Cash Collateral Can Crater Bankruptcy Cases And Careers

How to make a bankruptcy judge erupt

Want to make a bankruptcy judge go ballistic?  It’s easy: demonstrate ignorance or indifference to cash collateral.

If you are saying, what’s cash collateral, you need to read further or learn to walk over molten lava.

Cash collateral is essentially the output of property subject to the security interest of a creditor: rents, offspring, dividends, etc.

The Code (you knew I’d get to the Code, didn’t you?) at 363 says:

(a) In this section, “cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property…

Section 363(c)(3) goes on to provide

(1) If the business of the debtor is authorized to be operated under section 721, 1108, 1203, 1204, or 1304 of this title… the trustee may enter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.

(2) The trustee may not use, sell, or lease cash collateral under paragraph (1) of this subsection unless—

(A) each entity that has an interest in such cash collateral consents; or

(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.

In a typical consumer bankruptcy practice, cash collateral can come up a couple of ways:

  • Mortgage lender has security interest in the rents of an investment property pursuant to the security agreement
  • SBA or other business lender has blanket security interest on debtor’s business assets including receivables
  • Taxing authority has lien on all debtor’s assets, including assets that are generating cash flow

If your client ( who has the powers of a trustee for the purposes of the statute) is collecting income from some asset subject to a security interest, you need a stipulation with the creditor providing for the use of the cash collateral, or you need to bring a motion for the use of cash collateral and set a hearing.

Indifference to the rights of secured creditors in cash collateral is a sure path to conversion to Chapter 7 or appointment of a Chapter 11 trustee.

Image  licensed under Creative Commons, used courtesy of flydime

 

 

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  • >Mortgage lender has security interest in the rents of an investment property pursuant to the security agreement<

    Does that mean an explicit security interest in the rents and not just the normal security interest in the property itself?

    • Anonymous

      It’s usually in the language of the deed of trust.  I’ve never seen a separate document creating the security interest.

      • Cathy, I wasn’t asking where the language was. I was asking if you were referring to a security interest in the rents and not just the normal security interest in the property (the building).

        • Anonymous

          And I’m telling you that the document that creates the security interest in
          the real estate usually has language also creating a security interest in
          the rents.

          • Thanks! I wanted to be sure it was the security interest in
            the rents that was the issue.

          • Jim Cossitt

            In general, it is the real property security interest document that has the rents and profits clause and upon perfection of that instrument, the interest in the rents and profits are perfected. When I practiced in Iowa in the late 80’s and 90’s,  there were squabbles over the adequacy of that perfection and the issue of whether rents were real or personal property.  After that, many lenders just got a UCC-9 security agreement in the rents and perfected it in as a personal property lien.  So it is USUALLY in the DOT or whatever instrument is used in your jurisdiction, but not always and once the rents be commingled with other cash, UCC-9 does a better job of keeping the security interest alive.