The authority to continue in business includes the right to obtain credit and incur unsecured debt to fund ordinary operating expenses. To induce creditors to extend any necessary post-petition credit, such credit is allowable as an expense of administration.216 This provides the credit priority over other claims against the estate.217
Two tests should be applied to determine whether a new credit transaction is in the ordinary course of a debtor's business, and, therefore, allowed protection through administrative status. The first test, called the horizontal dimension test, compares the debtor's business to other like businesses. The test is whether the creditor transaction in question is similar to those in which comparable businesses engage in their day-to-day operations.218 The second test is the vertical dimension test, also called the creditor's expectation test. This test analyzes the credit transaction from the vantage point of a hypothetical creditor and inquires whether the transaction subjects a creditor to atypical economic risks.219
If the trustee or the DIP cannot obtain this unsecured credit as an administrative allowance, the court may authorize the trustee or the DIP to obtain credit or incur debt that has priority over all administrative expenses. The court can also authorize debt that is secured by a lien on property of the estate that is not otherwise subject to a lien or is secured by a junior lien on property of the estate that is subject to a lien.220 Furthermore, the court can authorize debt secured by a senior lien on property of the estate, but only if the trustee or the DIP is unable to obtain such credit otherwise and the existing lienholders' interests are adequately protected.221
The burden of proof for both standards is placed upon the trustee or the DIP. Under the prior Bankruptcy Act, a trustee or a DIP could issue certificates of indebtedness supercharging existing liens to secure loans for operating expenses only if there was a high degree of likelihood that there would be a successful reorganization within a reasonable time. This standard has been recently replaced by the adequate protection standard.222 Accordingly, the trustee or DIP must convince the court (1) that there is sufficient value in the property to satisfy the interest of the primed lender notwithstanding the granting of the new lien;223 (2) that there is an equity cushion sufficient to adequately protect the prior secured lender; or (3) that the increase in value of the collateral due to capital improvements made as a result of the DIP's financing constitutes adequate protection.224
Entities that loan money to debtors without notice and a hearing or a court order act at their own peril. Several courts have held that a creditor who lends money to a DIP without prior court approval is not even entitled to assert a general unsecured claim.225 On the other hand, a lender has no obligation to continue to extend financing under a pre-petition lending agreement subsequent to the petition date. The pre-petition lender may also enforce its lending agreement regarding termination or modification upon the commencement of a bankruptcy case.226
Because most post-petition lenders are generally pre-petition creditors as well, the trustee or the DIP may seek to obtain post-petition financing from such lenders that is secured not only by a post-petition lien, but that also grants additional liens to secure the existing pre-petition indebtedness. Bankruptcy courts generally disfavor such cross-collateralization and require the trustee or DIP to demonstrate (1) that absent the proposed financing, the debtor's business operations will not survive; (2) that the debtor is unable to obtain alternative financing on acceptable terms; (3) that the proposed lender will not agree to less favorable terms; and (4) that the proposed financing is in the best interests of all the creditors.227
