Page 50 - Bankruptcy Volume 1

cash collateral, defined generally as "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," only if each secured lender with an interest in it consents or the requisite lenders
in a loan syndicate consent, or if the bankruptcy court authorizes use of the cash collateral. In order for
the debtor to obtain the right to use cash collateral without the secured lender’s consent, the debtor must
establish that the secured lender’s interest in the cash collateral is adequately protected. In the case of
cash collateral, replacement liens typically take the form of postpetition receivables and inventory.

Courts are reluctant to refuse a request for the use of cash collateral, particularly where the debtor is
seeking to reorganize its business in Chapter 11. However, should the secured lender prove to the court
that the debtor’s business is not viable or that its current claim would be eroded if the debtor continues
to operate, a judge would likely rule that the debtor could not use the cash collateral of the estate and
would approve a plan to liquidate the assets of the debtor for the benefit of the creditors. Because the use
of cash collateral is so essential to the orderly operation of a business during bankruptcy, most debtors
will begin to negotiate with their secured lender for the use of cash collateral before a petition is filed. If
negotiations prove successful, then both parties file a stipulation for the use of cash collateral at the time
of the bankruptcy filing, negating the need for a future hearing on the matter. When the motion for cash
collateral is contested, an accountant may perform various financial analyses, develop credible budgets
and projections, and be called upon to render expert witness testimony. The accountant may also insti-
tute the necessary management controls to assure that once agreements are made concerning the use of
cash collateral, management and staff take every step to ensure, to as great a certainty as possible, that
cash collateral will never be used by the debtor other than as authorized by the court-approved cash col-
lateral order. Failure to do so can be fatal to the reorganization effort.

As with DIP financing, the motion seeking to use cash collateral is typically approved across two hear-
ings. An interim order is granted on an emergency motion authorizing the use of cash collateral. This is
typically followed by a hearing and a further order authorizing the use of cash collateral. Cash collateral
orders are usually of limited duration, to help the lender maintain a degree of discipline and control dur-
ing the course of the case.

Use of Property

Filing for bankruptcy creates a bankruptcy estate, which consists of all the property subject to the juris-
diction of the bankruptcy court. What constitutes property of the bankruptcy estate is broadly construed
so as to maximize (1) breathing room to a debtor attempting to make a fresh start and (2) equality of dis-
tribution of assets among similarly situated creditors. Property belonging to the bankruptcy estate is pro-
tected from piecemeal dismantling by creditors by the imposition of an automatic stay, which prevents
parties from taking any action to collect, assess, or recover a claim against the debtor that arose before
the commencement of the Chapter 11 case. Section 363 of the Bankruptcy Code allows the debtor-in-
possession to use, sell, or lease property of the estate.

Ordinary Course of Business

The Bankruptcy Code allows the debtor-in-possession to use, sell or lease property of the estate (other
than cash collateral) in the ordinary course of business without prior court approval. Accordingly, ordi-
nary course of business operations, such as selling inventory and completing work-in-process, may con-
tinue as it had prior to the bankruptcy filing.

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