Debtor in Possession Financing
The bankruptcy code allows a debtor in possession in chapter 11 ("DIP") to obtain postpetition financing and use "cash collateral" by providing the lienholder with "adequate protection". Most successful chapter 11 reorganizations require the DIP to obtain new financing after the chapter 11 case is filed. The bankruptcy code contains various incentives to encourage lenders to provide financing during a chapter 11 case.
A DIP is allowed to obtain unsecured credit in the "ordinary course of business" without court authorization. The lender will be entitled to administrative expense claim status for the loan under section 503(b)(1). A DIP is permitted to obtain unsecured credit "outside of the ordinary course of business" with bankruptcy court approval.
In the event that a debtor is unable to obtain adequate financing on an unsecured basis, the bankruptcy court may authorize the debtor to obtain credit that is entitled to superpriority claim, that is secured by a lien on unencumbered property, or by a junior lien on the debtor's unencumbered property. A superpriority claim ranks senior to all other administrative claim, including the priority status of the "inadequate" adequate protection claim. "
A bankruptcy court may authorize a debtor to incur debt secured by a senior or equal lien by only if the debtor was unable to obtain credit otherwise and the prepetition lienholder is "adequately protected." The term "adequate protection" is not defined in the bankruptcy code and is determined on a case-by-case basis by the courts. The focus of the requirement of adequate protection is to protect a secured creditor from diminution in the value of its interest in collateral during the reorganization process. A sufficient "cushion" of collateral value in excess of the debt may constitute adequate protection.
A DIP lender may attempt to obtain concession frm a debtor greater than those noted in the bankruptcy code. One method is to grant to a DIP lender a superpriority claim or lien upon the claims based on "strong arm powers," preferences, and fraudulent conveyances under sections 544, 545, 547, 548, and 549. Some court view liens on these causes of action as overreaching by a DIP lender absent exigent circumstances.
A DIP lender may also seek to obtain a finding that its prepetition credit facility is valid and binding and not subject to any defenses or counter claim. Some DIP lenders are not willing to lend without a finding of good faith by the bankruptcy court. A DIP lender may also seek to obtain certain waivers from the debtor such as the ability to use cash collateral or to file a chapter 11 plan without the DIP lender's consent. Another waiver may be of the debtor's right to challenge the perfection and scope of the DIP lender's prepetition liens.
Some
A DIP is allowed to obtain unsecured credit in the "ordinary course of business" without court authorization. The lender will be entitled to administrative expense claim status for the loan under section 503(b)(1). A DIP is permitted to obtain unsecured credit "outside of the ordinary course of business" with bankruptcy court approval.
In the event that a debtor is unable to obtain adequate financing on an unsecured basis, the bankruptcy court may authorize the debtor to obtain credit that is entitled to superpriority claim, that is secured by a lien on unencumbered property, or by a junior lien on the debtor's unencumbered property. A superpriority claim ranks senior to all other administrative claim, including the priority status of the "inadequate" adequate protection claim. "
A bankruptcy court may authorize a debtor to incur debt secured by a senior or equal lien by only if the debtor was unable to obtain credit otherwise and the prepetition lienholder is "adequately protected." The term "adequate protection" is not defined in the bankruptcy code and is determined on a case-by-case basis by the courts. The focus of the requirement of adequate protection is to protect a secured creditor from diminution in the value of its interest in collateral during the reorganization process. A sufficient "cushion" of collateral value in excess of the debt may constitute adequate protection.
A DIP lender may attempt to obtain concession frm a debtor greater than those noted in the bankruptcy code. One method is to grant to a DIP lender a superpriority claim or lien upon the claims based on "strong arm powers," preferences, and fraudulent conveyances under sections 544, 545, 547, 548, and 549. Some court view liens on these causes of action as overreaching by a DIP lender absent exigent circumstances.
A DIP lender may also seek to obtain a finding that its prepetition credit facility is valid and binding and not subject to any defenses or counter claim. Some DIP lenders are not willing to lend without a finding of good faith by the bankruptcy court. A DIP lender may also seek to obtain certain waivers from the debtor such as the ability to use cash collateral or to file a chapter 11 plan without the DIP lender's consent. Another waiver may be of the debtor's right to challenge the perfection and scope of the DIP lender's prepetition liens.
Some