Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

The Bankruptcy StrategistFeaturesBankruptcyLitigation

DIP Financing and Liens On Avoidance Actions

By Michael L. Cook
October 01, 2023

In In re Simply Essentials, LLC, 2023 WL 5341506, *1 (8th Cir. Aug. 21, 2023), the Eighth Circuit held that "avoidance actions [e.g., preferences, fraudulent transfers] can be sold as property of the [Chapter 7 debtor's] estate." On a direct appeal from the bankruptcy court, the court affirmed the bankruptcy court's granting of the trustee's motions to compromise and sell property under Bankruptcy Code §363(f). A creditor had objected, arguing unsuccessfully that "avoidance actions… are not part of the bankruptcy estate …." Id. As shown below, the Eighth Circuit's holding and reasoning are consistent with the reasoning of other circuits in the asset sale context. More important, the decision has practical significance for Chapter 11 debtor in possession (DIP) lenders. U.S. Trustees and unsecured creditors regularly object to the granting of liens on avoidance actions, but Simply Essentials and other appellate rulings should now eliminate the purported legal obstacle.

Relevance

Bankruptcy judges are also often resistant when DIP lenders seek liens on avoidance actions. These estate assets are unencumbered and their proceeds would be otherwise available for unsecured creditors. Thus, local rules for Delaware and the Southern District of New York, for example, require all financing motions to identify and justify liens on estate claims "arising under sections 544, 545, 547 and 548 of the Bankruptcy Code or, in each case, the proceeds thereof." See, e.g., Del. Local Bankruptcy Rule 4001-2(a)(i)(U); Southern District of New York Bankruptcy Rule 4001-2(a)(9) (provisions must be "prominently highlighted and easily identified in the motion; failure to do so may result in such provisions being deemed denied by the court"). But mere compliance with these rules does not mean that the court will grant liens on avoidance actions. The debtor in possession and its lender must be prepared to justify the granting of such relief. As shown below, the Eighth Circuit's recent reasoning in Simply Essentials and the Seventh Circuit's analysis in Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290 (7th Cir. 2003), cert. denied, 124 S. Ct. 2103 (2004) (Dick), provide DIP lenders with the legal support for obtaining liens on avoidance actions when they can show benefit to the debtor's estate.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
The DOJ's Corporate Enforcement Policy: One Year Later Image

The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.

Use of Deferred Prosecution Agreements In White Collar Investigations Image

This article discusses the practical and policy reasons for the use of DPAs and NPAs in white-collar criminal investigations, and considers the NDAA's new reporting provision and its relationship with other efforts to enhance transparency in DOJ decision-making.

The DOJ's New Parameters for Evaluating Corporate Compliance Programs Image

The parameters set forth in the DOJ's memorandum have implications not only for the government's evaluation of compliance programs in the context of criminal charging decisions, but also for how defense counsel structure their conference-room advocacy seeking declinations or lesser sanctions in both criminal and civil investigations.

CLE Shouldn't Be the Only Mandatory Training for Attorneys Image

Each stage of an attorney's career offers opportunities for a curriculum that addresses both the individual's and the firm's need to drive success.

Discovery of Claim Construction and Infringement Analysis May be Compelled Prior to a Markman Hearing Image

A defendant in a patent infringement suit may, during discovery and prior to a <i>Markman</i> hearing, compel the plaintiff to produce claim charts, claim constructions, and element-by-element infringement analyses.