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.
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