Debtor-In-Possession Financing

The bankruptcy litigators at Mark Anchor Albert and Associates have the skill and determination to achieve successful outcomes in bankruptcy cases related to debtor-in-possession financing.

Debtor-in-possession (DIP) financing refers to loans and other credit facilities made available to a debtor, typically a corporation, limited liability company (LLC), or limited liability partnership (LLP), that is in the process of reorganization under chapter 11 of the United States Bankruptcy Code. Under 11 U.S.C. § 1108, the Bankruptcy Court may appoint a trustee to operate the debtor’s business. However, if a trustee is not appointed for cause, the debtor, as debtor-in-possession, acts as trustee of the business for the benefit of the debtor and its creditors, under 11 U.S.C. § 1107. A debtor-in-possession is afforded several tools and mechanisms to restructure its business under Chapter 11. One of the most important of these tools is the ability of the debtor to acquire DIP financing and loans on favorable terms by granting to new lenders senior secured first priority on the debtor’s assets and earnings.

DIP financing under Bankruptcy Code section 364 contemplates advances not otherwise available to a debtor-in-possession. This is commonly referred to as “new money,” and it can be made available by the debtor’s pre-petition lenders or from a new lender who begins lending money to the debtor post-petition—i.e., after filing the bankruptcy.

DIP financing and loans typically are not considered to be made within the ordinary course of business and, therefore, the debtor must obtain prior approval of the Bankruptcy Court for the DIP financing or loan under section 364(b). A noticed motion and hearing is required. The claim of the DIP lender providing such financing typically is considered a first priority administrative expense.

If, however, the debtor cannot find a lender willing to extend unsecured credit allowable as an administrative expense, section 364(c) permits the Bankruptcy Court, after notice and a hearing, to grant either (i) a super-priority administrative claim (having priority over all other administrative expenses); (ii) a lien on property of the estate that is free from any prior liens; or (iii) a junior lien on property of the estate that is subject to a prior lien.

In circumstances where the debtor-in-possession cannot locate a lender willing to extend credit on the foregoing terms, section 364(d) permits the court, after notice and a hearing, to grant a “priming” lien to a lender that is equal to or senior to any preexisting lien on property of the debtor’s estate. The grant of a priming lien requires, however, that the preexisting lienholder be granted adequate protection of its interest in such property.

Bankruptcy litigation sometimes arises in connection with DIP financing or loan proposals because of their effect of pushing down the priority of prior secured loans and other liens on the property of the estate.