Funding the Debtor in Bankruptcy Flashcards
What are the two options for funding the debtor in bankruptcy?
Get the court to approve the use of cash collateral (363(a))
Get Dip financing under 364
What are the 4 tiers of DIP financing?
364(a) - suppliers in ordinary COB unsecured (admin)
364(b) - creditors outside ordinary COB (admin)
364(c) - super admin priority unsecured
364(d) - priming lien secured creditors
What are the 4 levels of approval for the four tiers of DIP financing?
364(a) no approval (maybe comfort order)
364(b) notice + hearing
364(c) showing can’t get credit under b n+h
364(d) showing can’t get credit under c, n+h, adequate protection of primed secured lenders
What is the threshold inquiry for admin expense status for all dip debt under 364? Cite code section
503b1AShowing that it is an actual necessary cost or expense of preserving the estate. Doesn’t have teeth in practice
What causes DIP lending to go through?
Part of first day orders when no one is prepared. Granted interim approval - gets momentum; even 364(d) usually approved despite contradiction
What is the effect of an appeal about dip financing decisions?
Almost always ineffective per 364(e) but cross-collateralization may be rolled back in the 11th circuit because it is totally outside of the scope of 364
Why is the market to provide DIP financing so thin despite the safety of 364(d)
informational advantages of inside creditors; winner’s curse; added bonus benefit of existing players of getting leverage over management
What is the hierarchy of claims in the event of administrative insolvency?
1) Secured creditors get the value of their collateral
2) 364(c) unsecured creditors get paid
3) inadequate adequate protection claims per 507(b)
4) 507(a) admin priority claims are paid (inc 364(a/b))
What is administrative insolvency and what is the likely result?
Admin insolvency is when the debtor cannot even pay off its administrative claims, and since admin claimants have the right to be paid in cash under any plan per 1129(a)9, the result is likely a conversion to ch 7
What is cross collateralization?
repetition secured creditors may use their bargaining power for DIP financing to try to extract extra security on pre-petition debt
Effectively raises the cost of the financing to the estate if the pre-petition loan is less than fully secured
When will the judge approve a roll-up?
When the judge finds that there is no prejudice to the other creditors because the pre-petition loan is already fully secured, but the judge and the other creditors are in a poor position to evaluate that + unappealable under 364(e)
When is cross collateralization approved?
Circuit split:
11th circuit says it is barred by 364, 507 and indirectly by preference law
EDNY allows cross collateralization if Kmart like factors are met
11th circuit might reverse on appeal despite 364(e) it hates it so much
