Postpetition Lending under Section 364: Issues Regarding the Gap Period and Financing for Prepackaged Plans

If the priorities provided by section 364(c) are insufficient to entice potential lenders to provide sufficient :financing to a Chapter 11 debtor, the debtor may, with the court\u27s approval, obtain credit by granting the lender a lien on property of the debtor that is senior to existing liens on such property (a priming lien ). The granting of such a priming lien, however, is subject to several statutory conditions. First, as with section 364(c), the debtor must prove that it cannot obtain credit on any less intrusive basis (i.e., through the use of section 364(a), (b), or (c)). Second, the debtor must prove that the interest of any lender whose interest is to be primed is adequately protected. Although adequate protection can be provided in any number of ways, debtors attempting to utilize section 364(a) usually claim that the prime lender\u27s interest is adequately protected by a substantial equity cushion in the property. Finally, lenders who have advanced funds based on court orders granted under section 364 are protected on appeal by section 364(e). Chapter 11 debtors generally have an immediate need for postpetition financing. Creditors would be reluctant to advance funds if a section 364(b) or (c) priority or a section 364(c) or (d) lien could be removed by the reversal on appeal of the order granting the priority or lien. Consequently, section 364 lenders are protected from reversal on appeal by section 364(e), provided that the order granting the priority or lien was sought in good faith and provided that a stay pending the appeal was not obtained by a party opposing the grant of the priority or lien