Seller Beware Cash Collateral Must Be Returned

By: Brian Powers
St. John’s Law Student
American Bankruptcy Institute Law Review Staff

Section 549(a) empowers a chapter 7 trustee to avoid unauthorized post-petition transfers of estate property.[1]  Recently, in Marathon Petroleum, Co., LLC v. Cohen (In re Delco Oil, Inc.), the court held that there is no protection for an innocent seller of goods who was unaware that the DIP was not authorized to use cash collateral to pay for the delivered good.[2] In the case, the debtor, an oil company, filed a routine first-day motion[3] and simultaneously moved for an emergency order authorizing the use of cash collateral.[4] One of the oil company’s secured creditors objected to the cash collateral motion on the ground that its security interest was not adequately protected.[5] Reserving judgment on the cash collateral motion until after a hearing, the bankruptcy court nevertheless authorized the debtor to continue its business as a DIP.[6] Before the hearing date on the cash-collateral motion, the oil company used cash collateral to purchase approximately $1.9 million of petroleum products without the court’s permission.[7] The cash-collateral motion was subsequently denied, and the oil company voluntarily converted its case to chapter 7.[8] The chapter 7 trustee then filed suit against the oil supplier, attempting to recover the funds paid to it.[9]

The court held that there is no “innocent vendor” defense to a trustee’s 549(a) powers because the Code does not specifically authorize such a defense.[10] The “cash collateral” provisions of section 363(c)(2)[11] likewise contain no provision that excludes ordinary course business transactions from its reach.[12] The court was also not persuaded by the argument that the estate received equivalent value in the form of petroleum products, and that this adequately protected the secured creditor’s interests.[13] It rejected this defense, stating that “a ‘harmless’ exception to a trustee’s section 549(a) avoiding powers does not exist.”[14] In doing so, the court examined the text of section 549(a) and concluded that it does not require an analysis of the adequacy of consideration, but rather only requires the court to determine whether the transfer was authorized.[15]

While the court’s decision was a victory for secured creditors, it also sends an alarming message to any vendor who is considering doing business with a DIP. Many parts of the Code attempt to promote such transactions,[16] but the Delco court’s interpretation of section 549(a) could potentially hinder them. Although this is a rare situation,[17] more decisions like this could seriously hinder the ability of DIPs to operate their businesses. In order to protect themselves, vendors may now have to factor in the costs (in both money and time) of the necessary research into the case history to determine whether the transaction is legally permissible under the Bankruptcy Code, and may be discouraged by this added cost. Although the vendor’s claim in such a case would be entitled to administrative expense priority, the value of the product delivered may be dissipated or claimed by a more senior creditor. In cases like this, where the vast majority of a company’s assets are subject to a security interest, the estate might not have enough remaining assets to pay the vendor’s administrative expense claim in full. This case is also a warning to secured creditors who are objecting to a DIP’s use of cash collateral. These creditors might want to monitor the DIP’s use of cash collateral to prevent such a problem from occurring in the first place and save the time and expense of recovering the funds.


[1] See 11 U.S.C. § 549(a) (2006).

[2] See Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.), 599 F.3d 1255, 1257 (11th Cir. 2010). In order for a DIP to use cash collateral, they need permission from either the secured creditor or the bankruptcy court. See 11 U.S.C. § 363(c)(2) (2006).

[3] See Collier on Bankruptcy, ¶ 6003.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS, 10-6003 Collier on Bankruptcy P 6003.01.

[4] See In re Delco Oil, 599 F.3d at 1257.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at 1263.

[11] 11 U.S.C. § 363(c)(2) (2006).

[12] See In re Delco Oil, 599 F.3d at 1263.

[13] Id.

[14] Id.

[15] Id.

[16] See, e.g.,11 U.S.C. § 503 (2006) (granting priority to administrative expense claims).

[17] See Collier on Bankruptcy, ¶ 6003.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS, 10-6003 Collier on Bankruptcy P 6003.01. Most emergency motions for the use of cash collateral are approved at least on a temporary basis with a more formal hearing scheduled later. See id.