Using Cash Collateral and the Protection a Lender Gets
A business that files with money in the bank often cannot spend it. Cash subject to another entity's interest is walled off by statute, and access is obtained either by agreement with the lender or by an order entered in the first days of the case.
The rule in short
Section 363(c)(2) prohibits the trustee or debtor in possession from using cash collateral unless each entity with an interest in it consents or the court authorizes the use after notice and a hearing. Cash collateral is defined broadly to include deposit accounts, negotiable instruments, and the proceeds, products, rents and profits of collateral. The rule requires a motion with a concise statement of material terms, and permits a preliminary hearing before the ordinary notice period expires.
A company that files on a Friday with money in its accounts frequently cannot make payroll on the Monday. The money is there, the bank has not taken it, and the automatic stay protects it from creditors — but the debtor is prohibited by statute from spending it. That prohibition, and the process for lifting it, is the first operational problem in most business cases.
What counts as cash collateral
The definition is deliberately broad. Cash collateral means 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. It includes the proceeds, products, offspring, rents or profits of property, and the fees, charges, accounts and other payments for the use or occupancy of rooms and other public facilities in hotels, motels and other lodging properties subject to a security interest.
Two elements matter. The property must be cash or a cash equivalent, and both the estate and some other entity must have an interest in it. A deposit account subject to a perfected security interest satisfies both; an account with no lien on it does not, and the debtor may use that money in the ordinary course without asking anyone.
Whether a lender's interest continues in cash generated after the filing turns on a separate provision. Property acquired by the estate after the case begins is generally not subject to a prepetition security agreement, but there is an exception for proceeds, products, offspring, rents or profits of prepetition collateral, subject to the court's power to order otherwise based on the equities of the case. Collections on prepetition receivables are the standard illustration.
Consent or an order, and nothing else
The trustee may not use, sell or lease cash collateral unless each entity that has an interest in it consents, or the court, after notice and a hearing, authorizes the use in accordance with the section. Ordinary-course authority, which permits a debtor operating a business to transact without notice or a hearing, is expressly subject to that limitation.
Consent is the faster route and the more common one. It is rarely unconditional: a lender agrees to the use of its cash on terms, and the terms are recorded in a stipulation submitted to the court for approval. Where consent is withheld, the debtor moves, and the question becomes whether the lender's interest is adequately protected.
Cash collateral that is not being used has to be segregated and accounted for. That obligation applies from the filing and is independent of any motion, which is why debtors open new accounts immediately and keep prepetition collections apart from postpetition receipts.
| Route | What is required | Timing |
|---|---|---|
| Consent of each interested entity | A stipulation, usually approved by order | Available immediately |
| Preliminary hearing | Motion requesting it; only what avoids immediate and irreparable harm | Before the fourteen-day period ends |
| Final hearing | Full showing of adequate protection | No earlier than fourteen days after service |
| Objection by an interested entity | A request to prohibit or condition the use | At any time under subsection (e) |
| Continued segregation | No use pending authorization | From the filing |
The motion and its concise statement
The rule imposes a distinctive drafting requirement. A motion for authorization to use cash collateral must comply with the contested matters rule and be accompanied by a proposed form of order. The motion must consist of, or if it exceeds five pages begin with, a concise statement of the relief requested that is no longer than five pages.
The statement must list or summarize all material provisions, citing their locations in the relevant documents, and it must include the name of each entity with an interest in the cash collateral, how the cash will be used, the material terms of the use including its duration, and all liens, cash payments or other adequate protection to be provided to each interested entity — or, if none is proposed, an explanation of how each entity's interest is adequately protected.
Service is prescribed as well. The motion must be served on each entity with an interest in the cash collateral, on the parties who must be served with a stay relief motion, and on any other entity the court designates. The requirement exists because these orders are frequently entered quickly and can shape the whole case.
The rule restricting a court from granting certain applications and motions within twenty-one days after the petition is filed, absent relief needed to avoid immediate and irreparable harm, expressly does not apply to a motion under the cash collateral and financing rule. That is why cash collateral is heard on the first day while other requests wait, and it is examined further in the sequence of first-day motions.
Two hearings and what each can do
The court may begin a final hearing on the motion no earlier than fourteen days after it has been served. If the motion so requests, the court may conduct a preliminary hearing before that period ends. The structure is designed to allow immediate access to a limited amount of cash while giving interested parties a real opportunity to be heard on the rest.
The preliminary hearing is expressly limited. After it, the court may authorize the use of only the cash collateral necessary to avoid immediate and irreparable harm to the estate pending a final hearing. The statute contains a parallel limit, permitting authorization at a preliminary hearing only if there is a reasonable likelihood that the trustee will prevail at the final hearing, and directing the court to act promptly on the request.
An interested entity is not confined to objecting. On request of an entity with an interest in property being used, the court shall, with or without a hearing, prohibit or condition the use as is necessary to provide adequate protection of that interest — a remedy that runs in parallel with a motion for relief from the stay and is often filed alongside it.
The interim order and the budget
What emerges from the preliminary hearing is an interim order with a budget attached. The budget lists permitted expenditures by category and week, usually with a variance tolerance, and the authorization is limited to spending consistent with it. Reporting against the budget is typically required, and a material deviation is a default.
The order also records what the lender receives in exchange, which commonly includes replacement liens on postpetition collateral, periodic payments, and reporting rights. Where protection later proves inadequate, the statute grants the affected creditor a superpriority claim, which is the backstop discussed in the analysis of what adequate protection means.
Interim orders are frequently the vehicle for terms that go well beyond cash. Milestones, budget covenants, waivers and stipulations about the validity of prepetition liens all appear in them, and the same terms recur in motions for postpetition financing, which the rule treats in a parallel subdivision with its own disclosure requirements.
Points to carry away
- Cash collateral includes cash, deposit accounts, negotiable instruments and the proceeds and rents of collateral.
- Use requires the consent of each entity with an interest, or authorization after notice and a hearing.
- Cash collateral not being used must be segregated and accounted for.
- The motion must begin with a concise statement of the relief requested, no longer than five pages.
- A final hearing may begin no earlier than fourteen days after service, with a preliminary hearing available sooner.
- After a preliminary hearing the court may authorize only what is necessary to avoid immediate and irreparable harm.
Questions readers ask
What happens to cash collateral while permission is being sought?
The statute requires the trustee to segregate and account for any cash collateral in its possession, custody or control, except to the extent use has been consented to or authorized. In practice a debtor opens separate accounts on filing so that prepetition collections and postpetition receipts can be told apart, and reports on the balances to the lender and the court. Failure to segregate is a common ground for an early objection, because it makes the tracing of the lender's interest difficult later.
Does a security interest continue in cash generated after the filing?
It depends on the collateral description and on the postpetition effect provision. As a general matter, property acquired by the estate after the case begins is not subject to a prepetition security agreement, but there is an exception for proceeds, products, offspring or profits of prepetition collateral, subject to the court's power to order otherwise based on the equities. Receivables collected after filing that arise from prepetition inventory are the everyday illustration, and their treatment is often the central dispute.
Can a lender simply refuse and force a shutdown?
A lender may withhold consent, but that does not end the matter. The debtor may seek authorization from the court, and the question then is whether the lender's interest is adequately protected. Lenders frequently do consent, because a business that cannot pay for materials or wages generally produces a worse recovery than one that continues to operate. Consent is usually given on terms, which is why the negotiated interim order rather than a contested hearing is the common outcome.
Sources
- 11 U.S.C. § 363, Cornell LIISubsection (a) defines cash collateral and (c)(2) states the consent or authorization requirement.
- 11 U.S.C. § 361, Cornell LIIDescribes the forms adequate protection may take where use of collateral is authorized.
- 11 U.S.C. § 552, Cornell LIIStates the postpetition effect of a security interest, including the proceeds exception.
- Federal Rule of Bankruptcy Procedure 4001, Cornell LIISubdivision (b) sets the motion, concise statement, service and hearing requirements for cash collateral.
- Federal Rule of Bankruptcy Procedure 6003, Cornell LIIRestricts early relief in the first twenty-one days, and expressly does not apply to a motion under Rule 4001.
- 11 U.S.C. § 507, Cornell LIISubsection (b) grants a superpriority where adequate protection later proves insufficient.
Rapid Response Law is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
More in First-Day Relief
How Quickly a Court Must Hear a Stay Motion
Section 362(e)(1) terminates the stay thirty days after a request for relief from a stay of an act against estate property, as to the requesting party, unless the court after notice and a hearing orders it continued. The hearing may be preliminary or consolidated with the final hearing. Where it is preliminary, the court must order continuation if there is a reasonable likelihood that the party opposing relief will prevail, and the final hearing must conclude within thirty days after it.
The Shorter Stay for a Repeat Filer
Section 362(c)(3) provides that where an individual debtor had a case pending within the preceding year that was dismissed, the stay terminates on the thirtieth day after the later filing with respect to the debtor. Section 362(c)(4) provides that where two or more such cases were dismissed, no stay goes into effect at all. In each situation a party in interest may move to continue or impose the stay, and must demonstrate that the later filing is in good faith.
The First-Day Hearing and What Is Heard There
First-day hearings are held within days of a business filing, on shortened notice, to authorize what the debtor needs to keep operating. Rule 6003 prohibits granting listed applications within twenty-one days after the petition is filed unless relief is needed to avoid immediate and irreparable harm, and expressly does not apply to motions under Rule 4001. Cash collateral and financing are therefore heard first, with final hearings following after full notice.