Postpetition Financing, Trustees, and the Survival of Chapter 11: Advocating and Compromising with Trustees
Written by: David Jencks, Esq., Jencks Law, P.C.
I. Introduction: Trustees at the Crossroads of Oversight and Outcomes
As motor carrier bankruptcies, and bankruptcies in general, surge, the following article is a brief overview of issues to consider in negotiating and compromising with trustees to establish postpetition financing.
The United States Trustee Program is charged with protecting “the integrity of the chapter 11 process” and ensuring that the system functions effectively and efficiently. [1] That mandate naturally leads trustees to scrutinize early motions that can shape the entire case—chief among them, cash collateral and postpetition financing (DIP) orders.
At the same time, the Bankruptcy Code openly acknowledges a debtor’s desperate need for capital post-petition. Section 364 lays out a ladder of inducements—superpriority claims, priming liens, liens on unencumbered assets—because Congress understood that no rational lender will advance funds to a bankrupt entity without real protection. [2]
Those two realities are now colliding. In many districts, United States Trustees are increasingly objecting to common DIP terms: superpriority claims, roll-ups, priming liens, waivers of surcharge rights under § 506(c), liens on avoidance proceeds, aggressive milestones, fee protections, and more. While the concerns are understandable—the DIP order is often the “constitutional document” of the case—reflexive opposition can unintentionally push viable Chapter 11 cases into premature Chapter 7 liquidation.
This article, written with the Asset Based Lending and Factoring community squarely in mind, aims to help secured financiers to argue for approval of their proposed DIP Order and give counsel some thoughts to negotiate and compromise such Orders. The thesis is simple:
In most operating Chapter 11 cases, especially those relying on working-capital facilities such as factoring, the estate’s best chance of value preservation depends on giving postpetition financiers a meaningful degree of deference and flexibility, while still enforcing the guardrails set out in the Code and in the UST Program’s own manual (USTP).
II. The Economic Reality of DIP Financing: No Capital, No Case
A. Liquidity Shock at Filing
When a debtor files Chapter 11, the filing itself often triggers:
Immediate tightening or termination of trade credit;
Freezing of lines of credit;
Loss of customer and vendor confidence;
Immediate payroll, rent, fuel, inventory, or insurance obligations.
As the USTP Manual recognizes, cash collateral and financing motions typically arise within the first week and have “a substantial impact on the interests of unsecured creditors.” [3] Without authorization to use cash collateral or obtain new credit, the estate has no runway to stabilize operations, let alone to confirm a plan.
In asset-light service industries—transportation, logistics, staffing—there is often no inventory to liquidate for quick cash. The only way to keep the lights on is to borrow against postpetition receivables or to factor them. If the DIP or factor will not extend credit on economically rational terms, the case quickly becomes administratively insolvent and collapses into Chapter 7. Frankly, a Chapter 11 on Monday becomes a Chapter 7 on Friday.
B. Voluntary Capital Requires Real Protection
The UST’s manual distinguishes clearly between:
Use of cash collateral under § 363, where a secured creditor can be compelled to permit use of its collateral if adequately protected; and
Postpetition financing under § 364, where a lender cannot be ordered to provide credit and must therefore be induced by increasing protections, including superpriority and priming liens. [4]
Courts have repeatedly stressed this point:
Describe § 364 as an “escalating series of inducements” to obtain credit for reorganization. [5]
Acknowledges that DIP lenders “are not altruists” and must receive reasonable protections to lend. [6]
When trustees successfully strip out or severely limit those protections, the natural consequence is that the DIP lender walks away or materially reduces availability. In a typical middle-market or smaller Chapter 11, there is no replacement lender waiting in the wings.
III. Trustees’ Own Playbook: What the UST Manual Actually Says
The USTP Manual devotes an extended section (3-2.8.5) to “Cash Collateral Use and Financing Orders.” It emphasizes three core roles for the United States Trustee: [7]
Ensuring proper characterization (cash collateral vs. true postpetition financing);
Insisting on adequate notice and an opportunity to be heard, especially for committees; and
Flagging substantive issues that may concern unsecured creditors, such as cross-collateralization, superpriority provisions, and roll-ups.
Crucially, the Manual also reminds Program personnel that the UST “should not seek to substitute his or her business judgment for that of creditors or other parties in interest,” particularly in cases with active creditor participation. [8]
Taken together, the Manual suggests that the UST role is:
To enforce process and transparency;
To prevent overreaching;
To preserve issues for later review.
It does not require automatic opposition to strong DIP protections. The question, for each contested provision, should be: Does the benefit of this financing—given the lack of alternatives—outweigh the incremental burden on the general creditor body? [9]
IV. A Deep Dive Into “Hot-Button” DIP Provisions
Below are the provisions most commonly targeted by trustee objections, with a discussion of why they matter to lenders and how trustees might evaluate them more flexibly.
1. Superpriority Claims (§ 364(c)(1))
Trustee concern: Superpriority can put the DIP lender ahead of nearly all administrative creditors.
Why lenders insist:
Superpriority is the statutory norm, not an aberration, for DIP financing. It reflects Congress’s explicit policy that if you want creditors to lend into an insolvent estate, you may have to offer them a claim senior to § 503(b) and § 507(b) expenses. [10]
From the financier’s perspective, the question is binary:
Superpriority with clearly defined carve-outs; or
No loan.
The USTP Manual acknowledges this trade-off and recommends applying the Vanguard Diversified four-factor test—survival of business, lack of alternative financing, lender unwillingness to accept less, and benefit to general creditors—to both superpriority and cross-collateralization. [11]
In cases where all four factors are met—and especially where the DIP lender is a factor advancing against new receivables—superpriority often increases, not decreases, the expected recovery for unsecureds because it is the only way to keep the debtor alive long enough to generate value.
2. Cross-Collateralization and Roll-Ups
The UST Manual flags cross-collateralization and roll-ups as disfavored, and it encourages trustees to insist on full disclosure, adequate notice, and careful application of the Vanguard test. [12] Some courts prohibit cross-collateralization outright; others allow it under strict conditions. [13]
From the lender’s perspective, roll-ups and cross-collateralization often serve three business functions:
Simplifying collateral structure (e.g., consolidating prepetition and postpetition facilities);
Avoiding costly tracing fights where pre- and post-petition collateral constantly turns;
Justifying new money by improving the risk profile of the overall exposure.
For factors funding postpetition receivables, a partial, incremental roll-up (where each dollar of new money gradually “rolls” an equal amount of prepetition exposure) may be the only way to justify continued advances. [14]
Rather than opposing roll-ups categorically, a financier can encourage the trustee to:
Insist they be final-order only, not interim; [15]
Require a challenge period for committees to investigate prepetition liens and claims;
Push for disclosure and modeling showing that, with the roll-up, overall creditor recoveries are higher than in a no-DIP liquidation scenario.
3. Priming Liens (§ 364(d))
Priming liens—granting the DIP lender a senior lien over existing lienholders—raise legitimate concerns about adequate protection and fairness. The UST Manual rightly stresses notice to junior lienholders and a careful look at adequate protection. [16]
But when the primed creditors either consent or are demonstrably adequately protected, priming liens can be the only tool that unlocks new money, particularly where the capital structure is already heavily encumbered. Recent decisions have approved robust priming DIP facilities, even in administratively distressed cases, where the court concluded the DIP was the “best deal on the table” and necessary to keep the debtor operating despite UST objections. [17]
4. Waivers of § 506(c) and § 552(b) Rights and “No Surcharge” Clauses
The UST Manual encourages skepticism toward waivers that strip the estate of potential rights, including validation of prepetition liens and broad waivers of claims. [18]
From the financier’s perspective, however:
A full, unconditional § 506(c) waiver eliminates uncertainty that the DIP will be later surcharged for the very operating costs it funded.
Limited waivers of the “equities of the case” exception under § 552(b) provide comfort that postpetition proceeds of prepetition collateral will remain available for repayment.
Courts have enforced § 506(c) waivers where they were clearly bargained for, noticed, and approved, recognizing that they form part of the economic package that induced the lender to provide DIP financing. [19]
A compromise approach should be considered and offered at a stalemate on this issue:
Allow a narrowed waiver effective only upon final order;
Preserve surcharge claims for lender misconduct or gross negligence;
Ensure a meaningful carve-out for professional fees and UST fees before DIP liens attach to avoidance action proceeds. [20]
5. Liens on Avoidance Actions and Their Proceeds
The USTP Manual specifically cautions against granting liens on avoidance actions as interim relief and encourages trustees to preserve these causes of action for committees. [21]
Yet some courts have allowed liens on avoidance proceeds (not the claims themselves) after carve-outs are funded, recognizing that:
Avoidance recoveries often exist only because the DIP kept the business operating;
DIP lenders are often the indirect source of the litigation war chest;
The lien on proceeds is part of the risk-adjusted bargain that brings money into the case. [22]
A middle ground to be considered is:
Prohibit liens on the claims themselves;
Permit liens on net proceeds after payment of (i) professional carve-outs; (ii) UST fees; and (iii) a reasonable reserve for general unsecured distributions.
6. Professional Fee and UST Fee Carve-Outs
Here, trustees and DIP lenders actually share interests. The USTP Manual is explicit that any superpriority arrangement should carve out fees for debtor’s counsel, committee counsel, and UST quarterly fees. [23]
DIP lenders equally need:
Predictability in the size of the carve-out;
Assurances that litigation budgets will not spiral beyond what the DIP facility can support.
The point of friction usually lies in the size and structure of the carve-out, not its existence. Reasonable compromises include:
A dollar cap for estate professionals with periodic true-ups;
Separate line items for UST fees and Chapter 7 wind-down costs, consistent with § 726(b) priority after conversion. [24]
7. Default Provisions and Automatic Remedies
The Manual correctly flags provisions that call for automatic dismissal, conversion, or relief from stay upon a DIP default as inconsistent with notice and hearing requirements. [25]
Financiers, however, are not seeking to bypass due process; they seek timely, practical remedies when the debtor stops complying with the budget or reporting covenants. Acceptable middle ground often looks like:
“Automatic” remedies that still require short-notice hearings rather than self-executing conversions;
Cure periods and negotiated standstill windows;
Clear, objective default triggers tied to budget performance or reporting failures. [26]
8. Milestones, Sale Deadlines, and Case-Control Concerns
Milestones and sale timelines are frequent targets of UST and committee objections. The concern is that they “tilt the playing field” toward the DIP lender and push a quick 363 sale at the expense of a full reorganization process. [27]
But for many lenders, especially in distressed sectors, the lack of a credible timetable very well could be a deal-breaker. They need:
Visibility into when a sale, plan, or refinancing must occur;
Assurance that their funds are not financing endless drift.
Reasonable compromise strategies with trustees could include:
Insisting that milestones be resettable by court order on a showing of cause;
Requiring periodic status conferences prior to milestone dates;
Tying extensions to demonstrable progress (e.g., executed LOIs, filed plan).
V. Postpetition Factoring and Working Capital Finance: A Special Case
Trustee skepticism is often informed by large, highly structured syndicated DIP facilities. However, many middle-market and smaller Chapter 11 cases rely on factors and asset-based lenders.
In those cases:
The financier’s risk is tied to collection risk and customer credit, not just collateral value;
The financier is constantly “turning” its exposure as receivables are purchased, collected, and replaced;
Without the factor’s advances, the debtor literally cannot move product, ship freight, or staff jobs.
Because factoring is typically a high-velocity, thin-margin business, a factor arguably cannot, or should not, participate unless:
They receive superpriority and lien protection for their advances;
The DIP order provides clarity about ownership and security interests in postpetition receivables;
Fee and default structures reflect the operational risk they are assuming.
For trustees, the key is to recognize that factors often are the only realistic source of capital for certain Chapter 11 debtors, particularly in transportation and logistics. Imposing a large-public-company DIP template on those transactions may unintentionally guarantee case failure.
VI. A Trustee-Friendly Framework for Evaluating DIP Orders
Instead of starting from “no,” a financier should guide the trustee through a questions-first framework:
Is this true postpetition financing?
Distinguish between disguised cash collateral use and genuine new money. [28]
What are the alternatives?
Has the debtor made a record of efforts to obtain financing on better terms, as local rules often require? [29]
Does the financing pass the Vanguard four-factor test?
Business survival, lack of alternatives, lender’s unwillingness to lend on lesser terms, overall benefit to general creditors. [30]
Are controversial protections tied to real new money?
For roll-ups and cross-collateralization, is there something close to dollar-for-dollar new credit being advanced?
Are professionals and the UST adequately carved out?
Are debtor’s counsel, committee professionals, and UST fees reasonably protected, consistent with §§ 330, 1129(a)(12), and 726(b)? [31]
Are challenge rights and due process preserved?
Is there a meaningful challenge period for committees to investigate liens, claims, and roll-ups?
Are automatic remedies subject to reasonable notice and hearing?
Does denying this DIP meaningfully improve creditor recoveries?
Will denial push the case into Chapter 7 within weeks?
Viewed through this lens, many of the DIP orders trustees currently oppose are actually the only viable path to preserving going-concern value and creditor recoveries.
VII. Conclusion: Calibrated Mutual Flexibility
The UST Program is right to guard against overreaching and to insist on transparency, notice, and fairness. The case law and the Manual provide a robust set of tools to push back on abusive provisions. [32]
But in today’s environment—where credit is tighter, lenders are more risk-averse, sub chapter 5 bankruptcies limit the lender pool, and many Chapter 11 debtors are thinly capitalized service businesses—overly rigid opposition to standard DIP protections does not protect creditors. It destroys their best chance at recovery. Factors should drive this point home and keep the cornerstone of all trustee interactions.
Clear advocacy combined with proposing some compromise leads to a calibrated approach—anchored in the economics of the specific case, the availability of alternative financing, and the statutory inducements Congress built into § 364. The end result should better serve:
The integrity of the system;
The UST’s oversight mission; and
The creditors whose recoveries depend on the debtor having the capital to survive long enough to reorganize or sell as a going concern.
About David Jencks, Esq.
David Jencks is an attorney with more than 25 years of experience in transportation and transportation finance. He represents factors and transportation companies in both transactional matters and litigation. David is a member of the Transportation Lawyers Association and serves as co–general counsel to the International Factoring Association. For nearly two decades, he has been a featured keynote speaker at the IFA’s Annual Conference and its Transportation Factoring Meeting. He has also led numerous trainings and webinars on all facets of transportation factoring, including account management, credit, technology issues, fraud prevention, risk management, problem-load resolution, billing practices, and legal compliance. David can be reached at davidjencks@jenckslaw.com.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.
Footnotes:
1. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/ Note: The bulk of the cites in this article are found on pages 17 through 21 of the USTP. For ease of linking, the citations are somewhat general.
2. Id.
3. Id.
4. Id.
5. Id.
6. https://www.nysb.uscourts.gov/sites/default/files/opinions/166857_37_opinion.pdf
7. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
8. Id.
9. Id.
10. Id.
11. Id.
12. Id.
13. Id.
14. https://restructuring.weil.com/dip-financing/roll-up-roll-up-read-all-about-it/
15. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
16. Id.
17. https://www.jonesday.com/en/insights/2025/09/florida-bankruptcy-court-proposed-dip-financing-and-sale-framework-for-administratively-insolvent-debtors-did-not-violat
18. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
19. https://www.abi.org/abi-journal/section-506c-waiver-enforceable-good-news-for-dips-and-other-secured-lenders
20. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
21. Id.
22. https://natlawreview.com/article/understanding-cash-collateral-and-dip-financing-orders
23. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
24. Id.
25. Id.
26. https://www.coleschotz.com/wp-content/uploads/2018/12/debtor-in-possession-financing.pdf
27. https://www.dailydac.com/
28. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
29. https://www.ctb.uscourts.gov/local-bankrr4001-3?
30. https://www.justice.gov/ust/file/volume_3_chapter_11_case_administration.pdf/
31. Id.
32. Id.