Cash Collateral

AuthorBy Sharon Z. Weiss, Craig K. Schuenemann, and Aaron Kaufman
Pages95-122
95
As discussed in other chapters, business bankruptcies provide a mech-
anism for a distressed company to reorganize. Such a reorganization
can happen in a number of ways—through a recapitalization under a
conrmed plan of reorganization, through sales of the debtor’s assets,
locations, or businesses, through an orderly wind-down of all or por-
tions of the business, or a combination of these methods. This chapter
discusses how a company nances the operations of its businesses
during the bankruptcy from its cash collateral.
Outside of bankruptcy, few creditors pay much attention to a com-
pany’s daily cash use—except, perhaps, a franchisor or lender who
claims an interest in the debtor’s cash and receivables. Whatever defer-
ence may exist out of bankruptcy, it quickly erodes once the company
les its bankruptcy petition and becomes a “debtor-in-possession” or
DIP. Although a DIP may benet from the “breathing spell” of an auto-
matic stay, the cost for that breathing spell is a sudden increase in con-
trols imposed over the DIP’s use of its cash and cash equivalents—also
known as “cash collateral.”
This chapter explores the push and pull of cash collateral use in bank-
ruptcy. The Bankruptcy Code denes “cash collateral” very broadly
to include any liquid funds held by a debtor that serve collateral for a
creditor. Cash collateral is afforded special protection under the Bank-
ruptcy Code because it is fungible, easily concealed, or commingled,
and is a wasting asset that is dissipated or consumed by the debtor as
it operates its business.1 Recognizing that cash and cash equivalents
1. 5
NortoN BaNkr. L. & Prac.
3d § 94:6 (3d ed. 2008) (“Cash collateral is a unique
form of collateral that requires special protection since it is most likely to be consumed
during the reorganization process and is at times subject to change on an almost daily
basis.”); see also In re EES Lambert Assocs., 62 B.R. 328, 343 (Bankr. N.D. Ill. 1986) (“Con-
gress in enacting § 363 of the Code gave a special treatment to ‘cash collateral’ for the
obvious reason that cash collateral is highly volatile, subject to rapid dissipation and
requires special protective safeguards in order to assure that a holder of a lien on ‘cash
collateral’ is not deprived of its collateral through unprotected use by the Debtor.”); In re
Mickler, 9 B.R. 121 (Bankr. M.D. Fla. 1981).
Cash Collateral
By Sharon Z. Weiss, Craig K. Schuenemann, and Aaron Kaufman 4
9781641051972_CH04.indd 95 29/06/18 4:20 PM
96 Chapter 4
are easily dissipated, the Bankruptcy Code places strict limitations on a DIP’s
ability to use such property. For this reason, in bankruptcy, a debtor is not gen-
erally free to use its cash collateral without court permission or consent from
a creditor with an interest in the cash collateral. If creditors do not consent to
a debtor’s proposed cash use and budget, the debtor must come forward and
establish that using the cash collateral will not prejudice creditors holding an
interest in it.
The importance of a DIP’s ability to use its cash collateral during the course
of its bankruptcy cannot be overstated. Without the ability to use cash collat-
eral while working toward an exit strategy, most Chapter 11 cases will wither on
the vine. The debtor will be unable to operate its business, and the company
will likely have to liquidate under Chapter 7.
In these respects, franchise cases are no different from the ordinary bank-
ruptcy case. In fact, given the uid nature of most franchise DIPs and their
dependency on daily cash ow, obtaining permission to use cash collateral is
even more crucial than in the typical bankruptcy. A franchisee that is consider-
ing bankruptcy should carefully evaluate whether cash collateral will be avail-
able before they le a petition on a continued or noncontinual basis. Failure to
do so may result in a quick end to the debtor’s control of the business. For this
reason, understanding cash collateral use and the related practical and strate-
gic elements in a bankruptcy case is critical.
I. OVERVIEW OF 11 U.S.C. §363(
a
)
A. WHAT IS CASH COLLATERAL?
Before discussing cash collateral further, a textual denition is in order. Sec-
tion 363(a) of the Bankruptcy Code denes “cash collateral” as follows:
[C]ash, 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 prots 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 lodging properties
subject to a security interest as provided in section 522(b) of this title,
whether existing before or after the commencement of the case under this
title.2
In short, cash collateral is anything like cash that the DIP can use during the
bankruptcy case, but which is encumbered by another party’s (e.g., a lender or
9781641051972_CH04.indd 96 29/06/18 4:20 PM

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