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In re VPH Pharmacy, Inc.

United States District Court, E.D. Michigan, Southern Division

January 9, 2018

In re VPH PHARMACY, INC. Debtor

          ORDER DENYING APPELLANT'S BRIEF ON APPEAL [Doc. 5]

          Victoria A. Roberts United States District Judge

         The issue presented by this bankruptcy appeal is whether Appellant Creditor The Winrose Plus Group, LLC (“Winrose”) was granted super-priority administrative expense claim, or a priming lien (a lien either senior or equal to existing liens), on Debtor VPH Pharmacy, Inc. (“VPH”) assets when it extended post-bankruptcy credit to VPH. This Court uphold of the findings by the Bankruptcy Court that non priority status was granted to Winrose.

         VPH filed a petition for Chapter 11 bankruptcy on January 13, 2017. The same day, VPH filed a Financing Motion (“Motion”) requesting authority to borrow $150, 000 from Winrose. The Motion indicated that pursuant to Section 364(a)(1) of the Bankruptcy Code, the loan would be entitled to super-priority administrative expense claim status. The United States Bankruptcy Court for the Eastern of District of Michigan issued an order (“Financing Order”) authorizing VPH to obtain this post-petition financing.

         Winrose argues that the Financing Order granted it super-priority status. The United States Trustee appointed the Unsecured Creditors' Committee (“Committee”), which objected to the super-priority status urged by Winrose. The Bankruptcy Court sustained the Committee's objection, ruling that the Financing Order did not grant either a super-priority administrative claim, or a priming lien on VPH's assets. Winrose appealed to this Court.

         The Bankruptcy Court's ruling is AFFIRMED.

         I. Background

         VPH is a closed-door pharmacy, meaning it services private entities including nursing homes and children's foster care facilities. In the three years prior to filing its petition for Chapter 11 bankruptcy, VPH averaged about $15 million per year in annual revenue. In 2016, VPH's revenue began to decline due to various factors, including the loss of customer contracts, and an investigation and subsequent seizure of assets by the Drug Enforcement Agency (“DEA”): the DEA seized funds on September 22, 2015 that were allegedly used or acquired as a result of a violation of the Controlled Substances Act. On September 7, 2016, a state court entered judgment against VPH in the amount of $1, 278, 310.55 after its current owner, Devenkumar C. Patel (“Patel”) defaulted on payment for stock purchased from its former owner. After entry of the judgment, Patel gave his wife, Amee Patel (“Mrs. Patel”) his power of attorney on December 2, 2016. Patel also began serving an eighteen month prison sentence in December, 2016.

         The judgment against VPH had immediate effect. VPH's bank account was garnished. This affected VPH's cash flow and its ability to pay creditors. As a result, it sought protection from the Bankruptcy Court under Chapter 11.

         After filing its Chapter 11 petition on January 13, 2017, VPH's suppliers cut off all credit and refused to ship medications to VPH. Without access to its bank account, VPH could not operate, and was in need of an emergency loan to meet its obligations and provide medications to its patients.

         VPH's Chief Restructuring Officer (“CRO”) attempted to obtain cash or credit for VPH, but could not. The CRO contacted Mrs. Patel for an emergency loan of $150, 000. Mrs. Patel then formed Winrose as a limited liability company, and borrowed money from family in order to give the requested loan.

         VPH filed its Motion, asking the Bankruptcy Court to authorize it to obtain post-petition financing and use cash collateral, pursuant to 11 U.S.C. § 364(a)(1), (c)(1), (c)(2), (c)(3), and (d)(1). The Motion indicated that Winrose, which was to loan VPH $150, 000, was entitled to a super-priority administrative claim, and a priming lien on VPH's assets. The Bankruptcy Court entered various orders authorizing VPH to obtain interim post-petition financing and use cash collateral (collectively referred to as “Financing Order”). The Financing Order stated that Winrose had “a security interest in and liens on all of” VPH's assets, which served as collateral. [Designated Bankruptcy Record, Doc. 63, Pg. 5]. The Financing Order also stated “to the extent there is a conflict or inconsistencies between the Motion and this [Financing Order], the [Financing Order] shall control.” Id. at 4.

         A second revised version of the Financing Order permitted VPH to borrow an additional $150, 000 from Winrose. VPH was informed that Winrose refused to fund the second $150, 000. The Committee filed an objection, noting the bad faith actions of Winrose in refusing to fund the second $150, 000 loan, and claiming that the Financing Order did not grant Winrose either a super-priority administrative claim or a priming lien. The parties briefed the issue and the Bankruptcy Court held a hearing and issued an oral ruling.

         In its ruling, the Bankruptcy Court acknowledged that the Motion states that Winrose would receive a super-priority administrative expense claim status. But the Financing Order did not grant such status. The Bankruptcy Court said that the Financing Order made clear that the terms of the Financing Order, not the Motion, control. Accordingly, the Bankruptcy Court sustained the Committee's objection.

         VPH's Chapter 11 petition was later converted into a Chapter 7 petition. The Bankruptcy court entered a written order (“Order Sustaining the Objection”) stating that the Committee's objection was sustained for the reasons set forth in the oral ruling, “Winrose was not granted either a super-priority administrative claim ...


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