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In Re Carbone Companies, Inc.

United States Bankruptcy Court, N.D. Ohio
2008 Bankr. LEXIS 2827, 2008 WL 4761970, 395 B.R. 631 (2008)
ELI5:

Rule of Law:

A debtor in bankruptcy provides 'adequate protection' for a secured creditor's interest in cash collateral, as required for its use under § 363 of the Bankruptcy Code, by demonstrating through credible evidence that its continued business operations will not diminish, but will likely increase, the value of that collateral.


Facts:

  • On August 1, 2004, R.P. Carbone Company (later Carbone Companies) obtained a $15,000,000 loan from Fifth Third Bank (the Bank).
  • To secure the loan, R.P. Carbone granted the Bank a security interest in substantially all of its assets, including accounts, equipment, and cash.
  • On June 17, 2008, R.P. Carbone defaulted on the loan.
  • Following the default, the Bank ceased negotiations for a forbearance agreement and swept the Debtors' bank accounts.
  • The sweep left the Debtors unable to pay operating expenses, including payroll and taxes.
  • On August 1, 2008, the Bank obtained a state court judgment against the Debtors for approximately $15 million.
  • On September 3, 2008, the Bank notified Carbone Companies that it was beginning to execute on its judgment.
  • Carbone Companies is a construction business with 13 ongoing projects and six additional projects pending startup.

Procedural Posture:

  • Carbone Companies, Inc. and Carbone Properties, LLC ('Debtors') filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Ohio.
  • The Debtors filed a motion seeking authorization to use the cash collateral of their secured lender, Fifth Third Bank ('Bank').
  • The Bank filed an objection, arguing its interest was not adequately protected.
  • The Official Committee of Unsecured Creditors also filed an objection.
  • Following a preliminary hearing, the court granted the Debtors interim, limited authority to use the cash collateral.
  • The court then held a final evidentiary hearing on the Debtors' motion for final authorization to use cash collateral.

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Issue:

Does a debtor in bankruptcy provide adequate protection for a secured creditor's interest in cash collateral by presenting credible financial projections showing that the proposed use of the collateral in business operations will result in an increase, rather than a decrease, in the collateral's value?


Opinions:

Majority - Randolph Baxter

Yes. A debtor provides adequate protection for a secured creditor's interest by demonstrating that the proposed use of cash collateral will not result in a decrease in the value of the creditor's interest. Here, the Debtors met their burden of proof by presenting credible, uncontroverted expert testimony and financial projections. This evidence showed that the Debtors' net cash flow and accounts receivable were projected to increase over the next three months due to continued operations. Furthermore, the Debtors' actual performance in the prior month exceeded their projections, lending credibility to their future forecasts. Because the evidence indicated the Bank's cash collateral would increase, not diminish, through the Debtors' proposed use, the Bank's interest was deemed adequately protected.



Analysis:

This case provides a clear example of how the 'adequate protection' standard is applied in cash collateral disputes under the Bankruptcy Code. It establishes that protection is measured by whether the value of the creditor's collateral is preserved, not by whether the creditor consents. The decision underscores that a debtor can overcome a creditor's objection by presenting strong, credible financial projections that demonstrate continued operations will enhance, rather than erode, the creditor's position. This sets a precedent that a viable business plan showing future profitability can itself serve as a form of adequate protection, allowing a debtor the breathing room needed to reorganize successfully.

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