Summary of a Recent
Judicial
Development in
Bankruptcy
Use of Cash Collateral Requires Consent of Creditor or the Court
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Planters Bank and Trust Co. v. Ellis (In re Ellis), No. 05-19561-NPO, 2006 Bankr. LEXIS 3965 (Bankr. N.D. Miss. Aug. 31, 2006), the United States Bankruptcy Court for the Northern District of Mississippi held that cause existed to terminate the debtors' automatic stay.
Background
The Debtors' Chapter 12 case was filed in November 2005. Id. at *1. In November 2006, Planters Bank and Trust Company filed a motion for relief from automatic stay, alleging numerous procedural violations and other improper conduct (see Analysis below). Id.
Arguments
Planters Bank argued that it was entitled to relief from the automatic stay because of the Debtors' conduct, and to deny such relief would harm its rights as a secured creditor. Id.
Debtors argued that no cause existed to lift the automatic stay protecting his assets. Id.
Analysis and Holdings
The court began by noting that under 11 U.S.C. § 363(c)(2), "no debtor may use cash collateral unless the secured creditor consents or the court, after notice and a hearing, authorizes such use." Id. at *1-2. However, the Debtors used cash collateral without court authority until an order was entered on April 3, 2006. Id. at *2. The order expired in June 2006, and the Debtors again continued to use cash collateral without consent or authority to do so. Id. Furthermore, the Debtors failed to pay their electric bills in March, April, May, and June 2006, and Planters Bank was forced to pay the bills in order to protect its collateral. Id. The Debtors also allowed their insurance coverage to lapse, so Planters Bank's collateral became uninsured. Id. at *2-3. The court was also concerned because the Debtor apparently admitted to paying pre-petition unsecured debts after the case was filed, which was impermissible. Id. at *3. Thus the court determined that the Debtors could not pay the ongoing expenses from their farming operation and would not be able to fund a Chapter 12 plan, and it granted Planters Bank's motion to terminate the Debtors' automatic stay. Id. at *3-4.
The case was decided on August 31, 2006.