## Facts

- William and Jane O’Connor filed a voluntary Chapter 11 petition.
- $721,600 in operating cash was held in a court-controlled account; MBank Dallas, N.A. asserted a security interest in the funds as “cash collateral” under 11 U.S.C. § 363.
- A different secured creditor claimed a prior mechanic’s lien on the same proceeds, but the parties did not litigate lien priority or the extent of MBank’s interest for purposes of the cash-collateral motion.
- The debtors sought authority to use the funds to drill three gas wells on leased acreage associated with a limited partnership in which Mr. O’Connor was general partner.
- To protect MBank, the debtors offered replacement liens on (1) proceeds from the proposed wells and (2) Mr. O’Connor’s unencumbered, regular monthly income.
- At an evidentiary hearing, Mr. O’Connor testified that the partnership had 150 proven wells in the area, 148 still producing, that the proposed wells were within an established producing field, and that a ready market and purchasers for the gas existed.
- An expert testified that the drilling project could be expected to generate future cash flow; the bankruptcy court credited this evidence.

## Issues

1. Whether the determination that a secured creditor is “adequately protected” under 11 U.S.C. § 363(e) is a factual question reviewed for clear error or a legal question reviewed de novo.
2. Whether, on this record, replacement liens on anticipated well proceeds and on unencumbered monthly income could support a finding of adequate protection for use of cash collateral.

## Decision

- The Tenth Circuit reversed the district court and reinstated the bankruptcy court’s order authorizing use of the cash collateral.
- The court held that whether adequate protection has been provided under § 363(e) is a question of fact reviewed under the clearly erroneous standard.
- The district court erred by treating adequate protection as a legal question and reversing based on its own assessment of risk rather than reviewing the bankruptcy court’s findings for clear error.

## Legal Principles

- Adequate-protection determinations under 11 U.S.C. § 363(e) are predominantly factual and must be upheld unless clearly erroneous.
- In bankruptcy appeals, appellate courts defer to the bankruptcy court’s factual findings, including credibility determinations and fact-bound risk assessments; legal conclusions are reviewed de novo.
- Replacement liens and projected income streams may constitute adequate protection when supported by evidence showing the secured creditor’s interest will not be impaired, and the secured claim requiring protection is limited to the value of the creditor’s lien in the collateral at issue.

## Conclusion

The Tenth Circuit held that adequate protection for use of cash collateral is a fact-intensive determination reviewed for clear error, and it reversed the district court for reweighing the evidence and substituting its judgment for the bankruptcy court’s findings that MBank was adequately protected by replacement liens and additional income collateral.


MBank Dallas, N.A. v. O’Connor (In re O’Connor), 808 F.2d 1393 (10th Cir. 1987)