Maine Bankruptcy and Debt Relief Blog

Adequate Protection of Cash Collateral In Chapter 11

Posted on 02/26/2010 at 12:00 am by Molleur Law Offices
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Section 363(a) of the Bankruptcy Code provides the definition of cash collateral. Cash collateral is defined by section 363 to mean:

.  .  . cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, 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 a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title.

11 U.S.C. § 363(a).

A debtor is authorized to use cash collateral if the party with an interest in the cash collateral consents to its use or the Court after notice and hearing authorizes its use. 11 U.S.C. § 363(c)(2). A court can authorize use of cash collateral over the objection of the affected creditor where the debtor demonstrates that it can adequately protect the interests of the party holding an interest in the cash collateral. 11 U.S.C. § 363(e).

Where collateral is income-producing real property, the value of a creditor's interest in the underlying real property must be declining if the creditor is to be lacking adequate protection with respect to the real property and/or its accompanying rental stream (which is incorporated within and is an element of the real property value). In re Mullen, 172 B.R. 473, 476 (Bankr. D. Mass. 1994) (citing In re Kalian, 169 B.R. 503, 505 (Bankr. D. R.I. 1994); Federal Nat'l Mortgage Ass'n v. Dacon Bolingbrook Assoc. Ltd. P'ship, 153 B.R. 204, 210 (N.D. Ill. 1993); In re Robbins, 119 B.R. 1 (Bankr. D. Mass. 1990); In re Pine Lake Village Apartment Co., 19 B.R. 819, 826 (Bankr. S.D. N.Y. 1982). Thus, where the value of a creditor's interest in property is not declining, no further adequate protection is necessary.

Under established precedent in this district, creditors are not entitled to adequate protection of their interest in the underlying real property because the basic method of valuation for income producing properties is predicated on the rental income stream, meaning that the fair market value of the real property is equal to the present value of the rental income over some extended period of time, plus residual value. In re Citicorp Park Assocs., 180 B.R. 15, 18 (Bankr. D. Me. 1995). Therefore, if the value of the income producing property is not declining, and the debtor is using the rental income to properly maintain the property, insure it, and pay real estate taxes, a secured creditor with a mortgage and an assignment of rents is adequately protected because its interest in property is not declining in value. Id. see also Chapter 11 Theory and Practice: A Guide to Reorganization § 16.64 (James F. Quenan, Jr., Philip J. Hendel & Ingrid M. Hillinger, eds., 3d ed. rev. 2002) (the "typical approach" for adequately protecting creditors with an interest in income-producing real estate "focuses on maintaining the value and rental capacity of the property and utilizing the cash flow from rents [to do so]."); Chapter 11 Theory and Practice§ 16.28.

Cash collateral issues can also arise in Chapter 12 and Chapter 13 cases. While the issues can arise from secured creditors filing motions for relief from stay, the reorganizing debtor can also file a motion to permit the use of cash collateral, and thereby bring the matter to the Court's attention.