This matter came before the court by motion of the debtor in possession, Central Kentucky Supply Company, Inc., ("CKS") and the unsecured creditors' committee for approval of postpetition inventory financing pursuant to 11 U.S.C. 364(d).

The motion, which was filed on March 25, 1993, requests an order granting to any creditor who provides inventory financing a lien prior and superior to all other liens and encumbrances on accounts receivable, inventory and cash collateral of the debtor in possession up to the aggregate sum of $650,000, and granting to such creditors "superpriority" administrative expense status which would give those creditors priority over other administrative expense claimants. The motion was withdrawn to the extent it requested superpriority administrative expense status.

CKS and the creditors' committee state that as many as 20 suppliers who now sell to CKS on a cash only basis would be willing to extend credit to CKS to enable CKS to acquire additional inventory in an aggregate sum not to exceed $650,000 if the suppliers receive first and prior liens in all inventory and accounts receivable of the debtor in possession on a pooled pro-rata basis with other inventory suppliers/lenders. The debtor in possession and creditors' committee further state that the interests of existing lienholders in inventory and accounts receivable are adequately protected in that the value of the collateral exceeds the amount of indebtedness secured by the collateral.

Bank One, Lexington, N.A. has a first lien on inventory and accounts receivable and proceeds thereof to secure an indebtedness in the approximate amount of $790,000.

National City Bank, formerly known as First National Bank of Louisville, has a second lien on inventory and accounts receivable and proceeds thereof, a second mortgage on the business real estate of CKS, a first lien on equipment, furniture and fixtures of CKS, and a first mortgage on a tract of residential real estate in Bourbon County, Kentucky, all of which secure an indebtedness of approximately $540,000.

Liberty National Bank of Lexington holds a first mortgage on the business real estate to secure an indebtedness of approximately $1.4 million.

Bank One and National City object to the motion, asserting as a basis for the objection that their interests are not adequately protected under 11 U.S.C. 364(d)(1)(B) if the collateral is valued at a liquidation value rather than at a going concern value or if their liens in inventory and accounts receivable are subordinated to liens of creditors providing inventory financing. The banks requested an evidentiary hearing for the purpose of establishing the value of their collateral as it relates to the issue of adequate protection.

An evidentiary hearing was commenced on April 6, 1993 and was continued to and concluded on April 9, 1993.

The debtor in possession presented evidence that its assets are valued as follows: inventory, $720,000 (at cost); accounts receivable, $1.2 million (with less than 1% considered uncollectible); equipment, furniture and fixtures, $304,000; business real estate, $2.2 million; residential real estate, $240,000.

The value of equipment, furniture and fixtures might include an amount attributable to motor vehicles which are leased by CKS. The value of the business real estate adduced by the debtor in possession does not appear to be corroborated by evidence of an independent appraisal. Without additional evidence respecting the value of equipment and real estate it is difficult to determine the extent of the secured position of National City.

Bank One presented evidence that the assets of CKS should be valued at liquidation value and argued that CKS cannot survive as a going concern. Bank One also challenged the assertion of CKS that only 1% of its accounts receivable are uncollectible.

If inventory financing were provided by suppliers on terms other than those set forth in the motion, the risk of loss to the extent of $650,000 would be spread among the 20 or so creditors providing the financing, thereby limiting the exposure of any one creditor in the event of liquidation. The fact that creditors providing postpetition inventory financing ordinarily enjoy administrative expense priority would offer additional protection to the suppliers. Instead the motion seeks to shift the risk of loss to the creditors who presently appear to be fully secured but who may be undersecured upon liquidation. The proposed inventory financing would impair the banks' secured positions if their liens were subordinated to the liens of inventory suppliers.

The motion of the debtor in possession and unsecured creditors' committee is overruled. Adequate protection of the interests of Bank One and National City is lacking.


By the court -




Chief Judge


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