cash collateral and dip loans

CASH COLLATERAL AND DIP LOANS

Part of the COMMERCIAL BANKRUPTCY LITIGATION 2015 Series

Premier Date: October 6, 2015


MEET THE FACULTY

PANELISTSKirk Burkley Bernstein – Burkley, P.C.Don Fletcher Lake & Cobb PLCHamid Rafatjoo Venable


MODERATORBeau Hays,

Hays, Martin & Potter

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Practical and entertaining education for business owners and executives, Accredited Investors, and their

legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

DISCLAIMER:

THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS


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CLLA is the leader in providing expertise, insight and results to and for attorneys, credit grantors and their

partners in the credit and business communities. For more information, visit www.clla.org.

DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE

BEST FOR YOUR INDIVIDUAL NEEDS

4


ABOUT THIS EPISODE


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Cash is the lifeblood of any business. Yet, when a company files for bankruptcy it commonly cannot use its cash without court approval or the consent of its lender. What’s more, many companies that file bankruptcy do not have enough cash to survive and, so, must borrow cash, which can only be done with court approval. Attend this webinar if you want to understand the how to obtain or object to the use of cash collateral or DIP financing.

EPISODES IN THIS SERIES

EPISODE #1 How to Defeat a Single Asset Real Estate Case5/5/15

EPISODE #2 Professional Responsibility in Bankruptcy Cases 6/2/15

EPISODE #3 Valuation Fights in Bankruptcy 7/7/15

EPISODE #4 Overview of Fraudulent Transfer Litigation 8/4/15

EPISODE #5 Fighting About Involuntary Bankruptcy Petitions 9/8/15

EPISODE #6 Cash Collateral and DIP Loans 10/6/15

EPISODE #7 Anatomy of Preference Litigation 11/3/15

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(Dates below are premier dates; all webinars also available on demand)

IntroductionThis presentation discusses the necessity of use

of cash collateral and of debtor in possession (DIP) financing in bankruptcy, explains the distinction between these concepts, key considerations for secured lenders in deciding whether to provide DIP financing and the key bankruptcy-related business and legal issues for each form of financing.

CASH COLLATERAL AND DIP LOAN MOTIONS

Financing process and documentation will be generally familiar but will involve some additional players/parties in interest (bankruptcy court, U.S. Trustee, creditors’ committee, existing lenders).


NECESSITY OF CASH COLLATERAL AND DIP

FINANCING


CASH IS KING!


Cash Collateral – 11 U.S.C §363Cash, 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


http://www.law.cornell.edu/uscode/text/11/552

http://www.law.cornell.edu/uscode/text/11/usc_sec_11_00000552----000-

Down to Basics Refers to any cash, negotiable instrument, document of

title, security, deposit account or other cash equivalent (as well as the proceeds thereof) in which both the Debtor and another party have an interest (usually a creditor to whom the Debtor has granted a security interest pre-petition)

Although involuntary lien creditors do have certain rights in

cash collateral, they are much more limited (and beyond the scope of this webinar)

Generally applies to any accounts receivable (AR) that existed at the time the petition was filed, as well as the cash proceeds that are generated from those AR – most common form of cash collateral for an operating business


What Does a Debtor Need to Use Cash Collateral?

Consent from each party with an interest in the cash collateral (i.e. secured lender) OR

Court approval (which generally requires a Debtor to provide “adequate protection” to the party with an interest in the cash collateral)

11 U.S.C. §§363(c)(2) and (e)The consequences for using cash collateral without first

obtaining consent or court approval can be severe, ranging from the granting of relief from the automatic stay to

conversion or dismissal of the case


What Is Adequate Protection?The Bankruptcy Code’s method for protecting a party’s interest in property when actions in a bankruptcy proceeding affect or threaten

to affect that interest

Cash Collateral – A party is permitted to seek adequate protection of its interest in property when a debtor seeks to use, sell or lease such property 11 U.S.C. §363(e)

DIP Financing – A debtor must provide adequate protection to a lienholder where the debtor obtains credit or other debt secured by a lien on estate property that is equal to or senior to the creditor’s lien on such property 11 U.S.C. §364(d)(1)(B)


Examples of Adequate ProtectionThe Bankruptcy code does not define “adequate protection” – but 11 U.S.C. §361 does provide

the following examples

A cash payment or periodic cash payments to the extent that the party’s interest declines in value as a result of the Debtor’s actions;

An additional or replacement lien to the extent that the party’s interest declines in value as a result of the Debtor’s actions; OR

Such other relief as will result in the realization of the “indubutable equivalent” of an entity’s interest in property (does not require an identical type of collateral)

An allowed administrative expense claim is not considered adequate protection. 11 U.S.C. §361(3)

Although the type of adequate protection that is provided generally depends upon the type of

collateral in question, the most common forms of adequate protection are:

Cash Collateral: replacement liens

DIP Financing: additional and replacement liens and periodic cash payments (i.e. current interest)


Valuation for Purposes of Adequate Protection

Although adequate protection is clearly intended to protect the value of a creditor’s

interest in property – is the relevant value determined on the date the petition was

filed or the date adequate protection is sought?

The Bankruptcy Code and the majority of courts indicate the latter

Lesson for creditors, lenders or any other party with an interest in cash collateral: Move for adequate protection as soon as possible once the petition is filed in order to protect against a decline in the value of the collateral


Miscellaneous Adequate Protection Issues

The amount of adequate protection that the Debtor must provide is limited to the value of the property in which the party has a security interest, not the entire amount of its claim. That is, if a party’s claim is greater than the value of its interest in property, the excess portion of the claim is unsecured and not entitled to protection

11 U.S.C. §363(c)(4) mandates that the Debtor segregate and account for any cash collateral in its possession, custody, or control for which it has not received consent or court approval to use Creditor/lender tip: Immediately upon the filing of a petition,

consider sending the Debtor a letter setting forth its obligation to segregate cash collateral – their unwillingness or inability to do so will strengthen any future remedies a creditor or lender may seek (i.e. relief from the automatic stay, conversion and/or dismissal)


Cash Collateral Procedure Immediately following the commencement of a case, the Debtor will often seek

to use cash collateral on an interim basis – as such relief is routinely granted by the Court, it is usually more beneficial to work with the Debtor to draft a stipulation governing the use of cash collateral

Common Terms Period of time during which cash collateral can be used Amount and form of adequate protection to be provided Budget indicating specific items cash collateral can be used for, as well

as a permitted variance (either line item or aggregate percentage)

The Debtor will eventually seek to use cash collateral on a final basis (although there will likely be numerous interim orders) – similar considerations apply


DIP FinancingDefinition for purposes of today’s call –

Loans that a bankruptcy estate gets after the bankruptcy begins to provide additional funding for the business in addition to or instead of funding provided by recycling proceeds of cash collateral

“DIP” – chapter 11Technically, section 364 of BR CodeTo encourage lenders, BR Code gives special

rights to DIP lenders


Different types of DIP financing

Available only if debtor is unable to obtain credit without “priming” or pari passu lien.Available only if debtor is unable to obtain unsecured credit.

Available outside the ordinarycourse of businessafter noticeand hearing.

In practice, available only from

vendors.

Stat

utor

y re

quir

emen

ts

Few

ExtensiveCredit

secured by pari passu or priming lien.

11 U.S.C.§364(d)

Credit with priority status, secured by lien on unencumbered property

or secured by junior lien on encumbered property.

11 U.S.C. §364(c)

Unsecured credit allowable as an administrative expense.

11 U.S.C. § 364(b)

Unsecured credit may be obtained in the ordinary course without notice or a hearing.

11 U.S.C. § 364(a)


Likely sources of DIP financing

Existing lendersLenders specializing in DIP financingBuyers


Illustration of DIP Financing Structures

New Money from Pre-Petition Lenders

New Money from PE, Hedge Fund or Bank

First Lien Debt

Second Lien Debt

HoldCo Preferred


Factors and Obstacles to New Financing


Key steps for consideration

Weekly cash flow forecastIncremental financing?Public relationsImpact on trade credit


Budget

CredibilityCushionCritical vendors


Incremental financing?

DriversOptions


Objectives of Different Parties

Secured LendersUnsecured CreditorsDebtor


Secured LendersProtection of Prepetition CollateralPotential quicker processValidation of Prepetition LiensAvoidance of LitigationLender Control of ProcessWaiver of §506(c) surcharge


Unsecured Creditors

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Where Does Debtor Fit?

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How DIP Financing Controls the Case

BudgetRequired Milestone TimingPlan v. §363 sale

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TIMELINE OF DIP FINANCING PROCESS


Typical DIP Financing Process Timeline

Two weeks prior to bankruptcy filing

Debtor negotiates various sets of commitment papers

Interim DIP hearing heldClosing and funding of interim DIP

Creditors' committee appointed by US Trustee

Final DIP hearing heldFinal DIP order entered

3 weeks prior to bankruptcy filing

0-2 days after bankruptcy filing

25-45 days after bankruptcy filing

Date of bankruptcy filing

Debtor selects DIP providerDebtor signs commitment papers

One week to 10 days after bankruptcy filing

Debtor seeks proposals for DIP financing and executes work fee letters with potential DIP providers

Drafting and negotiation of loan documents and form of Interim and final DIP order

DIP Lenders and Debtor negotiate with Creditors’ Committee, U.S. Trustee and other objecting parties concerning terms of DIP AgreementAmend DIP Agreement to reflect terms of resolved objections (if any), and completion of DIP loan syndication

Work to determine DIP size and structure, development of DIP budget and 13 week cash flow forecast

Debtor files motion to approve DIP


Key Issues

Key business issuesCarveoutsAP limitsCritical vendor paymentsKEIP payments/payments to managers


Key legal issue: Carve-outs


Key legal issues Lien perfection and claim waiversAuto stay waiverAvoidance actionsCase MilestonesRoll-ups and Cross-Collateralization


Key legal issue: Roll-Ups Definition of Roll-up.

“Creeping” Roll-up: When proceeds received during bankruptcy are applied to reduce prepetition indebtedness first, and then to postpetition debt (which is subject to stronger protections). Postpetition cash needs funded by DIP loan.

“First-Day” Roll-up (aka Super Roll-up): When proceeds of the DIP loan are used to pay down the entire prepetition facility immediately upon approval of the DIP at the first-day hearing.

Structure. Existing lenders (all lenders or only a subset thereof). New lenders.

Justifications Cost savings. Avoid priming battle. DIP loan otherwise unavailable.


Other key legal issues

Cross-collateralization


Court processKey steps in court approval

Interim approval, then final approvalKey debtor pointsDraft of DIP credit agreement; detailed order to

use CCOrder to approve DIP credit agreement


Provisions Generally Not Approved by Courts Cross-collateralization clauses (pre/post petition).

Provisions or findings of fact that bind the estate with respect to the validity, perfection, or amount of a prepetition lien or debt. Cannot bind estate without a challenge period. But debtor binds itself on Day 1.

Provisions that operate to divest the Debtor of any discretion in the formulation of a plan or administration of the estate.

Releases of, or limitations on, liability for the creditor’s alleged prepetition torts or breaches of contract.

Waivers of avoidance actions.

Automatic relief from the automatic stay upon default.

Time limits on investigation of validity, perfection or priority of prepetition claims.


Provisions Generally Not Approved by Courts Under Interim Orders

A debtor will need to prove its immediate borrowing needs for emergency approval (on an interim basis) of a DIP at the first day hearing.

On the first day, interim order approving a DIP, courts generally will not approve certain provisions, even though such provisions are not uncommon in a final DIP order.Liens on avoidance actions.506(c) waiver.Effectiveness of roll-up.Limitations on committee investigation rights.


MORE ABOUT THE FACULTY

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BEAU HAYS


[email protected] (Beau) W. Hays, is a principal in Hays Potter & Martin LLP, has acted as lead counsel in litigation matters, specializing in commercial disputes and bankruptcy law for over twenty years. He has successfully prosecuted federal Miller Act cases and bankruptcy creditors’ cases in federal and state courts around the country.

In 1995, with HPM partner Emory Potter, Mr. Hays founded the commercial law firm of Hays & Potter, PC, which was recognized nationwide as a pre-eminent source of counsel and expertise in service of the business credit community. Mr. Hays is a Past President of the Commercial Law League of America (CLLA), having served as Recording Secretary of the League, Chair of the Creditors’ Rights Section, Chair of the Southern Region, and a representative to the Board of Governors. In addition to being active in the Bankruptcy Section of CLLA, he is an Associate Member of the National Association of Bankruptcy Trustees. Mr. Hays was a founding member of the Creditors Rights Section of the State Bar of Georgia, and has served as Legislative Liaison for that Section.

He is an editor for the National Association of Credit Management’s Handbook of Credit and Commercial Laws, focusing on chapters related to materialman’s liens and construction bonds, and is regularly invited to speak on creditors’ issues, construction law, and bankruptcy for the National Association of Credit Management and many of its constituent credit groups. He is regularly an advocate for creditor’s rights at the state and federal level.

Mr. Hays earned his J.D. at the University of North Carolina School of Law, where he was a member of the Holderness Moot Court Bench. He received a B.A. in Political Science at the University of North Carolina at Chapel Hill. He is admitted to practice in Georgia, the U.S. District Court for the Northern, Middle, and Southern Districts of Georgia. He is a member of the State Bar of Georgia and has earned the AV Preeminent® peer review rating by Martindale-Hubbell.

mailto:[email protected]


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KIRK BURKLEY


[email protected] is the supervising partner of the firm’s Bankruptcy and Restructuring practice group. The Bankruptcy and Restructuring group handles national cases and acts as an efficient, one-stop shop for our clients’ bankruptcy and restructuring needs. Kirk is experienced in representing secured and unsecured creditors in bankruptcy, financial restructuring and workout situations, including the representation of numerous unsecured creditors’ committees, equipment lessors, financial institutions and commercial landlords.Kirk has also represented owners, contractors and subcontractors in construction disputes and regularly advises developers and lenders on large real estate transactions. Additionally, Kirk has developed unique experience in many facets of shareholder litigation in different industries.Kirk is certified in Business Bankruptcy and Creditors’ Rights Law from the American Board of Certification. He frequently appears before the United States District Courts for the Western, Middle and Eastern District of Pennsylvania, as well as the Pennsylvania state courts. He is also admitted to practice in the United States District Court for the Northern and Southern Districts of West Virginia.Kirk has quickly been defined as a well-respected lawyer in his field, as is evidenced by being named a “Pennsylvania Rising Star” from 2005 to 2012 and a “Super Lawyer” in 2013 by Philadelphia Magazine. He has lectured for the National Association of Credit Management (NACM), American Bankruptcy Institute and the Pennsylvania Bar Institute. He is a regular panelist for NBI and Lorman Educational Services on various legal topics.In 2013, Bernstein-Burkley, P.C. was ranked by U.S. News Media Group and Best Lawyers as a “Metropolitan First Tier Law Firm” in the areas of:Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization LawLitigation – Bankruptcy



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DON FLETCHER

Don Fletcher is an attorney with Lake and Cobb PLC.

Mr. Fletcher currently represents various landlords and lenders with their creditor’s interests in various Chapter 11 and Chapter 7 bankruptcy cases. He has filed motions for stay relief and sought other creditor remedies. Moreover, Mr. Fletcher has assisted various real estate developers as they have sought to restructure their debt both in and out of the bankruptcy process. He has successfully confirmed Chapter 11 plans of reorganization for companies in the area of real estate, entertainment, manufacturing, and for those providing professional services. He also handles a wide range of debtor cases including professionals and consumers seeking bankruptcy relief.

Don Fletcher has long been involved with various professional and community affairs. He is currently a member of the International Conference of Shopping Centers, which is the world’s largest collection of professionals involved with retail shopping operations. He has made presentations at the annual ICSC Law Conference and serves on the Bankruptcy Task Force for the ICSC. He is currently a member of the American Bankruptcy Institute, which is the largest organization of bankruptcy lawyers in the United States, as well as a member of the Bankruptcy Section of the Arizona State Bar. He frequently speaks at various professional sessions on collection matters, commercial landlord and tenant matters, and related bankruptcy matters. He has received several awards and accommodations including the Honors Program Attorney with the United States Justice Department. In 2008 he was named “Top Lawyer” by the Arizona Business Magazine. In addition, he has recently completed his term as chairman of the Phoenix Chapter of the J. Reuben Clark Law Society.


[email protected]


MORE ABOUT THE FACULTYHAMID RAFATJOO


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[email protected]

Hamid Rafatjoo focuses his bankruptcy practice at Venable on insolvency and corporate restructurings, either through an out-of-court workout process or through a chapter 11 filing, corporate transactions, and mergers and acquisitions.

He represents clients in complex reorganizations throughout the United States. Hamid’s clients represent a broad spectrum of industries, including entertainment, retail, manufacturing, real estate development, building contractors and hospitality.

Hamid is AV® Peer-Review Rated by Martindale-Hubbell and was recognized in the 2012 edition of Chambers USA (Band 4), Bankruptcy/Restructuring, California. He has also been selected for inclusion in Southern California Super Lawyers, 2007–2012.

He is a former Assistant Editor of the Norton Bankruptcy Law and Practice and former contributing author of the Wiley Bankruptcy Law Update.


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IMPORTANT NOTE:

THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS. 56