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The Bankruptcy StrategistLJN NewslettersNewsSections

Debtor-in-Possession Financing

By Gretchen M. Santamour

There has been much discussion among bankruptcy practitioners and scholars as to whether the courts have abdicated their responsibility to enforce the Bankruptcy Code and whether debtors and creditors committees are too easily pressured by lenders such that control of bankruptcy cases has been effectively ceded to secured creditors. One of the areas where many would say this is most prevalent is with post-petition lending.

Under Section 364(c) of the Bankruptcy Code, a post-petition lender may be entitled to a super-priority administrative claim, a lien on unencumbered assets or a junior lien on encumbered assets if the debtor is unable to obtain unsecured debt. Section 364 permits the granting of liens that are equal to or prime pre-petition liens if adequate protection can be provided to the existing lienholders and the debtor “is unable to obtain such credit otherwise.” 11 U.S.C. ' 364(d) “Unable to obtain unsecured debt” or “unable to obtain such credit otherwise” means that it is incumbent upon the debtor to show that it cannot obtain financing that is unsecured or secured by a junior lien.

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