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 the estate in the form of a post-petition debtor-in-possession (DIP) loan. What the debtor is permitted or not permitted to do can seal the fate of a case from the outset. This webinar sheds light on the intricacies involved in DIP financing. Part of the webinar series: THE NUTS & BOLTS OF BANKRUPTCY LAW 2022 See more at https://www.financialpoise.com/webinars/

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4. 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
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Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
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5. Meet the Faculty
MODERATOR:
Josh Gadharf – McDonald Hopkins PLC, Detroit
PANELISTS:
Erin Brady – Hogan Lovells
Edward Schnitzer – Montgomery McCracken Walker & Rhoads LLP
James Sullivan – Windels Marx Lane & Mittendorf LLP, New York
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6. About This Webinar
The Nuts & Bolts of DIP Financing
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 the estate in the form of a post-petition debtor-in-possession (DIP)
loan. What the debtor is permitted or not permitted to do can seal the fate of a case from the
outset. This webinar sheds light on the intricacies involved in DIP financing.
6

7. About This Series
The Nuts & Bolts of Bankruptcy Law 2022
During the past few years, companies across a broad spectrum of industries have faced
challenges stemming from the COVID-19 pandemic, supply chain interruptions, labor shortages,
and inflation, among other things. Many businesses have been crippled by decreased revenues,
increased debt, uncertain prospects and vaporized equity. Sometimes companies in distress
cannot heal on their own and are forced to check into the hospital of Chapter 11 . . . or arrive at the
door of the emergency room before negotiating a cure. If you need to understand Chapter 11 –
whether to avoid it or learn how to harness its power – this program is for you. Designed for the
corporate attorney, litigator, business consultant, executive and others not already experienced in
Chapter 11, each episode in this Financial Poise webinar series takes a deep dive into one aspect
of a Chapter 11 bankruptcy case at a level that can be understood by the non-expert.
Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without
background in these areas, yet also invaluable to seasoned attorneys, accountants, and other professionals who need to refresh their
understanding of this timely topic. Each episode brings you an engaging conversation designed to entertain as it teaches, and may be
viewed independently so that your knowledge will be enhanced whether you attend one, some, or all episodes.
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8. Episodes in this Series
#1: The Nuts & Bolts of a Chapter 11 Plan
Premiere date: 5/3/22
#2: The Nuts & Bolts of a Lift Stay Motion
Premiere date: 6/7/22
#3: The Nuts & Bolts of DIP Financing
Premiere date: 7/12/22
#4: The Nuts & Bolts of a 363 Motion
Premiere date: 8/16/22
#5: The Nuts & Bolts of Retention
Premiere date: 9/2/22
#6: The Nuts & Bolts of a First Day Hearing
Premiere date: 10/25/22
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9. Episode #3
The Nuts & Bolts of DIP Financing
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10. 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
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11. Debtor Financing and Use of Cash Collateral
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12. 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
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. 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.
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14. 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
• 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
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15. 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.
• A particular state’s laws may determine whether court approval is required
15

16. 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
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17. 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
• 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
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18. Adequate Protection Issues for the Debtor’s Lenders
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19. 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
• 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
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20. 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”
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21. 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
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22. 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
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23. 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
✓ 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
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24. 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)
• Periodic Cash Payments
✓ Sufficient for soft collateral and hard collateral if payments are enough to
compensate creditor for diminution in value
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25. 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
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26. Motions for Authorization to Use Cash
Collateral and/or for Post-Petition Financing
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27. 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
• 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)
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28. 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
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29. 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?
• 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
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30. 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.
30

31. Resolving Cash Collateral by Financing the
Debtor’s Business
31

32. 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
• 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
32

33. 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
• 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)
• 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
33

34. Post-Petition 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
34

35. Terms of Agreement for Post-Petition 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
• 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)
35

36. Resolving Cash Collateral and Post-Petition
Disputes
36

37. 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
• 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
37

38. Miscellaneous Considerations
38

39. Miscellaneous Considerations
• 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
• 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
39

40. Miscellaneous Considerations (cont’d)
• 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 post-petition proceeds of that property to the
extent provided for in the security agreements and by applicable non-bankruptcy law
40

41. Miscellaneous Considerations (cont’d)
• 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.
41

42. About the Faculty
42

43. About The Faculty
Josh Gadharf – jgadharf@mcdonaldhopkins.com
Josh is a member in the Detroit office of McDonald Hopkins PLC. He counsels clients in both
distressed and non-distressed settings. Josh regularly represents public and private companies,
strategic and financial investors, directors, officers, lenders, creditors, and shareholders. Josh’s
debtor practice involves advising companies and their boards of directors and management teams
in business restructuring scenarios ranging from out-of-court restructurings to chapter 11
reorganizations and liquidations. He also represents purchasers of distressed assets and lenders
involved in distressed workouts. In addition, Josh provides counseling in non-distressed settings to
businesses, business owners, and investors and serves as outside general counsel to several
middle market businesses where he advises on transactional, corporate, and commercial litigation
matters.
To read more about Josh, go to https://mcdonaldhopkins.com/Team/Attorney/j/Joshua-Gadharf
43

44. About The Faculty
Erin Brady – erin.brady@hoganlovells.com
Erin Brady has nearly two decades of experience effectively resolving her clients' most complex problems with practical
business solutions that don't complicate the issues.
Her practice focuses on complex, time-sensitive challenges inherent in corporate restructurings and liquidations. This
successful representation of creditors' committees, individual creditors, trustees, debtors, and others has helped them
realize their business goals when the stakes were high and the outcomes uncertain.
One concentration of Erin's practice is restructurings in the retail sector. She represented Mattel as the largest unsecured
creditor and co-chair of the creditors' committee in the Toys 'R' Us Chapter 11 cases. She represented Fleming
Companies in the sale of substantially all of its grocery store distribution business. She also represented American
Apparel and its affiliates in its two recent Chapter 11 cases, the first in 2015 and the second in 2016. American Apparel
operated a vertically integrated manufacturing, distribution, and retail business focused on branded fashion-basic
apparel, employing thousands of employees across multiple manufacturing facilities and hundreds of retail stores in the
United States and 17 other countries worldwide.
To read more about Erin, please visit: https://www.hoganlovells.com/en/brady-erin
44

45. About The Faculty
Edward L. Schnitzer - eschnitzer@mmwr.com
Edward L. Schnitzer is Chair of Montgomery McCracken’s Bankruptcy & Financial Restructuring
Department and a member of the firm’s Management Committee. He represents creditor committees,
creditors, litigation trustees, equity committees, and debtors, with particular expertise in bankruptcy
litigation including the prosecution and defense of avoidance actions, claims objections, and collection
and turnover actions. Ed is a court-approved mediator and has mediated disputes in the Health
Diagnostic, Standard Register, Borders and WP Steel bankruptcy cases. As a member of the N.Y.C. Bar
Association’s Pro Bono Bankruptcy Panel, he has represented individuals in need of pro bono assistance
in adversary proceedings. Following law school, Ed served as an Assistant District Attorney in the Bronx
where he handled appeals before the Appellate Division, New York Court of Appeals, Southern District of
New York and Second Circuit, as well as tried several cases and assisted with the prosecution of a first
degree murder trial. He then joined the SEC’s Enforcement Division where he investigated violations of
the Federal Securities Laws.
To read more about Ed, go to https://www.mmwr.com/attorney/edward-l-schnitzer
45

46. About The Faculty
James Sullivan - jsullivan@windelsmarx.com
James Sullivan’s primary practice focus is corporate restructuring and bankruptcy, distressed situations and complex
commercial disputes. He brings a wealth of experience representing creditors’ committees, corporate debtors, banks,
secured and unsecured creditors, trustees and distressed investors in large Chapter 11 cases.
James has handled a range of cases for his clients in litigation, trial and mediation. On the transactional side, he
counsels borrowers and lenders in matters involving corporate and acquisition financing. He also appears before
numerous federal and state courts throughout the country on these matters.
James is honored with a listing in New York Super Lawyers® and is rated AV Preeminent™ in his field by Martindale-
Hubbell. He is described by his clients as “a smart lawyer who understands business issues and is always on his clients’
side.”
Prior to joining Windels Marx, he was a partner at the law firms of Moses & Singer, Arent Fox and McDermott Will &
Emory.
He regularly authors and lectures on numerous topics concerning bankruptcy, and is an experienced pilot who enjoys
skiing and scuba diving.
46

47. 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.
47

48. Commercial Bankruptcy Litigation is a must-have
resource for any non-bankruptcy attorney who is
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experienced chapter 11 professional. This 2,000-
plus page treatise, updated yearly, and with
contributions from some of the country's most
respected practitioners from top firms across the
U.S., covers topics from general bankruptcy and
procedure to appeals.
Commercial Bankruptcy Litigation, 2d, 2022 ed.
eBook available through Thomson and Reuters and Amazon
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Businesses, 2022 ed.
Strategic Alternatives for And Against
Distressed Businesses is one of a kind. It is
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eBook available through Thomson
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52. ABOUT DailyDAC
DailyDAC.com is the leading source of
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53. About Financial Poise
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