## Facts

- The Colad Group, Inc., a specialty printer of custom stationery products, filed a Chapter 11 petition and sought expedited “first day” relief to stabilize operations.
- The debtor moved, among other things, to pay certain prepetition wages and benefits, pay certain prepetition sales and use taxes, ensure continued utility service, continue existing cash-management practices, and retain professionals.
- The debtor also sought postpetition financing from its largest secured creditor, Continental Plants Group, LLC, including a priming lien and administrative superpriority under 11 U.S.C. § 364(d).
- The court granted interim operational relief on most non-financing first-day motions but withheld final approval of the DIP financing due to legal and procedural concerns.
- A creditor with interests tied to a related Chapter 7 estate objected, heightening scrutiny of relief sought before formation of a creditors’ committee and before meaningful notice to affected parties.

## Issues

1. What standard governs emergency first-day orders that authorize payment of prepetition obligations and affect creditor rights before a committee forms and creditors receive meaningful notice.
2. Whether the proposed DIP financing, including interest, fees, a priming lien, and superpriority status, could be finally approved given potential illegality under state usury law.
3. Whether a priming lien under § 364(d) was justified by inability to obtain credit otherwise and supported by adequate protection and adequate notice to existing secured creditors.
4. Whether lender protections and waivers in the proposed DIP order impermissibly modified statutory or third-party rights in a first-day posture.

## Decision

- The court approved interim first-day relief needed to maintain operations, including limited payment of certain prepetition wages and taxes, utility assurance, continuation of cash-management practices, and retention of key professionals, subject to later review.
- The court denied final approval of the proposed DIP financing order as presented.
- The court found material defects in the DIP proposal, including substantial concern that the economic terms could violate New York criminal usury limits when interest and fees were aggregated.
- The court declined to authorize a priming lien and related protections without a sufficient showing of adequate protection and adequate notice to affected secured creditors.
- The court rejected provisions that, in effect, sought to bind or impair third-party and statutory rights through broad releases or restrictions inappropriate for expedited first-day approval.

## Legal Principles

- First-day orders are extraordinary and should be limited to relief necessary to prevent immediate and irreparable harm and preserve going-concern value, while avoiding irreversible determinations of parties’ rights at the outset.
- Payment of select prepetition obligations may be authorized on an interim basis when necessary to avoid disruption of operations and preserve reorganization prospects, and should remain subject to later challenge and adjustment.
- Approval of postpetition financing with a priming lien under 11 U.S.C. § 364(d) requires proof that credit cannot be obtained otherwise and that existing lienholders will receive adequate protection, with procedurally adequate notice.
- Bankruptcy courts do not possess a general power to approve financing that appears illegal under applicable state law; parties seeking approval bear the burden to show the transaction’s economic terms are lawful.
- Provisions in DIP orders that waive rights, restrict challenges, or otherwise impair non-consenting parties must satisfy Bankruptcy Code requirements and due process, and are disfavored in an emergency, early-case posture.

## Conclusion

The court permitted narrowly tailored interim first-day relief to keep the debtor operating but refused to grant final approval of a DIP facility that raised serious usury concerns, sought a priming lien without adequate protection and notice, and attempted to impose sweeping waivers and third-party impairments inappropriate for expedited approval.


In re Colad Grp., Inc., 324 B.R. 208 (Bankr. W.D.N.Y. 2005)