14. What is the authority of the debtor in possession?
Use of Business Assets – The DIP may use assets of the business in on-going operations. This includes the use of business cash in the “ordinary course of business”. This authority also includes using, selling, or leasing the business’s assets. If an asset will be “permanently impaired” or the use of assets is challenged by a creditor of the estate, the court must specifically approve its use. Special issues arise when the DIP seeks to lease or sell business assets in the course of business. Physical assets of the business generally serve as collateral for one or more classes of secured creditor. In this situation, the secured creditors may demand adequate protection of their interests from the DIP. This means the DIP may have to take measures to ensure that the bankruptcy estate’s use of the assets in on-going operations does not prejudice the secured status of the creditors. Adequate protection may be provided by:
⁃ Payments – The DIP may make payments to the secured creditor for any decrease in the value of collateral securing the debt.
⁃ Second Lien – The DIP may authorize an additional or replacement lien to the extent of any decrease in the value of collateral securing the debt.
⁃ Other Relief – The DIP may provide other relief that provides the creditor with assurance of payment of the equivalent value of the collateral.
Also, to the extent of any surplus value in the collateral, the secured creditor is entitled to interest and reimbursement of attorneys’ fees and expenses as part of its claim against the bankruptcy estate.
⁃ Discussion: Why do you think the bankruptcy law allows a DIP to use assets of the business to fund on-going operations? Do you think the above-listed methods of providing adequate assurance sufficiently protects creditor rights? Why or why not?
⁃ Practice Question: ABC Corp files for Chapter 11 Bankruptcy. The DIP continues to use business assets in the on-going operations of the business. Some of the assets are collateral for loans. The secured parties are concerned, as these assets will be used up in business operations. The secured parties do not want to be reduced to unsecured status. What is the DIP required to do in order to continue using these expendable assets in the course of operations?