A Lesson In DIP Financing Due Diligence

The Bankruptcy Code contains an array of provisions designed to encourage lenders to provide debtor-in-possession ("DIP") financing in chapter 11 cases, including authorization of "superpriority" administrative expense claims and "priming" liens designed to ensure that DIP loans are repaid. However, as illustrated by a ruling recently handed down by the U.S. Court of Appeals for the Seventh Circuit, these provisions do not relieve a DIP lender from its obligation to perform customary due diligence regarding the terms of the loan, including the extent and value of the collateral securing it. In Banco Panamericano, Inc. v. City of Peoria, 880 F.3d 329 (7th Cir. 2018), the Seventh Circuit held that a DIP lender with a superpriority claim secured by a "blanket lien" on all of the debtor lessee's assets did not have a "better claim" to property which automatically reverted to the lessor upon termination of a lease.