Cash Collateral in Chapter 11: Key Facts for Debtors
Cash collateral in Chapter 11 bankruptcy refers to cash and cash equivalents that are collected and held for the benefit of creditors during bankruptcy proceedings. This includes negotiable instruments, documents of title, securities, deposit accounts, and other liquid assets such as accounts receivable and inventory. 124
Key Characteristics:
- Definition: Cash collateral encompasses cash, cash equivalents, and the proceeds from the sale of liquid assets belonging to the debtor. 12
- Security Interests: Cash collateral often has security interests attached, prohibiting the debtor from using the collateral without the prior consent of the creditor or a court order. 23
- Usage Restrictions: A Chapter 11 debtor cannot use cash collateral without obtaining consent from the creditor or receiving court approval. Unauthorized use can lead to significant repercussions, including conversion to Chapter 7 liquidation. 25
Importance in Chapter 11 Proceedings:
- First Day Motions: Debtors often file a "first day motion" to use cash collateral at the outset of a Chapter 11 case. This motion is crucial for obtaining immediate relief and ensuring the debtor can continue operating the business. 24
- Adequate Protection: Creditors are entitled to "adequate protection" of their interests in cash collateral. This can include granting a lien in the cash collateral generated post-bankruptcy filing or making periodic cash payments to compensate for any decline in the value of the collateral. 35
Consequences of Unauthorized Use:
- Legal Disputes: Unauthorized use of cash collateral can lead to legal disputes and mistrust among creditors, potentially jeopardizing the entire Chapter 11 process. 25
- Penalties: Misuse of cash collateral can result in substantial fees, penalties, and even the termination of the Chapter 11 reorganization, leading to conversion to Chapter 7 liquidation. 25