Addressing Section 503(b)(9) Claims Issues at the Outset

May 28, 2014

Publication| Bankruptcy & Corporate Restructuring

It is a common fact pattern among cases filed in the U.S. Bankruptcy Court for the District of Delaware over the past decade: an over-leveraged debtor is in default under its prepetition credit facility, and the prepetition secured lender is looking to liquidate its collateral and get out as quickly and inexpensively as possible. It is this fact pattern, along with an increased awareness of the costs and uncertainty associated with “free fall” Chapter 11 bankruptcies, that has helped maintain the popularity of sale cases under Section 363 of the Bankruptcy Code. Assuming an appropriate marketing process has been conducted, Section 363 generally enables a debtor to complete a sale of substantially all of its assets within 60 to 90 days of the petition date. There are, however, still significant costs involved in funding a sale process of this length, including, among other things, funding the post-petition costs and expenses of operating the business through the sale process. More likely than not, these costs will need to be funded by the prepetition secured lender in the form of a DIP (debtor-in-possession) credit facility or through the consensual use of the prepetition lender’s cash collateral. This article discusses the impact that Section 503(b)(9) of the Bankruptcy Code may have on the funding needs of a case and explores the manner in which the Delaware bankruptcy court has addressed the issue.

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