## Facts

- Ames Department Stores and affiliated entities filed Chapter 11 petitions on April 25, 1990, operating nearly 700 stores with about 55,000 employees.
- The debtors faced an immediate liquidity crisis and sought approval of a $250 million debtor-in-possession (DIP) financing facility.
- Before filing, the debtors sought postpetition financing from four major lending institutions; two could not meet the required timetable.
- The debtors negotiated with a prepetition secured lender group led by Citibank and with Chemical Bank.
- Citibank proposed only $40 million of new money, conditioned on stringent protections, including broad collateral coverage, a cash-loss cap, and cross-collateralization of roughly $460 million in prepetition debt.
- Chemical offered up to $250 million under 11 U.S.C. § 364(c) on a secured, superpriority basis, but the agreement contained contested provisions that:
  - treated appointment of a trustee (or similar case-control events) as a default,
  - treated certain stay-relief orders benefiting large creditors as a default, and
  - limited effective payment protections for estate professionals and committee counsel.
- The official creditors’ committee, the bondholders’ committee, and other creditors objected to these provisions and negotiated modifications.

## Issues

1. Whether the debtors proved they were unable to obtain unsecured credit (or less onerous credit) as required to authorize superpriority and secured postpetition financing under 11 U.S.C. § 364(c).
2. Whether the proposed DIP financing terms were permissible where certain defaults and covenants could pressure case governance, chill statutory motion practice, or impair committee and professional functions.
3. What level of deference the court should give to the debtors’ business judgment in selecting financing terms, consistent with Chapter 11 policy and statutory protections.

## Decision

- The court authorized the debtors to obtain postpetition credit under § 364(c) on a secured, superpriority basis because the debtors showed urgent need and lack of adequate alternative financing.
- The court granted the motion only with modifications, rejecting or requiring revisions to provisions that:
  - penalized the potential appointment of a trustee or similar statutory remedies,
  - made certain stay-relief orders for large creditors an event of default, and
  - threatened the ability of estate professionals and statutory committees to function through inadequate fee protections.
- The court approved the financing as modified to preserve the reorganization effort while preventing the lender from obtaining undue influence over case administration.

## Legal Principles

- A court may approve postpetition financing under 11 U.S.C. § 364(c) only upon a showing that the debtor cannot obtain unsecured credit allowable as an administrative expense and that more favorable alternatives are unavailable.
- DIP financing is reviewed under a business-judgment framework, but the court must independently ensure terms are fair, reasonable, and consistent with the Bankruptcy Code’s allocation of rights and case administration.
- Financing terms are not invalid solely because they are aggressive, but provisions that distort case governance, chill the exercise of statutory rights (including trustee motions or stay-relief litigation), or impair the role of committees and professionals are subject to heightened scrutiny and may be disallowed or modified.
- Superpriority status and liens may be approved when necessary to obtain credit, but they cannot be used to subordinate or effectively control payment of professional fees in a manner that compromises the Chapter 11 process.

## Conclusion

The court approved substantial § 364(c) DIP financing as necessary to preserve the debtors’ operations, but conditioned approval on removing or revising terms that would improperly constrain statutory remedies, influence stay-relief outcomes, or weaken professional-fee and committee protections central to Chapter 11 administration.


In re Ames Dep’t Stores, Inc., 115 B.R. 34 (Bankr. S.D.N.Y. 1990)