In Re LTV Steel Company, Inc.
274 B.R. 278, 2001 Bankr. LEXIS 131, 37 Bankr. Ct. Dec. (CRR) 137 (2001)
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Rule of Law:
A bankruptcy court may authorize a debtor to use cash collateral from assets involved in a disputed 'true sale' transaction on an interim basis, even over a creditor's objection, when such use is essential for the debtor's immediate survival and the creditor's interest is adequately protected pending a final determination of ownership.
Facts:
- LTV Steel Company, Inc. ('Debtor') is a large, integrated steel manufacturer.
- In 1994, Debtor created a wholly-owned subsidiary, LTV Sales Finance Co. ('Sales Finance').
- Debtor entered into an agreement purporting to sell all of its accounts receivables to Sales Finance on an ongoing basis.
- Abbey National Treasury Services PLC ('Abbey National') loaned $270 million to Sales Finance, receiving a security interest in the receivables.
- This financing structure, an asset-backed securitization (ABS), was specifically designed to protect Abbey National's collateral from being included in a potential bankruptcy estate of the Debtor.
- Debtor later created another subsidiary for a similar inventory financing arrangement with other lenders.
- Facing a severe financial crisis, Debtor determined it would have to cease all operations immediately if it could not use the cash generated from its receivables and inventory.
Procedural Posture:
- LTV Steel Company, Inc., and 48 of its subsidiaries ('Debtor') filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.
- On the same day, Debtor filed a motion seeking an interim order authorizing its use of cash collateral, which consisted of accounts receivables and inventory allegedly owned by its non-debtor subsidiaries.
- After a first-day hearing, the Bankruptcy Court entered an interim order permitting Debtor to use the cash collateral.
- The order provided the secured lenders, including Abbey National, with adequate protection in the form of replacement liens on post-petition assets and weekly interest payments.
- Abbey National filed an emergency motion to modify the interim cash collateral order nunc pro tunc.
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Issue:
Does a bankruptcy court err in refusing to modify an interim order that allows a Chapter 11 debtor to use cash proceeds from assets allegedly sold in an asset-backed securitization, where the creditor argues it was denied due process, the assets are not property of the bankruptcy estate, and its interests are not adequately protected?
Opinions:
Majority - William T. Bodoh
No. A bankruptcy court's interim order authorizing a debtor's use of cash collateral will not be modified where the creditor received constitutionally sufficient notice, the debtor possesses at least an equitable interest in the property, the creditor's interest is adequately protected, and the equities heavily favor the debtor's continued operation. The court analyzed Abbey National's motion under the standard for relief from judgment in Fed. R. Civ. P. 60(b). Regarding due process, the court found that Abbey National's agent had actual notice of the hearing, an opportunity to object, and that extensive post-deprivation procedures were available, satisfying the Mathews v. Eldridge test. On the property of the estate issue, the court concluded that pending a full evidentiary hearing on whether the transaction was a 'true sale,' the Debtor retained at least an equitable interest in the receivables it generated, which is sufficient to bring them into the estate under § 541 for interim purposes. Finally, the court determined Abbey National's interest was adequately protected by replacement liens on post-petition assets that were creating a significant equity cushion, and that the catastrophic economic consequences of a shutdown far outweighed Abbey National's interest in immediate enforcement of its rights.
Analysis:
This decision highlights the immense equitable power of bankruptcy courts during the critical first days of a major Chapter 11 reorganization. It establishes that sophisticated, 'bankruptcy-proof' structured financing vehicles, like asset-backed securitizations, are not inviolable and can be temporarily subordinated to the primary goal of preserving a debtor as a going concern. The court's willingness to find a debtor's 'equitable interest' sufficient to bring assets into the estate for an interim order creates a significant precedent, allowing debtors crucial breathing room while deferring complex ownership disputes. This approach strengthens the debtor's hand in early negotiations and affirms the court's role in balancing creditor rights against the public interest in preventing economic collapse.
