Cash Collateral
The bankruptcy code defines "cash collateral" as cash, negotiable instruments, documents of title, securities, deposit accounts or other cash equivalents in which the bankruptcy estate and an entity other than the bankruptcy estate have an interest. It also includes the proceeds, products, offspring, rents, or profits of property or profits of property, and the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties, subject to the creditor's perfected security interest.
Cash collateral may only be used by the debtor if the lender consents or the bankruptcy court approves such use over the lender's objection. As an example, a chapter 11 debtor may not use its accounts receivables if they are collateral for a prepetition debt. The bankruptcy code requires that a debtor provide "adequate protection" before cash collateral may be used.
The bankruptcy code does not contain a specific definition of adequate protection but does contain a nonexclusive list of forms that adequate protection may take. Adequate protection may be in the form of providing the lender the "indubitable equivalent" of its interest in the cash collateral. The indubitable equivalent may include the granting to the lender of a lien on some alternative assets of equal or greater value than the amount of the cash collateral to be used. In the determination of adequate protection, the court may analyze the property's "equity cushion". Case law reflects that a 20% or more equity cushion constitutes "adequate protection." In general, adequate protection is meant to provide secured creditors with sufficient protections against the diminiution in value of their interest which would otherwise constitute a "taking" in violation of the creditor's constitutional Fifth Amendment rights.
A creditor is entitled to an administrative expense claim that takes priority over all other administrative claims in the event adequate protection turns out not to protect its interests.
Cash collateral may only be used by the debtor if the lender consents or the bankruptcy court approves such use over the lender's objection. As an example, a chapter 11 debtor may not use its accounts receivables if they are collateral for a prepetition debt. The bankruptcy code requires that a debtor provide "adequate protection" before cash collateral may be used.
The bankruptcy code does not contain a specific definition of adequate protection but does contain a nonexclusive list of forms that adequate protection may take. Adequate protection may be in the form of providing the lender the "indubitable equivalent" of its interest in the cash collateral. The indubitable equivalent may include the granting to the lender of a lien on some alternative assets of equal or greater value than the amount of the cash collateral to be used. In the determination of adequate protection, the court may analyze the property's "equity cushion". Case law reflects that a 20% or more equity cushion constitutes "adequate protection." In general, adequate protection is meant to provide secured creditors with sufficient protections against the diminiution in value of their interest which would otherwise constitute a "taking" in violation of the creditor's constitutional Fifth Amendment rights.
A creditor is entitled to an administrative expense claim that takes priority over all other administrative claims in the event adequate protection turns out not to protect its interests.