Harsh Consequences of Unauthorized Post-Petition Financing

Lenders and other creditors who extend credit or provide financing during the course of a chapter 11 case do so with the expectation that their claims will be entitled to elevated priority of payment in accordance with whatever court approved agreement they reach with the debtor-in-possession ("DIP") or bankruptcy trustee. Even though the Bankruptcy Code expressly confers priority status on all such "administrative claims," creditors dealing with the DIP must be vigilant to ensure that the priority of their claims cannot be undermined due to non-compliance with the Code’s requirements or later developments in the bankruptcy, such as the conversion of the case to a liquidation. A decision recently issued by an Illinois bankruptcy court illustrates what can happen when a post-petition lender pays less than adequate attention to the details. In In re Ockerlund Construction Company, the court held that a lender who failed to obtain a court order authorizing a DIP to borrow money did not