The ability of a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to obtain credit or financing during the course of a bankruptcy case is often crucial to the debtor's prospects for either maintaining operations pending the development of a confirmable plan of reorganization or facilitating an orderly liquidation designed to maximize asset values for the benefit of all stakeholders. In a chapter 11 case, financing (and/or cash infusions through recapitalization) also is often a key component of the reorganized debtor's ability to operate post-bankruptcy. Section 364 of the Bankruptcy Code includes provisions specifically governing the circumstances under which a trustee or DIP can obtain credit or financing, including secured financing that primes existing secured creditors' liens, during a bankruptcy case. It is unclear, however, whether those provisions apply to post-confirmation exit financing.
A Tenth Circuit bankruptcy appellate panel ("BAP") recently addressed this question as a matter of first impression in GPIF Aspen Club LLC v. Aspen Club Spa LLC (In re Aspen Club Spa LLC), 2020 WL 4251761 (B.A.P. 10th Cir. July 24, 2020). The divided panel ruled that section 364(d)(1) of the Bankruptcy Code could not be used to approve chapter 11 plan exit financing that primed the liens of an existing secured lender and remanded the case to the bankruptcy court to determine whether the cram-down plan provided the primed lender with the "indubitable equivalent" of its secured claim. The majority also held that, in a single asset real estate ("SARE") case, a bankruptcy court must always decide whether a plan has a reasonable possibility of confirmation within a reasonable time when ruling on a motion to modify the automatic stay if the debtor is not making payments to the creditor seeking stay relief.
Obtaining Credit and Financing in Bankruptcy
Section 364(a) of the Bankruptcy Code provides that a "trustee … authorized to operate the business of the debtor" may obtain unsecured credit or incur unsecured debt in the ordinary course of business and that the resulting claims will be treated as administrative expenses. In addition, the bankruptcy court may authorize the trustee to obtain non-ordinary course unsecured credit or financing with administrative expense priority. See 11 U.S.C. § 364(b).
If unsecured credit or financing is unavailable, the court, after notice and a hearing, may authorize the trustee to obtain: (i) unsecured credit or financing with "super-priority" over other administrative expenses; or (ii) credit or financing secured by a lien on unencumbered "property of the estate," a junior lien on already encumbered estate property, a lien on already encumbered estate property equal in priority to existing liens, or a "priming" lien on already encumbered estate property, as long as the existing lien holder is provided with "adequate protection." See 11 U.S.C. § 364(c) and (d). A DIP is granted the same ability to obtain credit or financing in accordance with section 1107(a) of the Bankruptcy Code.
Cram-Down of Secured Claims in Bankruptcy
Section 1129(a) of the Bankruptcy Code requires, among other things, that for a chapter 11 plan to be confirmable, each class of claims or interests must either accept the plan or not be impaired. See 11 U.S.C. § 1129(a)(8). However, confirmation is possible in the absence of acceptance by impaired classes under section 1129(b) if all of the other plan requirements are satisfied and the plan "does not discriminate unfairly" and is "fair and equitable" with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
With respect to a dissenting class of secured claims, section 1129(b)(2)(A) provides that a plan is "fair and equitable" if the plan provides for: (i) the secured claimants' retention of their liens and receipt of deferred cash payments equal to at least the value, as of the plan effective date, of their secured claims; (ii) the sale, subject to the creditor's right to "credit bid" its claim under section 363(k), of the collateral free and clear of all liens, with attachment of the creditor's lien to the sale proceeds and treatment of the lien under option (i) or (iii); or (iii) the realization by the secured creditors of the "indubitable equivalent" of their claims.
The Bankruptcy Code does not define the term "indubitable equivalent," which, in addition to section 1129(b)(2)(iii), appears in section 361(3) of the Bankruptcy Code as an alternative form of "adequate protection" of a creditor's interest in property ("adequate protection may be provided by … granting such other relief … as will result in the realization by such entity of the indubitable equivalent of such entity's interest in such property"). It has been defined as "the unquestionable value of a lender's secured interest in the collateral." In re Philadelphia Newspapers, LLC, 599 F.3d 298, 310 (3d Cir. 2010); accord In re Sparks, 171 B.R. 860, 866 (Bankr. N.D. Ill. 1994) (a plan provides the indubitable equivalent of a claim to the creditor where it "(1) provides the creditor with the present value of its claim, and (2) insures the safety of its principle [sic]"); see generally Collier on Bankruptcy ("Collier") ¶¶ 361.03[4] and 1129.04[2][c][i] (16th ed. 2020) (discussing the derivation of the concept from In re Murel Holding Corp., 75 F.2d 941 (2d Cir. 1935), and explaining that "abandonment, or unqualified transfer of the collateral, to the secured creditor," substitute collateral, and the retention of liens with modified loan terms have been deemed to provide the "indubitable...
