USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
“adequate protection” of a lender’s interests in its collateral. Lack of “adequate protection” means a lack of security to protect against the diminution in value of the secured lender’s collateral dur - ing the bankruptcy case (eg, from the debtor’s use/dissipation of the collateral). Any property acquired after the date of the filing of a bank - ruptcy petition is not subject to a secured party’s after-acquired property provisions of its secu - rity agreement and the security interest will not attach to the property, although lenders will fre - quently receive liens on after-acquired property as “adequate protection”. Secured lenders may be “under-secured” or “over-secured” in a Chapter 11 bankruptcy proceeding. An “over-secured” creditor (ie, where the value of 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 creditor’s collateral does not exceed the amount of its debt) may not. Given the requirement that “adequate protec - tion” is a condition to a priming debtor-in pos - session (DIP) financing, this is a central area of focus during most bankruptcy proceedings in which substantially all of the assets of a Chap - ter 11 debtor are otherwise encumbered by senior secured debt and insufficient collateral is available for junior DIP financing. Given the difficulty in demonstrating adequate protection, a non-consensual priming DIP financing is also extraordinarily 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 groups of similarly situated credi - tors depending on their relative priority in the assets, comprising collateral 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 unse - cured claims and a Chapter 11 debtor may not be able to reorganise under the US Bankruptcy Code if the administrative and priority claims are not paid in full (or unless the creditors hold - ing such claims agree otherwise). These claims are then followed by other general unsecured or “under-secured” claims. Notwithstand - ing this, certain unsecured creditors are often paid in a bankruptcy through “critical vendor” orders, 503(b)(9) claims (which require payment for goods delivered in the 20 days preceding a bankruptcy filing) and assumption of execu - tory contracts in a plan or sale (which requires the resolution of any pre-petition default). Cus - tomers are often paid through “customer pro - gramme” orders and employees are generally paid, aside from certain types of claims (eg, sev - erance 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 .
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