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Cash Collateral and DIP Loan Contests (Series: Bankruptcy Battle Royale)

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Show me the money! Debtors in Chapter 11 cases cannot survive without money to continue operations, pay vendors and professionals, and work to restructure debt and/or sell assets. Where do those necessary funds come from? There are really only two sources – cash the debtor has or can generate (in either case, generally the collateral of the secured lender) or new money coming into estate in the form of a post-petition debtor-in-possession (DIP) loan. At the very outset of the case, a debtor must obtain a court order allowing it to use its cash when that cash is the collateral of a third party or must obtain authority from the court to borrow funds. In either case, what the debtor is permitted or not permitted to do can seal the fate of a case from the outset. As a result, the battles over the terms of the use of cash collateral or DIP financing are some of the most hotly contested in the Chapter 11 process. This webinar examines the issue involved and how the various constituencies fight about them.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/cash-collateral-dip-loan-contests-2019/

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Cash Collateral and DIP Loan Contests (Series: Bankruptcy Battle Royale)

  1. 1. 1
  2. 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  3. 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DISCLAIMER The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 3
  4. 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: Mark Melickian – Sugar Felsenthal Grais & Helsinger Panelists: Michael Atkinson – Province Michael Riela – Tannenbaum Helpern Christopher B. Wick – Hahn Loeser 4
  5. 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS WEBINAR: Cash Collateral and DIP Loan Contests Show me the money! Debtors in Chapter 11 cases cannot survive without money to continue operations, pay vendors and professionals, and work to restructure debt and/or sell assets. Where do those necessary funds come from? There are really only two sources – cash the debtor has or can generate (in either case, generally the collateral of the secured lender) or new money coming into estate in the form of a post- petition debtor-in-possession (DIP) loan. At the very outset of the case, a debtor must obtain a court order allowing it to use its cash when that cash is the collateral of a third party or must obtain authority from the court to borrow funds. In either case, what the debtor is permitted or not permitted to do can seal the fate of a case from the outset. As a result, the battles over the terms of the use of cash collateral or DIP financing are some of the most hotly contested in the Chapter 11 process. This webinar examines the issue involved and how the various constituencies fight about them. 5
  6. 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS SERIES: BANKRUPTCY BATTLE ROYALE 2019 - COMMON COMMITTEE CONTROVERSIES No matter how you are involved in a Chapter 11 bankruptcy proceeding, there is a real chance you will wind up litigating some issue. Litigating in bankruptcy court, however, is very different than litigating in any other federal or state court because the customs, rules and players are all different. This webinar is designed for the litigator who does not generally find herself in front of a bankruptcy judge As with all Financial Poise Webinars, each episode in the series episode is delivered in Plain English, bringing you into engaging, sometimes humorous conversations designed to entertain as they teach. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes. 6
  7. 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 2/26/19 Episode #1: Cash Collateral and DIP Loan Contests 3/26/19 Episode #2: Anatomy of a Preference Action 4/23/19 Episode #3: Anatomy of a Fraudulent Transfer 5/21/19 Episode #4: Contesting Confirmation 7 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  8. 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODE #1: CASH COLLATERAL AND DIP LOAN CONTESTS 8
  9. 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe OVERVIEW • Debtor Financing and Use of Cash Collateral • Adequate Protection Issues for the Debtor’s Lenders • Motions for Authorization to Use Cash Collateral and/or PostPetition Financing • Resolving Cash Collateral Disputes by Financing the Debtor’s Business • Resolving Cash Collateral and PostPetition Financing Disputes • Miscellaneous Considerations 9
  10. 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DEBTOR FINANCING AND USE OF CASH COLLATERAL
  11. 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INTRODUCTION • Debtor-In-Possession (DIP) Loan (from debtor’s existing or new lenders) ✓ Necessary where there’s not enough cash flow to operate long enough to achieve desired goal ✓ Problems with prepetition lenders: o Typically try to protect prepetition position by cross- collateralizing the loan 11
  12. 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INTRODUCTION (cont’d) o May use “drop dead” triggers to limit ability to challenge its liens o May use the DIP financing order to lock up the sale/plan process to acquire the business or its assets o Provisions could unduly favor lender because of leverage disparity with debtor 12
  13. 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe INTRODUCTION (cont’d) • Cash Collateral ✓ In rare cases where the company generates sufficient cash from operations, this can be used to fund ongoing operations with court authorization 13
  14. 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe APPLICABLE BANKRUPTCY CODE PROVISIONS • 11 U.S.C.A § 364(a) ✓ Debtor is allowed to incur unsecured debt in the ordinary course of business • 11 U.S.C.A § 364(b) ✓ Debtor may seek court approval for an unsecured loan other than in the ordinary course of the debtor’s business ✓ Court can approve as an administrative priority 14
  15. 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe APPLICABLE BANKRUPTCY CODE PROVISIONS (cont’d) • 11 U.S.C.A § 364(c) ✓ Debtor may obtain a post-petition secured loan through liens on unencumbered property or junior liens on encumbered property • 11 U.S.C.A § 364(d) ✓ If credit cannot be obtained on the above terms, debtor may seek approval with liens that prime pre-existing liens 15
  16. 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe APPLICABLE BANKRUPTCY CODE PROVISIONS (cont’d) If debtor only needs funds produced from its operation to finance reorganization: •11 U.S.C.A § 363(a) defines cash collateral as: ✓ Cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title. 16
  17. 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe APPLICABLE BANKRUPTCY CODE PROVISIONS (cont’d) • A particular state’s laws may determine whether court approval is required 17
  18. 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERAL CONSIDERATIONS • To protect its cash collateral, secured creditor should request the debtor provide written assurances it will not use, will segregate, will reconcile and will account for all cash collateral. ✓ If not provided immediately, request bankruptcy order prohibiting use of cash collateral • Code does not provide specific sanctions for unauthorized use 18
  19. 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERAL CONSIDERATIONS (CONT’D) • If use of cash collateral is contested, debtor will be highly motivated to settle related litigation because a loss would likely end an attempt of reorganization ✓ This provides the secured creditor with a leg-up for negotiating settlement 19
  20. 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERAL CONSIDERATIONS (CONT’D) • Settlement of cash collateral litigation can be structured in 2 ways: ✓ An agreement whereby the secured creditor consents to the debtor’s use of cash collateral ✓ An agreement whereby the secured creditor makes a new loan to the debtor 20
  21. 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADEQUATE PROTECTION ISSUES FOR THE DEBTOR’S LENDERS
  22. 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe AP GENERALLY • To obtain court authorized use of cash collateral, debtor must demonstrate the secured creditor is adequately protected ✓ Preserves the value of the secured creditor’s bargain by placing restrictions upon rights that would otherwise be under the security agreement and state law 22
  23. 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe AP GENERALLY (cont’d) • Automatic Stay ✓ AP compensates creditor for any decrease in value of interest in the collateral during the stay • Use of Collateral in Debtor’s Business ✓ AP compensates for decrease in value of interest in the collateral caused by debtor’s use 23
  24. 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STANDARD FOR EVALUATING AP In re Martin (8th Circuit) 3-part test: 1. Establish the value of the creditor’s interest in the collateral 2. Identify the risks to that value resulting from the debtor’s proposed use, sale, or lease of the collateral 3. Determine whether the debtor’s proposed means of AP protects value against those risks as nearly as possible in accordance with the concept of “indubitable equivalence” 24
  25. 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 1.ESTABLISH THE VALUE OF THE CREDITOR’S INTEREST IN THE COLLATERAL • Value is the lesser of the value of the collateral or the amount of its debt (Evidence of both required) • Oversecured Creditor: ✓ Limited to the amount of its debt (including interest and attorney’s fees) • Undersecured Creditor: ✓ Equal to the value of the collateral 25
  26. 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 2. IDENTIFY THE RISKS TO THAT VALUE RESULTING FROM THE DEBTOR’S PROPOSED USE, SALE, OR LEASE OF THE COLLATERAL Debtor’s proposed use of the secured creditor’s collateral can affect its value, depending on the collateral type. • Cash, inventory, and accounts will be used up or consumed in the business • Equipment will depreciate • Real estate may depreciate or even appreciate 26
  27. 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 3. DETERMINE WHETHER THE PROPOSED MEANS OF AP PROTECTS VALUE AGAINST THOSE RISKS • Means of AP must be equivalent in value to the predicted amount of impairment • Type of collateral: ✓ Soft o Used up or consumed in the operation of the debtor’s business 27
  28. 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe 3. DETERMINE WHETHER THE PROPOSED MEANS OF AP PROTECTS VALUE AGAINST THOSE RISKS ✓ Hard o Not used up or consumed, such as buildings and machinery o May depreciate, but will still be around at the end of the bankruptcy • If collateral doesn’t depreciate (real estate), may only need AP against waste 28
  29. 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe METHODS OF PROVIDING AP • Replacement Liens ✓ Upon bankruptcy filing, secured creditor’s rights in new accounts and inventory created after the petition date are cut off ✓ Most common method for soft collateral ✓ Sufficient only if quality/quantity of postpetition inventory and receivables are maintained at the same level as the outset of the case (Won’t happen if debtor continues to lose money in operation) 29
  30. 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe METHODS OF PROVIDING AP • Periodic Cash Payments ✓ Sufficient for soft collateral and hard collateral if payments are enough to compensate creditor for diminution in value 30
  31. 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe METHODS OF PROVIDING AP (cont’d) • Proposed Use of Cash Collateral ✓ Ex. If the debtor proposes to spend the cash to harvest crops or fees livestock subject to the creditor’s security interest • Equity Cushion ✓ Excess value in collateral above the amount of the creditor’s debt (Common with real estate) ✓ Rarely used with soft collateral but may suffice when used with other methods of AP 31
  32. 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MOTIONS FOR AUTHORIZATION TO USE CASH COLLATERAL AND/OR FOR POSTPETITION FINANCING
  33. 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERALLY • 11 U.S.C.A § 363(c) ✓ Permits court to authorize use of cash collateral only after notice and hearing o Biggest issue is how far in advance to give notice ✓ Hearing must be scheduled in accordance with needs of the debtor and court is instructed to act promptly 33
  34. 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERALLY (cont’d) • Rule 4001: ✓ Request must be made by motion and served on any entity with an interest, the creditors’ committee, and any other committees (or 20 largest creditors) ✓ Final hearing must be 14 days later (Can have a preliminary hearing with notice) 34
  35. 35. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERALLY (cont’d) • Secured creditor often not given enough notice to provide meaningful defense • Court can authorize use on an interim basis if necessary • Most courts insist the creditors’ committee be given 30-60 days at least to conduct an investigation before any waiver of claims will be effective against them 35
  36. 36. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CASH COLLATERAL HEARING • 3 Primary Issues ✓ What is the extent of the secured creditor’s interest in cash collateral and other properties of the estate? ✓ To what extend will the creditor’s interest be adversely affected by the debtor’s use of cash collateral? ✓ Can the interest be adequately protected in connection with the used of its cash collateral? 36
  37. 37. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CASH COLLATERAL HEARING (cont’d) • Creditor has burden of proving validity, priority, and extent of its interest in property. ✓ Must offer into evidence: security agreements, financing statements, mortgages, and any other docs relevant 37
  38. 38. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe VALUE OF COLLATERAL • 11 U.S.C.A § 506(a) ✓ Valuation of collateral is to be conducted in light of the purpose of the valuation and the proposed disposition or use of the collateral • Undervaluation can adversely affect: the amount a creditor received on account of the secured claim under the plan, priority under section 507(b), and right to interest and charges under section 506(b) • Creditor should insist debtor provide periodic financial reports • Creditor has burden of proving validity, priority, and extent of its interest in property. 38
  39. 39. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESOLVING CASH COLLATERAL DISPUTES BY FINANCING THE DEBTOR’S BUSINESS
  40. 40. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR USE OF CASH COLLATERAL • Documented in a written agreement effective only upon court approval or in an order the parties stipulate to and submit to the court • Principal issue in negotiation is what AP the creditor requires in exchange for its consent of the use of collateral 40
  41. 41. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR USE OF CASH COLLATERAL (cont’d) • Secured creditor should want: ✓ AP sufficient to protect against erosion during case and insist on additional lien on hard collateral, periodic cash payments, or some other form of protection ✓ Provision prohibiting debtor from granting superpriority claims/liens without consent ✓ The debtor to develop a budget for reorganization and require reports 41
  42. 42. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR USE OF CASH COLLATERAL (cont’d) • Secured creditor should want (cont’d): ✓ Covenants dealing with debtor’s inventory levels, aging of accounts receivable, working capital, and similar matters from commercial loan agreements ✓ Release from potential liability from avoidance actions ✓ Provision requiring DIP to waive right under section 506(c) to surcharge the collateral 42
  43. 43. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR USE OF CASH COLLATERAL (cont’d) • Postpetition interest is a major issue and generally only oversecured creditors are entitled to it (to the extent the value of its collateral exceeds the amount of the debt) 43
  44. 44. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR USE OF CASH COLLATERAL (cont’d) • If chapter 11 is converted to chapter 7, agreement should deal with: ✓ If AP later proves inadequate, the secured creditor may be entitled to a section 507(b) superpriority claim to make up the deficiency o Though 726(b) claims likely have priority over 507(b) claims ✓ Should be enforceable in the absence of fraud or overreaching 44
  45. 45. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe POSTPETITION EXTENSIONS OF CREDIT • Secured creditor typically bargains for the right to apply its cash collateral to its prepetition loan and for a higher priority claim • Section 364 governs and provides 4 routes: ✓ Obtain loan in the ordinary course of business ✓ Lender given first –priority administrative claim for additional funds ✓ Security interest limited to a lien on encumbered property or to a subordinate lien on already encumbered property ✓ Priming lien on property that is already encumbered 45
  46. 46. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR POSTPETITION EXTENSIONS OF CREDIT • Priority, priming liens, and interest ✓ Superpriority claim ✓ Prime existing liens against debtor’s property (even if prepetition loan docs with other creditors expressly prohibit such subordination) ✓ Oversecured creditors entitled to postpetition interest 46
  47. 47. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR POSTPETITION EXTENSIONS OF CREDIT (cont’d) • Additional covenants to protect the secured lender ✓ Should include many same provisions as cash collateral agreement • Lock-up agreements ✓ Clauses addressing the secured lender’s approval or vote in favor of the debtor’s subsequent plan of reorganization (Must be drafted carefully to be enforceable) 47
  48. 48. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR POSTPETITION EXTENSIONS OF CREDIT (cont’d) • Liens on the debtor’s Chapter 5 causes of action ✓ Significant doubt exists as to whether such liens are permissible • Rolling up prepetition debt ✓ Allows lenders to convert prepetition debt into postpetition debt 48
  49. 49. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe TERMS OF AGREEMENT FOR POSTPETITION EXTENSIONS OF CREDIT (cont’d) • Cross-collateralization clause (Not enforceable unless approved by a reluctant court) ✓ Provides either: o That both the creditor’s pre and postpetition debts shall constitute a priority claim, or o That both the creditor’s pre and postpetition debts are secured by the debtor’s pre and postpetition assets 49
  50. 50. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESOLVING CASH COLLATERAL AND POSTPETITION DISPUTES
  51. 51. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADVANTAGES OF 364 FINANCING OVER AGREEMENTS FOR THE USE OF CASH COLLATERAL • Two advantages already described: ✓ Creditor can obtain a claim that has a higher priority than it would through AP ✓ Creditor’s right to postpetition interest is clear 51
  52. 52. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ADVANTAGES OF 364 FINANCING OVER AGREEMENTS FOR THE USE OF CASH COLLATERAL (cont’d) • Additionally: ✓ Creditor is able to apply its cash collateral to the prepetition loan, thereby converting its prepetition claim into a priority postpetition claim o Debtor must pay this priority claim in full at plan confirmation, whereas a prepetition claim will be paid only in accordance with the terms of the plan ✓ Creditor is protected even if the order authorizing extension of credit is appealed 52
  53. 53. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MISCELLANEOUS CONSIDERATIONS
  54. 54. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe • Second Lien Financing ✓ Financing via a second lien on the debtor’s assets provides the bank with a most attractive position than if it extended an unsecured loan to the debtor ✓ May also allow the debtor to obtain a better loan rate ✓ Hard to obtain during downturns in financial markets where credit is less widely available 54 MISCELLANEOUS CONSIDERATIONS
  55. 55. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe • Commingling Proceeds ✓ Common for creditor to permit debtor to deposit cash proceeds of its collateral in the debtor’s general bank account ✓ Commingling of proceeds does not terminate the security interest to the extent that the funds can be traced 55 MISCELLANEOUS CONSIDERATIONS (cont’d)
  56. 56. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe • After-Acquired Property ✓ 552: A creditor’s prepetition lien does not extend to property the estate acquires after the commencement of a bankruptcy case, with certain exceptions • Proceeds of After-Acquired Property ✓ 552(b)(1): If a secured party’s security agreement covers prepetition property, the security interest shall extend to any postpetition proceeds of that property to the extent provided for in the security agreements and by applicable nonbankruptcy law 56 MISCELLANEOUS CONSIDERATIONS (cont’d) CONT’D
  57. 57. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe • Rents and Hotel Revenues ✓ 552(b)(2): With certain exceptions, where a creditor has a prepetition security interest that extends to property of the debtor acquired prepetition and to amounts paid as rents of the property or the fees, charges, accounts…, the creditor continues to have a security interest in such rents, etc., except to any extent the court (after notice and hearing) orders otherwise. 57 MISCELLANEOUS CONSIDERATIONS (cont’d) CONT’D
  58. 58. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe QUESTIONS? 58
  59. 59. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY MARK MELICKIAN – mmelickian@sfgh.com Mark Melickian leads Sugar Felsenthal Grais & Helsinger LLP’s restructuring practice. Over the past 20 plus years, he has worked primarily on business transactional and litigation matters with a focus on chapter 11 commercial bankruptcy cases and non-bankruptcy distressed situations. His practice includes both debtor- and creditor-side representations and include financial institutions, indenture trustees, trade creditors, asset purchasers, investors, commercial real estate interests, corporate officers, and other parties in interest in chapter 11 cases throughout the country. In addition, a significant focus of his practice is the representation of committees and other estate fiduciaries in bankruptcy cases – over the past two decades, he has counseled dozens of official and unofficial bankruptcy committees, liquidating trustees, litigation trustees, and plan administrators charged with pursuing and liquidating assets for the benefit of estate creditors. Mark has written extensively on bankruptcy and insolvency law and other topics, having contributed materials on these subjects to American Bankruptcy Institute Journal, Bankruptcy Strategist, Wiley Bankruptcy Law Update, Ginsberg & Martin on Bankruptcy, Norton Bankruptcy Law Adviser, the Cornell University Legal Ethics Library, and dozens of professional conferences and seminars. For several years, he wrote a monthly legal affairs column for Student Lawyer, an America Bar Association publication, for which he received the Peter Lisagor Award for Exemplary Journalism from the Chicago chapter of the Society of Professional Journalists. He is a graduate of Colorado State University and Northwestern University School of Law. 5 9
  60. 60. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY MICHAEL ATKINSON – matkinson@provincefirm.com Mr. Atkinson provides a variety of financial advisory, consulting, expert witness and fiduciary services to debtors, their lenders, unsecured creditors, post-confirmation trusts, plan administrators, boards of directors, and avoidance action defendants. He has served as financial advisor, expert, or accountant with respect to bankruptcy and restructuring issues, including business stabilization, cash flow improvement, financial projections, strategic business plans, debt restructuring, reorganization plan development, analysis, feasibility and negotiation, pension issues, fraud investigation, solvency analyses, business valuation, detailed liquidation and payout analyses, substantive consolidation issues, asset liquidation, preference actions, and claims analyses. Mr. Atkinson has previously served as Chief Restructuring Officer, Chief Financial Officer, and Trustee to troubled companies. He has vast experience in a wide range of industries including restaurants, retail, grocery and supermarkets, convenience stores, hospitality, food distribution, healthcare, manufacturing, energy, telecommunications, equipment leasing, utilities, construction, mining, wholesale distribution, publishing, real estate, and insurance. Mr. Atkinson has led over 50 creditors’ committee cases and debtor cases in his career. He has served as financial advisor in bankruptcies including Nine West, Gymboree, Alpha Natural Resources, Health Diagnostic Laboratory, Circuit City, Linens ‘n Things, and Erikson Retirement Communities. Mr. Atkinson has represented over 30 post-confirmation trusts including those of Chi-Chi’s, ATA Airlines, Murray’s Inc., and United Petroleum. 6 0
  61. 61. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY MICHAEL RIELA – Riela@thsh.com Mike Riela is a partner in Tannenbaum Helpern’s Creditors’ Rights and Business Reorganization practice. With more than 15 years of experience, Mike advises companies on complex restructuring, distressed M&A, loan transactions and bankruptcy related litigation matters. Mike has in-depth experience in advising clients on corporate and real estate bankruptcies, workouts, Chapter 11 and Chapter 7 bankruptcy cases, debtor-in-possession (DIP) and bankruptcy exit loan facilities, secondary market trading of distressed debt and trade claims, Section 363 sales and bankruptcy retention and fee agreements and disputes. His clients include banks, administrative agents, indenture trustees, hedge funds, private equity firms, professional services firms, trade creditors, contract counterparties, shareholders, debtors and investors. Mike has represented buyers of assets in Section 363 and out-of-court sales from sellers such as Evergreen Solar, Inc., Sonic Telecommunications International, Ltd, Urban Communicators PCS Limited Partnership, US Aggregate, Inc., and Vectrix Corporation, as well as representing lenders, trustees and administrative agents in major Chapter 11 cases and workouts such as Delta Air Lines, Inc., Extended Stay Inc., Buffets Inc., Legends Gaming LLC, Nortel Networks, Premier International Holdings Inc., and many others. Mike also works with clients on cybersecurity and data privacy issues, including the assessment and investigation of information security and data breach incidents. Before any data breaches occur, Mike prepares and helps clients implement written information security programs, systems access policies, and incident response plans. After clients suffer a breach, Mike assists with their response and advises on their legal duties, including clients’ duties under various security breach notification laws. Prior to joining Tannenbaum Helpern, Mike was a shareholder at Vedder Price and was a counsel at Latham & Watkins. He has been recently selected to serve on the 2016 Bankruptcy editorial advisory board for the Law360 publication. Mike can be reached at riela@thsh.com or at 212.508.6773 or connect with him on LinkedIn: https://www.linkedin.com/in/michael-riela-9644658 6 1
  62. 62. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY CHRISTOPHER WICK – cwick@hahnlaw.com Christopher B. Wick focuses his practice in the Creditors’ Rights, Reorganization and Bankruptcy, and Litigation Areas. He has experience representing debtors, creditors and creditors’ committees in bankruptcy and insolvency proceedings. Chris has represented businesses and financial institutions in business reorganizations, workouts, and restructurings; represent companies in defense of preference actions; and represent businesses in foreclosure actions, and replevin actions. Among his accomplishments, Chris is listed in the 2005, 2006 & 2010-13 editions of “Ohio Rising Stars” by Ohio Super Lawyers, and the 2014 edition of Ohio Super Lawyers for Bankruptcy and Business Litigation. He is a member of the Cleveland Bridge Builders Class of 2007, and a former finalist for Inside Business magazine’s Top 25 Under 35 Movers & Shakers. Chris also serves on the board of directors of the Friends Group of Achievement Centers for Children. 6 2
  63. 63. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe QUESTIONS OR COMMENTS? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 6 3
  64. 64. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 6 4 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.

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