Pliant Corporation,  the Chicago manufacturer of plastic shipping materials, filed for bankruptcy in the Delaware Bankruptcy Court on February 11, 2009.  This is Pliant’s second time in bankruptcy, having confirmed a plan of reorganization from its first bankruptcy in June of 2006.  On the same day that Pliant filed its 2009 bankruptcy petition, it filed its prepackaged plan of reorganization and disclosure statement.  The same factors that contributed to Pliant’s first bankruptcy (high commodity prices, lack of liquidity and growing debt) contributed to Pliant’s need to file the pre-packaged bankruptcy presently before the Bankruptcy Court.

Hours after Pliant filed for bankruptcy,  an ad hoc committee of second lien noteholders filed an Objection to Pliant’s Motion for Interim Financing.  The ad hoc committee objected to Pliant’s proposed DIP loan claiming it was “inappropriate, overreaching, violates the Intercreditor Agreement, is not representative of the best financing available to the Debtors and is not in the best interests of the Debtors’ estates.”  This post focuses on some of the issues raised by Pliant’s Motion for Interim Financing and the ad hoc committee’s Objection.  Doing so provides a useful look at the Bankruptcy Code’s requirements for postpetition financing.

Due Diligence Requirements Under Section 364(d)

Section 364(d) of the Bankruptcy Code permits courts to “authorize the obtaining of credit or the incurring of debt secured by senior or equal lien on property of the estate that is subject to a lien only if – (A) the trustee is unable to obtain such credit otherwise; and (B) there is adequate protection of the interest of the holder of the lien on the property of the estate on which such senior or equal lien is proposed to be granted.”

As stated in their Objection, the ad hoc committee contends Pliant did not satisfy section 364(d)’s requirement that Pliant demonstrate that less expensive and less restrictive financing is unavailable.  The committee cites In re Aqua Assocs.  for the proposition that before a bankruptcy court can grant relief under section 364(d), it must “make a qualitative assessment of the credit transaction in light of readily available alternatives …”  123 B.R. 192, 196 (Bankr. E.D. Pa. 1991).  According to the committee, under Aqua Assocs., Pliant has not obtained financing with the most advantageous terms available.

According to Pliant’s Motion for Interim Financing, Pliant was unable to obtain postpetition financing on an unsecured basis.  Pliant cites Bray v. Shenandoah Fed. Sav. & Loan Ass’n (In re Snowshoe Co.), to support its position that section 364 does not impose a duty on a debtor to seek credit from every possible lender in order to show unsecured credit is not available.  789 F.2d 1085, 1088 (4th Cir. 1986).  Instead, Pliant contends it conducted a good faith search for credit by seeking “indications of interest in other subordinate debtor-in-possession facilities that would have been palatable to the Prepetition Credit Facility Lenders.”  See Pliant’s Motion for Interim Financing at p. *36.

Adequate Protection

Besides arguing that Pliant failed to conduct proper due diligence, the ad hoc committee also argues that the proposed financing lacks adequate protection for second lien note holders.  As stated above, Bankruptcy Code section 364(d) permits debtor financing “by a senior or equal lien on property … only if … there is adequate protection of” the lienholder’s interest.  11 U.S.C. 364(d)(1).  Likewise, section 363(e) provides that the court “shall prohibit or condition” the use of cash collateral “as is necessary to provide adequate protection of such interest.”  11 U.S.C. 363(e).  See also, Objection to Pliant’s Motion for Interim Financing at p. *12.

Although the Bankruptcy Code does not define “adequate protection,”  under section 361Congress provided a few examples as to what the term may mean.  For example, under section 361(1), adequate protection may include requiring a debtor to make a “cash payment or periodic cash payments” to the party entitled to protection.  Further, section 361(2) allows adequate protection to come in the form of a “replacement lien to the extent that such stay, use, sale, lease or grant results in a decrease in the value of such entity’s interest in such property.”  Finally, under 361(3), adequate protection may exist by granting a creditor the “indubitable equivalent of such entity’s interest in such property.”  (For those interested, Princeton’s Wordnet 3.0 defines “indubitable” as meaning “too obvious to be doubted.”

As reflected in their Motion, Pliant contends that the second  lien noteholders are not entitled to adequate protection under the proposed financing.  In support of its position, Pliant cites In re Dunckle Associates, Inc., for the “well settled [law] that valueless junior secured positions … are not entitled to adequate protection.”  19 B.R. 481, 485 n.10 (Bankr.E.D. Pa. 1982).  Pliant notes that the value of its business is substantially less than its prepetition debt and first lien indebtedness.  When you add in the second lien noteholders, Pliant argues, their debt is “entirely unsecured, and as such, are therefore not entitled to any adequate protection.”  Pliant’s Motion for Interim Financing at p. *41.

The second lien noteholders question Pliant’s allegation that the second lien notes are “out of the money” and therefore without a security interest to protect.  Citing In re Mosello, the ad hoc committee argues that “the Debtor bears the burden of proof to establish the existence of adequate protection, which should be premised on facts or projections with a firm evidentiary basis.”  195 B.R. 277, 287, 292 (Bankr. S.D.N.Y. 1996).  Until Pliant proves otherwise on a “full evidentiary hearing,”  the ad hoc committee contends that they are secured creditors and should receive the adequate protection required under the Code.  Objection at p. *13.


The Court granted Debtors’ Motion and entered an Interim Order granting Pliant various relief, including the authority to enter into postpetition financing, using cash collateral and granting adequate protection to secured parties.  Since this is an interim Order, the Court scheduled a final hearing on Pliant’s Motion for March 11th at 9:30 a.m..  Looking at paragraphs 15 and 16 of the Order, the second lien noteholders and other secured lenders are parties to a Prepetition Intercreditor Agreement.  Pursuant to the Order, the parties’ rights and priorities under the Intercreditor Agreement are neither diminished nor impaired by the Order.  Instead, the Order provides that the “rights of each party to the Prepetition Intercreditor Agreement are reserved in all respects.”