364(e) centers on honesty in fact and the absence of fraud, collusion, or an attempt to obtain a grossly unfair advantage; it is not defeated merely because aspects of the transaction are arguably legally erroneous or distributionally unfavorable.
- Even when an appeal is not jurisdictionally moot, § 364(e) can make the controversy effectively unremediable by foreclosing relief that would disturb a protected post-petition lender’s priority where no stay was obtained.

## Conclusion

The Seventh Circuit held that § 364(e) protects a good-faith post-petition lender’s court-approved priority when no stay is obtained, and that Chase met the statutory good-faith standard; as a result, the creditors’ committee could not obtain relief that would undo the priority granted to Chase, including the portion earmarked for union attorneys’ fees.


In re EDC Holding Co., 676 F.2d 945 (7th Cir. 1982)