First Impressions: Tenth Circuit BAP Rules that Section 364 of the Bankruptcy Code Does Not Apply to Chapter 11 Exit Financing

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 equivalent").

Aspen Club

Aspen Club & Spa, LLC and Aspen Redevelopment Company, LLC (collectively, "debtors") own real property in downtown Aspen, Colorado, on which they have been developing luxury residential condominiums and a fitness club and spa since 2015. Construction halted after the lender that provided $30 million in construction financing refused to make additional advances. The original lender then assigned the loan, which was secured by the real property and had increased to $34 million, to GPIF Aspen Club, LLC ("GPIF"). The debtors filed SARE chapter 11 cases in the District of Colorado in May 2019.

The bankruptcy court authorized the debtors to obtain up to $4.2 million in DIP financing from EFO Financial Group, LLC ("EFO"), secured by a priming lien on the property senior to approximately $25 million in mechanics' liens and the lien securing GPIF's $34 million claim. In approving the financing, the court found that, solely for the purpose of the financing motion, the property was worth no less than "the ninety to one hundred million-dollar range," compared to estimated prepetition secured claims totaling approximately $67 million.

The debtors filed a joint chapter 11 plan shortly before the expiration of the 90-day period applicable to SARE debtors under section 362(d)(3). One of the plan's stated conditions to confirmation was that the court shall have entered an order under sections 364(c) and 364(d)(1) approving $140 million in super-priority exit financing provided by EFO to the "Debtors and Reorganized Debtors" secured by a lien senior to all existing liens other than mechanics' liens. The plan proposed to pay all mechanics' lien claims in full. It provided that GPIF's secured claim would be paid over a period of years from a certain portion of the anticipated sale proceeds of living units constructed on the property.

The debtors separately filed a motion seeking approval of the exit financing, to which GPIF objected. GPIF also filed a motion for relief from the automatic stay, arguing that: (i) as specified in section 362(d)(3), the plan "did not have a reasonable possibility of being confirmed with a reasonable time" and was patently unconfirmable because it was based on nonconsensual priming-lien exit financing, which cannot be approved under section 364 or state law; and (ii) "the proposed exit financing could not be crammed down" because the plan did not provide either that GPIF would retain its lien under section 1129(b)(2)(a)(i) or that GPIF would receive the indubitable equivalent of its secured claim under section 1129(b)(a)(iii). 

The bankruptcy court acknowledged that whether the proposed exit financing could be approved was a "threshold issue" because the debtors' plan would fail without it. The court also noted that there is no binding precedent from either the U.S. Supreme Court or the Tenth Circuit Court of Appeals regarding whether exit financing can be approved under section 364(d)(1). For that reason, the bankruptcy court determined that it was not yet prepared to decide the issue and concluded that the debtors therefore were not, "as a matter of law, precluded from seeking an exit financing facility … pursuant to 11 U.S.C. § 364(d)(1)."

The court then denied GPIF's stay relief motion, finding that: (i) the debtors had equity in the property exceeding the $95 million in debt secured by it; and (ii) foreclosure by GPIF would benefit only itself and the mechanics' lienors rather than the entire creditor body. The court also suggested that GPIF's secured claim could be crammed down by providing GPIF with adequate protection amounting to the indubitable equivalent of its claim. Finally, the bankruptcy court extended the periods during which the debtors had the exclusive right to propose and seek acceptances for a plan.

GPIF appealed the ruling to the BAP.

The Bankruptcy Appellate Panel's Decision

A divided BAP reversed. According to the majority, the bankruptcy court erred by basing its denial of stay relief on the existence of equity in the property, rather than a finding that the debtors had a reasonable possibility of confirming a plan within a reasonable time, as required by section 362(d)(3) in a SARE bankruptcy case. To make that finding, the majority explained, the bankruptcy court was obligated to rule on the debtors' motion to approve the priming-lien exit financing.

Instead of remanding the case below for the bankruptcy court to make this determination, however, the BAP majority "exercised its discretion to consider" the issue because it had been fully briefed and argued by the parties, the issue was one of law impacting confirmation, "and plan confirmation potentially could moot a later appeal of whether exit priming lien financing is permitted under § 364, §§ 1123 and 1129, or both."

It was not clear from the record whether the exit financing would take effect before or after the effective date of the debtors' plan, and the court addressed both possibilities. Because section 364 uses the terms "trustee" and "property of the estate," the BAP majority reasoned that any exit financing incurred by the reorganized debtors after the collateral was no longer estate property could not be approved under the provision as a matter of law. For support, it cited three bankruptcy court rulings that purportedly reached the same conclusion. See In re SAI Holdings, Ltd., 2012 WL 3201893 (Bankr. N.D. Ohio Aug. 3 , 2012); In re Les Ruggles & Sons, Inc., 222 B.R. 344 (Bankr. D. Neb. 1998); In re Hickey Props., Ltd., 181 B.R. 173 (Bankr. D. Vt. 1995); see generally Collier at ¶ 364.05[3] (discussing cases).

The BAP majority characterized as "less clear" whether section 364(d) would apply if the bankruptcy court granted the debtors' exit financing motion prior to confirmation of the plan (while the collateral securing the priming liens was still estate property) and the exit loan was funded after confirmation—i.e., "hybrid" exit financing that "straddles confirmation." The majority concluded, however, that the debtors could not rely on the provision to obtain priming-lien exit financing under these circumstances either: 

Section 364 is designed to provide a mechanism for the trustee or debtor-in-possession to obtain credit to finance the operation of the business or to fund the cost of administering the bankruptcy case, not to finance post-confirmation operations after the property of the estate has vested in the reorganized debtor.

But this did not end the analysis. The BAP majority went on to hold that the debtors could obtain priming lien exit financing: (i) as a means of implementing their chapter 11 plan by satisfying or modifying a lien pursuant to section 1123(a)(5)(E) of the Bankruptcy Code; and (ii) by providing the dissenting secured creditor whose lien was being modified—GPIF—with the indubitable equivalent of its claim under section 1129(b)(2)(A)(iii).

The bankruptcy court had not determined the value of GPIF's collateral for purposes of anything other than the initial DIP loan. For this reason, the BAP majority held that it could not determine whether the plan (including the proposed priming-lien exit financing) provided GPIF with the indubitable equivalent of its claim. It accordingly remanded the case to the bankruptcy court to make this determination as part of its finding under section 362(d)(3) that, in the absence of a final determination of the section 364(d) issue, there was a reasonable possibility that the debtors' plan could be confirmed within a reasonable time.

In a "vehement" dissent, Bankruptcy Judge Terrence L. Michael stated that he would have affirmed the bankruptcy court's decision. In his view, the bankruptcy court "acted reasonably and prudently" by moving the case toward confirmation and making a decision about indubitable equivalence at the confirmation hearing. "That's what we do," he wrote.

According to Judge Michael, the bankruptcy court appropriately exercised its discretion not to decide the 364(d) issue in the context of the stay relief motion, and the BAP majority consequently abused its own discretion by deciding the question as a matter of first impression even though it had not been ruled on by the bankruptcy court or in any decision at the circuit court level. He also noted that a close reading of the cases cited by the BAP majority for the proposition that section 364 cannot be used to obtain financing that survives confirmation reveals that they are conclusory, distinguishable, and establish no "bright-line rule" against exit financing.


Exit financing is a routine feature of chapter 11 plans, and many courts have approved such financing under section 364 without actually ruling on whether the provision applies in that context. See, e.g., In re XS Ranch Fund VI, L.P., 2018 WL 2448084, at *2 (Bankr. N.D. Cal. Mar. 26, 2018) (noting that "[t]he Debtor and Crestline have negotiated the terms and conditions of Exit Financing loan documents and this Order in good faith and at arm's-length, and any loans made to the Debtor pursuant to the Plan or this Order shall be, and hereby are, deemed to have been made in 'good faith' within the meaning of Section 364(e) of the Bankruptcy Code"); In re Starbrite Properties Corp., 2012 WL 2050745, at *2 (Bankr. E.D.N.Y. June 5, 2012) ("The Debtor also secured, with the Court's authorization, exit financing in the amount of $3,850,000 (the "Exit Loan") from Madison Acquisition Group II LLC ("Madison"). The Confirmation Order specifically approved the Exit Loan under section 364(e) of the Bankruptcy Code."); In re Panolam Holdings Co., 2009 WL 7226968, at *5 (Bankr. D. Del. Dec. 10, 2009) (approving exit financing under sections 364 and 1123(a)(5) as a necessary means of implementing a chapter 11 plan and finding that lender was entitled to the protections of section 364(e) as a good faith lender); In re U.S. Mineral Prod. Co., 2005 WL 5887218, at *2 (Bankr. D. Del. Nov. 29, 2005) (approving secured exit loan financing provided by a DIP lender to consummate a chapter 11 plan and "for general working capital purposes of the Reorganized Debtor").

Given the uncertainty highlighted by the courts in Aspen Club as to whether section 364 governs post-reorganization exit financing, however, the better approach may be to rely on a bankruptcy court's power to approve a chapter 11 plan that includes exit financing as a permitted means of implementation. See In re City of Detroit, 524 B.R. 147, 276 (Bankr. E.D. Mich. 2014) (ruling that, although section 364 does not apply to post-confirmation exit financing, such financing was, among other things, necessary and appropriate to implement a chapter 9 plan under section 1123(a)(5) (made applicable to chapter 9 cases under section 901(a)), and the financing was not inconsistent with any other provisions of the Bankruptcy Code under section 1123(b)(6)). This approach obviates the need to obtain approval of exit financing prior to confirmation when there is still a DIP or trustee and while any collateral securing such financing is still property of the estate.

Finally, it should be noted that, in discussing "hybrid" exit financing that "straddles confirmation," the BAP in Aspen Club referred to "confirmation" consistent with section 1141(b) of the Bankruptcy Code, which provides that confirmation of a chapter 11 plan vests property of the estate in the debtor "[e]xcept as otherwise provided in the plan or the order confirming the plan." However, chapter 11 plans and confirmation orders commonly provide that such plans take effect in the future in accordance with their terms. In such a case, the court presumably would intend for its analysis to reference hybrid exit financing that straddles the effective date of any such plan, not its mere confirmation.

A version of this article was previously published by Lexis Practice Advisor. It has been reprinted here with permission.

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