## Facts

- Michael Day Enterprises, Inc. (Day) filed a Chapter 11 case and continued operating as a debtor in possession.
- KeyBank National Association (KeyBank) was one of Day’s prepetition lenders and held unsecured claims against the bankruptcy estate.
- Day sought court approval to obtain postpetition financing from KeyBank under 11 U.S.C. § 364, asserting that postpetition credit was unavailable from other sources.
- KeyBank was willing to provide new postpetition funds only if the financing also addressed KeyBank’s existing prepetition unsecured debt.
- Specifically, KeyBank conditioned the postpetition facility on combining (or “rolling up”) Day’s prepetition unsecured debt to KeyBank with the new postpetition credit, so that the consolidated amount would be treated as a secured postpetition obligation.
- The proposed structure would have improved KeyBank’s position on its prepetition unsecured claim compared to other unsecured creditors.

## Issues

1. Whether a bankruptcy court may approve postpetition financing under 11 U.S.C. § 364 when the lender conditions new credit on combining the lender’s prepetition unsecured claim into the postpetition secured facility.
2. What showing the debtor must make under § 364 to justify financing terms that alter the relative treatment of prepetition creditors.

## Decision

- The bankruptcy court declined to approve the proposed postpetition financing to the extent it would combine KeyBank’s prepetition unsecured debt with the postpetition secured financing.
- The court refused to authorize a financing structure that would treat prepetition unsecured debt as secured postpetition debt through a combined facility.
- The debtor was left to seek financing on terms consistent with § 364, without granting KeyBank’s prepetition unsecured claim a better priority through the DIP loan.

## Legal Principles

- Postpetition financing under 11 U.S.C. § 364 is permitted only when the debtor shows that it cannot obtain credit on less burdensome terms.
- Section 364 authorizes liens and priority rights to induce new lending, but it is not a general tool for rewriting prepetition distribution priorities.
- A debtor in possession acts as a fiduciary for the estate and must consider the effect of financing terms on the creditor body as a whole, not only the demands of a single lender.
- Financing terms that effectively convert a lender’s prepetition unsecured claim into a secured postpetition obligation require close judicial review and must be supported by a strong, case-specific justification tied to obtaining new money.

## Conclusion

In *In re Michael Day Enterprises, Inc.*, the bankruptcy court treated § 364 financing as a means to obtain necessary postpetition credit, not as a device to grant a prepetition unsecured lender a better position by folding old debt into a new secured DIP facility, and it therefore refused to approve the proposed combined-debt financing structure.


In re Michael Day Enterprises, Inc., 2009 WL 7195491 (2009)