## Facts

- 495 Central Avenue Corporation (debtor) owned an income-producing building and real property located at 495 Central Avenue, Scarsdale, New York (the opinion’s caption refers to “495 Central Park Avenue Corp.”).
- The property was encumbered by a first-priority, perfected mortgage held by John Hancock Mutual Life Insurance Company (Hancock).
- The debtor acquired the property in April 1991 from Viewpoint Realty Corp., paying cash and giving Viewpoint a subordinate purchase-money mortgage junior to Hancock’s lien.
- After the debtor defaulted on the Hancock mortgage, Hancock commenced foreclosure.
- The debtor filed a voluntary Chapter 11 petition on September 5, 1991, and continued operating as debtor in possession; the foreclosure was stayed by the bankruptcy filing.
- The debtor sought authority under 11 U.S.C. § 364(d) to borrow postpetition funds (roughly $650,000) to renovate the building to attract tenants and stabilize operations.
- The proposed financing required granting the new lender a lien senior to existing liens, including Hancock’s first mortgage (a priming lien).
- The proposed sources included loans from insider shareholders (Leon Silverman and Tom Borek) and/or third-party lenders whose loans would be supported by shareholder guarantees.
- The debtor’s principals attempted to obtain financing on non-priming terms but were unsuccessful; evidence was offered that lenders would not make the loan without a first-priority security position.
- Hancock objected, arguing the debtor failed to satisfy § 364(d)’s requirements and also contending the proposal implicated the absolute priority rule under § 1129(b).

## Issues

1. Whether the debtor proved it was “unable to obtain such credit otherwise” as required by 11 U.S.C. § 364(d)(1)(A).
2. Whether Hancock’s interest as existing first mortgagee would be “adequately protected” if the court authorized a priming lien under 11 U.S.C. § 364(d)(1)(B).
3. Whether an objection based on the absolute priority rule under 11 U.S.C. § 1129(b) could defeat a pre-confirmation financing motion under § 364(d).

## Decision

- The court granted the debtor’s motion and authorized the requested senior secured postpetition financing under § 364(d).
- The court found the debtor satisfied § 364(d)(1)(A) because it could not obtain the needed financing on any basis that did not give the lender priority over Hancock’s lien.
- The court found Hancock was adequately protected under § 364(d)(1)(B) based on evidence that the renovations funded by the loan would increase the property’s value enough to protect Hancock’s collateral position despite the priming lien.
- The court rejected Hancock’s absolute-priority objection as premature, holding that § 1129(b) concerns plan confirmation and does not control whether interim financing may be approved under § 364(d).

## Legal Principles

- A bankruptcy court may authorize postpetition credit secured by a lien senior to an existing lien only if the debtor proves both statutory requirements of § 364(d)(1): (A) inability to obtain credit otherwise, and (B) adequate protection of the existing lienholder.
- The debtor bears the burden to show reasonable efforts to obtain financing on other terms and that the market will not provide the needed credit without the requested senior lien.
- Adequate protection under § 364(d)(1)(B) focuses on protecting the existing secured creditor from a decline in the value of its interest in the collateral; a supported showing that funded improvements will increase collateral value may satisfy this requirement.
- Objections based on the absolute priority rule arise at plan confirmation under § 1129(b) and generally do not bar approval of interim postpetition financing under § 364(d).

## Conclusion

The court approved the debtor’s request for priming DIP financing to fund renovations because the debtor showed it could not obtain the loan on non-priming terms and presented evidence that the renovations would raise the property’s value enough to adequately protect Hancock’s secured interest; the court also held that absolute-priority-rule concerns belong at plan confirmation, not on a § 364(d) financing motion.


In re 495 Central Avenue Corporation, 136 B.R. 626 (1992)