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Court Denies Prepetition Lender’s Request for Stay Pending Appeal of Interim Financing Order

Postpetition financing is usually crucial to a debtor's chapter 11 success. Once an order is entered authorizing postpetition financing, however, creditors and other interested parties are generally powerless to reverse the order's effects. In In re Health Diagnostic Lab., Inc., No. 15-32919-KRH, 2015 Bankr. LEXIS 2731 (Bankr. E.D. Va. Aug. 17, 2015), for instance, a prepetition lender's request for a stay pending appeal of a court's interim order authorizing postpetition financing was denied. In the case, a secured prepetition lender loaned the debtor over $13 million, but was unwilling to provide postpetition financing, forcing the debtor to take out a loan from a different lender for $12,000,000 in exchange for a security interest in all of the debtor's assets and superiority status. The court subsequently approved the financing on an interim basis and set a date for a hearing on a final order. The debtor's prepetition lender appealed the interim order and sought a stay pending appeal. In denying the prepetition lender's request, the court examined whether: (1) the prepetition lender was likely to prevail on the merits of its appeal; (2) the prepetition lender would suffer irreparable injury if the stay was denied; (3) the other parties would be substantially harmed by the stay; and (4) the public interest would be served by granting the stay. The prepetition lender argued primarily that a stay should be issued because the lender would be successful on appeal. Specifically, the prepetition lender argued that the court improperly found that the lender had a 100% equity cushion due to valuing the debtor's assets at a going concern, rather than at a liquidation. The court disagreed by holding that the use of the going concern value was appropriate because liquidation did not seem likely in the future. As for the other factors, the court held that the balance of hardships and the public interest weighed in favor of the debtor because the lender had an adequate equity cushion and because the debtor could continue to operate its business with the financing. Accordingly, the court denied the prepetition lender's request. Health Diagnostic yet again demonstrates that creditors and interested parties are limited in attacking a financing order. Such parties should therefore attempt to negotiate the terms of a proposed financing order before, rather than after, it is entered.

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