Opinion ID: 491041
Heading Depth: 2
Heading Rank: 2

Heading: Post-Petition Accounts Receivable

Text: 29 The bankruptcy court held that debtor violated 11 U.S.C. Sec. 363(c)(2) 3 because it used cash collateral derived from collection of accounts receivable purportedly covered by Freightliner's security interest without a court order or Freightliner's consent. Unless the Trustee gets a court order or consent, he is obligated to segregate and account for any cash collateral in his possession, custody, or control. 11 U.S.C. Sec. 363(c)(4). 4 Because the Trustee failed to perform his duties under Sec. 363, the court found that the parties were prevented from tracing the proceeds of Freightliner's collateral or establishing the level of Freightliner's receivables collateral at the time of the filing of the bankruptcy petition. The bankruptcy court concluded, therefore, that Freightliner had a security interest in all of debtor's pre- and post-petition accounts receivable. 30 The underlying proceeding in this appeal was commenced by a complaint for relief from an automatic stay. 11 U.S.C. Sec. 362(g) provides: 31 In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section-- 32 (1) The party requesting such relief has the burden of proof on the issue of the debtor's equity in property; and 33 (2) The party opposing such relief has the burden of proof on all other issues. 34 In this proceeding, the bankruptcy court shifted the burden of proof on all issues to the Trustee. The basis for the shift was the court's view that debtor improperly used cash collateral in violation of Sec. 363(c)(2). The court concluded that the burden of proof on the issue of tracing the accounts receivable was most fairly placed on the Trustee because his predecessor's (debtor's) breach of duty resulted in the inability to trace the proceeds derived therefrom. The court found that the Trustee failed to meet his burden of proof (i.e., that pre-petition receivables were not being used after entry of the cash collateral orders.) The court enforced Freightliner's security interest in all of debtor's pre- and post-petition accounts. 35 Trustee for the debtor argues that Freightliner consented to use of the cash proceeds after filing occurred and therefore there was no violation of Sec. 363. As a consequence, he argues, the court erred in shifting the burden of proof to the Trustee on all issues. Furthermore, argues the Trustee, if Freightliner had properly had the burden of proof, it would have been unable to prove that pre-petition receivables were still being used after entry of the cash collateral orders. Therefore, Freightliner should not have been given a security interest in all of debtor's pre- and post-petition receivables. 36 Both sides agree that Freightliner did not give actual consent to the Trustee to use the cash collateral. Nor did the Trustee get court authorization to do so--at least not until it requested the cash collateral orders after defaulting on its payments. 5 The Trustee argues that Freightliner either gave its implied consent or is estopped by its actions from denying consent. The Trustee points to Freightliner's conduct after the petition was filed as proof of consent. He argues that Freightliner knew of debtor's operations and knew that the money which had been used to pay Freightliner each month came from proceeds of its collateral. According to the Trustee, Freightliner's acceptance of debtor's monthly payments indicated its consent to that continued use and its satisfaction with the receipt of those monthly payments as adequate protection. Therefore, because Freightliner failed to object, it cannot now complain about debtor's use of the cash collateral. 37 First, we find that the purposes underlying Sec. 363(c)(2) & (4) require that a debtor seek affirmative express consent from all parties involved before using cash collateral. See 2 Collier on Bankruptcy, 363.02 (15th ed. 1986) (the protection offered by Sec. 363(c)(2) is in recognition of the unique nature of cash collateral and the risk to the entity with an interest therein arising from the consumption of the collateral in a rehabilitative effort in bankruptcy.); 2 Collier on Bankruptcy, 363.04 (It was recognized that due to the unique nature of cash collateral, specific protections should apply to prevent its dissipation, leaving the court and the entity with an interest therein with a fait accompli.). Without deciding whether Freightliner, by its actions, gave debtor its implied consent to use the cash collateral or is estopped from denying such consent, we find implied consent to be insufficient to satisfy the requirements of Sec. 363(c)(2). 38 Second, we find that notions of equity and fairness support the bankruptcy court's shift of the burden of proof on the issue of tracing to the Trustee. See United States v. Hayes, 369 F.2d 671, 676 (9th Cir.1966). This is especially true where, as here, the Trustee's predecessor, the debtor's, breach of duty has created the confusion preventing proof of the issue. See id.