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 Article 8 Opt In Image

The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.

Major Differences In UK, U.S. Copyright Laws Image

This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.

Beach Boys Songs Written Decades Ago Triggered Current Quarrel With Lawyers Image

There's current litigation in the ongoing Beach Boys litigation saga. A lawsuit filed in 2019 against Nevada residents Mike Love and his wife Jacquelyne in the U.S. District Court for the District of Nevada that alleges inaccurate payment by the Loves under the retainer agreement and seeks $84.5 million in damages.

Strategy vs. Tactics: Two Sides of a Difficult Coin Image

With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.

Transfer Tax Implications on Real Property Leases Image

The real property transfer tax does not apply to all leases, and understanding the tax rules of the applicable jurisdiction can allow parties to plan ahead to avoid unnecessary tax liability.