Using Cash Collateral to Maintain the Collateral

One of the less controversial uses of cash collateral is cover reasonable and necessary operating expenses relating to the underlying collateral. This type of spending maintains the value of income producing collateral and of the cash collateral stream itself. For example, keeping the lights on in apartment complex common areas keeps tenants from terminating their leases.

Although this type of use is the most commonly agreed to by secured creditors, the very necessity and urgency of the spending can give a secured creditor significant bargaining power to secure concessions as part of a cash collateral stipulation.

This post will introduce four arguments for using cash collateral to maintain the collateral itself.

1. Using cash collateral to maintain the collateral adequately protects the creditor’s interest in both the collateral and in the income stream it generates. Phrased this way, the argument presents a bankruptcy question: whether the proposed use of cash collateral “provide[s] adequate protection” of the lienholder’s interest under 11 USC § 363(e), such that the court should allow its use under 11 USC § 363(c)(2).
2. Under non-bankruptcy law (the contract and state law), the creditor’s interest in the cash collateral does not extend to prohibiting its use to maintain the collateral or, alternatively, that the secured creditor has a duty under non-bankruptcy law to permit the use. This argument typically presents a question under Article 9 of the UCC or under the law governing assignments of rents.
3. This use of cash collateral constitutes “reasonable, necessary costs and expenses” of the property which benefit the lienholder. This argument presents the bankruptcy question whether the proposed use should be authorized under 11 USC § 506(c).
4. The “equities of the case” justify the court in limiting a creditor’s lien against post-petition cash collateral to the extent necessary to maintain the collateral under 11 USC § 552(b). This is a bankruptcy question, though state law equitable doctrines may inform the court’s decision.

These arguments will be developed in detail in separate posts.

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.