Cash Collateral is cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents where the estate and someone else have an interest in the property. Also included would be the proceeds of noncash collateral, such as inventory and accounts receivable and proceeds, products, offspring, and rents, profits, or property subject to a security interest, if converted to proceeds of the type defined as cash collateral, provided the proceeds are subject to the prepetition security interest.
To use cash collateral, the creditor with the interest must consent to its use, or the court, after notice and hearing, must authorize its use. The court may authorize the use, sale, or lease of cash collateral at a preliminary hearing if there is a reasonable likelihood that the debtor in possession will prevail at the final hearing. The Bankruptcy Code also provides that the court is to act promptly for a request to use cash collateral.
Requirements of cash collateral
Cash collateral includes property that satisfies each of the following requirements:
- it is made up of either
- cash, negotiable instruments documents of title, securities, deposit account, or other cash equivalents in which both the bankruptcy estate and another entity have an interest
- the proceeds products, offspring, rents, or profits from such property
- fees, charges, accounts, or other payments for the use or occupancy of rooms or other public lodging facilities.
- it is subject to a security agreement that the debtor and creditor entered into before the bankruptcy case commenced
- the security agreement extends to both property the debtor acquired prepetition and to either the proceeds or profits of such property or amounts paid as rents of such property
- applicable non bankruptcy law does not prohibit the security agreement
When a debtor's cash constitutes cash collateral, that debtor must either obtain the consent of every party that has an interest in such cash collateral, or file a motion for the use of such cash collateral
Motion of cash collateral
The motion to use cash collateral must consist of a concise statement of the relief requested, and list or summarize all material provisions, including:
- the name of each entity with an interest in the cash collateral
- the purposes for the use of the cash collateral
- the material terms, including duration, of the use of the cash collateral
- any liens, cash payments, or other adequate protection that will be provided to each entity with an interest in the cash collateral or, if no additional adequate protection is proposed, an explanation of why each entity's interest is adequately protected
Where the lender consents to the use of cash collateral, a court order is necessary to approve the cash collateral agreement.
Examples of the types provisions
Examples of the types of provisions that are found in cash collateral agreements to give adequate protection include:
- security interest in and lien on all of the property of the debtor, including post-petition inventory and receivables
- a continuing security interest in and lien on the collateral and proceeds thereof, with the lien subordinated only to the extent necessary to pay post-petition wages
- release off all cash collateral, which becomes a post-petition claim
- G.W. Newton 2009, p.320-321
- M.I. Sanders 2013, p.121-124
- R.E.Ginsberg, R.D. Martin, S.V. Kelley 2018, p.92-93
- G.W. Newton 2009, p.322
- Ginsberg R.E., Martin R.D., Kelley S.V., (2018). Ginsberg and Martin on Bankruptcy, Aspen Publishers, New York.
- Newton G.W., (2009). Bankruptcy and Insolvency Accounting, John Wiley & Sons, Canada.
- Sanders M.I., (2013). Joint Ventures Involving Tax-Exempt Organizations, John Wiley & Sons, Canada.
Author: Karina Stefańska