Cracking the Code: The Legal Authority Behind Extrastatutory Debtor-in-Possession Financing Mechanisms and Their Prospects for Surival

Abstract

In surveying the landscape of bankruptcy law twenty-five years after its dramatic renovation in 1978, Professor Douglas Baird has observed the gradual development of numerous practices in debtor-in-possession (“DIP”) financing that do not accord with the plain meaning of the text of the Bankruptcy Code (the “Code”), yet “have become deeply engrained and will remain a part of bankruptcy practice as long as no one objects.” However, when someone does object, appellate judges, expressing “little sympathy for interpretations of the Bankruptcy Code that are out of step with what seems the plain language of the statute,” have sometimes stricken such procedures, despite their common acceptance among bankruptcy specialists. By examining three practices that lack explicit statutory approval—cross-collateralization, critical vendor orders, and restrictive loan covenants—this survey piece seeks to evaluate not only their legal and normative validity, but also the ability of strict constructionist judges to curtail them in opposition to the will of most practitioners and DIP lenders.