## Facts

- Strick Chex Columbus Two, LLC (SCCT) owned and operated a Checkers fast-food restaurant in Columbus, Georgia under a franchise agreement.
- On June 6, 2013, Bank of North Georgia (the Bank) made SCCT a $329,941.51 loan.
- SCCT granted the Bank a security interest in virtually all of SCCT’s personal property and the proceeds of that property; the loan was also secured by a deed to secure debt on SCCT’s leasehold interest in the restaurant site and was cross-collateralized with related parties’ assets.
- SCCT filed a voluntary Chapter 11 petition on June 16, 2015 and continued operating as debtor in possession; no trustee was appointed.
- On July 24, 2015, the Bank filed a motion for adequate protection or, alternatively, relief from the automatic stay, claiming its collateral was depreciating and SCCT was using the Bank’s cash collateral without consent.
- The Bank argued that because its lien covered inventory, equipment, and the franchise agreement (and proceeds), all post-petition restaurant revenue necessarily constituted “proceeds” of its collateral and thus “cash collateral.”
- The Bank asserted that SCCT’s use of revenue to pay owners and employees and to purchase replacement inventory was an unauthorized use of cash collateral.
- The Bank requested, among other things, a replacement blanket lien on SCCT’s business assets, proof of insurance, compliance with a bank-approved budget, at least $2,000 in monthly adequate-protection payments, and weekly financial reporting.
- SCCT responded that its post-petition restaurant revenues were not the Bank’s proceeds (or at least not all of them) and therefore did not constitute cash collateral to the extent claimed.
- After a preliminary hearing on September 2, 2015, the court ordered interim adequate-protection payments of $750 per month and set briefing and an evidentiary hearing on the cash-collateral and adequate-protection disputes.
- The court held an evidentiary hearing on October 27, 2015 and later entered an order resolving the motion.

## Issues

1. Whether, and to what extent, SCCT’s post-petition restaurant revenues constituted the Bank’s “cash collateral” under 11 U.S.C. §§ 363 and 552.
2. What relief was required to adequately protect the Bank’s interest (including whether stay relief was warranted) while allowing SCCT to continue operations.

## Decision

- The court denied the Bank’s request to treat all post-petition restaurant revenue as cash collateral and rejected the view that a blanket lien on business assets automatically converts the entire post-petition revenue stream into “proceeds.”
- The court held that “proceeds” under § 552(b) requires a conversion or substitution of collateral, and that post-petition receipts are cash collateral only to the extent they are proceeds of prepetition collateral covered by the Bank’s lien.
- Applying that approach to a restaurant, the court concluded that only the portion of revenue attributable to the food sold (inventory) is proceeds; the portion attributable to services and labor is not.
- The court authorized SCCT’s continued use of cash collateral subject to adequate protection and operating conditions, including continuation of the $750 monthly adequate-protection payments, a replacement lien on post-petition inventory, maintenance of insurance, operation under a budget, and periodic financial reporting.
- The court did not grant broad relief from the automatic stay, finding that the Bank’s interests could be protected through tailored adequate-protection terms rather than shutting down the reorganization effort.

## Legal Principles

- Under 11 U.S.C. § 552(a), liens created by prepetition security agreements generally do not attach to property acquired after the petition date; § 552(b)(1) allows a lien to continue in post-petition “proceeds” of prepetition collateral to the extent provided by the security agreement and applicable nonbankruptcy law, subject to bankruptcy-law limits.
- “Cash collateral” under 11 U.S.C. § 363(a) includes proceeds of property subject to a security interest; a debtor in possession may not use cash collateral without consent or court authorization with adequate protection.
- A secured creditor claiming that post-petition receipts are its cash collateral must show both that its lien covers proceeds and that the receipts at issue are actually proceeds of prepetition collateral; the creditor bears the burden on the “extent” of its interest. 11 U.S.C. § 363(p)(2).
- “Proceeds” in this setting requires more than the collateral’s mere use in operations; it involves the collateral being sold, exchanged, collected, or otherwise disposed of and replaced by the new property (money).
- For restaurants and similar service-heavy businesses, gross receipts reflect both (i) payment for inventory (food) and (ii) payment for preparation and service; only the inventory component is treated as proceeds of the creditor’s prepetition inventory lien.
- Adequate protection under 11 U.S.C. §§ 361 and 363 may include periodic payments and replacement liens, along with practical controls such as insurance, budgeting, and reporting, calibrated to guard against a decline in the secured creditor’s collateral position while permitting continued operations.

## Conclusion

The bankruptcy court held that the Bank’s lien reached SCCT’s post-petition receipts only to the limited extent those receipts were proceeds of prepetition inventory, not the service component of restaurant revenue, and it allowed SCCT to use any cash collateral subject to adequate protection including $750 monthly payments, a replacement lien on post-petition inventory, and operating and reporting conditions, while declining to grant broad stay relief.


In Matter of Strick Chex Columbus Two, LLC, 542 B.R. 914 (2015)