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In Re Wright Group, Inc.

United States Bankruptcy Court, N.D. Indiana
443 B.R. 795, 2011 WL 570019, 2011 Bankr. LEXIS 505 (2011)
ELI5:

Rule of Law:

Revenue from a license to use real property that is paid immediately in cash constitutes "money" under the Uniform Commercial Code. A security interest in money is only perfected by the secured party's physical possession of it; without possession, the interest is unperfected and the funds do not qualify as a creditor's "cash collateral" in bankruptcy.


Facts:

  • The Wright Group, Inc. (Wright) operated an amusement facility that included a miniature golf course.
  • Fifth Third Bank (Fifth Third) had a security agreement with Wright that granted it a security interest in Wright's assets, including all 'monies' and 'cash'.
  • Patrons paid a pre-designated fee in cash to Wright before being allowed access to play on the course.
  • This transaction was a simultaneous exchange of cash for a license to use the real property; no credit was extended and no 'account' was created.
  • As part of the fee, patrons could use a putter, golf ball, scorecard, and pencil, but this was incidental to the primary transaction of accessing the course.
  • Wright collected and maintained possession of all cash receipts from the miniature golf operation; Fifth Third never had physical possession of this money.

Procedural Posture:

  • The Wright Group, Inc. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Indiana.
  • Wright, as debtor-in-possession, filed an 'Emergency Motion for Use of Fifth Third Bank’s Cash Collateral'.
  • In its motion, Wright argued that the revenue from its miniature golf facility was not cash collateral belonging to Fifth Third.
  • The bankruptcy court entered interim orders allowing Wright to use undisputed cash collateral while reserving judgment on the miniature golf receipts.
  • The court held a final evidentiary hearing to determine whether the miniature golf receipts constituted Fifth Third's cash collateral.

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Issue:

Do the cash receipts derived by a debtor from the operation of its miniature golf course facility constitute the secured creditor's 'cash collateral' under 11 U.S.C. § 363(a) when the creditor does not have physical possession of the money?


Opinions:

Majority - J. Philip Klingeberger

No. The cash receipts derived by Wright from patrons of its miniature golf course facility do not constitute 'cash collateral' as defined by 11 U.S.C. § 363(a). The court reasoned that the transaction between Wright and its patrons is a license to use real property, not a lease of equipment or the creation of an 'account' under the Uniform Commercial Code (UCC). The resulting payment is properly classified as 'money.' Under Indiana's UCC (IC 26-l-9.1-312(b)(3)), a security interest in money can only be perfected by the secured party taking physical possession. Since Fifth Third never possessed the cash receipts, its security interest was unperfected. An unperfected security interest is avoidable by the debtor-in-possession under the 'strong-arm' powers of 11 U.S.C. § 544(a)(2), and therefore cannot form the basis for a 'cash collateral' claim. Additionally, pursuant to 11 U.S.C. § 552(a), Fifth Third's security interest does not attach to any revenues generated after Wright filed for bankruptcy because the receipts are not 'proceeds' of pre-petition collateral.



Analysis:

This decision clarifies the characterization of revenue from businesses that grant licenses for the use of property, such as amusement parks or event venues. It establishes that immediate cash payments for such licenses are 'money' under the UCC, not 'accounts' or 'proceeds' of other collateral. The ruling underscores the critical importance of possession for perfecting a security interest in cash, creating a significant distinction from perfecting interests in accounts receivable via filing a financing statement. This precedent serves as a caution to lenders for cash-intensive businesses, indicating that without a mechanism to take possession of daily cash receipts (e.g., a deposit account control agreement), their security interest in that cash flow is vulnerable in bankruptcy.

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