Chapter 12 Cash-Collateral and DIP-Financing Orders from the Perspective of the Deposit Bank

• Jurisdiction: United States

Chapter 12 Cash-Collateral and DIP-Financing Orders from the Perspective of the Deposit Bank

Adequate protection of the deposit bank in connection with cash-collateral and DIP-financing orders involves considerations that are somewhat different than those concerning other secured creditors. This chapter will begin with a very general overview of cash-collateral and DIP-financing orders, then will address the specific concerns of the deposit bank in connection with these types of orders.

A. Cash-Collateral Orders

"Cash collateral" in bankruptcy is defined in § 363 of the Bankruptcy Code as cash and cash-like property in which both the debtor and another entity have an interest. In addition to cash, "cash collateral" includes negotiable instruments, documents of title, securities, deposit accounts or other cash equivalents.¹³³ Cash collateral is critical in bankruptcy because the debtor almost always needs it to operate, and the Bankruptcy Code prohibits the debtor from using it without the consent of the secured creditor or an order of the court.¹³⁴

Cash-collateral issues arise almost immediately in a chapter 11 bankruptcy case, in the "first day" hearings.¹³⁵ In order to use cash collateral, the debtor must adequately protect the secured creditor's interest in the cash being used or to be used. Adequate protection can take many forms, limited only by the imagination. The most common forms of adequate protection are periodic cash payments and additional or replacement liens.¹³⁶ The debtor and its secured creditor usually negotiate a consensual order allowing the debtor to continue to use cash collateral. However, a bankruptcy court is likely to allow the debtor to use cash anyway, so a negotiated order saves the debtor the time and expense of a court hearing and provides more protections to the secured creditor than an order that the court would enter. The court may enter an interim cash-collateral order as a "first day" order, effective for a limited period of time. An interim order affords the debtor the ability to use cash collateral immediately, on limited notice to third parties, while giving those with an interest in cash collateral additional time to raise their concerns or seek adequate protection from the court.

The debtor's deposit bank and secured lender might have an interest in the same cash collateral. When the secured creditor is not the debtor's deposit bank, care should be taken to consider the interest of the deposit bank with regard to...