prepetition lender acts as the DIP lender
is whether, in granting replacement
liens for the prepetition loans, the
liens can be cross-collateralized
with the DIP liens—i.e., whether the
broad base of collateral for the DIP
liens can also serve as collateral for
the prepetition liens, especially if the
prepetition liens were more limited in
scope. Courts often allow it, but the
issue is hotly contested, as it results in
the expansion of prepetition liens. 8
Liens on Avoidance Actions. When it
comes to adequate protection for DIP
financing, another hotly contested
issue is whether to allow liens on
Chapter 5 avoidance actions. The
Bankruptcy Code does not include an
express prohibition, but such provisions
can be considered overreaching. 9
Additional Triggers, First Day Timing.
There are a number of additional
triggers that may make their way
into DIP financing orders when the
existing lender is the DIP lender in the
current environment. These include
a requirement that the debtor sell its
assets by a certain time, that it make
changes in management, and that it
attempt to confirm a specific type of
Chapter 11 plan. These provisions are
subject to additional scrutiny, although
they are sometimes allowed. 10
When it comes to the timing of
financing orders, entry on a first day
basis is far from pro forma. While first
day cash collateral orders are often short
and intended to preserve the status quo,
financing orders are usually lengthy
and by their very nature change the
status quo—they create post-petition
obligations. Therefore, the first day
process for financing orders generally
requires testimony (or, at the least, a
proffer), and first day financing motions
are more often the subject of contest and
controversy. Judges often view first day
financing orders—accompanied by loan
agreements that may run more than 100
pages—as overreaching pressure tactics
that require special scrutiny to protect
other parties in interest from prejudice.
Financing on a first day basis is typically
allowed only in limited amounts.
A Matter of Survival
The hot issues in DIP financing remain
largely the same as they have been for
years. Nevertheless, the circumstances
in which they arise raise new and
important issues regarding control
in Chapter 11 cases. The appropriate
distribution of leverage is central to
the Chapter 11 process and to the
ability of companies to effectively
reorganize. When DIP financing is
needed but unavailable, companies
that could otherwise survive financial
distress may fail unnecessarily. J
1 For an in-depth discussion of these issues
unrelated to DIP Financing, see Bobby Guy,
“It’s Not Your Father’s Chapter 11,” Journal
of Corporate Renewal at 28 (June 2013).
2 See Jacqueline Palank, “Bankruptcy Milestones
Put Companies on Short Leash,” Dow Jones
Daily Bankruptcy Review (Jan. 7, 2013) (DIP
lenders in 44 out of 50 surveyed recent cases
were the prepetition lenders); Marcia L.
Goldstein, “Debtor in Possession Financing:
Balancing Lifeblood and Lender Controls,” Am.
Bankr. Inst. 37th Annual New York University
Bankruptcy and Reorganization Workshop at
118 (September 2011) (listing numerous cases,
including In re Borders Group, Inc., Ch. 11 Case
No. 11-10614 (Bankr. S.D.N. Y.); In re TerreStar
Networks Inc., Ch. 11 Case No. 10-15446 (Bankr.
S.D.N. Y.); In re Blockbuster Inc., Ch. 11 Case
No. 10-14997 (Bankr. S.D.N. Y.); In re Foamex
Int’l, Inc., Ch. 11 Case No. 09-10560 (Bankr.
D. Del.); In re Aleris Int’l, Inc., Ch. 11 Case No.
09-10478 (Bankr. D. Del.); In re TronoxInc.,
Ch. 11 Case No. 09-10156 (Bankr. S.D.N. Y.);
In re Apex Silver Mines Ltd., Ch. 11 Case No.
09-10182 (Bankr. S.D.N. Y.); In re SemCrude,
Ltd. P’ship, Ch. 11 Case No. 08-11525 (Bankr.
D. Del.); In re Circuit City Stores, Inc., Ch.
11 Case No. 08-35653 (Bankr. E.D. Va.)).
3 See Pistole v. Mellor (In re Mellor), 734 F.2d
1396, 1400 (9th Cir. 1984); In re Grant Broad. of
Philadelphia, Inc., 75 B.R. 819, 823–24 (E.D. Pa.
1987); In re Am. Sunlake Ltd. P’ship, 109 B. R. 727,
732 (Bankr. W.D. Mich. 1989); McCombs Props.
VI, Ltd. v. First Tex. Sav. Ass’n (In re McCombs
Props. VI, Ltd.), 88 B. R. 261, 265-66 (Bankr.
C.D. Cal. 1988); Anchor Sav. Bank FSB v. Sky
Valley, Inc., 99 B.R. 117, 122 (N.D. Ga. 1989).
4 See, e.g., In re Swedeland Dev. Group, Inc., 16
F.3d 552 (3d Cir. 1994). But see In re Hubbard
When it comes to the timing of
financing orders, entry on a first
day basis is far from pro forma.