The "Devil's Dictionary" is a quick-reference guide for commercial lenders and other restructuring professionals. In this series, we highlight many of the buzz words found in the Dictionary and used in today's bankruptcy arena.
USE OF CASH COLLATERAL: Concept vital to the debtor, as its cash is its lifeblood as it attempts to reorganize under Chapter 11. To use its cash in bankruptcy, the debtor must obtain either court approval or the consent of its secured lender if the cash is subject to the lender’s lien. Where the secured lender does not consent, the case’s first battle is often fought at a cash collateral hearing conducted just after the bankruptcy filing in which the creditor tries to prove that its interest in the cash is not adequately protected or that the cash does not belong to the debtor at all.
Bankruptcy Code § 363. See also Absolute Assignment of Rents, Adequate Protection, Assignment of Rents for Security, Cash Collateral.
Personal liability of the borrower on an otherwise nonrecourse debt, triggered by the occurrence of a stated contingency such as a bankruptcy filing by the borrower. Section 365(e)(1) invalidates ipso facto clauses in executory contracts and unexpired leases, but a debt instrument qualifies as neither. Nevertheless, in some instances bankruptcy courts have refused to enforce ipso facto clauses beyond the context of executory contracts and unexpired leases. Whether a court would enforce a springing recourse provision triggered by the borrower’s bankruptcy filing is not a settled question of law. Springing recourse is unlike a Springing Guaranty where the borrower’s filing creates recourse for a third party guarantor and not the borrower/debtor itself. Note also that such a “springing recourse” provision is sometimes unnecessary in Chapter 11 because, under certain circumstances, Section 1111(b)(1)(A) converts nonrecourse debt to recourse for purposes of a Chapter 11 case. But Section 1111 does not confer that benefit in a Chapter 7 or Chapter 13 case.
The "Devil's Dictionary" is an excellent reference tool that reflects the collective wisdom of its four authors, Brett Anders, Jim Bird, David Ferguson, Dan Flanigan, and digital editor, Christopher Ward, who have a combined total of more than 130 years working in the forefront of real estate and other commercial finance, loan enforcement, financial restructuring and bankruptcy law.