Courts Weigh Priming Liens, Lender Protection

Debtor-in-possession financing often lies at the center of a Chapter 11 case. For debtors, it can mean the difference between stabilizing operations and facing liquidation. For lenders, it can reshape priority rights and collateral positions in ways that ripple throughout the case. Nowhere is this tension greater than when a debtor seeks approval of a "priming" lien. Courts tasked with approving such relief must balance two competing priorities: ensuring that a debtor has the liquidity needed to preserve going-concern value, and safeguarding prepetition lenders from erosion of their collateral position. This article examines how courts navigate that balance, with a focus on the statutory requirement of "adequate protection" for secured creditors.

Statutory Framework

Section 364 of the Bankruptcy Code establishes a hierarchy of financing options for debtors seeking funding while under bankruptcy protection. The degree of judicial scrutiny generally tracks the financing's potential impact on existing creditors.

At the most basic level, a debtor may obtain unsecured credit in the ordinary course of business. See 11 U.S.C. § 364(a). With court approval, a debtor may obtain unsecured credit outside the ordinary course of business. See 11 U.S.C. § 364(b). If unsecured credit is unavailable, the court may authorize debt secured by "superpriority" administrative expense claims, liens on unencumbered property, or junior liens. 11 U.S.C. § 364(c). At the other end of the spectrum, the court may permit debtor-in-possession financing secured by a lien that is senior or equal to an existing lien. 11 U.S.C. § 364(d). This is commonly known as a "priming" lien.

Because priming liens displace existing lienholders, Congress imposed two conditions under section 364(d)(1): (1) the debtor must demonstrate an inability to obtain alternative credit, and (2) prepetition secured creditors must receive "adequate protection" against any diminution in the value of their collateral. The statute tries to strike a balance: new money is often essential to preserve the debtor's going-concern value, but obtaining it should not unfairly disadvantage existing creditors.

Is Priming Necessary?

Courts recognize that the ability to prime is "extraordinary." In re Seth Co., 281 B.R. 150, 153 (Bankr. D. Conn. 2002). As a result, courts are typically reluctant to approve priming liens unless a debtor can clearly establish necessity. In re 495 Cent. Park Ave. Corp., 136 B.R. 626, 630 (Bankr. S.D.N.Y. 1992) ("Because super priority financing displaces liens on which creditors have relied in extending credit, the debtor must demonstrate to the court that it cannot obtain financing by other means."). The necessity inquiry is fact-intensive, see Suntrust Bank v. Den-Mark Constr., Inc., 406 B.R. 683, 691 (E.D.N.C. 2009), and courts often look for a record that demonstrates both the debtor's good-faith efforts and a lack of viable alternatives. While there is an expectation of diligence, "a debtor is not required to seek credit from every possible lender before concluding that such credit is unavailable." First Sec. Bank & Tr. Co. v. Vander Vegt, 511 B.R. 567, 579 (N.D. Iowa 2014). Courts instead consider factors such as:

• whether the debtor made good-faith efforts to obtain non-priming financing, In re Clouter Creek Res. LLC, 669 B.R. 764, 783 (Bankr. D.S.C. 2025) (approving priming DIP based, in part, on testimony from the debtor's representative detailing the number of prospective lenders contacted and other debtor-specific obstacles to alternative financing);
• the urgency of the debtor's liquidity needs and the risk of estate collapse absent prompt approval, In re Ames Dep't Stores, Inc., 115 B.R. 34, 40 (Bankr. S.D.N.Y. 1990) (noting seasonal demands on debtor's business in approving priming liens); and
• the feasibility of alternative structures that might avoid priming existing lenders, In re L.A. Dodgers LLC, 457 B.R. 308, 314 (Bankr. D. Del. 2011) (denying priming request where the record showed a superior unsecured financing alternative was available).
• Once the court is satisfied that priming is necessary, it must then address the second prong of section 364(d): whether the interests of existing lienholders are adequately protected.

Are Lienholders Adequately Protected?

The most hotly contested issue in a priming dispute is whether prepetition secured lenders will receive "adequate protection" as required under sections 361 and 364(d) of the Bankruptcy Code. While not defined, adequate protection generally means protecting a secured creditor against a decline in the value of its collateral position during the bankruptcy case.

Courts recognize several forms of adequate protection, often used in combination with one another. While not exhaustive, section 361 of the Bankruptcy Code offers a few examples of adequate protection:

• Periodic cash payments. Prepetition lenders may receive monthly interest payments or reimbursement for professional fees. This helps offset diminution in value but is limited by a debtor's liquidity.
• Replacement liens. Lenders may be granted liens on previously unencumbered assets or on postpetition assets. These liens substitute for collateral value consumed during the case.
• "Indubitable equivalent." This refers to any other relief to ensure the creditor realizes the equivalent value of its interest, and can include financial reporting, budget compliance covenants, limitations on use of cash collateral, or restrictions on additional liens. Courts sometimes find these non-cash protections sufficient in the aggregate.

In addition to the enumerated forms of adequate protection found in the Bankruptcy Code, courts may also find that adequate protection exists if there is a substantial equity cushion in the assets subject to the existing lender's lien. If the cushion is large enough, priming may be allowed without additional protection. See, e.g., In re Dunes Casino Hotel, 69 B.R. 784 (Bankr. D.N.J. 1986) (finding a substantial equity cushion sufficient to protect the value of a creditor's lien from depreciation); but see In re R & H Inv. Co., 46 B.R. 114, 116 (Bankr. D. Conn. 1985) ("When a debtor relies solely on the existence of an equity cushion to provide adequate protection to a secured creditor, the debtor assumes a heavy burden to overcome the creditor's assertion that the secured interest is at risk.").

Courts consistently emphasize that adequate protection depends on the facts of each case. See In re Swedeland Dev. Grp., Inc., 16 F.3d552, 564 (3d Cir. 1994). In making their determination, courts assess the value of the secured creditor's interest, identify potential threats to that value, and evaluate whether the proposed protection sufficiently compensates the creditor for those risks. See In re Vander Vegt, 499 B.R. 631, 637 (Bankr. N.D. Iowa 2013) (citations omitted).

Adequate Protection In Practice

In applying these principles, courts often focus on policy considerations, including preserving the bankruptcy estate and ensuring that prepetition lenders are fairly treated. For example, if priming financing is necessary to preserve going-concern value, courts are inclined to approve it, reasoning that even prepetition lenders benefit from avoiding a fire-sale liquidation. See, e.g., In re Yellowstone Mountain Club, LLC, No. 08-61570-11, 2008 WL 5875547, at *12 (Bankr. D. Mont. Dec. 17, 2008) (concluding that without DIP financing, the debtor would "go dark" to the detriment of all creditors). On the other hand, courts will scrutinize whether protections offered to prepetition lenders are substantive, and not illusory. Courts may reject proposals where the equity cushion is thin, collateral values are speculative, or replacement liens are on assets of uncertain worth. See In re LTAP US, LLLP, No. 10-14125 KG, 2011 WL 671761, at *3 (Bankr. D. Del. Feb. 18, 2011) (rejecting priming DIP after finding adequate protection illusory where the prepetition lender was offered a replacement lien on assets against which it already hada lien).

In a recent decision, the Bankruptcy Court for the Southern District of New York in In re Broadway Realty I Co., LLC, No. 25-11050 (DSJ), 2025 WL 1803089 (Bankr. S.D.N.Y. June 29, 2025) addressed debtors' creative arguments surrounding adequate protection. Facing an objection from their secured creditor, the debtors contended that because certain proposed expenditures, including operating costs and professional fees, would preserve or enhance the value of their properties, those payments should be treated as surchargeable under section 506(c) of the Bankruptcy Code, and thus deemed to satisfy section 361's "indubitable equivalent" standard. The court rejected that contention, emphasizing that section 506(c) is designed to allow retrospective recovery of expenses that directly and quantifiably benefit a secured creditor, not to justify prospective use of a lender's collateral to fund an entire Chapter 11 case. Equating estate-preserving expenses with adequate protection, the court warned, would effectively nullify the requirement that secured creditors receive real, contemporaneous protection in exchange for the diminution in value of their collateral. Although the dispute arose in the cash collateral context rather than in connection with DIP financing, Broadway Realty makes clear that a debtor's flexibility in structuring adequate protection does not extend to measures that are speculative, generalized, or indistinguishable from the ordinary costs of bankruptcy case administration.

In the priming DIP context, the recent case of In re Marelli Automotive Lighting USA LLC (Case No. 25-11034), before the Bankruptcy Court for the District of Delaware, illustrates how courts evaluate the sufficiency of an adequate protection package. The debtors sought court approval for $1.1 billion in new-money DIP financing, coupled with a roll-up of prepetition claims held by certain DIP lenders. The proposed DIP liens would prime those of an existing secured lender, which objected on the ground that the package failed to guard against diminution in value of its collateral. The lender emphasized the lack of evidence of an equity cushion and argued that, even if the debtors established one, it would fall well short of the 20% cushion often viewed by courts as sufficient. The debtors countered that the objection ignored the substantial pool of unencumbered assets available to support replacement liens. Because a significant portion of the debtors' balance sheet was unencumbered, they argued, the proposed adequate protection package offered meaningful value.

The dispute was not ultimately adjudicated, as the parties reached a resolution before the final DIP hearing. As part of that settlement, however, the debtors agreed to modify the DIP order to provide additional adequate protection in the form of amortized cash payments to the existing secured lender during the case. This enhanced package underscores the risks a debtor faces when seeking priming financing without offering protections robustenough to satisfy its senior secured lenders.

Conclusion

Priming liens remain one of the most contentious tools in Chapter 11. They are extraordinary in nature and approved only when the record demonstrates both necessity and robust adequate protection for existing lenders. Courts weigh evidence of the debtor's financing efforts, the urgency of liquidity needs, and the substance of protections offered, while keeping an eye on preserving estate value for all stakeholders. Recent disputes over priming and adequate protection reveal a clear lesson: debtors that fail to offer meaningful safeguards risk resistance from senior lenders and scrutiny from the bankruptcy court. Conversely, when priming is supported by a well-documented record and credible protections, it can supply the lifeline that keeps a restructuring on track.

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This article first appeared in the December 3,2025, edition of "Turnarounds & Workouts" © 2025Beard Group, Inc. All rights reserved.

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