In re Colad Grp., Inc. - 324 B.R. 208 (Bankr. W.D.N.Y. 2005)

Rule:

Pursuant to 11 U.S.C.S. § 363(c)(2), a debtor in possession may not use cash collateral unless either (A) each entity that has an interest in such cash collateral consents; or (B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section.

Facts:

The Colad Group, Inc. ("Colad") is a specialty printer, whose primary business involves the production and sale of custom folders, binders and other stationary products. On the evening of Thursday, February 3, 2005, Colad electronically filed a petition for relief under chapter 11 of the Bankruptcy Code. The following day, Colad’s counsel contacted the court to schedule an opportunity on an emergency basis to seek the court's approval of eight "first day orders" by virtue of the Doctrine of Necessity. In bankruptcy practice, the phrase "first day motions" refers generally to any of a variety of requests made shortly after the filing of a chapter 11 petition, for prompt authorizations needed to facilitate the operation of the debtor's business. The court ruled orally on all issues except an application for final authority to obtain post-petition financing.

Issue:

Should Colad’s motion regarding the authority to obtain post-petition financing be granted?

Answer:

No.

Conclusion:

The most important of the first day motions was the application for authority to obtain post-petition financing. Like most debtors in chapter 11, Colad had pledged nearly all of its assets as collateral to secure a pre-petition credit facility. Among these assets were Colad's inventory, receivables, and the proceeds of its inventory and receivables, all of which are deemed to constitute "cash collateral," as defined by section 363(a) of the Bankruptcy Code. In support of its first day motion for authority to obtain post-petition financing, the debtor represented that it could not operate without a post-petition line of credit and that it had no ability to obtain such credit from any source other than Continental. Conceptually, this Court found that these representations were adequate to justify an appropriate form of emergency lending until the scheduled hearing for final approval. However, in the form that the debtor proposed, the emergency funding order was unacceptable for the following four reasons: one, the order failed to reflect any effort to limit the conditions of credit only to those which would be absolutely necessary to avoid immediate and irreparable harm; two, the interim order was inappropriately complex, and thereby denied to the court a sufficient basis of confidence in the reasonableness of its terms; three, based on its cursory review, the court discovered that the proposed order would change substantive and procedural rights, without allowing any reasonable opportunity for creditor objection; and last, As originally submitted, the first day lending order proposed to authorize a potential violation of state law and to waive the substantive rights of other creditors without prior notice to them. Instead, the court issued an interim lending order authorizing Colad to borrow funds on an emergency basis, until such time as the court would decide the request to approve a final lending order.