Free Appellee's Brief - District Court of Delaware - Delaware

Case 1:07-cv-00621-GMS

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWAR
In re:
)
Chapter 11

EXARIS, INC., and
1 INX USA, LTD.,

) )
) ) ) ) ) ) ) )

Case No. 07-10887 (KG) Case No. 07-10888 (KG)

Debtors.

DR. JACK KACHKA,
Appellant
v.

Civil Action No. 07-621 (GMS)

WESTERNAN PUERTO RICO,
STEPHEN S. GRAY, Chapter 11

) )
) ) ) ) )
)

Trustee ofINX USA, LTD.
Appellees.

BRIEF OF APPELLEE
CHAPTER 11 TRUSTEE OF INYX USA. LTD.
Richard Pachulski
Bruce Grohsgal (DE Bar No. 3583)

PACHULSKI STANG ZIEHL & JONES LLP 919 North Market Street, 17th Floor
Wilmington, Delaware 19801

Telephone: (302) 652-4100 Facsimile: (302) 652-4400
EmaI1: bgrohsgal(êpszjlaw.com
Attorneys for the Chapter 11 Trustee of Inyx USA, Ltd.

Dated: April

14, 2008

i The Exaeris, Inc. and Inyx USA, Ltd. bankptcy cases were jointly administered for procedural puroses
at the commencement of those cases, by order entered on July 12, 2007 (Docket No. 39 in Bankptcy Case 07-10887). On December 6, 2007 (Docket No. 421 in Bankptcy Case No. 07-10887), the Bankptcy Cour vacated the order for joint admnistration, and the bankptcy cases have been separately
No. admstered since the entr of

that order.

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Table of Contents
PAGE
PRELIMINARY STATEMENT ....................................................................................... 1
ISSUES PRESENTED..................................................... .................................................. 4
1. Is Kachkar's appeal from the Final Westembank Financing

Order moot pursuant to section 364 ( e) of the Banptcy Code because the Banptcy Cour found that
Westemban extended the Westemban financing in good

faith to the Debtor, which Kachkar's counsel acknowledged, admitted and agreed to at the August 23,
2007 hearing on the Westembank financing? ................................4
2. Is Kachkar's appeal from the Final Westemban Financing

Order moot because the liens granted to Westembank pursuant to the Final Westemban Financing Order appealed from do not, contrary to Kachkar's assertions, prime any lien previously granted to Kachkar pursuant to the interim Kachkar DIP Order? ................................................... 5
3. Is the Bankptcy Court's interpretation of

its interim Kachkar DIP Order clearly erroneous with respect to the
extent ofthe liens granted to Kachkar by the interim

Kachkar DIP Order, on which interpretation depends the question of whether those liens were primed by the Final Westemban Financing Order? ..................................................... 5

4. Are the Bankptcy Cour's 'specific findings that the Westembank financing was negotiated and extended in
good faith and at arm's length between the Chapter 11
Trustee and Westemban, and for valid business puroses

and uses, and hence that Westembank is entitled to the protections and benefits of secti 364( e) of the Bankptcy
Code, clearly erroneous?............................................................... 5

STANDAR OF APPELLATE REVIEW................. ..... ................ ......... ...................... ... 5
STATEMENT OF THE CASE...... ..................................... ......................................... ...... 6

A. Background.................... ........ .......................................... .................... ...... 6

B. The Interim Kachkar DIP Order ................................................................ 7
C. Appointment of

the Trustee and the Westembank Financing ................... 8

ARGUMENT................................................................................................................... 17

i. KACHK'S APPEAL FROM THE FINAL WESTERNAN FINANCING
ORDER IS MOOT............................................................................................... 17

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TABLE OF AUTHORITIES (continued)
Page(s)
A. Westembank Extended the Westemban Financing in Good Faith

to the Chapter 11 Trustee Pursuant to the Final Westemban
Financing Order....... ........ ............ ........................................... ........... ...... 17
B. Kachkar Did Not Seek or Obtain a Stay ofthe Final Westembank

Financing Order....................................................................................... 18

II. THE FINAL WESTERNAN FINANCING ORDER DOES NOT
IMERMISSIBLY PROVIDE FOR THE PRIING OF THE LIENS

GRATED TO KACHKA BY THE INTERI KACHK DIP ORDER NOR AR THE BANUPTCY COURT'S FININGS
CLEARY ERRONEOUS, ITS CONCLUSIONS OF LAW IN ERROR, OR ITS DECISION AN ABUSE OR DISCRETION .........................................23
A. The Liens Granted to Westembank Do Not Impermissibly Prime
Any Lien of

Kachkar Entitled to Priority................................................ 23

B. The Bankptcy Cour's Interpretation of

its Interim Kachkar DIP Order is Not Clearly Erroneous with respect to the Extent and Priority ofthe Liens granted to Kachkar by the Interim Kachkar DIP Order, on which Interpretation Depends the Question of
Whether Those Liens were Primed by the Final Westemban

Financing Order............................... ......... ............................... ................ 25
C. The Chapter 11 Trustee's Waivers of the Doctrine of Marshaling, the Equities of the Case Doctrne, and Surcharge Rights, and the

Payment of Proceeds Provision of the Final Westemban Financing Order, Were Justified and Appropriate and Authorization ofthese Provisions by the Banptcy Cour as a Necessary Condition ofthe Westembank Financing Was Not Clearly Erroneous........................ .................... ........................................ 29

CONCLUSION................................................................................................................ 33

11

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TABLE OF AUTHORITIES
Cases
Boulloun Aircraft Holding Co. v. Smith Mgmt. (In re W. Pac. Airlines, Inc.), 181 F.3d 1191 (10th Cir. 1999) .................................................................................... 21
Burchinal v. Cent. Wash. Bank (In re Adams Apple, Inc.), 829 F.2d 1484 (9th Cir. 1987) ...................................................................................... 20

Creditors' Comm. v. Spada (In re Spada), 903 F.2d 971 (3d Cir. 1990) ........................... 5

Debbie Reynolds Management Co. v. Calstar Corp. (In re Debbie Reynolds Hotel & Casino, Inc.), 255 F.3d 1061 (9th Cir. 2001) ...................................................................................... 30

Hartford Underwriters Ins. Co. v. Union Planters Bank, NA., 530 U.S. 1 (2000).......................................................................................................... 30
In re Abbotts Dairies of Pa., Inc., 788 F.2d 143 (3d Cir. 1986) ........................................................................................... 5
In re Am. Home Mortgage Holdings, Inc.,
Ch. 11 Case No. 07-11047 (CSS) (Ban. D. DeL. Nov. 28, 2007) .............................. 30

In re Ames Dep 't Stores, Inc., 115 B.R. 34 (Bank. S.D.N.Y. 1990)............................................................................33
In re Buffets Holdings Inc.,

Ch. 11 Case No. 08-10141 (MFW) (Ban. D. DeL. Feb. 22,2008) ............................29
In re Domain, Inc., Ch. 11 Case No. 08-10132 (PJW) (Bank. D. DeL. Feb 14,2008) ...............................29
In re EDC Holding Co., 676 F.2d 945 (7th Cir. 1982) .....................................................20
In re Fla. W. Gateway, Inc.,

147 B.R. 817 (Bank. S.D. Fla. 1992) .......................................................................... 22

In re Foamex Intl, Inc., Ch. 11 Case No. 05-12685 (PJW) (Bank. D. DeL. Oct. 17,2005)...............................30
In re HomeBanc Mortgage Corp., Ch. 11 Case No. 07-11079 (KJC) (Bank. D. DeL. Sept. 13,2007)..............................30
In re New Century TRS Holdings,

Ch. 11 Case No. 07-10416 (KJC) (Bank. D. DeL. May 7,2007)................................. 30

11
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TABLE OF AUTHORITIES (continued)
Page(s)
In re Sharon Steel Corp., 871 F.2d 1217 (3d Cir. 1999) ......................................................................................... 5

In re Sharper Image Corp., Ch. 11 Case No. 08-10322 (KG) (Bank. D. DeL. Mar. 7,2008).................................. 29
In re The Colad Group, Inc., 324 B.R. 208 (Ban. W.D.N.Y. 2005) .................................................................. 31, 32
In re Tweeter Home Entm 't Group,

Ch. 11 Case No. 07-10787 (PJW) (Bank. D. DeL. June 29, 2007) .............................. 30
Kham & Nate's Shoes No.2, Inc. v. First Bank of Whiting,

908 F.2d 1351 (7th Cir. 1990) ...................................................................................... 20
Meridian Bank v. Alten,

958 F.2d 1226 (3d Cir. 1992) ......................................................................................... 5
Resolution Trust Corp. v. Swedeland Dev., Inc. (In re Swedeland Dev., Inc.),
16 F.3d 552 (3d Cir. 1994) ........................................................................... 4, 18, 19,22

Unsecured Creditors Comm. v. First Nat 'i Bank & Trust Co. (In re Ellngsen MacLean
Oil Co.),

834 F.2d 599 (6th Cir. 1987) ........................................................................................ 21
Weinstein, Eisen & Weiss, LLP v. Gil (In re Cooper Commons, LLC), 430 F.3d 1215 (9th Cir. 2005)............................................................................................................... 21

White Rose Food v. Gen. Trading Co. (In re Clinton St Food Corp.), 170 B.R. 216 (S.D.N.Y. 1994)......................................................................................21

Statutes
11 U.S. C. § 101.............. ......... ..................... ..... .............................................. .................... 1

11 U.S.C. § 361 (2) ................................ ..... ...................................................... ................. 28

11 U.S.C. § 363..................................... ............................................................................ 28
11 U.S. C. § 363( a) ............................................................................................................ 28
11 U. S. C. § 3 64( e) ..................................................................................................... passim

11 U. S. C. § 552........................................................................................................... 10, 24

iv
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TABLE OF AUTHORITIES (continued)
Page(s)
11 U.S. C. § 5 52(b ) ..................................................................................................... passim

11 U.S.C. § 552(b)(I) ................................................................................................. 24, 26
11 U. S. C. § 5 52(b )(2) ....................................................................................................... 24

Rules
DeL. Bank. L.R. 400 1-2( a)(1 )

(A) ........... ............ ....................... ................. ...................... 31

DeL. Ban. L.R. 400 1-2( a)(1 )(B) ............ ..... .............. ................ ............... ....................... 31
DeL. Bank. L.R. 400 1-2( a)(1 )(E) .... ....... ................ ....... ....... ....... ................. .................... 31

DeL. Bank. L.R. 4001- 2(b ) ............................................................................................... 32
Fed. R. Bank. P. 8013... ................................ ..................... .................. ........... ........ ........... 5

v
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PRELIMINARY STATEMENT
The Appellant, Dr. Jack Kachkar ("Kachkar"), has appealed from the final
financing order of the United States Banptcy Cour for the Distrct of

Delaware (the

"Bankptcy Court") entered on September 7,2007 (Docket No. 179 in Bankptcy Case.
No. 07-10887) (the "Final Westemban Financing Order"). The Final Westemban

Financing Order authorized Stephen S. Gray, the duly-appointed chapter 11 trustee (the

"Chapter 11 Trustee" or "Appellee") for the debtor Inyx USA, Ltd. ("Invx USA"), to
obtain postpetition credit and borrow from Westemban Puerto Rico ("Westemban") in
the aggregate amount of

up to $3,373,100 for the period August 15,2007 through and
the Banptcy Code.1

including November 30,2007, pursuant to section 364 of

Westemban also was Inyx USA's prepetition lender.

The Appellant, Kachkar, did not seek or obtain a stay of the financing

pursuant to the Final Westembank Financing Order or with respect to any of the
provisions of

that order. The Westembank financing, pursuant to the Bankptcy Court's
the Final Westemban Financing Order, was extended by

findings in paragraph G of

Westemban to the debtor Inyx USA in good faith pursuant to section 364 (e) of

the

Banptcy Code. The loan proceeds were fully disbursed by Westembank to Inyx USA,
in good faith, and in accordance with and for the puroses set forth in the Final
Westembank Financing Order.

1 The provisions of 11 U.S.c. § 101 et seq. are referred to herein as the "Bankptcy
Code."
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The Appellant, Kachkar, now seeks reversal ofthe Final Westemban
Financing Order and the terms and conditions of such order, and remand to the

Banptcy Cour with instrctions to "preserve the lead position afforded by the
Kachkar DIP Order,,,2 pursuant to which order Kachkar previously had advanced

postpetition financing both to Exaeris, Inc. and to Inyx USA, prior to the appointment of
Stephen S. Gray

as the Chapter 11 Trustee in the Inyx USA case. The Appellant,
the Final Westembank Financing Order he was

Kachkar, further asserts that by entry of

deprived of, and should be granted upon such remand, "first priority secured post-petition

liens upon (i) all unencumbered property ofthe Debtors' estates not subject to prior valid,

perfected first priority security interests of any pary, and (ii) all post-Petition Date

property of the Debtors" other than avoidance actions under Chapter 5 of the Banptcy
Code and other than the proceeds of such avoidance actions.3 Finally, the Appellant asks

this Cour to reverse certain lender protection provisions and other provisions of the Final
Westembank Financing Order, including replacement liens granted to Westembank to
adequately protect Westemban to the extent of any diminution in value of its prepetition

2 The interim Kachkar DIP Order is defined by the Appellant on page 3 of Appellant's

Brief as the order entered by the Bankptcy Cour on July 12, 2007 (Docket No. 43 in Bankptcy Case No. 07-10887), authorizing Kachkar to advance financing on an interim basis to both Exaeris, Inc. and to Inyx USA, and that definition is utilized herein. The Appellant, Kachkar, sought but did not obtain a good faith finding in the interim Kachkar
DIP Order. The Bankptcy Court, following the hearng on the interim Kachkar DIP Order, excised the proposed good faith finding in the interim Kachkar DIP Order prior to

entering such order. See, excised paragraph F ofthe Kachkar DIP Order. Final approval of the Kachkar financing was never obtained, and a final order on the Kachkar financing
has not been entered.

3 Appellant's Brief, p. 45.
2
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collateral,4 waivers of

marshaling, equities of

the case, and surcharge, and the payment of
its Lender's

proceeds provision that requires Westemban to be paid the proceeds of

Collateral in payment of

its loans.s

The Appellant, Kachkar, an insider ofInyx USA and Exaeris, Inc. (the
"Debtors"), seeks such remand and instruction from this Cour notwithstanding his faI1ure
to seek or obtain a stay and the express provisions of section 364 ( e) applicable to appeals
from postpetition financing orders. Pursuant to section 364(e) of

the Banptcy Code,

in circumstances of an authorized postpetition loan that has been fully disbursed, no

reversal or modification on appeal can "affect the validity of any debt so incurred, or any
priority or lien so granted, to an entity that extended such credit in good faith," unless

"the incurrng of such debt, or the granting of such priority or lien, were stayed pending

appeaL" It is beyond dispute that no such stay was obtained. Accordingly, the liens and
priority granted to Westembank pursuant to the Final Westembank Financing Order may

not be affected by this appeaL. Even were the Bankptcy Code to provide otherwise
(which it does not), the Appellant, Kachkar, has failed to show that the Final
Westemban Financing Order impermissibly primed the liens granted to him by the

interim Kachkar DIP Order. The Kachkar appeal is moot and should be dismissed.

4 Appellant's Brief, p. 39.
S Appellant's Brief, p. 39-44.

3
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Resolution Trust Corp. v. Swedeland Dev., Inc. (In re Swedeland Dev., Inc.), 16 F.3d 552,
562-63 (3d Cir. 1994).

With respect to the additional "non-lien" lender protections granted to

Westernbank by the Final Westernban Financing Order, by the marshalling, equities of
the case and surcharge waivers complained of

by Kachkar, the Banptcy Cour

correctly determined to grant those protections because without them Westernbank would

not lend and Inyx USA would have been unable to fud its operations. Similarly, the
payment of proceeds provision of

the Final Westernbank Financing Order requires
Western

merely that the Westernbank loans be paid from the proceeds of

bank's

"Lender's CollateraL." The Banptcy Court's decision with respect to these provisions
was not clearly erroneous and should be upheld.

ISSUES PRESENTED
1. Is Kachkar's appeal from the Final Westernbank Financing Order

moot pursuant to section 364 (e) of

the Bankptcy Code because the Banptcy Court

found that Westernban extended the Westernbank financing in good faith to the Debtor,

which Kachkar's counsel acknowledged, admitted and agreed to at the August 23,2007
hearng on the Westernban financing?6

6 Transcript of

Banptcy Cour Hearng held on August 23,2007, page 11, lines 3-6,

referred to herein as "D-I0." All references to items designated for inclusion in the Record are referred to record in Appellant's Statement oflssues and Designation of herein as "D-_." All references to items designated for inclusion in the record in the
Chapter 11 Trustee's Counter-Designation of

Record and Counter-Statement oflssues are

referred to herein as "CDT - ."
4
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2. Is Kachkar's appeal from the Final Westernbank Financing Order

moot because the liens granted to Westernban pursuant to the Final Westernban
Financing Order appealed from do not, contrary to Kachkar's assertions, prime any lien previously granted to Kachkar pursuant to the interim Kachkar DIP Order?
3. Is the Bankptcy Cour's interpretation of

its interim Kachkar DIP

Order clearly erroneous with respect to the extent of

the liens granted to Kachkar by the

interim Kachkar DIP Order, on which interpretation depends the question of

whether

those liens were primed by the Final Westernbank Financing Order?

4. Are the Bankptcy Court's specific findings that the Westernban
financing was negotiated and extended in good faith and at ar's length between the

Chapter 11 Trustee and Westernbank, and for valid business purposes and uses, and
hence that Westernbank is entitled to the protections and benefits of secti 364( e) of the

Bankptcy Code, clearly erroneous?

STANDAR OF APPELLATE REVIEW
A bankptcy court's findings of

fact are not to be set aside unless clearly

erroneous. See Fed. R. Ban. P. 8013; Creditors' Comm. v. Spada (In re Spada), 903

F.2d 971,975 (3d Cir. 1990). Conclusions oflaw are subject to de novo review. In re

Abbotts Dairies ofPa., Inc., 788 F.2d 143, 147 (3d Cir. 1986). The Cour considering an
appeal must "break down mixed questions of law and fact, applying the appropriate
standard to each component." Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir.

1992), citing, In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1999).
5
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STATEMENT OF THE CASE
Facts applicable to this appeal are set forth in the findings of fact made by

the Bankptcy Court in the interim Kachkar DIP Order and the Final Westernban
Financing Order are incorporated as if fully set forth herein. Certain of

those facts and

other relevant facts are set forth below and are referred to in connection with Appellee's

arguent.
A. Backl!round

On July 2,2007 (the "Petition Date"), each ofthe Debtors, Exaeris, Inc., a
Delaware corporation, and Inyx USA, an Isle of

Man corporation, commenced a

voluntary case under chapter 11 ofthe Bankptcy Code in the Distrct of Delaware. The
chapter 11 cases were referred to United States Bankptcy Judge Kevin Gross. D-l.
The declaration in support of

the Debtors' first day motions and applications, dated July

6,2007, was executed by Kachkar, as the Chief

Executive Officer and Chairman ofInyx,
both Exaeris, Inc.

Inc., a non-Debtor entity that allegedly was the parent corporation of

and Inyx USA. Id. irir 5, 12 n. 4.
Westernbank asserted that, as of

the Petition Date, Inyx USA was indebted

to it in an amount in excess of$140 milion, D-6 ir 9; CDT-l ir 17; CDT-2 ir 16; CDT-4
ir 3, secured by perfected, first priority liens on all of

the assets ofInyx USA. D-6 at 3;

CDT-l at 6-8; CDT-2 ir 14.
Inyx USA operated on the Petition Date, and through the Chapter 11

Trustee continues to operate postpetition, a pharmaceutical plant in Manati, Puerto Rico,
6
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producing pharaceutical products. D-l ir 7; D-6 ir 7; CDT-2 ir 5. Cash flow from Inyx

USA's operations was inadequate to fud its postpetition expenses. D-l ir 9.
B. The Interim Kachkar DIP Order

On July 3,2007, the Debtors, Exaeris, Inc. and Inyx USA, as debtors in
possession, moved the Banptcy Court for authority pursuant to section 364 of the

Bankptcy Code to obtain credit from Kachkar in an amount up to $2 million. D-l ir 12.
On July 11, 2007, the Bankptcy Court entered the interim Kachkar DIP

Order. The interim Kachkar DIP Order authorized Exaeris, Inc. and Inyx USA, as

debtors in possession, to borrow up to $2.1 milion, to be advanced to the Debtors by
Kachkar in his discretion. D-2 ir 3.

The interim Kachkar DIP Order provided at paragraphs 5, 6 and 7 that:
5. As a condition for the Debtors' use of the DIP

Financing, the Debtors are authorized to grant and by this
Interim Order shall be deemed to have granted to Jack Kachkar liens upon all unencumbered property of the Debtors' estates not subject to prior valid, perfected first priority security

interests of any party, including those of Westernban Puerto
Rico.
6. In addition, the Debtor (sic) is authorized to and

hereby does grant to Jack Kachkar a superpriority,
administrative claim pursuant to Section 364(c)(I) of the

Bankptcy Code.
7. As a fuher condition for the Debtors' use of the

DIP Financing, the Debtors are authorized to grant and by this Interim Order shall be deemed to have granted to Jack Kachkar liens upon all post-Petition Date property of the Debtors, not
including any causes of action arsing under chapter 5 of the

Bankptcy Code or proceeds thereof.

7
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Id. irir 5_7.7 No provision of

the interim Kachkar DIP Order provided for the priming of

Westernbank's asserted prepetition liens and claim by the liens or claim granted by the
interim Kachkar DIP Order. Id. None of

the liens granted to Kachkar by the Kachkar

DIP Order were granted priority over the liens of any other party, whether existing at the
time of entry of

the interim Kachkar DIP Order or subsequently arsing. Id.
The Banptcy Cour declined to find that the Kachkar financing was

extended in good faith. The finding of good faith proposed by Kachkar and the
borrowers in paragraph E of

the proposed interim Kachkar DIP Order was excised by the

Banptcy Court. D-2 irE (excised). As a consequence, the Kachkar financing
extended pursuant to the interim Kackar DIP Order is not entitled to any of

the

protections of section 364 ( e) of the Bankptcy Code that are afforded to a postpetition
lender that extends credit in good faith pursuant to sections 364 of

the Banptcy Code.

11 U.S.c. § 364(e).

c. Appointment of

the Trustee and the Westernbank Financinl!

Shortly after entr ofthe interim Kachkar DIP Order, on July 13, 2007, the

Bankptcy Cour granted the Debtors' motion for entr of an order pursuant to Rule
1015 of the Federal Rules of

Banptcy Procedure directing that the chapter 11 cases of

7 As noted, the Kachkar DIP Order is an interim order, not a final order, and the

provisions therefore remain subject to revision by the Banptcy Cour prior to entry of
a final order on the Kachkar financing.
8
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Exaeris, Inc. and Inyx USA be consolidated for joint administration puroses only.
D-5 ir A.

On August 13, 2007, following a motion for the appointment of a trstee
made by the Offce of

the United States Trustee and Westernbank, Inyx USA consented

to the appointment ofa chapter 11 trustee. D-5 ir B; D-ll ir B; D-16 ir B. On August 7,

2007, at the recommendation of the Offce of the United States Trustee, the Banptcy
Court appointed Stephen S. Gray as the Chapter 11 Trustee for Inyx USA. Id.
Upon his appointment, the Chapter 11 Trustee found that Inyx USA did

not have sufficient fuds to meet its payroll and other operating costs and expenses. D-3

at 3. The Chapter 11 Trustee submitted to the Banptcy Court that: Without the necessary funds to purchase materials and meet its
payroll and other expenses, the Debtor's manufacturng

operations wil rapidly grnd to a halt. Milions of dollars in
inventory likely will be lost or decrease in value, the goodwill that the Debtor enjoys with its customers and vendors wil be severely damaged, key contracts with those customers and

vendors wil be cancelled or terminated, and the Debtor's
employees wil

lose their jobs. A termination of the Debtor's

operations - or even an interrption in production - wil result

in irreparable harm to the Debtor's estate and the Debtor's
stakeholders.

D-6 ir 15. The Trustee immediately commenced negotiations with Westernban for
postpetition financing. D-3 at 3.

On August 16, 2007, the Banptcy Cour entered an emergency order
(the "Emergency Order") pursuant to sections 362, 363 and 364 of

the Bankptcy Code

authorizing the Trustee to obtain postpetition financing from Westernbank and granting

9
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other relief (D-5), and Westernban extended credit to the Trustee in an amount up to
$428,000 (the "Emergency Loan") pursuant to the Emergency Order, to be used for the
purposes of

payroll and direct operating expenses ofInyx USA's plant in Manati, Puerto

Rico and for other administrative expenses. Id. ir 2(a). The repayment ofthe Emergency

Loan was collaterally secured by first priority perfected liens and securty interests on all

property ofthe Inyx USA estate pursuant to sections 364(c)(2), 364(c)(3) and 364(d) of

the Bankptcy Code, expressly made subject to Kachkar's liens pursuant to paragraph
2( d) of the Emergency Order, as well as other protections as specified in the Emergency

Order. Id. irir 2(c)-(e).

The Emergency Order was entered by the Bankptcy Cour following
hearngs held before it on August 15 and 16,2007. D-3; D-4. At the August 16,2007
hearng, Kachkar objected to the proposed Emergency Order,8 claiming that the Order

would somehow circumscribe the liens granted pursuant to the interim Kachkar DIP
Order. D-4 at 10-12. Westernbank agreed to defer the issue of

the priming ofKachkar's

liens to a later date, (i) it was understood at the hearng that the liens granted to Kachkar
under the interim Kachkar DIP Order were subordinate to the prepetition liens held by

Westernbank, and (ii) Westernban's position at the hearing was that its prepetition liens
extended to any property acquired postpetition by Inyx USA with proceeds of
Westernbank's collateral security. See, 11 U.S.C. § 552. Westernbank fuher asserted
8 The official committee of

unsecured creditors appointed in the jointly administered
the proposed

chapter 11 cases (the "Committee") also objected to certain aspects of

Emergency Loan. D-3 at 11-13; D-7. The Committee is not a pary to this appeaL.
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that every asset ofInyx USA was subject to Westernban's prepetition liens. Id. at 1316; D-ll ir 2(c).

The Emergency Order was submitted to the Bankptcy Cour containing
the provision making Westernban's postpetition Financing Liens subject and
subordinate to Kachkar's postpetition liens as set forth in paragraph 2( d) of the
Emergency Order. At the conclusion of

the August 16,2007 hearng, the Banptcy

Court stated that it was "satisfied with the language as proposed in the Emergency Order"

and granted the Chapter 11 Trustee's motion. Id. at 17. Westernban consented to a
reservation ofKachkar's right "to prove (at a later time) the benefit that (Kachkar)

conferred upon the Inyx USA estate with (his) DIP." Id. at 18. The Emergency Order

approving the Westernbank financing was signed by the Bankptcy Cour on August 16,
2007, and provided, inter alia, that:

(Westernban's postpetition liens) shall be subject and subordinate to the liens granted under the Kachkar DIP (as defined below) on (1) unencumbered property of the Debtor's estate as of July 11,2007, if any, or (2) property acquired after the Petition Date and prior to the date hereof by USA or the Trustee from fuds used for USA's direct benefit provided under the postpetition financing extended

to the Debtor pursuant to the Banptcy Cour's
Emergency Order dated July 11, 2007 (the "Kachkar DIP"), if any.
D-5 ir 2( d).

Thereafter, by motion dated August 21, 2007 (the "Trustee's Motion"), the
Chapter 11 Trustee moved for interim and final orders authorizing him to obtain

financing from Westernban and grant Westernbank liens, priorities and other protections
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for loans to be made to the Chapter 11 Trustee for the period through November 30,
2007. D-6.

The Chapter 11 Trustee, at paragraph 27.b of

the Trustee's Motion, in an

abundance of caution in accordance with Del.Ban.L.R. 4001-2(a)(i), and prior to
consideration by the Bankptcy Court ofthe Trustee's Motion, highlighted that: "The
replacement liens granted with respect to the Debtor's use of Western

ban's cash

collateral have the same priority as the Prepetition Liens and accordingly prime the liens
granted under the Kachkar DIP to the extent of any property of

the Debtor's estate that

was unencumbered on the Petition Date. Westernban asserts that there was no such
unencumbered property on the Petition Date." D-6 ir27.b.

The interim hearng on the Trustee's Motion was held by the Bankptcy
Court on August 23, and the final hearing was held on September 7,2007. D-I0; D-14.

Kachkar objected to the proposed financing. D-8; D-13. At the August 23 hearing, the

Chapter 11 Trustee and Westernban agreed to the entr of an interim order (the "Interim
Westernbank Financing Order"), authorizing the Trustee to borrow up to an aggregate

amount of$I,502,100, as requested in the Trustee's Motion. D-I0 at 26. Pursuant to the
Interim Westernbank Financing Order, the Chapter 11 Trustee was authorized to borrow

from Westernban in accordance with the interim budget for the period through

September 6,2007 attached to the Interim Westernbank Financing Order. D-ll ir 2(a).
At the August 23,2007 hearing, Kachkar by his counsel made the same
objections that Kachkar had made to entry ofthe Emergency Order, and also objected to
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entr of

the proposed final order to the extent that it contained the waiver of certain

provisions of

the Banptcy Code as they related to Westernban. D-I0 at 6-17.

Kachkar did not contest or object to the Banptcy Court's finding that the Westernban
financing, if approved, was negotiated in good faith and that the financing to be disbursed

by Westernbank likewise would be in good faith. Kachkar's attorney stated: I don't begrdge a good faith finding, they can have it. I have no reason to believe that the negotiations that have taken place with the trustee are anything other than good faith. However, without the protections afforded to Dr. Kachkar, they wil be able to shield themselves behind that good faith finding, and Dr. Kachkar wil have limited relief on appeal.
Id. at 11 (emphasis added).

At the August 23 hearng, United States Bankptcy Judge Gross clarfied
his finding on the priming issue, stating:
Having read the propose(d) Interim Order, I am of

the view that whatever rights Dr. Kachkar has on the -- -- essentially on the priming issue, are preserved. That's been so represented and I also observe that the stage is set for a fight at a later date as to the allocation of assets, the postpetition assets, the proceeds, the cash proceeds from cash collateral and that those positions of the parties are not upset by the proposed order, and under the circumstances I am prepared to enter the interim order as presented by the
chapter 11 trstee here.

Id. at 26.

The Interin Westernban Financing Order was entered on August 23,

2007. D-ll. The Bankptcy Cour made the following finding, among others:
Cash Collateral and the borrowing provided in this Interim Order was negotiated in good faith and at arms' length between the Trustee and
F. Good Faith. The use of

Westernbank. That credit to be extended under this Interim
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Order wil be extended in good faith, and for valid business which is that puroses and uses, the consequence of
Westernban is entitled to the protections and benefits of

section 364(e) ofthe Banptcy Code.
Id. ir F.

The Interim Westernbank Financing Order expressly provided that:

(Westernbank's postpetition liens) shall be subject and subordinate to the liens granted under the Kachkar DIP (as defined below) on (1) unencumbered property of the Debtor's estate as of July 11, 2007, if any, or (2) property acquired after the Petition Date and prior to the date hereof by USA or the Trustee from fuds used for USA's direct benefit provided under the postpetition financing extended

to the Debtor pursuant to the Banptcy Cour's Interim
Order dated July 11,2007 (the "Kachkar DIP"), if any.
Id. ir 2(c).

On September 7, 2007, the Bankptcy Court held the final hearing on the
Westernbank financing. D-14. At that hearing, Kachkar's counsel raised the same
objections to the proposed final order as she had argued in opposition to the Interim

Westernbank Financing Order. Id. at 3-5. After considering the objections, the

Bankptcy Court granted the Trustee's Motion, noting that the financing by
Westernbank was "critical and essential to the Trustee's administration of

the USA estate
the USA

and to avoid immediate and irreparable harm to the Trustee's administration of

estate." D-16 at 3-4. As agreed at the prior hearing, Westernban did not require the
priming of any liens that might have been granted to Kachkar pursuant to the interim
Kachkar DIP Order. D-14 at 20-24. Any issues regarding the priority of

the prepetiton
Kachkar and Westernbank,
14

liens of

Western

ban and the postpetition liens of

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respectively, with respect to any property ofInyx USA's estate, were deferred to a later
date. Id. at 22.

The Banptcy Cour entered the Final Westernban Financing Order on
September 7,2007 following the final hearing on the Trustee's Motion, authorizing the
Chapter 11 Trustee to borrow from Westernban an aggregate amount of

up to

$3,373,100, inclusive of

the fuds advanced under the Emergency Order and the Interim

Westernbank Financing Order, and pursuant to the budget attached to the Final

Westernbank Financing Order (the "Budget"). D-16. The Final Westernbank Financing
Order granted to Westernbank perfected liens, administrative expense status and other
protections, including those that were incorporated into the Interim Westernban

Financing Order. Id.

The Banptcy Cour's findings set forth in the Final Westernban
Financing Order included, inter alia:
G. Good Faith. The use of Cash Collateral and the borrowing provided in this Order was negotiated in good faith and at arms' length between the Trustee and

Westernban. That credit to be extended under this Order

will be extended in good faith, and for valid business which is that puroses and uses, the consequence of Westernbank is entitled to the protections and benefits of Section 364( e) of the Bankptcy Code.
Id. ir G.

The Final Westernbank Financing Order again specified that:

(Westernbank's postpetition liens) shall be subject and subordinate to the liens granted under the Kachkar DIP (as defined below) on (1) unencumbered property ofthe Debtor's estate as of July 11,2007, if any, or (2) property acquired after the Petition Date and prior to August 16,
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2007 by USA or the Trustee from funds used for USA's direct benefit provided under the postpetition financing

extended to the Debtor pursuant to the Banptcy Court's
Order dated July 11, 2007 (the "Kachkar DIP"), if any.
Id. ir 2(c).

Kachkar did not seek or obtain a stay ofthe Final Westernban Financing
Order.

Westernban has fully advanced and extended the postpetition loan
authorized pursuant to the Final Westernban Financing Order, and the Trustee has

expended the proceeds of the advances in the operation ofthe business oflnyx USA
pursuant to the approved Budget and in payment ofpostpetition expenses ofInyx USA's
estate.

¡Remainder of page left intentionally blank)

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ARGUMENT
I.

KACHKA'S APPEAL FROM THE FINAL
WESTERNBANK FINANCING ORDER IS MOOT
The Final Westernban Financing Order was entered notice and hearings,
and authorized the Chapter 11 Trustee to obtain credit and incur debt pursuant to the

terms and conditions specified in the order pursuant to section 364 ofthe Banptcy
Code. All objections to the Trustee's Motion, including Kachkar's, were overrled by

the Bankptcy Cour.
Section 364(e) of

the Bankptcy Code, as applied by the Third Circuit,

governs this appeaL. That section provides: The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incured, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurrng of such debt, or the granting of such priority or lien, were stayed pending appeaL.
11 U.S.c. § 364(e).

A. Westernbank Extended the Westernbank Financing in Good Faith to the Chapter 11 Trustee Pursuant to the Final Westernbank Financinl! Order
It is uncontested that the Westernban financing was negotiated by

Westernbank and extended to the Chapter 11 Trustee in good faith under Bankptcy
Code section 364( e). The Bankptcy Court made a finding of good faith in paragraph G
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ofthe Final Westernban Financing Order, and Kachkar's counsel acknowledged on the

record of

the August 23 hearng that the Westernban financing was made in good faith.

D-16 irG; D-l 0 at 11. The good faith finding is not challenged by Kachkar in his
Appellant's Brief.

B. Kachkar Did Not Seek or Obtain a Stay ofthe Final Westernbank Financinl! Order
Kachkar did not seek or obtain a stay of

the Final Westernbank Financing

Order. Westernbank proceeded to fully disburse the postpetition loan pursuant to the
Final Westernbank Financing Order, for Inyx USA's purposes pursuant to the Budget and

in payment ofpostpetition expenses ofInyx USA's estate. Absent a stay, the validity of
the fully disbursed debt incured by the Chapter 11 Trustee, and the liens, priorities and

other protections granted to Westernbank pursuant to the Final Westernban Financing
Order, may not be reversed or modified on appeal, and the Kachkar appeal is moot as
provided by section 364(e) of

the Bankptcy Code.

In Resolution Trust Corp. v. Swedeland Development Group, Inc. (In re

Swedeland Development Group, Inc.), 16 F.3d 552 (3d Cir. 1994), the Third Circuit

Cour of Appeals unequivocally held that an appeal from a bankptcy court order
authorizing superpriority postpetition financing that was fully disbursed prior to an

appeal and expended for working capital by the borrower was moot. Id. at 562-63. The

Third Circuit explained that under "these circumstances, the bankptcy cour could not
on remand enjoin Swedeland from using the proceeds ofthe . . . loan nor could it order

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Swedeland to return the proceeds, as they were gone." /d. at 563. The Third Circuit also
determined that other protections extended to the lender, such as the requirement and
existence of an interest reserve which was deposited by the debtor for the benefit of

the

postpetition lender, likewise were protected by section 364( e). Id. The Third Circuit

fuher noted that though the interest reserve was property of

the debtor, it was

established for the benefit of

the postpetition lender, and therefore "voiding the reserve

would impact the security for which (the postpetition lender) bargained and thus would

be inconsistent with the protection afforded it by section 364(e)." Id. The Court found
that even if effective relief could be obtained by voiding the reserve, "in view of section

364(e) it cannot be done." Id.
Kachkar's appeal similarly cannot be undone. Pursuant to the Final
Westernban Financing Order, the Westernban financing has been fully disbursed and

used for the puroses specified in the Final Westernban Financing Order. Kachkar
faI1ed to seek or obtain a stay of the Final Westernban Financing Order in either the

Bankptcy Court or this Cour, with full knowledge of the effect of section 364( e), as
acknowledged by his attorney. D-I0 at 11. Kachkar must now be held to the
consequences of

his decision. The circumstances presented by the Westernbank

financing are identical to those that were presented in respect of the financing order in

Swedeland. As determined by the Third Circuit in Swedeland, Kachkar's appeal is moot
and the terms of the Westernban financing cannot be reversed or modified on appeal
absent a stay.

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The purose of section 364( e) of the Banptcy Code is to induce a
postpetition financing made by a lender in good faith to a trstee or trstee in a

bankptcy proceeding. The statute assures a postpetition lender that a loan extended
pursuant to section 364( e) wil be enforced on the terms of the order entered by the
banptcy court. Accordingly, unless a stay of

the financing order is obtained pending

appeal, or the bankptcy court did not find that the lender had acted in bad faith, an
appellate court may not upset the validity ofthe debt incured or the protections granted
to the postpetition lender. See 11 U.S.c. § 364(e); see also Burchinal v. Cent. Wash.
Bank (In re Adams Apple, Inc.), 829 F.2d 1484, 1487 (9th Cir. 1987). A good faith

lender that "extends credit in reliance on a financing order is entitled to the benefit ofthat
order, even if it turns out to be legally or factually erroneous." Kham & Nate's Shoes No.
2, Inc. v. First Bank of

Whitng, 908 F.2d 1351, 1355 (7th Cir. 1990).
If

Kachkar wished to preserve his right of appeal, it was incumbent upon

him to seek a stay pending appeaL. As stated by the Seventh Circuit in In re EDC
Holding Co., 676 F.2d 945 (7th Cir. 1982), section 364(e):

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seek(s) to overcome people's natual reluctance to deal
with a bankpt firm whether as purchaser or lender by

assurng them that so long as they are relying in good faith on a bankptcy judge's approval of the transaction they need not worry about their priority merely because some
creditor is objecting to the transaction and is trng to get

the district cour or the court of appeals to reverse the banptcy judge. The proper recourse for the objecting creditor is to get the transaction stayed pending appeal.
Id. at 947 (emphasis added). See also, Weinstein, Eisen & Weiss, LLP v. Gil (In re
Cooper Commons, LLC), 430 F.3d 1215, 1218 (9th Cir. 2005) (holding not only that

appeal from postpetition financing was moot because of section 364, but also that "any
provisions of

the financing agreement that (lender) might have bargained for or that

helped to motivate its extension of credit are protected by § 364( e)"), cert. denied, 546

u.s. 1174 (2006); Boulloun Aircraft Holding Co. v. Smith Mgmt. (In re W. Pac. Airlines,

Inc.), 181 F.3d 1191, 1196 (lOth Cir. 1999) (holding that where DIP fuds were fully
disbursed in reliance on postpetition financing agreement, lender was entitled to full section 364(e) protection and appeal of order granting debtor's interest in lease of aircraft
as collateral to postpetition lender was moot); Unsecured Creditors Comm. v. First Nat 'i

Bank & Trust Co. (In re Ellngsen MacLean Oil Co.), 834 F.2d 599,604 (6th Cir. 1987)
(holding that waiver in financing order of debtors' ability to challenge bans' prepetition
securty interest was protected by section 364( e) and that appeal of order was moot in

absence of stay pending appeal); White Rose Food v. Gen. Trading Co. (In re Clinton St.
Food Corp.), 170 B.R. 216, 220 (S.D.N.Y. 1994) (holding that section 364(e) prohibits

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not only outright invalidation of lien or priority where challenging pary failed to seek a
stay, but also modification of other terms ofpostpetition lender's bargained-for

consideration); In re Fla. W. Gateway, Inc., 147 B.R. 817, 819 (Bank. S.D. Fla. 1992)
(applying protections of section 364( e) and denying motion for reconsideration of
postpetition financing order where party seeking relief faI1ed to obtain stay pending
appeaL.

Kachkar suggests that "(m)any issues could be resolved, and without har
to the Trustee or the estate," if

the Final Westernban Financing Order "was revised" at

this time. Appellant's Brief, p. 45. But Kachkar makes no specific suggestion regarding

how this can be done short of asking this Cour to instrct the Bankptcy Cour to
"resolve the conflct of

the two financing orders... to preserve the lead position afforded

by the Kachkar DIP Order." Id. As set forth below, Kachkar's liens have no "lead
position" to preserve beyond that provided by the provisions of paragraphs 2( d) and 4 of

the Final Westernbank Financing Order. But as in Swedeland, even were it otherwise,
there is no way that giving Kachkar what he now requests "can be done on any
basis. . . without either infrnging" W esternban' s "protections under section 364( e) or
exceeding the cour's powers to grant relief following the reversal" of

the Bankptcy

Cour's section 364 Final Westernban Financing Order. Resolution Trust Corp. v.

Swedeland Development Group, Inc. (In re Swedeland Development Group, Inc.), 16

F.3d at 563. Accordingly, as in Swedeland, Kachkar's appeal is moot.

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Kachkar failed to seek or obtain a stay of the Final Westernban Financing
Order, which the Banptcy Cour found, and Kachkar's counsel acknowledged, was

made in good faith. Pursuant to Bankptcy Code section 364( e), Kachkar's appeal is
moot and the relief sought should be denied.

II. THE FINAL WESTERNBANK FINANCING ORDER DOES NOT IMPERMISSIBLY PROVIDE FOR THE PRIMING OF

THE LIENS GRATED TO KACHKA BY THE INTERIM KACHKA DIP ORDER NOR AR THE BANKRUPTCY COURT'S FINDINGS CLEARY
ERRONEOUS, ITS CONCLUSIONS OF LAW IN ERROR, OR ITS DECISION AN ABUSE OR DISCRETION
A. The Liens Granted to Westernbank Do Not Impermissibly Prime Any Lien

of Kachkar Entitled to Priority
The liens granted to Westernban by the Final Westernban Financing
Order do not impermissibly prime the liens granted by the interim Kachkar DIP Order. The Final Westernbank Financing Order expressly provided that:

(Westernban's postpetition liens) shall be subject and subordinate to the liens granted under the Kachkar DIP (as defined below) on (1) unencumbered property ofthe Debtor's estate as of July 11,2007, if any, or (2) property acquired after the Petition Date and prior to the date hereof by USA or the Trustee from funds used for USA's direct benefit provided under the postpetition financing extended

to the Debtor pursuant to the Banptcy Cour's Interim
Order dated July 11, 2007 (the "Kachkar DIP"), if any.
Id. ir 2(c).

It is clear from clause (1) above that Westernban's liens in
unencumbered property ofInyx USA's estate as of July 11, 2007, if any, are subject and
subordinate to the liens granted to Kachkar by the interim Kachkar DIP Order entered on

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the following day, July 12, 2007. It is equally obvious, pursuant to clause (2) above, that

Westernban's liens in estate property acquired after the Petition Date from the proceeds
of the Kachkar financing, which were fully advanced to Iny USA prior to entr of the

Interim Westernban Financing Order, are subject and subordinate to the liens granted by
the interim Kachkar DIP Order.

But what of liens in estate property acquired postpetition from the
proceeds of Western

ban's prepetition collateral? It is undisputed that the liens granted

to Kachkar by the interim Kachkar DIP Order did not prime the prepetition liens of
Westernbank. Neither paragraph 5 nor paragraph 7 nor any other provision of

the interim
the

Kachkar DIP Order grants any priming liens to Kachkar, nor does any provision of

interim Kachkar DIP Order purport to deprive the Westernbank of any of its existing
liens pursuant to the equities of the case doctrine of

Bankptcy Code section 552(b)(2)

or otherwise. Pursuant to Bankptcy Code section 552(b)(1), a prepetition lender's liens

that extend to a debtor's prepetition property and to "proceeds, products, offspring, or

profits of such property," also extend to postpetition proceeds, products, offspring, or
profits of such property. 11 U.S.C. § 552(b )(1).

The provision of

the Final Westernbank Financing Order expressly

subjecting and subordinating Westernbank's liens to Kachkar's liens to the extent of
collateral acquired with the proceeds of the Kachkar financing makes clear that any

prepetition liens of Westernban in prepetition collateral and any "proceeds, products,
offspring, or profits of such property" are not subordinate to Kachkar's liens granted by
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the interim Kachkar DIP Order. The Banptcy Cour's characterization and
preservation of

the lenders' respective lien positions in the Final Westernbank Financing

Order should be upheld.

B. The Bankruptcy Court's Interpretation of its Interim Kachkar DIP Order is
Not Clearly Erroneous with respect to the Extent and Priority of the Liens
granted to Kachkar by the Interim Kachkar DIP Order, on which

Interpretation Depends the Question of Whether Those Liens were Primed
bv the Final Westernbank Financinl! Order
Furher, the Kachkar's liens granted to him by the interim Kachkar DIP

Order are not expressly given priority over any lien of Westernban or any other liens
whatsoever, whether those other liens arose prior to or after entry of the interim Kachkar

DIP Order. Paragraphs 5 and 7 merely grant to Kachkar "liens" upon the property
described, with no description whatsoever of

the priority afforded to Kachkar's liens,

other than the express subordination ofKachkar's liens to preexisting liens in paragraph 5

ofthe interim Kachkar DIP Order. Had Kachkar required liens having priority over
existing or subsequent financings extended to Inyx USA, he could have insisted upon

such priority as a condition to his extending the Kachkar financing. He did not.9

the interim Kachkar DIP Order in paragraphs 5 and 7 had granted to Kachkar first priority lien status or priority over subsequently granted liens, which it did not, Kachkar obtained only interim approval ofthe Kachkar financing pursuant to the interim Kachkar DIP Order. Accordingly, all of the terms and provisions including the priority of any liens granted by the interim Kachkar Financing Order remained subject to change
until entry of the final order on the Kachkar financing. Federal Rule of

9 Even if

Bankptcy

Procedure 4001(c)(I)(B), expressly recognzing this doctrne in the amendments that became effective on December 1,2007, now requires an interim financing order to identify any lien provision "that is proposed to remain in effect if interim approval is is denied." Though, as noted, this change in the Rule requiring granted, but final relief such a statement in an interim financing order became effective after entr of the interim
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There simply is no priming by Westernban pursuant to the Final

Westernban Financing Order. That order expressly provides that the liens granted to
Westernbank are subordinate to Kachkar's postpetition liens in unencumbered property
and property acquired from the proceeds of

the Kachkar financing, and does nothing to

alter the continuation of any prepetition liens of Westernban in postpetition proceeds
pursuant to Banptcy Code section 552(b)(I). Paragraph 5 of

the interim Kackhar DIP

Order provided Kachkar with "liens upon all unencumbered property ofthe Debtors'
estates not subject to prior valid, perfected first priority security interests of any party,
including those of Western

bank Puerto Rico." D-2, ir 5 (emphasis added). The right of

Kachkar to prove the existence of such unencumbered property has been preserved and is
not affected by the Final Westernban Financing Order.

Kachkar repeatedly asserts that the interim and final orders entered on the
Westerban financing somehow altered the priority ofthe liens granted to Kachkar. In

support Kachkar argues that the language in the Final Westernbank Financing Order

somehow "redefined" Kachkar's collateral because it is other than the precise language
that he requested be utI1ized. Even assuming that the interim Kachkar Financing Order gave Kachkar priming liens over subsequently granted liens (which, as set forth above, it

did not), the language of the Final Westernbank Financing Order expressly preserves any
priority of

Kachkar's liens granted by the interim Kachkar DIP Order in unencumbered

Kachkar Financing Order, the doctrine behind such new requirement is clearly that an interim financing order is not final, and remains subject to change, untI1 it is finaL.
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property, and equally expressly preserves the priority of any prepetition liens of
Westernban in prepetition collateral and the proceeds thereof

under Banptcy Code

section 552(b). D-16, ir 2(c). Kachkar similarly asserts that that language ofthe Final
Westernbank Financing Order "impermissibly shift

( s) the burden to Dr. Kachkar to prove

that post-petition property was acquired with the proceeds of

the Kachkar DIP
proof

Financing." Appellant's Brief, p. 23. But such requirement of

arses from

Bankptcy Code section 552(b) itself, which extends any prepetition liens of
Westernban to the proceeds of its collateral, not from any order of

the Bankptcy

Court.

Indeed, Westernbank, through its counsel, expressly conceded at the
August 23 hearng that Westernbank's liens granted by the Interim Westenbank

Financing Order did not affect any priority given to Kachkar's liens under the interim
Kachkar DIP Order:

MR. MILLER: The lien issue has to be decided on another day, Your Honor, and that's what the emergency order and the proposed order proposes to do. It doesn't prime Kachkar in any way, shape, or form.

D-I0 at 19.
The subordination provision of the last clause of paragraph 2(c) of

the

Interim Westernbank Financing Order referred to by W esternban' s counsel in the

colloquy quoted above is identical to the subordination provision of the last clause of the
same paragraph of

the Final Westernbank Financing Order. D-ll ir2(c); D-16 ir2(c).

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In short, any Westernban prepetition lien which already had priority over

Kachkar's postpetition liens, maintained the priority afforded them by Banptcy Code

section 552(b) and the interim Kachkar DIP Order, and the financing liens granted to
Westernban by paragraph 2( c) of the Final Westernbank Financing Order were made

expressly subject and subordinate to, and did not prime, the liens granted under the
interim Kachkar DIP Order. D-ll ir2(c); D-16 ir2(c).
It is equally apparent that the replacement liens granted to Westernban

pursuant to paragraph 4 of the Final Westernban Financing Order do not prime
Kachkar's postpetition liens. D-16 ir4. The proceeds of any of W esternban' s
prepetition collateral constitute cash collateral under Banptcy Code section 363(a).
Accordingly, (i) any proceeds of Western

bank's collateral constituted its cash collateral
Western

on the Petition Date and (ii) and any of

bank's prepetition collateral that was

subsequently converted into cash also was cash collateral, subject to Westernban's liens.

Westernbank is entitled to adequate protection under Bankptcy Code section 363(e) to
the extent of any diminution in the value of Western

ban's prepetition collateraL. The

replacement liens granted to Westernbank as adequate protection by the Final

Westernban Financing Order pursuant to Bankptcy Code section 361(2) expressly are
given "the same priority as the Financing Liens," i.e., they are subject to the identical
provision of paragraph 2( c) of that order that makes them subject and subordinate to
Kachkar's liens as set forth in paragraph 2(c) of

the Final Westernban Financing Order.

D-16 irir2( c) and 4.

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The Banptcy Cour's characterization and preservation of

the lenders'

respective lien positions in the Final Westernban Financing Order was correct, and
certainly was not clearly erroneous, and should be upheld.
C. The Chapter 11 Trustee's Waivers of the Doctrine of

Marshaling, the

Equities of the Case Doctrine, and Surcharge Rights, and the Payment of

Proceeds Provision of the Final Westernbank Financing Order, Were Justifed and Appropriate and Authorization of these Provisions by the
Bankruptcy Court as a Necessary Condition of

the Westernbank Financing

Was Not Clearly Erroneous
With respect to the other protections granted to Westernban, by the

waivers of marshallng, the equities ofthe case, and the right to assert surcharge, the
record reflects that the Chapter 11 Trustee, after intense negotiations with Westernban,
made these concessions to Westernbank upon the exercise of

his business judgment in

order to obtain the Westernbank financing. D-14 at 6.
Such waivers are typical in postpetition financings. See, e.g., In re

Sharper Image Corp., Ch. 11 Case No. 08-10322 (KG) (Ban. D. DeL. Mar. 7, 2008)
(D.1. 182, pp. 28, 37) (waiving doctrne of

marshaling, "equities ofthe case" exception to

section 552(b) and section 506(c)); In re Buffets Holdings Inc., Ch. 11 Case No. 08-

10141 (MFW) (Bank. D. DeL. Feb. 22, 2008) (D.1. 350, pp. 20, 27) (waiving doctrine of

marshaling and section 506(c)); In re Domain, Inc., Ch. 11 Case No. 08-10132 (PJW)
(Bank. D. DeL. Feb 14,2008) (D.1. 218, pp. 29, 37-38) (waiving doctrne of

marshaling,

"equities ofthe case" exception to section 552(b) and section 506(c)); In re Am. Home

Mortgage Holdings, Inc., Ch. 11 Case No. 07-11047 (CSS) (Ban. D. DeL. Nov. 28,

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2007) (D.1. 2205, p. 13) (waiving doctrne of

marshaling and section 506(c)); In re

HomeBanc Mortgage Corp., Ch. 11 Case No. 07-11079 (KJC) (Ban. D. DeL. Sept. 13,
2007) (D.1. 268, p. 17) (waiving doctrne of

marshaling and section 506(c) except as

provided in care-out); In re Tweeter Home Entm 't Group, Ch. 11 Case No. 07-10787
(PJW) (Ban. D. DeL. June 29, 2007) (D.1. 253, pp. 32-33,44) (waiving doctrne of
marshaling, "equities of

the case" exception to section 552(b) and section 506(c)); In re

New Century TRS Holdings, Ch. 11 Case No. 07-10416 (KJC) (Ban. D. DeL. May 7,

2007) (D.1. 565, p. 15) (waiving doctrne of

marshaling and section 506(c)); In re

Foamex Intl, Inc., Ch. 11 Case No. 05-12685 (PJW) (Ban. D. DeL. Oct. 17,2005) (D.1.
197, pp. 17,23) (waiving doctrne of

marshaling and section 506(c)). Moreover, any

section 506(c) claims are property ofthe Trustee, not any other party, and Kachkar's
standing to raise an objection to the section 506(c) waiver is doubtfuL. See, Hartford
Underwriters Ins. Co. v. Union Planters Bank, NA., 530 U.S. 1 (2000) and

Debbie

Reynolds Management Co. v. Calstar Corp. (In re Debbie Reynolds Hotel & Casino,
Inc.), 255 F.3d 1061, 1066 (9th Cir. 2001).

The Chapter 11 Trustee strenously negotiated the Final Westernban
Financing Order, and that the provisions of

that order were necessary to secure the

financing from Westernban necessary for Inyx USA's continued operations. "(W)e
argued very forcefully with the lender, and we did negotiate a number of

these provisions

to improve upon them from our perspective. . .. (W)e have negotiated this order, and

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it's where we are. . . ." D-14 at 6-7. The Banptcy Cour's findings based on such
record were not clearly erroneous.
The Banptcy Code, the Federal Rules of

Banptcy Procedure and the

Delaware Banptcy Local Rules (the "Local Rules") do not prohibit such waivers,

which are customarily given in negotiations for postpetition financing.
Indeed, the Chapter 11 Trustee did not agree to many of

the more onerous

provisions typically demanded by postpetition lenders which the Local Rules require to

be highlighted and for which justification is required, such as cross-collateralization
(other than by replacement liens or other adequate protection) (Local Rule 4001-

2(a)(I)(A)), provisions or findings that limit the estate from challenging the lender's

prepetition claim or liens Local Rule 4001-2(a)(I)(B)), liens in avoidance actions Local

Rule 4001-2(a)(I)(D)), or the "roll-up" ofthe prepetition debt by using the postpetition
loan to pay it Local Rule 4001-2(a)(1)(E)). The absence of all ofthese provisions from

the Final Westernban Financing Order further supports the Bankptcy Court's finding
that the terms of

the Westernban financing were justified.

No authority supports Kachkar's arguent that the waivers he complains
of

are prohibited. In re The Colad Group, Inc., 324 B.R. 208 (Bank. W.D.N.Y. 2005),

the only authority cited by Kachkar, is inapplicable. In that case the banptcy cour

declined to authorize a waiver of marshallng in an interim, emergency financing
submitted on minimal notice by the debtor at the ince