## Facts

- Carbone Companies, Inc. (Carbone Companies) operated a construction business based in Cleveland, Ohio.
- Carbone Properties, LLC (Carbone Properties) was an affiliated entity that functioned as a holding company for related businesses.
- Fifth Third Bank (the bank) extended a $15 million loan to Carbone Companies.
- The bank’s loan was secured by a broad security interest in Carbone Companies’ personal property, including accounts and other assets, and the bank claimed an interest in the debtors’ cash collateral.
- Carbone Companies later defaulted on the loan.
- The bank obtained a judgment against Carbone Companies for more than $16 million and notified Carbone Companies that it intended to execute on the judgment.
- The day after receiving the execution notice, the debtors filed Chapter 11 reorganization petitions and continued operating as debtors in possession.
- The debtors sought a final order authorizing continued use of the bank’s cash collateral to fund payroll and other operating expenses and to continue performing on construction projects.
- In support, the debtors presented evidence of projected cash flows and the expectation of continued work from existing clients, arguing that ongoing operations would generate receivables that would replace the cash collateral being spent.
- The debtors proposed to protect the bank by granting replacement liens on postpetition collateral (including postpetition accounts/receivables and proceeds) and by operating under budget and reporting controls.
- The bank objected, arguing that it was not adequately protected and raising concerns about the debtors’ cash-management practices and the reliability of projections and budgets.
- The Official Committee of Unsecured Creditors also objected to the requested cash-collateral authority.
- After a noticed evidentiary hearing, the bankruptcy court considered testimony and exhibits regarding the debtors’ operations, projections, and proposed protections for the bank.

## Issues

1. Whether the debtors could use the bank’s cash collateral over the bank’s objection under 11 U.S.C. § 363(c)(2)(B) by providing the bank adequate protection under §§ 361 and 363(e).

## Decision

- The court granted the debtors’ motion and entered a final order authorizing continued use of the bank’s cash collateral, subject to conditions.
- The court found that the bank was adequately protected by the proposed replacement liens on postpetition collateral and proceeds, along with budgetary limits and reporting/cash-control measures.
- The court accepted the debtors’ evidence that continued operations were expected to produce cash flow and generate new receivables, and it determined that the bank had not shown a likely decline in the value of its collateral position from the authorized use.

## Legal Principles

- A debtor in possession may not use a secured creditor’s cash collateral unless the creditor consents or the court authorizes use after notice and a hearing. 11 U.S.C. § 363(c)(2).
- On request of an entity with an interest in property used by the estate, the court must condition or forbid such use as necessary to provide adequate protection of that interest. 11 U.S.C. § 363(e).
- Adequate protection is designed to guard against a decrease in the value of the secured creditor’s interest in collateral during the case; it does not guarantee the creditor immediate payment or its preferred state-law remedies. 11 U.S.C. § 361.
- Replacement liens on postpetition accounts and proceeds may provide adequate protection where evidence shows the secured creditor’s collateral position will be maintained as cash collateral is spent to generate new receivables.
- In evaluating adequate protection for cash-collateral use, the court may consider projected cash flow, the debtor’s ability to continue operations, and the presence of budgetary limits and reporting requirements that monitor use of funds and collateral levels.
- The debtor bears the initial burden to show a basis for authorizing use of cash collateral and that proposed protections can prevent a decrease in the secured creditor’s interest; the objecting creditor must then support its objection with evidence that the protection is insufficient or that collateral value is likely to decline.

## Conclusion

The bankruptcy court authorized Carbone Companies and Carbone Properties, as Chapter 11 debtors in possession, to continue using Fifth Third Bank’s cash collateral over the bank’s objection because the debtors showed adequate protection through replacement liens on postpetition collateral and proceeds, combined with budgets and reporting controls and evidence that ongoing construction operations were expected to generate cash flow and new receivables that would maintain the bank’s collateral position.


In re Carbone Companies, Inc., 395 B.R. 631 (2008)