Objecting to a Debtor’s Use of Cash Collateral in Bankruptcy

When a produce company files a chapter 11 bankruptcy case, one of the first questions my PACA trust creditor clients ask is whether the debtor will be able to keep any cash it may have in the bank or any cash it receives from collecting its accounts receivable.

The answer is that the debtor almost always has a bank or other secured creditor which holds a lien on substantially all of its assets.  Property like inventory, machinery and equipment and the like is called hard collateral.  Such items can be used and sold in the ordinary course of business in a chapter 11 case.

Liquid assets, like cash, bank accounts, and accounts receivable, however, are a different matter.  These are called “cash collateral.”  And cash collateral may not be used over the objection of a secured party without a court order.  This order is called the “cash collateral order.”   Simply put, the purpose of a cash collateral order is to allow the debtor to utilize its cash collateral even though the cash collateral is subject to the liens of a secured party.  To do this, the debtor must provide its secured lenders with adequate protection (e.g. replacement liens in post-petition assets, super-priority administrative claims, etc.) necessary to facilitate the use of the cash collateral.  Because the debtor’s ability to use its cash collateral is critical to its ability to successfully emerge from a chapter 11 filing, debtor’s counsel often seek court approval of a cash collateral order on the very first day of the bankruptcy filing.

If you are a PACA trust creditor, you must be mindful of the cash collateral order process because there are almost never any provisions included in a cash collateral order that protect the rights of the PACA trust creditors.  As a result, a savvy PACA trust creditor will immediately object to the debtor’s use of cash collateral and create a seat at the negotiating table for the PACA trust creditors.  A well advised PACA trust creditor understands the debtor’s obligations under PACA and will generally make the following objections to debtor’s use of cash collateral:

1. The scope of the PACA trust covers the debtor’s cash collateral as a matter of law
2. PACA trust assets are not property of the debtor’s estate
3. The debtor cannot use non-estate property as cash collateral
4. The debtor cannot use PACA trust assets as collateral for post-petition financing

A timely filed objection to a debtor’s attempt to obtain a cash collateral order will often result in the full and immediate payment of the PACA trust claim.  When that is not possible, the objecting PACA trust creditor will have the ability to either seek adequate protection (just like a secured party) from both the debtor and its secured creditors or force the case to convert to a chapter 7 liquidation case.  Remember, a chapter 11 case will not stand if there are no estate assets to administer.

Key Point: If the PACA trust creditors do not act quickly when they are notified of a produce buyer’s insolvency, the debtor will obtain a cash collateral order that does not include any protections for PACA trust creditors.  If that happens, the cash collateral order will allow the debtor to use trust assets (the Court won’t know unless someone speaks up) to administer its estate, obtain DIP financing, and otherwise place trust assets out of the PACA trust creditors reach (e.g. paying pre-petition wages, etc.)

The Packer Quoted Jason Klinowski in its Delta Produce Update Article

On November 2, 2012, U.S. Bankruptcy Court Judge John Akard made an unprecedented ruling that denied all but $25,000.00 of over $200,000.00 in attorneys’ fee applications from various PACA trust creditors.  In support of this ruling, the Court held that “because the case is being handled in bankruptcy court, unsecured creditors are not entitled to attorney fees incurred after the debtor files for bankruptcy protection.”  Judge Akard further stated for the record that:

What we are seeing here, I think, is a bunch of vultures coming in and asking for fees and wasting time.

See The Packer: Judge Denies Most Attorney Fees in Delta Produce PACA Case

Quoting Jason Klinowski, The Packer stated that the court’s ruling could have “chilling effects” on the produce industry and that the ruling was both “dangerous” and “anti-industry.”  Jason Klinowski further opined that “the PACA claimants did everything there were supposed to do to recover these funds.”

This ruling is currently the subject of various motions to reconsider and an appeal.  The main thrust of these pleadings will focus on the fact that the court failed to appreciate and consider the impact of the PACA trust on the court’s administration of the Debtor’s estate.  Specifically, PACA trust assets are not considered property of the Debtor’s estate and, therefore, the court should not handle PACA trust claims as unsecured claims against the Debtor’s estate.  Rather, the court must treat the PACA trust creditors’ claims as trust claims against a common pool of PACA trust assets that are separate and apart from the Debtor’s estate.

The Packer Quoted Jason Klinowski in its Adams Produce Settlement Announcement Article

On October 22, 2012, U.S. Bankruptcy Court Judge Tamara Mitchell cleared the way for 48 produce companies to be paid in excess of $8 million dollars in the Adams Produce case.

Quoting Jason Klinowski, The Packer announced the settlement and commented on how the attorneys involved in this case “were very smart about where to draw the line about what to fight over and when to agree.”

See The Packer: Adams Produce to pay $8 million in PACA claims

On a more personal note, counsel for the Debtor (Chris Carson) worked very hard to make sure the PACA claims were handled properly and his efforts were key to the speed at which this large case was settled.  Quoting Larry Meuers, The Packer noted that the Adams Produce “case could have died several times, been converted to a Chapter 7 liquidation or drug out for more than a year.”  The attorneys involved in this case made sure none of that happened because there was no reason for it occur.

PACA Proofs of Claim Due in the Adams Produce Bankruptcy

For those interested, the PACA Claims Procedure Order entered in the Adams Produce Bankruptcy established August 3, 2012 (Today!) as the deadline to file all PACA proofs of claim .  Any party that fails to file their PACA proof of claim by will be forever barred from asserting a PACA claim.

All PACA Trust Creditors must file a  PACA proof of claim no later than today, Friday, August 3, 2012. 

Once all of the PACA claims are asserted, the parties will begin the process of identifying the valid claims and eliminating all others.  Afterwards, the real amount of the PACA trust debt will be known and distributions will follow shortly thereafter.  As with most PACA cases, the validation process is critical because all of the Debtor’s unsecured creditors are waiting to see if there will be enough assets left to pay administrative claims and other unsecured obligations.   The answer to this question will come in the next few months.

Jason Klinowski Quoted in The Packer’s Updated Article on Adams Produce

The Packer quoted Jason Klinowski in its 7/12/2012 updated article announcing the entry of an Agreed Order Establishing a PACA Claims Procedure in the $50 million dollar Adams Produce bankruptcy case, which involves over $16 million in secured debt.

See: PACA Claims Due in Adams Produce Case

In this article, The Packer noted that: “Attorney Jason Klinowski, from Freeborn & Peters in Chicago, and Larry Meuers of Meuers Law Firm in Naples, Fla., represent produce companies seeking payment from Adams and were key players in the development of the plan. They worked with lawyers representing Adams, PNC Bank and other parties to resolve how the PACA claims should move forward.”  Id.

The article also quoted Jason as saying: “Getting the PACA trust beneficiaries paid quickly was our No. 1 priority,” Klinowski said. “A lot of good attorneys worked through some tough issues … Having been intimately involved in that process, I can tell you that it is not only a solid work product but the best way to get the PACA trust beneficiaries paid quickly.”  Id.

With the PACA Claims Procedure in place, here are some critical dates of interest:

EVENT	DEADLINE
Bankruptcy Proof of Claim Deadline	July 6, 2012
PACA Proof of Claim Deadline:	August 3, 2012
PACA Trust Asset Report Deadline:	August 3, 2012
Deadline to Object to PACA Proofs of Claim:	August 24, 2012
Deadline to Object to PACA Trust Asset Report:	August 24, 2012
Deadline to Schedule Meet and Confer:	August 31, 2012
Deadline to Meet and Confer:	September 14, 2012
Deadline to Notify Debtor of Result of Meet and   Confer Conferences:	September 17, 2012
Deadline to file Meet and Confer Report:	September 21, 2012
Deadline to Respond to Claim Objections:	September 28, 2012
Deadline to File PACA Trust Distribution Report:	October 5, 2012
Deadline to Object to PACA Trust Distribution   Report:	October 12, 2012
Deadline to Make First Interim Distribution:	October 19, 2012
Mediation Date for Disputed Claims and Disputed   Assets:	October __, 2012
Deadline to File Motion to Determine Disputed   Claims and Assets	December 7, 2012

Proofs of Claim Due in the Adams Produce Bankruptcy

Although the Court is set to establish a PACA Claims Procedure on July 9, 2012, the deadline to file all proofs of claim (PACA and non-PACA alike)  is July 6, 2012.  Importantly, any party that fails to file their proof of claim by July 6, 2012 will not be able to file their PACA proof of claim after the Court enters an approved order as the July 6, 2012 date is a statutory date.  Please do not be confused.

ALL creditors must file a proof of claim on or before July 6, 2012. 

In addition to meeting the July 6, 2012 deadline, the PACA creditors will be required to file a special PACA Proof of Claim as outlined in Judge Mitchell’s  forthcoming order.  Simply put, the PACA creditors need to be prepared to file two separate proofs of claim.  Any PACA creditor who fails to file any one of the two proofs of claim runs the risk of having the Court deny its claim.  Those familiar with this case can tell you that these dates are going to come fast.  Please do not wait to assert your rights.

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

On May 21, 2012, Judge Mitchell of the U.S. Bankruptcy Court for the Northern District of Alabama rejected a proposed settlement in the Adams Produce Bankruptcy, which the Court identified as a case of “national interest.”

On May 22, 2012, The Packer published an article outlining Judge Mitchell’s reasons for rejecting the proposed settlement, which can be found here:

Judge Rejects Deal from Adams Produce, PNC Bank and Pro*Act

Echoing Jason Klinowski and Brian Jackiw of Freeborn & Peters’ objections to the proposed settlement, the Court cited the “lack of financial statements,” the lack of “schedules, statement of affairs and a full creditors’ matrix.”  As key reasons the Court would not approve the proposed settlement.  The Court went further to say that “we know very little about this company” and we are only “three weeks and three days into this case.”  Simply put, settlement was both premature and overreaching given the timing and all of the conditions contained in the proposal.

Judge Mitchell, agreeing with counsel from Freeborn & Peters, also took issue with the liability releases contained in the proposed settlement agreement.  Specifically, the Court noted that the “deal would have benefitted PNC Bank because it would get other creditors off the books, clearing the way for it to receive payment on a $5 million lien it claims to have against Adams Produce.”    Jason Klinowski and Brian Jackiw of Freeborn & Peters were not willing to allow their clients to sign away their future rights and the Court clearly agreed!

Jason Klinowski Quoted in The Packer’s Updated Article on Adams Produce

The Packer quoted Jason Klinowski in its 5/18/2012 updated article discussing the battle over a proposed settlement in the Adams Produce bankruptcy case, which involves the Debtor, PNC Bank and certain PACA creditors.

See:  Future Recovery Rights at Heart of PACA Case

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several other PACA trust creditors.  Steve Leara and Jay Clark of Wallace, Jordan, Ratliff & Brandt LLC are an important part of the PACA creditors’ opposition to the proposed settlement and have filed their client’s opposition jointly with Klinowski and Jackiw.   Similarly, Jason Read of Rynn & Janowsky LLP and Howard Spector of Spector & Johnson PLLC have each filed pleadings in opposition to the proposed settlement.

Oral arguments in this highly publicized case will be held on Monday, May 21, 2012 at 10:30 a.m. in the U.S. Bankruptcy Court for the Northern District of Alabama, which is located in Birmingham, Alabama. 

Jason Klinowski Quoted in The Packer’s Recent Article on Adams Produce

 

The Packer quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Adams Produce: Bankruptcy Deal Could Hamper PACA Creditors

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.

Jason Klinowski Cited in The Produce News’ Recent Article on Adams Produce

The Produce News quoted Jason Klinowski in its 5/17/2012 article discussing the rapidly unfolding battle over a proposed settlement in the Adams Produce bankruptcy case.

See:  Creditors Battling Over Potential Adams Produce Settlement

Jason Klinowski and Brian Jackiw of Freeborn & Peters LLP are leading the opposition to the proposed settlement on behalf of several PACA trust creditors.