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Judge Nugent

12-05063 Morris v. Family Motors et al (Doc. # 27)

Morris v. Family Motors et al, 12-05063 (Bankr. D. Kan. Dec. 28, 2012) Doc. # 27

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__________________________________________________________________________
SO ORDERED.
SIGNED this 27th day of December, 2012.

 


DESIGNATED FOR ON-LINE PUBLICATION
BUT NOT PRINT PUBLICATION

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS

IN RE:

)
DOOLEY’S RAINWATER ) Case No. 10-14145
CONDITIONING, INC. ) Chapter 7

Debtor. )
____________________________________)
)

J. MICHAEL MORRIS, Trustee )
)
Plaintiff, )

v. ) Adversary No. 12-5063
)
FAMILY MOTORS, INC.; and/or )
RFC, LLC )

)
Defendants. )
____________________________________)


ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT

Among the trustee’s avoiding powers is the power to recover post-petition transfers of property

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that are not authorized by a court order or by the bankruptcy code that is found in 11 U.S.C. § 549.
Here, Dooley’s Rainwater made a series of car payments to a lender post-petition without the Court’s
approval, focusing the inquiry on whether making it made the payments in the ordinary course of its
business. Generally, a chapter 11 debtor-in-possession may operate its business post-petition as it sees
fit and pay debts as authorized by the Bankruptcy Code or the bankruptcy court.1 But the debtor-inpossession
is not totally free from court supervision or oversight. The chapter 7 trustee seeks to recover
the car loan payments, asserting that the payments were not authorized by the Bankruptcy Code or the
bankruptcy court. In the absence of a court order that expressly authorized the payments, the
defendants claim that either § 363(c)(1) authorized these post-petition loan payments as payments in the
ordinary course of business or that § 361 authorizes them as a form of adequate protection. Whether
these payments were made in the ordinary course of Dooley’s Rainwater’s business is a disputed material
fact. Therefore, defendants Family Motors and RFC are not entitled to summary judgment on the basis
of § 363(c)(1). As to the defendants’ alternative claim that these payments were made as adequate
protection, neither the debtor nor the secured creditors complied with the statutory provisions for
seeking and obtaining adequate protection and summary judgment must be denied on this alternative
theory as well.

Jurisdiction

The Court has subject matter jurisdiction over this § 549 avoidance action under 28 U.S.C. §
157(b)(1) and (2)(A) and (O) and § 1334.2

Uncontroverted Facts

1 See 11 U.S.C. § 1107 and § 1108.

2 Unless otherwise noted, all statutory references are to the Bankruptcy Code, title 11 U.S.C.
The trustee J. Michael Morris appears for himself. The defendants Family Motors and RFC appear
by their counsel David Eron and Emily Wilson.

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All but one of the material facts are undisputed.3 That one fact, however, is crucial to the
defendants’ ordinary course of business defense to the trustee’s claim. The trustee asserted seven
additional statements of uncontroverted fact in response to the defendants’ motion. As the defendants
did not controvert those statements, the trustee’s additional facts in paragraphs 15-21 are deemed
uncontroverted.4

Dooley’s Rainwater Conditioning, Inc. filed its chapter 11 petition on December 10, 2010. Upon
the motion of the United States Trustee, Dooley’s case was converted to chapter 7 on August 30, 2011.5
While in chapter 11, Dooley’s Rainwater operated its business as a debtor-in-possession. During that
time, it made nine loan payments to Family Motors and/or RFC totaling $4,525. These payments were
credited to the defendants’ prepetition purchase money loan secured by a 2003 Chevrolet Tahoe. On
the petition date, Dooley’s owed $10,947.45; the loan documents specified monthly payments of $500.6
The defendants relied on the NADA guide to establish a retail value for the Tahoe at $13,500 as of the
petition date and $12,950 at the date of conversion in August 2011. No one sought an adequate
protection order from this Court and there is no other order authorizing these payments for any
purpose. After conversion of the case, the trustee commenced this adversary proceeding to avoid the
post-petition transfers.

Dooley’s Rainwater and its principal shareholder, Michael D. Dooley, signed an installment sales
contract to purchase the Tahoe from defendant Family Motors on April 16, 2010. Under the agreement,

3 See Fact No. 14 stating that debtor “required the use of the vehicle for its ordinary
business operations.” Adv. Dkt. 18 and 23.

4 Adv. Dkt. 23. See Fed. R. Civ. P. 56(e)(2); D. Kan. L.B.R. 7056.1(b)(2) and (c).

5 No plan or disclosure statement was ever filed while the chapter 11 was proceeding.

6 The debtor paid $525 in the month of February, 2011. No explanation is provided for this
variance but it is not material to the resolution of this matter.

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Family Motors extended purchase money financing and received a security interest in the Tahoe. Family
Motors says it assigned the contract to RFC, but the copy of the installment sales instrument that is in
the summary judgment record does not contain an executed notice of assignment.7 Michael executed
the instrument as an individual purchaser under the contract, not as a corporate representative.8 The
sales document suggests that the Tahoe would be titled in both Dooley’s Rainwater and Michael, but
the certificate of title is not a part of the summary judgment record and the Court can make no finding
concerning the Tahoe’s ownership.

In the chapter 11 filing, Dooley’s Rainwater listed the Tahoe among six vehicles with the
following corresponding values on Schedule B:

1995 Ford flat bed truck $3,200

1999 Chev Suburban $3,500

1999 Chev Suburban $2,500

1999 Chev Suburban $3,000

2000 International truck $13,000
2003 Tahoe $12,500
On Schedule D of its chapter 11 filing, Dooley’s Rainwater indicated that all of its inventory,

accounts, equipment, and general intangibles were secured to Garden Plain State Bank. After the case
was converted, the trustee successfully avoided the Bank’s lien in the personal property. The debtor’s
Schedule D also reflected that Family Motors was a secured creditor.

During the chapter 11, Dooley’s Rainwater transferred the 1995 Ford to Mr. Dooley’s father-inlaw
in June of 2011 and sold the 2000 International in early 2011, neither transfer being done on notice
or with the Court’s authorization. After the conversion to chapter 7, Dooley’s Rainwater turned over
the three Suburbans to the trustee and they were sold.

7 Adv. Dkt. 18-2. Thus, on this record at least, RFC’s status as a secured creditor is open to
question.

8 Adv. Dkt. 23-3, Ex. C.
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At some point in the post-petition time frame but before the case was converted, Dooley’s
Rainwater transferred the Tahoe to a new entity owned by the individual Dooleys, known as Dooley’s
Water & Energy Solutions, L.L.C. When Michael Dooley filed his personal chapter 13 bankruptcy in
February of 2012, he scheduled no personally-owned vehicles, but his statement of financial affairs
reflects that he is holding the “2003 GMC [sic] Tahoe owned by Dooley’s Water & Energy Solutions,”
the new entity formed in August of 2011. Apparently Dooley’s Rainwater transferred the Tahoe to the
new entity while in chapter 11, again without notice to the creditors or authorization by the Court.9
There are no transfer documents in the summary judgment record.

Nor does the Court’s docket in the main case contain a motion for or an order granting adequate
protection of Family’s interest in the Tahoe. The defendants never sought stay relief to recover it,
either. Finally, Dooley’s Rainwater never sought or obtained court authority to use cash collateral.

Summary Judgment Standards

Fed. R. Bankr. P. 7056 makes Fed. R. Civ. P 56 applicable in adversary proceedings. Rule
56(e)(2) allows any unaddressed factual contention that is properly supported to be deemed undisputed
for the purpose of this motion.10 Subsection (e)(3) of the Rule permits the granting of summary
judgment for movants upon review only if the supporting materials show that the defendants are
entitled to judgment as a matter of law based upon the uncontroverted facts.11

9 Adv. Dkt. 23-6, Ex. F

10 See also, D. Kan. L.B.R. 7056.1(b)(2) and (c). Because the defendants failed to file a reply
to the trustee’s response and additional uncontroverted facts, those additional facts are undisputed
for purposes of the summary judgment motion.

11 Reed v. Bennett, 312 F.3d 1190 (10th Cir. 2002)(Summary judgment is appropriate if the
movant has met its initial burden of production under Rule 56(c) that no genuine dispute of a
material fact exists and those undisputed facts entitle the movant to judgment as a matter of law.);
Murray v. City of Tahlequah, Okla., 312 F.3d 1196, 1199-1200 (10th Cir. 2002) (same).

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Here, the movants challenge the trustee’s ability to demonstrate the existence of an essential
element of the avoidance action – that the transfers were unauthorized.12 Specifically, they contend that
the debtor’s post-petition transfers (payments) were authorized by the Bankruptcy Code. If the transfers
were authorized by the bankruptcy court or the Code, the trustee’s claim will fail. Fed. R. Bankr. P.
6011apportions the burden of proof to the party asserting of the validity of a challenged transfer. Thus,
on summary judgment the Court’s function is to determine if there are disputes of material fact about
whether the post-petition payments were authorized and whether there is any evidence to support the
defendants’ claim that they were.

Conclusions of Law

Section 549's purpose is to allow the trustee to avoid post-petition transfers of property that
deplete the estate.13 To successfully avoid a post-petition transfer under the section, the trustee must
prove the following elements: that there was a transfer, that property of the estate was transferred, that
the transfer occurred after commencement of the case, and that the transfer was not authorized by the
Bankruptcy Code or by the bankruptcy court.14 Only the final element is in partial dispute here; the
defendants do not argue that the first three elements are lacking nor do they assert the presence of a
court order that authorizes the payments.

The summary judgment record is insufficient to determine as a matter of law
whether the debtor’s loan payments were made to the defendants in the ordinary
course.

12 Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); In re Grabill Corp., 135 B.R. 101, 105-06
(Bankr. N.D. Ill. 1991); Koch v. Shell Oil Company, 927 F.Supp. 411, 413 (D. Kan. 1996); Johnson v.
Mullin, 422 F.3d 1184 (10th Cir. 2005).

13 In re Straightline Investments, Inc., 525 F.3d 870, 878-79 (9th Cir. 2008) (while dimunition of
the estate is cited as a purpose, section 549 contains no explicit requirement that the postpetition
transfer depletes the estate).

14 In re Marrero, 382 B.R. 861, 865-66 (1st Cir. BAP 2008).

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Defendants contend that the post-petition loan payments were made in the ordinary course of
business and, as such, were authorized by § 363(c)(1) of the Code.15 That section permits the debtor-inpossession
to “[sell] or lease . . . property of the estate, in the ordinary course of business, . . . and . . .
use property of the estate in the ordinary course of business without notice or a hearing.” The use, sale
or lease of estate property outside the ordinary course of business requires notice, hearing and court
approval.16 Defendants argue that these payments were made in the ordinary course of business because
they are required in order for the debtor-in-possession to continue to use the collateral that is necessary
to operate the debtor’s business. Indeed, some courts have found post-petition payments on secured
debt to be in the ordinary course of business.17

Defendants rely heavily here on Covey v. Soy Capital Bank & Trust Co. (In re T.A. Brinkoetter &
Sons, Inc.), a recent bankruptcy court decision from the Central District of Illinois.18 In Brinkoetter, the
chapter 7 trustee sought to avoid transfers of nearly $60,000, a portion of which went to the debtor’s
lender to pay off five vehicle loans during the period it was in chapter 11. After the debtor began to
make voluntary post-petition payments to the bank, the bank sought and obtained relief from the
automatic stay. Then, after stay relief was obtained, the debtor and bank reached an accord whereby

15 See COLLIER ON BANKRUPTCY ¶ (16th Ed. 2012), explaining that ordinary course
transactions are insulated from § 549 avoidance by their “ordinariness.”

16 Section 363(b)(1).

17 See e.g., In re Discount Family Boats of Texas, Inc., 233 B.R. 365 (Bankr. E.D. Tex. 1999)
(regular monthly postpetition deed of trust payments were not unauthorized postpetition transfers
but were authorized under the cash collateral order and enabled debtor to continue in the ordinary
course of operating its business); In re Family Health Food U.S.A. Inc., 223 B.R. 250 (Bankr. S.D. Fla.
1998) (postpetition payments made by chapter 11 debtor prior to confirmation in order to remain
current on its secured debt were allowed by § 1108 which authorizes debtor to continue operating its
business).

18 2012 WL 1865485 (Bankr. C.D. Ill. May 22, 2012).

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the debtor paid $45,000 in exchange for release of the liens on the vehicles.19 The trustee claimed that
these voluntary payments were outside the ordinary course because debtor failed to obtain an adequate
protection order from the court. The bankruptcy court concluded that the absence of a motion for
adequate protection and an order granting it did not require that payments be avoided per se.20 As to the
$45,000 payoff received by the bank, the bankruptcy court concluded that this transfer must be analyzed
using the horizontal and vertical tests to determine whether it was an ordinary course transaction and
that the record before it was insufficient to make that determination, as it is in the present case.21 In
short, the rule in Brinkoetter does not compel the entry of summary judgment for defendants on their
ordinary course of business defense here.

The record in this case is does not support a conclusion that the voluntary post-petition secured
debt payments to defendants were made in the ordinary course of debtor’s business. In deciding
whether a transaction is in the ordinary course, courts apply vertical and horizontal tests. Neither the
Tenth Circuit Court of Appeals nor the Bankruptcy Appellate Panel have specifically adopted these tests
for determinating whether a post-petition transfer is in the ordinary course of business, but bankruptcy
courts in this and many other Circuits do.22 In Rajala v. Langer (In re Lodge America, Inc.,), a bankruptcy
court sitting in Kansas applied those tests in a trustee’s action to avoid a chapter 11 debtor’s post-
petition repayment of an unauthorized post-petition short-term unsecured loan to pay its hotel utilities.23

19 2012 WL 1865485 at *2.
20 Id. at *7.
21 Id. at *8.
22 See Dill v. Brad Hall & Assoc., Inc. (In re Indian Capitol Distributing, Inc.), 2011 WL 4711895 at


*11-12; Adv. No. 10-1180 (Bankr. D. N.M. Oct. 5, 2011).
23 239 B.R. 580 (Bankr. D. Kan. 1999), aff’d 259 B.R. 728 (D. Kan. 2001).

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As described in Collier’s, the horizontal test examines businesses similar to the debtor’s to determine
whether the transfer is one that would normally be entered into by a similar business. It asks whether
the transaction is abnormal or unusual in the context of other, similar enterprises.24 In affirming the
bankruptcy court’s decision in Lodge America, the District Court described the horizontal test of
ordinariness as applying an industry-wide perspective to compare the debtor’s business to other like
businesses and determine whether the transaction is of a type that occurs in the day-to-day operation
of the debtor’s business.25

The vertical test involves assessing the expectations of the debtor’s creditors. It views the
transaction from a creditor’s perspective and asks whether the transaction is one that subjects a creditor
to economic risks that are different in nature from those initially accepted.26 Under the vertical test, a
transaction that is ordinary for other businesses in the industry may not be ordinary for the debtor’s
business.27 Courts have examined and compared debtors’ prepetition and post-petition activities to
determine their “ordinariness.”

With barely a nod to these tests, defendants’ only statement of fact concerning their ordinary
course of business defense is found in Fact 14 stating that debtor “required the use of the vehicle for
its ordinary business operations.”28 That contention is supported by the conclusory statement to that

24 3 COLLIER ON BANKRUPTCY ¶ 363.03[1][a] (16th ed. 2012).

25 259 B.R. at 732.

26 Burlington Northern Railroad Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d

700, 705 (9th Cir. 1988).

27 COLLIER ON BANKRUPTCY, supra at ¶ 363.03[1][b].

28 Adv. Dkt. 18. The terms of the loan and debtor’s prepetition and post-petition payments

are not disputed. These facts have some bearing on the vertical test of ordinary-course.

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effect found in affidavit of Michael Dooley that is quoted verbatim in the contentions.29 There is no
factual support in the affidavit that would bear on the horizontal and vertical tests, ignoring the time-
honored requirements of Civil Rule 56 that supporting affidavits must set forth facts, not just
conclusions.30 In the absence of any facts from which a court could conclude that the vehicle was used
in the debtor’s ordinary business operations, it is equally likely that debtor’s owner used the vehicle for
personal use, particularly where he individually was a purchaser, co-owner, and borrower under the
loan documents. Nor does Mr. Dooley explain why the Tahoe was necessary to operating the business
or how it was used in the business operations, two important bits of information because the debtor had
several other vehicles. More importantly, the summary judgment record utterly omits any factual
contentions that describing the nature of debtor’s business specifically and the related industry in
general. The defendants seem to suggest that any loan payment made by a debtor is “ordinary,” urging
me to take judicial notice of this proposition.31 But where there are no facts that flesh out the purpose
of incurring the debt, the necessity of making the payments, or the necessity of the collateral in debtor’s
business, the defendants cannot hope to prevail on summary judgment.

The inadequacy of this record parallels the factual deficiencies of the parties’ stipulation in Lodge
America. Judge Flannagan articulated that deficiency in discussing both the horizontal and vertical tests

29 See Fed. R. Civ. P. 56(c)(4) requiring that a supporting summary judgment affidavit “set
out facts that would be admissible in evidence . . .”; Stephens v. City of Topeka, Kan., 33 F. Supp. 2d 947

(D. Kan. 1999) (Conclusory terms or characterizations without any concrete facts to support
characterizations are afforded no weight by the court); Rogers v. United States, 58 F. Supp. 2d 1235 (D.
Kan. 1999) (The general characterization of a transaction is a question of law).
30 BancOklahoma Mortg. Corp. v. Capital Title Co., Inc., 194 F.3d 1089 (10th Cir. 1999) (Affidavit
must set forth facts, not conclusory statements); Fitzgerald v. Corrections Corp. of America, 403 F.3d
1134, 1143 (10th Cir. 2005) (Conclusory affidavit without specific supporting facts has no probative
value).

31 See Adv. Dkt. 18, p. 5.
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of ordinariness under § 364(a) addressing the debtor’s unauthorized post-petition short-term unsecured

loan to pay its hotel operating utilities and subsequent repayment of that loan.

[Defendant’s] argument regarding this [horizontal] test substitutes logic for proof. He
observes that the hotel business is seasonal with periods of high and low rentals that
necessarily require borrowing to pay expenses. This observation leads him to conclude
that Lodge America was acting in the ordinary course of business in the hotel industry
when it borrowed from him to pay its utilities. Although [defendant’s] reasoning is
appealing, it is not proof. The ordinary-course question is primarily one of fact, not of
reason. Yet, the stipulation is silent about the borrowing practices of the hotel industry.

* * *

Under this [vertical] test, [defendant] continues to rely on reason rather than proof. He
suggests that since the debtor needed cash to keep its hotel operating, its creditors
would have expected the borrowing and would have consented to a formal request to
borrow money and repay it with estate funds. But since the stipulation is silent about
the normal operations of Lodge America, no grounds exist to support a finding that
Lodge America had borrowed in the past to supplement its cash flow. In short,
[defendant] has adduced no evidence indicating that Lodge America’s creditors had a
basis in fact to expect that Lodge America would borrow, from either a bank or an
individual, to pay its utilities.32

Even if Dooley’s conclusory affidavit were sufficient to meet movants’ summary judgment

burden to properly support its factual assertions, the trustee has adequately controverted this contention

of fact by showing that the Tahoe was one of six Dooley’s vehicles available for use in operating the

business, two of which Dooley’s voluntarily transferred away while in chapter 11 (without notice to

creditors and without authorization of the bankruptcy court). Dooley’s had available to it three

Chevrolet Suburbans with which to operate its business. The presence of those vehicles casts doubt on

defendants’ factual contention that the Tahoe was “required” for use in Dooley’s business operations.

Nor can the Court ignore that Mr. Dooley was also liable on the instalment contract, making the

circumstances surrounding these otherwise unauthorized payments even more questionable.

The defendants have failed to show the post-petition loan payments were made in the ordinary

32 239 B.R. at 583-84

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course of Dooley’s Rainwater’s business as a matter of law and they should be denied summary
judgment on that defense.33

Debtor’s post-petition secured debt payments cannotbe justified as adequate
protection payments under § 361(1) and § 363(e).

After the fact and as an alternative basis for summary judgment, defendants attempted to justify
the vehicle payments as informal adequate protection payments made by the debtor to protect their
security interest in the Tahoe and therefore “authorized by § 361(a) and § 363(e). The latter section
conditions the provision for adequate protection on the request of an entity claiming a security interest
in property of the estate. Defendants never requested adequate protection payments nor did they ever
claim that they lacked adequate protection.34 Given the clear procedural requirements to obtain adequate
protection payments, defendants are hard-pressed to assert that the debtor’s regular payments
constituted adequate protection when they have done nothing to request that relief and the Court did
not authorize adequate protection payments.35 Nor did they come forward with any informal adequate
protection agreement that they may have entered into with the debtor.36 Indeed, these defendants

33 Some courts have held that postpetition payment of a prepetition debt is simply not
authorized by § 363(c)(1) as a transfer in the ordinary course of business and is not the type of
transfer contemplated by that section. In re Metropolitan Cosmetic & Reconstructive Surgical Clinic, P.A.,
115 B.R. 185, 189 (Bankr. D. Minn. 1990); In re Smith Min. & Material, L.L.C., 405 B.R. 589, 596
(Bankr. W.D. Ky. 2009) (payment that is not made for a post-petition ordinary operating expenses is
avoidable under § 549); In re Miller Mining, Inc., 219 B.R. 219, (Bankr. N.D. Ohio 1998) (postpetition
payment of over $17,000 on prepetition secured equipment loan was outside ordinary
course of business and avoidable).

34 See § 361 and § 363(e) requiring defendants to request adequate protection for use of their
collateral and Fed. R. Bankr. P. 4001 for the procedure to obtain adequate protection.

35 COLLIER ON BANKRUPTCY, supra at ¶ 363.03 states that a debtor-in-possession may
continue to use property in the ordinary course of business even if the property is subject to an
encumbrance, but noting: “Of course, they must provide adequate protection if requested by an entity
with an interest in the property.” (Emphasis supplied).

36 See Fed. R. Bankr. P. 4001(d).

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cannot even show that their interest in the collateral needed any protection. Their own summary
judgment papers suggest that there was sufficient value in the Tahoe to adequately protect their security
interest.37 Summary judgment on defendants’ “adequate protection” defense must also be denied.38

Conclusion

Because the summary judgment record is inadequate to support the Court’s conclusion as a
matter of law that debtor’s post-petition loan payments to defendants were made in the ordinary course
of business, the defendants’ motion for summary judgment on the trustee’s § 549 cause of action is
DENIED. As provided in Civil Rule 56(g), the material facts found not to be in dispute by this order
are deemed established in the proceeding. The Clerk will set the this proceeding for a one-half day trial
as soon as the Court’s calendar permits.

# # #

37 John Hattan’s affidavit contends that the vehicle’s value was not less than $13,500 on
the petition date and had dropped to $12,950 in the ensuing 9 months while defendant RFC
received $4,525 in payments over the same period. See Dkt. 18-1, ¶ 3.

38 To the extent defendants are arguing that voluntary adequate protection payments,
without notice or court approval, were made in the ordinary course of debtor’s business, that
argument is also rejected. See In re Miller Mining, Inc., 219 B.R. 219, 224 (Bankr. N.D. Ohio
1998)(adequate protection payments are not within the debtor’s ordinary course of business; § 363(e)
requires court authorization for adequate protection payments).

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