Bayard’s GianClaudio Finizio and Evan Miller wrote an article for the ABI Journal that examines the impact of a DIP Lender’s priming liens pursuant to Bankruptcy Code section 364(d) on creditors’ setoff rights, which are treated as secured claims under the Bankruptcy Code. The analysis involves the intersection of Bankruptcy Code sections 364(d), 553(a), and 506(a). Despite the language of 553 seemingly prohibiting setoff rights from being primed by the Bankruptcy Code, it is not uncommon to see DIP Orders authorizing precisely that. While at least one court has highlighted the absence of any express Bankruptcy Code authority allowing such priming, DIP Lenders often justify the priming of setoff rights by providing adequate assurance to the affected parties.
Other courts have underscored the fundamental difference between setoff rights and liens in the context of 364(d)’s language expressly allowing a debtor to prime an existing lien. These opinions are consistent with section 506(a)’s treatment of the value of a secured claim for a setoff and the value of a secured claim for a lien. While in appropriate circumstances, section 364(d) of the Bankruptcy Code authorizes the priming of existing liens, a right of setoff appears to be unaffected by section 364(d) both by definition and by express statutory language, but there has been no uniform view on the matter.
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