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The First Circuit affirmed, ruling that the sale of the loan portfolio after the lender had received “gap period” payments on one of portfolio loans, but before any proceeding had been commenced to avoid these payments, did not include bank's right to assert a claim for “gap period” payments previously made upon their avoidance. Further, that the claim the lender obtained, upon avoidance of unauthorized post-petition payments, took on same characteristics as the secured claim that it would have possessed if no such payments were made, including its secured status. The court also found that the plan language did not collaterally estop the lender from asserting a secured claim for repayment of sums recovered.

Gap Period Payments Not Avoidable

The First Circuit has ruled that unauthorized post-petition “gap period” payments made by a Chapter 11 debtor to a fully secured lender were not avoidable. Fleet National Bank v. Gray (In re Bankvest Capital Corp.), No. 03-1613 (July 12).

During the “gap period” between the filing of an involuntary petition and the entry of the bankruptcy court's order for relief, a secured lender, “aware of the bankruptcy filing and in apparent violation of the automatic stay,” accepted estate assets and applied these gap payments against a loan. After learning of these payments, the unsecured creditors' committee sought sanctions. In addition, the lender also sold a loan portfolio, which included the balances of the loans between the lender and the debtor. Following the confirmation of an uncontested joint liquidating plan of reorganization, the liquidating supervisor filed a complaint, seeking to avoid the post-petition gap payments received by the lender. The bankruptcy court granted both the sanctions motion and avoidance claim and the lender was ordered to pay the amount of the gap payments, plus interest. The district court reversed.

The First Circuit affirmed, ruling that the sale of the loan portfolio after the lender had received “gap period” payments on one of portfolio loans, but before any proceeding had been commenced to avoid these payments, did not include bank's right to assert a claim for “gap period” payments previously made upon their avoidance. Further, that the claim the lender obtained, upon avoidance of unauthorized post-petition payments, took on same characteristics as the secured claim that it would have possessed if no such payments were made, including its secured status. The court also found that the plan language did not collaterally estop the lender from asserting a secured claim for repayment of sums recovered.