Chapter 8 - § 8.8 POST-PETITION FINANCING — BANKRUPTCY CODE § 364

• Jurisdiction: Colorado

§ 8.8 POST-PETITION FINANCING — BANKRUPTCY CODE § 364

Bankruptcy Code § 364 permits a debtor-in-possession to obtain post-petition financing, subject to court approval. Rarely will a mechanics' lienholder be concerned about such financing, unless the debtor seeks financing pursuant to § 364(d), which permits post-petition financing secured by a lien that is senior to or equal to existing liens. Typically, this occurs when a debtor has an uncompleted construction project and needs additional cash to complete the project, but the lender (usually the existing lender) will provide financing with a senior or "priming" lien.

Bankruptcy Code § 364(d) provides authority for a debtor to obtain post-petition credit secured by a senior or priming lien:

(1) The court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt secured by a senior or equal lien on property of the estate that is subject to a lien only if—

(A) the trustee is unable to obtain such credit otherwise; and
(B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.

(2) In any hearing on this subsection, the trustee has the burden of proof on the issue of adequate protection.

Bankruptcy Code § 364(d)(1)(A) does not impose upon a debtor-in-possession the onerous duty to seek credit from every possible lender before concluding that such credit is unavailable.³⁷ Instead, the debtor need only make a good faith effort to obtain less burdensome credit, especially where time is of the essence to preserve a going concern.³⁸ A debtor's decision to obtain post-petition financing is judged on whether it exercised its reasonable business judgment.³⁹ So long as the terms of a priming loan are not onerous and the debtor provides adequate protection to other lienholders (per the adequate...