Bankruptcy – Use of Cash Collateral

USE OF CASH COLLATERAL. On the same day as the filing of their Chapter 12 petition, the debtors filed a motion to use cash collateral from a crop to be harvested later in the year. The secured creditor negotiated an order for use of cash collateral which provided for a cash payment to the creditor, replacement of a lien in the proceeds to replace the lien on the crops, and a priority  administrative expense status for the creditor’s lien in the case of a default. The administrative claim status priority was agreed to be subordinated only to legal fees and expenses and any trustee fees and expenses. The negotiated order was approved by the court. The debtors filed a plan but it was denied for lack of feasibility. The creditor then sought approval of an administrative claim for the original claim. The debtors objected, citing Section 1205(b) as providing only four forms of adequate protection: cash payments, additional or replacement liens, rental payments, or “other relief” except for “entitling such entity to compensation allowable under section 503(b)(1) of this title as an administrative expense.” However, the court held that a negotiated cash collateral agreement is in the nature of a contract and binds the parties to its terms. The court reasoned that Section 1205(b) does not specifically prohibit the grant of the administrative claim status to a lien for which cash collateral use is granted but merely states that the grant of the administrative claim status alone is insufficient adequate protection for the use of cash collateral. The court also noted that the debtors are equitably estopped from obtaining use of cash collateral through granting administrative claim status to the lien and then objecting to the use of the administrative claim status when things do not work out and the creditor seeks to assert the administrative claim status. In re Mortellite, 2017 Bankr. LEXIS 4199 (Bankr. D. N.J. 2017).

The case summary is from Vol 29 No. 1 of the Agricultural Law DigestClick here for information on how to subscribe to the Digest.

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