When a debtor seeks permission to use cash collateral, “operating expenses” can be approved more readily than other uses. In this context, the term “operating expenses” is tied to the collateral. I use it as a shortcut for the more precise phrase: “ordinary, necessary expenses required to maintain and operate the Property [the underlying collateral] to preserve its value.” In re Willowood East Apartments of Indianapolis, 114 B.R. 138, 143 (Bankr. S.D. Ohio 1990).
The court in Willowood dealt with income-producing property, so the particular cash collateral at issue was “rents.” Of course, when dealing with other types of cash collateral, its analysis may apply by analogy. In that context, the court the found the following to constitute valid operating expenses where incurred in connection with the underlying collateral:
- All payroll and normal and reasonable employee expenses, including post-petition payroll taxes for employees located at the Property;
- Utilities, equipment leases, insurance and similar expenses necessary to operate the Property;
- Reasonable fees under management and marketing agreements;
- Ordinary and necessary repairs and maintenance to permit the continued use and operation of the Property, but not, without consent of [the secured creditor], any expenditure generally considered to be a capital improvement;
- Ordinary advertising or marketing expenses;
- Taxes and governmental charges accruing after the filing of the Petition herein attributable to the Property;
- Reasonable bookkeeping and accounting fees to the entity chosen by the Debtor to perform these services for the Property; and
- Other charges incurred after the filing of the Petition which are necessary to conduct the Debtor’s normal business operations.
114 B.R. at 144. Nor is the list exhaustive. For example, item 4 on this list requires secured creditor approval of capital improvements, such expenses have been approved over a creditor’s objection. In In re McCombs Properties VI, Ltd., 88 B.R. 261 (Bankr. C.D. Cal. 1988) (approving the use of rents for renovations which would increase rentals).
Please feel free to contact me online, or by phone or email, to discuss whether a chapter 11 bankruptcy is a good fit for your situation and, if so, to identify in advance the cash collateral issues your case may raise.