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Section 364 -- Recent Developments From The Lender's Perspective

Article by Alan P. Solow and Randall L. Klein

I. Introduction

II. The perils of financing without court authorization

III. Prohibited terms in financing order: roll-over and section 506(c) waiver

IV. The use of future cash flows as present adequate protection

V. The limits of section 364(e) protection for good faith lenders

I. INTRODUCTION

Section 364 governs credit obtained by the debtor in possession or trustee. Section 364 contains several clear statutory provisions, such as the requirement for court authorization to obtain credit outside the ordinary course of business (Sections 364(a), (b) and (c)), the provisions of granting administrative status or collateral to secure post-petition credit (Sections 364(b) and (c)), the authorization to "prime" existing lienholders if their interests are otherwise adequately protected (Section 364(d)), and the protection of post-petition liens from reversal or modification on appeal of the financing order (Section 364(e)). The interstices of Section 364 are left to the courts. Issues not directly addressed by the express language of Section 364 include whether post-petition lenders are entitled to the benefits of Section 364 absent prior court authorization, what concessions and incentives a debtor or trustee may offer lenders to secure financing, what constitutes "adequate protection" for purposes of Section 364(d), and what the scope is of the protection afforded by Section 364(e). This Article addresses some of the significant or otherwise interesting decisions recently decided regardi...

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