Borrowing After the Filing
A company in bankruptcy still needs to buy materials and meet payroll. Section 364 supplies a graduated set of inducements for anyone willing to lend to it, and each rung of the ladder requires a stronger showing than the rung immediately below it.
The rule in short
Section 364 authorizes credit in ascending order. Ordinary-course unsecured credit is allowable as an administrative expense without an order. Other unsecured credit requires notice and a hearing. Where unsecured credit is unavailable, the court may authorize superpriority, a lien on unencumbered property, or a junior lien. A senior or equal lien over existing collateral requires both that credit was unobtainable otherwise and that the existing lienholder is adequately protected.
A business does not stop needing money because it filed. Suppliers want assurance, payroll falls due on schedule, and the working capital line that funded operations before the petition is usually unavailable afterward. Section 364 answers that by offering lenders a ladder of inducements, arranged so that each additional protection requires a stronger justification than the last.
The structure of the section
The section is built as a sequence. Subsection (a) permits ordinary-course unsecured credit without an order. Subsection (b) permits other unsecured credit after notice and a hearing. Subsection (c) becomes available only where unsecured credit is unobtainable, and offers three alternatives. Subsection (d) is the last rung and is available only on two findings.
| Subsection | What it authorizes | What must be shown |
|---|---|---|
| (a) | Unsecured credit in the ordinary course, as an administrative expense | Nothing; no order required |
| (b) | Unsecured credit outside the ordinary course | Authorization after notice and a hearing |
| (c)(1) | Priority over other administrative expenses | Inability to obtain unsecured credit |
| (c)(2) and (c)(3) | A lien on unencumbered property, or a junior lien | Inability to obtain unsecured credit |
| (d) | A senior or equal lien over existing collateral | Credit unobtainable otherwise, and adequate protection of the existing holder |
The ladder is not merely descriptive. A court asked to approve a facility at one level is entitled to ask why the level below would not serve, and objectors frame their arguments that way. A debtor seeking a priming lien has to explain the failure of every rung beneath it.
Ordinary-course credit, and why it is rarely enough
Where the trustee is authorized to operate the business, unsecured credit incurred in the ordinary course is allowable as an administrative expense without any order. Trade credit extended by a supplier on customary terms is the standard case, and it is the cheapest financing a debtor can obtain because it costs the estate nothing beyond the expense itself.
The difficulty is that suppliers know what an administrative expense is worth. It ranks ahead of unsecured claims and behind secured ones, and in an administratively insolvent case it is paid in part or not at all. Suppliers that continued shipping into a failing case have learned that lesson, and many now demand cash in advance instead.
Credit outside the ordinary course requires an order after notice and a hearing but carries the same administrative treatment. That combination — a hearing and no enhanced priority — makes it uncommon in practice. Lenders willing to go through a hearing generally want something more than the priority the section already gives.
Priority, unencumbered liens and junior liens
Subsection (c) opens once the trustee is unable to obtain unsecured credit allowable as an administrative expense. It then offers three inducements, which are frequently combined in one facility: priority over any or all administrative expenses of the kinds specified in the administrative expense and superpriority provisions; a lien on property of the estate that is not otherwise subject to a lien; and a junior lien on property that is already encumbered.
The first of these is the superpriority claim familiar from financing orders. It sits ahead of professionals' fees and operating expenses, which is why committees examine it closely and why carve-outs for professional compensation are negotiated into almost every order.
The inability requirement is a real element and is proved with evidence. Testimony about which sources were approached and why they declined is the ordinary showing. Where the debtor's existing lender is the only realistic candidate, that fact itself tends to establish the point, though it also gives the lender considerable influence over the terms.
Subsection (e) provides that reversal or modification on appeal of an authorization to obtain credit, or of a grant of priority or a lien, does not affect the validity of the debt incurred or the priority or lien granted to an entity that extended credit in good faith, whether or not it knew of the appeal, unless the authorization and the incurring of the debt were stayed pending appeal. Objections to financing therefore have to be pressed before the money moves.
The priming lien and its two findings
Subsection (d) permits the court to authorize credit secured by a senior or equal lien on property already subject to a lien, but only if the trustee is unable to obtain the credit otherwise and there is adequate protection of the interest of the existing holder. In any hearing under the subsection, the trustee bears the burden of proof on adequate protection.
The mechanism is contested, and the positions are well settled. Debtors and proposed lenders argue that priming is sometimes the only way to fund a case that would otherwise convert to liquidation, that the existing holder is protected by statute, and that a going concern generally produces a better recovery for everyone including the primed creditor.
Existing lenders argue the other side. Priming displaces a bargained-for position without consent; adequate protection rests on valuation estimates made under time pressure and rarely revisited; and the equity cushion said to protect them can evaporate before the case ends. Courts have reached results in both directions, and the outcome usually turns on the evidence of value rather than on any general view of the practice.
Protection is supplied in the ordinary forms — replacement liens, periodic payments, or other relief producing the indubitable equivalent — as described in the analysis of what adequate protection means. What cannot serve is an administrative expense claim, which the statute excludes from the permitted forms.
Disclosure and what the order contains
The rule imposes a disclosure regime that mirrors the cash collateral requirement. A motion for authorization to obtain credit must be accompanied by a copy of the credit agreement and a proposed form of order, and must begin with a concise statement, no longer than five pages, listing or summarizing all material provisions including interest rates, maturity dates, default provisions, liens, and borrowing limits and conditions.
The rule then names a list of specific provisions that must be separately identified if they appear, which is a direct response to terms that were once buried in long agreements. Cross-collateralization, waivers of avoidance actions, releases, and limits on a committee's ability to investigate all fall into that category.
In practice financing is heard alongside the motion to use cash collateral, often on the same day and under the same interim order, with the same budget governing both. Both are heard early under the sequence of first-day motions, and the budget they establish determines what is available for payments to employees and suppliers.
Points to carry away
- Ordinary-course unsecured credit is allowable as an administrative expense without a court order.
- Credit outside the ordinary course requires authorization after notice and a hearing.
- Superpriority, liens on unencumbered property and junior liens require an inability to obtain unsecured credit.
- A priming lien requires that credit was unobtainable otherwise and that the existing holder is adequately protected.
- The trustee bears the burden of proof on adequate protection at a priming hearing.
- Reversal on appeal does not affect debt incurred or liens granted to a good-faith lender unless the authorization was stayed.
Questions readers ask
Why is the good-faith protection in subsection (e) so significant?
It removes the risk that would otherwise deter lending. The reversal or modification on appeal of an authorization to obtain credit, or of a grant of a priority or a lien, does not affect the validity of the debt incurred or the priority or lien granted to an entity that extended credit in good faith, whether or not it knew of the appeal, unless the authorization and the incurring of the debt were stayed pending appeal. The practical effect is that an objector who does not obtain a stay may win the appeal and change nothing.
What is a roll-up, and how is it treated?
A roll-up uses part of a new facility to repay a prepetition loan held by the same lender, converting a prepetition claim into postpetition debt with the protections that carry. Proponents describe it as the price of obtaining financing at all and note the lender is often the only realistic source. Objectors describe it as paying one prepetition creditor in full ahead of others without the protections of the plan process. Courts differ on how much is permitted at an interim hearing, and the rule requires the feature to be disclosed in the concise statement.
Does the estate have to shop for financing before seeking a priming lien?
The statute requires that the trustee be unable to obtain the credit otherwise, and courts have read that as calling for evidence rather than assertion. Testimony describing which lenders were approached, on what terms, and why the approaches failed is the ordinary way the requirement is met. What courts have not required is an exhaustive search where the debtor's circumstances make the outcome obvious, and the reasonableness of the effort is judged against the time available.
Sources
- 11 U.S.C. § 364, Cornell LIISets the ascending priorities for postpetition credit and the findings required at each level.
- 11 U.S.C. § 361, Cornell LIISupplies the forms of adequate protection required before a senior or equal lien may be granted.
- 11 U.S.C. § 503, Cornell LIIDefines the administrative expenses to which ordinary postpetition credit is allowable.
- 11 U.S.C. § 507, Cornell LIIStates the priority scheme over which a superpriority is granted.
- 11 U.S.C. § 363, Cornell LIIGoverns use of property including cash collateral, which financing motions are usually filed alongside.
- Federal Rule of Bankruptcy Procedure 4001, Cornell LIISubdivision (c) requires the credit agreement, a proposed order, and disclosure of listed provisions in a concise statement.
Rapid Response Law is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
More in First-Day Relief
How Quickly a Court Must Hear a Stay Motion
Section 362(e)(1) terminates the stay thirty days after a request for relief from a stay of an act against estate property, as to the requesting party, unless the court after notice and a hearing orders it continued. The hearing may be preliminary or consolidated with the final hearing. Where it is preliminary, the court must order continuation if there is a reasonable likelihood that the party opposing relief will prevail, and the final hearing must conclude within thirty days after it.
The Shorter Stay for a Repeat Filer
Section 362(c)(3) provides that where an individual debtor had a case pending within the preceding year that was dismissed, the stay terminates on the thirtieth day after the later filing with respect to the debtor. Section 362(c)(4) provides that where two or more such cases were dismissed, no stay goes into effect at all. In each situation a party in interest may move to continue or impose the stay, and must demonstrate that the later filing is in good faith.
The First-Day Hearing and What Is Heard There
First-day hearings are held within days of a business filing, on shortened notice, to authorize what the debtor needs to keep operating. Rule 6003 prohibits granting listed applications within twenty-one days after the petition is filed unless relief is needed to avoid immediate and irreparable harm, and expressly does not apply to motions under Rule 4001. Cash collateral and financing are therefore heard first, with final hearings following after full notice.