USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
public sale of collateral may, for instance, decide to run a slower sale process, hire a professional sell- side adviser, and/or spend more time and resources advertising or finding potential bidders in an effort to pre-empt challenges of commercial unreasonable - ness. In developing a commercially reasonable pro - cess, it is generally advisable for the secured party to consider what steps it would take if it were selling its own assets.
of the assets of a Chapter 11 debtor are otherwise encumbered by senior secured debt and insufficient collateral is available for junior DIP financing. Also, given the difficulty in demonstrating adequate protec - tion, a non-consensual priming DIP financing is rare. 7.2 Waterfall of Payments Creditors in a bankruptcy proceeding are ranked. Under the absolute priority rule, secured parties are generally paid before unsecured creditors, including administrative claims that arise during a bankruptcy proceeding. Secured parties are classed into each group of similarly situated creditors and depending on their relative priority in the assets, comprising collat - eral they receive and the proceeds of collateral when realised. Among unsecured creditors, post-petition administrative and priority claims listed in statute (eg, taxes) will be paid first before other unsecured claims, and a Chapter 11 debtor may not be able to reorganise under the US Bankruptcy Code if such administrative and priority claims are not paid in full (or unless the creditors holding such claims agree oth - erwise). The aforementioned claims are then followed by other general unsecured or under-secured claims. Notwithstanding the foregoing, certain unsecured creditors often are paid in a bankruptcy through “criti - cal vendor” orders, 503 (b)(9) claims (which require payment for goods delivered in the 20 days preced - ing a bankruptcy filing), and assumption of executory contracts in a plan or sale (which requires the cure of any pre-petition default). Customers are often paid through “customer program” orders and employees are generally paid, aside from certain types of claims (eg, severance claims). 7.3 Length of Insolvency Process and Recoveries The length of an insolvency proceeding depends heavily on the type of bankruptcy (pre-arranged, pre- packaged, freefall or 363 sale case) and how much litigation is involved. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency See 7.8 Out-of-Court v In-Court Enforcement regard - ing out-of-court restructurings.
7. Bankruptcy and Insolvency 7.1 Impact of Insolvency Processes
The filing of a bankruptcy case under the US Bankrupt - cy Code will result in an automatic stay that prevents lenders (and all creditors) from enforcing any security without prior relief from the bankruptcy court or oth - erwise taking an affirmative action against property of the debtors’ estate (including terminating contracts, etc). Relief from the stay is available upon application and a showing of cause, including based on the lack of adequate protection of a lender’s interests in its col - lateral. Lack of “adequate protection” means a lack of security to protect against the diminution in value of the secured lender’s collateral during the bankruptcy case (eg, from the debtor’s use/dissipation of such collateral). Any property acquired after the date of the filing of a bankruptcy petition is not subject to a secured party’s after-acquired property provisions of its security agreement and the security interest will not attach to such property, though lenders will frequently receive liens on after-acquired property as adequate protection. Secured lenders may be “under-secured” or “over- secured” in a Chapter 11 bankruptcy. An over-secured creditor (ie, where the value of the creditor’s collateral exceeds the amount of its debt) is entitled to interest, fees and related charges as part of its allowed secured claim in a bankruptcy case, whereas an under-secured creditor (ie, where the value of the creditor’s collateral does not exceed the amount of its debt) is not. Given the requirement that adequate protection is a condition to a priming debtor-in-possession (DIP) financing, this is a central area of focus during most bankruptcy proceedings in which substantially all
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