Lender Preference Clauses and the Destruction of Appealability and Finality: Resolving a Chapter 11 Dilemma

Bankruptcy has long operated under a cloud of suspicion and mystery in the eyes of most of the legal profession, and certainly in the eyes of the public, which likely contributed in part to the refusal of Congress to grant article III status to bankruptcy judges. Although the Rules of Bankruptcy Procedure and the Bankruptcy Reform Act of 1978 sought to ameliorate this negative image, bankruptcy cases in general and chapter 11 cases in particular continue to suffer from poor press – in large part due to recent developments involving the utilization of lender preference clauses in chapter 11 cases, which in many cases have been shielded from even the possibility of appellate review because of the improper application of section 354(e) of the Bankruptcy Code. This article discusses this particular problem of the finality of financing orders, and argues that some certainty is needed in reconciling the need to act quickly in emergency situation and the need to protect the rights of interested creditors to receive notice and be heard.