5.4 Cash Collateral and Postpetition Financing

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

5.4 CASH COLLATERAL AND POSTPETITION FINANCING

5.401 Cash Collateral—Section 363.

A. In General. "Cash collateral" consists of "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." ¹¹⁶ Cash collateral also includes "proceeds, products, offspring, rents, and profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels or other public lodging properties." ¹¹⁷ Although a Chapter 7 trustee may be authorized to operate the debtor's business under section 721, questions concerning the use of cash collateral arise most often in the context of reorganization of the debtor's business under one of the reorganization chapters. Accordingly, this discussion will refer to the debtor-in-possession rather than a trustee as the administering fiduciary.

Upon the filing of a bankruptcy petition, a debtor-in-possession may not use, sell, or lease cash collateral unless each entity that has an interest in the cash collateral consents or the court, after notice and a hearing, authorizes its use, sale, or lease. ¹¹⁸ A debtor-in-possession has a duty to segregate and account for any cash collateral in its possession, custody, or control. ¹¹⁹ In addition, the court must prohibit or condition the use, sale, or lease of cash collateral on the request of an entity that has an interest in the cash collateral. ¹²⁰ This serves as a protection for creditors secured by cash collateral, which is a liquid asset subject to rapid dissipation. It is a significant restriction, as a debtor-in-possession's operating capital may constitute cash collateral. The loss of this significant asset may mean the end of the debtor-in-possession's prospects for a reorganization.

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Postpetition rents may be cash collateral, and subject to the restrictions of section 363, if the creditor's security interest in the rents is perfected as to the debtor-in-possession. ¹²¹ The Virginia Code provides that, upon recordation of any instrument granting, transferring, or assigning an interest in rents from real property, the interest is fully perfected without any further action. ¹²²

B. Grounds for Use. A court will permit the debtor-in-pos-session to use cash collateral upon the condition that the debtor-in-possession provide adequate protection of the creditor's interest. ¹²³ According to section 361 of the Code, when adequate protection is required under sections 362, 363, and 364, the protection may be provided by:

1.	Requiring the debtor-in-possession to make periodic cash payments to the creditor, to the extent that the stay of section 362, use, sale, or lease under section 363, or grant of a lien under section 364 results in a decrease in the value of the creditor's interest in the collateral; 124
2.	Providing to each creditor an additional or replacement lien to the extent that the stay, use, sale, lease, or grant decreases the value of the collateral; 125 or
3.	Granting such other relief (other than administrative expense priority under section 501(b)(1)) as will result in the realization by the creditor of the "indubitable equivalent" of such creditor's interest in the property. 126

In determining whether the debtor-in-possession may use cash collateral, the court must balance the need for the use of cash collateral against the potential detriment to the creditor's secured position. ¹²⁷

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C. Procedure for Use.

1. Motion Required. Rule 4001(b) of the Federal Rules of Bankruptcy Procedure governs the procedure for authorizing the use of cash collateral. The rule requires that a motion for authority to use cash collateral be made as a contested matter under Rule 9014. ¹²⁸ In addition, notice of the motion and the time and location of both the preliminary and final hearing must be provided to all parties with an interest in the cash collateral and to any committee appointed pursuant to the Bankruptcy Code, and if no committee has been appointed, to the twenty largest unsecured creditors, excluding insiders. ¹²⁹

The cash collateral motion must either be less than five pages or, if longer, begin with a concise statement of the relief requested. It must also set out the location in the relevant documents of all material provisions, including (i) the name of each entity with an interest in the cash collateral; (ii) the purpose for the use of the cash collateral; (iii) the material terms, including duration, of the use of the cash collateral; and (iv) any liens, cash payments, or other adequate protection that will be provided, or if none will be provided, an explanation of why the interests are adequately protected. ¹³⁰

2. Emergency Nature of Motion. In many instances, a debtor-in-possession will file a motion for authority to use cash collateral immediately after filing its petition and request an expedited hearing with the court. Generally, the court will grant the request for an expedited hearing if the debtor-in-possession has satisfied all local requirements. ¹³¹ It is imperative that a debtor-in-possession, at the very least, be given the opportunity to request the use of the cash collateral to continue with its business.

A creditor may file a motion to prohibit the use of cash collateral, particularly if the debtor-in-possession does not file a motion seeking its use. ¹³² Because of the liquidity of cash collateral, the creditor should likewise seriously consider requesting an expedited hearing.

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3. Preliminary Versus Final Hearing. Even though section 363(c)(3) and Rule 4001 acknowledge that a hearing on the authority to use cash collateral may be a preliminary or a final hearing, when the hearing is scheduled and held on an emergency basis, it is advisable to schedule a final hearing at a later date to allow adequate time for all parties in interest to thoroughly prepare. Thus, Rule 4001(b)(2) provides that the court may conduct a final hearing upon the use of cash collateral no earlier than 14 days from the service of the motion requesting it. Although a debtor-in-possession may seek authority to use cash collateral at a preliminary hearing, the court at a preliminary hearing is limited to...