Bankruptcy Newsletter
Chapter 11 Debtor Unauthorized to Use, Sell, or Lease Cash Collateral
In order to facilitate reorganization in a Chapter 11 case, Section 363 of the Bankruptcy Code allows a Chapter 11 debtor to remain in control of ordinary business transactions. Since a successful reorganization hinges in part on finding the cash to continue operations, the debtor retains the right to use, sell, or lease property “in the ordinary course of business, without notice or a hearing.” One of the purposes behind this provision is to allow a business to continue its daily operations without excessive court or creditor interference.
However, a Chapter 11 debtor may not use, sell, or lease “cash collateral” in the continuation of the operation of the business without:
- The consent of each interested secured creditor, or
- Court authorization
Secured Creditor Consent for the Use, Sale, or Lease of “Cash Collateral”
“Cash collateral” may be defined as property in which the estate and an entity other than the estate have a security interest, including:
- Cash
- Negotiable instruments
- Documents of title
- Securities
- Deposit accounts
- Cash equivalents
“Cash collateral” can also include the proceeds, rents and profits of property subject to a creditor’s security interest, along with the fees, charges or payments for the use of rooms and other public facilities in lodging properties (i.e., hotels).
A secured creditor is a creditor having a claim protected by specific assets in the debtor’s estate. In order to protect such security interests when a debtor files Chapter 11, the Bankruptcy Code strictly regulates the use, sale, or lease of “cash collateral.” Considering the ease with which a debtor might hide or transfer “cash collateral,” the use, sale, or lease of such property warrants stricter regulation than other forms of property (i.e., real property).
Court Authorization
Absent the consent of the interested secured creditor(s), the debtor must file a motion requesting an order from the court authorizing the use of the cash collateral. Upon such request, the court will schedule a hearing in accordance with the needs of the debtor, to make a determination on the issue of whether the debtor may use the cash collateral.
Pending the court’s determination, the debtor must segregate and account for any cash collateral in the debtor’s possession, custody, or control.
Adequate Protection
If the court authorizes the debtor’s use of the cash collateral, a creditor with an interest in the property being used may request the court to condition the debtor’s use as necessary to ensure that the creditor is “adequately protected.”
If the use of cash collateral will result in a decrease of a creditor’s interest in such property, adequate protection may be provided by:
- Requiring the debtor to make a lump sum payment or periodic cash payments to the creditor
- Providing the creditor with an additional or replacement lien
If the debtor offers to provide adequate protection by either paying the secured creditor or by giving the secured creditor a replacement lien in property on which the creditor presently does not have a lien, then the court will likely permit the debtor to use the cash collateral.
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