## Facts

- Dynaco Corp. and an affiliate operated as a printed circuit board manufacturer with facilities in New Hampshire and Arizona.
- After financial distress tied to declining defense-related business, the debtors filed Chapter 11 petitions in July 1993 (jointly administered).
- The debtors sought authority to continue using cash collateral (including proceeds of receivables and inventory subject to a secured lender’s liens) to fund operations and implement a reorganization plan focused on consolidating operations in Arizona.
- The secured lender objected, claiming continued cash-collateral use would erode collateral value and leave it inadequately protected; the unsecured creditors’ committee supported the motion.
- The debtors offered operational testimony and projections, including expected sales of about $15 million by the end of fiscal year 1994, improved collections and management, and no need for outside financing beyond use of cash collateral.
- Evidence showed an anticipated temporary decline in the collateral base (about $540,000) during months three and four postpetition, followed by projected restoration over a longer period.
- The debtors asserted an approximate 17% equity cushion to buffer the secured lender against interim collateral volatility.
- After evidentiary hearings, the court entered an order authorizing continued use of cash collateral subject to conditions (including budgeting/reporting and replacement liens), later issuing a memorandum opinion explaining the rationale.

## Issues

1. Whether a Chapter 11 debtor may be authorized to use cash collateral over a secured creditor’s objection when the collateral base is projected to decline temporarily but is credibly projected to be restored over a longer operating period.
2. Whether the debtor provided “adequate protection” under 11 U.S.C. § 363(c)(2) and § 363(e) through an equity cushion, replacement liens, and a viable business plan supported by evidence.

## Decision

- The court authorized the debtors’ continued use of cash collateral over the secured lender’s objection.
- The court found the secured lender’s interest adequately protected despite a forecast short-term decline in collateral value.
- The court credited the debtors’ evidence of an equity cushion, replacement lien value generated through ongoing operations, and realistic projections showing restoration of the collateral base.
- The court determined that evaluating adequate protection could properly account for longer-term business projections rather than focusing solely on a short-term collateral “snapshot.”

## Legal Principles

- A debtor may not use cash collateral absent secured creditor consent or a court order providing adequate protection. (11 U.S.C. § 363(c)(2), (e))
- Adequate protection may be established through a combination of:
  - An equity cushion sufficient to absorb anticipated collateral fluctuations;
  - Replacement liens or other protections that preserve the creditor’s secured position as postpetition value is generated; and
  - Credible, evidence-supported operational projections demonstrating restoration or preservation of collateral value over a reasonable period.
- A temporary decline in collateral value does not necessarily defeat adequate protection if the evidentiary record supports a realistic plan showing that the secured position will be preserved when viewed over an extended operational timeframe.

## Conclusion

The court permitted continued use of cash collateral in Chapter 11 because the debtors demonstrated adequate protection through an equity cushion, replacement liens, and credible projections showing that a short-term collateral decline would be reversed over time, preserving the secured lender’s interest.


In re Dynaco Corp., 162 B.R. 389 (Bankr. D.N.H. 1993)