## Facts

- Saybrook Manufacturing Co. and affiliated entities filed Chapter 11 petitions on December 22, 1988.
- At filing, the debtors owed Manufacturers Hanover about $34 million, secured by collateral worth less than $10 million, leaving roughly $24 million undersecured.
- On December 23, 1988, the debtors sought emergency authority to use cash collateral and obtain postpetition financing.
- The bankruptcy court entered an emergency financing order the same day.
- Manufacturers Hanover agreed to provide $3 million in postpetition financing.
- The order granted Manufacturers Hanover a security interest in all debtor property, including previously unencumbered prepetition assets and postpetition assets.
- The lien secured both the new $3 million postpetition loan and Manufacturers Hanover’s entire $34 million prepetition claim, improving its position relative to other unsecured creditors (“cross-collateralization”).
- Unsecured creditors Seymour and Jeffrey Shapiro objected, arguing the arrangement unlawfully elevated a prepetition undersecured claim at the expense of other unsecured creditors.
- The bankruptcy court overruled the objection and denied a stay pending appeal.
- The district court dismissed the Shapiros’ appeal as moot under 11 U.S.C. § 364(e) due to the absence of a stay.

## Issues

1. Whether 11 U.S.C. § 364(e) moots an appeal from a financing order approving cross-collateralization when the objecting creditors did not obtain a stay.
2. Whether the Bankruptcy Code, including 11 U.S.C. § 364, authorizes cross-collateralization that grants liens on estate property to secure a lender’s prepetition debt as part of postpetition financing.

## Decision

- The Eleventh Circuit reversed the district court’s mootness dismissal and remanded.
- Section 364(e) did not moot the appeal because its protection applies only to financing that is authorized by the Bankruptcy Code.
- Cross-collateralization that secures prepetition debt with liens on previously unencumbered estate assets is not authorized by § 364 and conflicts with the Code’s priority scheme.
- Because the bankruptcy court lacked statutory authority to approve the cross-collateralization, § 364(e) could not be used to preserve the challenged lien from appellate review.

## Legal Principles

- Section 364(e) protects good-faith postpetition lenders only where the underlying credit transaction and liens are authorized by § 364; it does not bar appellate review of an order that exceeds statutory authority.
- Section 364(c)–(d) authorizes liens to secure postpetition credit; it does not authorize granting liens to secure a lender’s prepetition claims.
- Cross-collateralization that converts an undersecured or unsecured portion of a prepetition claim into a secured claim through postpetition liens impermissibly alters the Bankruptcy Code’s distribution and priority rules.

## Conclusion

The Eleventh Circuit held that an appeal challenging a financing order is not moot under § 364(e) when the order authorizes relief beyond the Bankruptcy Code, and it ruled that cross-collateralization securing prepetition debt through postpetition financing is unauthorized and inconsistent with the Code’s priority structure.


Matter of Saybrook Mfg. Co., 963 F.2d 1490 (11th Cir. 1992)