Debtor-in-Possession Financing and Cash Collateral

What do debtor-in-possession financing and cash collateral encompass?

Debtor-in-possession (DIP) financing and cash collateral are vital in bankruptcy, particularly Chapter 11 cases. DIP financing enables bankrupt companies to access funds necessary for maintaining operations and meeting working capital requirements. Cash collateral comprises cash, negotiable instruments, or other liquid assets subject to a creditor’s lien, which the debtor may use with court approval during bankruptcy.

The connection between these elements and bankruptcy is evident in the need to protect creditors’ interests. Accordingly, creditors must actively participate in the bankruptcy process to safeguard their rights, and the debtor’s use of DIP financing or cash collateral is subject to adequate protection measures. For creditors, this process involves negotiating the terms of DIP financing agreements and cash collateral orders, monitoring the debtor’s financial activities, and enforcing the creditor’s rights in court when necessary.

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Which Florida laws and regulations apply to DIP financing and cash collateral?

The Bankruptcy Code, particularly 11 USC § 364 and 11 USC § 363, governs DIP financing and the use of cash collateral in the United States, including Florida. Section 364 addresses obtaining credit and incurring debt during bankruptcy, while Section 363 pertains to using, selling, or leasing property, including cash collateral. Furthermore, Florida Statutes § 679.1021 defines cash collateral in the context of Florida’s Uniform Commercial Code.

To navigate the complexities of DIP financing and cash collateral use, creditors must consult an experienced bankruptcy attorney familiar with Florida and federal laws. The attorney can guide on protecting the creditor’s interests and ensuring compliance with applicable statutes and regulations.

What legal risks do creditors face associated with DIP financing and cash collateral?

Consider the following forms of exposure:

Inadequate protection: Creditors risk not receiving sufficient protection for their interests when the debtor uses cash collateral or obtains DIP financing. Inadequate protection can lead to a diminished value of the creditor’s collateral.
Primed liens: DIP financing may involve granting the lender a senior lien on the debtor’s assets, which can prime the existing creditor’s lien, causing a loss in priority.
Violation of loan covenants: The debtor’s access to DIP financing or cash collateral may cause a breach of existing loan agreements with other creditors, potentially triggering default provisions.
Loss of collateral value: The debtor’s use of cash collateral or DIP financing may lead to the depletion or depreciation of the collateral’s value, undermining the creditor’s ability to recover their claim.
Increased administrative expenses: Active participation in bankruptcy to protect their interests can result in higher legal and administrative costs for creditors.
Potential preference liability: Creditors may face preference liability if they receive payments or transfers from the debtor within the 90 days preceding the bankruptcy filing, which could be considered preferential and subject to avoidance actions.

When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.

How should bankruptcy counsel facilitate DIP financing and cash collateral?

Counsel should consider the following to protect their clients:

Monitor the debtor’s activities: By closely monitoring the debtor’s financial activities, creditor bankruptcy counsel can identify and address any potential issues or irregularities early in the process.
Negotiate DIP financing terms and cash collateral orders: Engaging in active negotiations with the debtor and other stakeholders can help protect the creditor’s interests and ensure adequate protection measures are in place.
Assert adequate protection rights: Creditors should assert their adequate protection rights under the Bankruptcy Code, which can include periodic cash payments, replacement liens, or other forms of protection that safeguard the creditor’s interests.
File objections or motions when necessary: Filing timely objections or motions in response to the debtor’s requests for DIP financing or use of cash collateral can help creditors protect their interests and challenge potentially unfavorable terms.
Engage financial and industry experts: Retaining financial and industry experts to assess the debtor’s financial position and business operations can provide valuable insights that help creditors make informed decisions and protect their interests.
Participate in creditors’ committee: Active participation in the creditors’ committee can increase the creditor’s influence in the bankruptcy process and help shape the outcome in their favor.

Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.

Frequently Asked Questions

Can a debtor use cash collateral without the creditor’s consent?

A debtor cannot use cash collateral without the creditor’s consent or court approval. In addition, the debtor must provide adequate protection to the creditor, which may include periodic cash payments, replacement liens, or other arrangements.

What happens if a debtor defaults on DIP financing obligations?

Suppose a debtor defaults on their DIP financing obligations. In that case, the DIP lender may seek remedies such as relief from the automatic stay, foreclosing on the collateral, or converting the case to a Chapter 7 liquidation.

Can creditors challenge the debtor’s choice of DIP lender?

Yes, creditors can challenge the debtor’s choice of DIP lender if they believe the terms of the DIP financing are not in the interest of the debtor’s estate and creditors. However, the court will ultimately decide whether the proposed DIP financing is appropriate based on the estate’s and its stakeholders’ best interests.

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Crucially, this overview of DIP financing and cash collateral does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation.