Overview

Companies that plan to sell goods or services to a debtor in bankruptcy should be aware of a recent US case decided by the Court of Appeals for the Eleventh Circuit, holding that a trustee may avoid a debtor's post-petition transfers of cash collateral if such transfers were made without the consent of the secured party or court order.

Delco Oil, a manufacturer of motor fuel and related products, began purchasing petroleum products from Marathon Petroleum Company in 2003 pursuant to a sales agreement. In April 2006, Delco entered into a financing agreement with CapitalSource Finance in which CapitalSource agreed to provide financing to Delco in exchange for Delco's pledge of all rights to Delco's personal property, including collections, cash payments and inventory.

On October 17 2006, Delco filed for voluntary relief under Chapter 11 of the Bankruptcy Code. On the same day, Delco filed an emergency motion with the bankruptcy court requesting authorization to use cash collateral to continue its operations. At the first-day hearing, the bankruptcy court approved Delco's request to continue its business as a debtor-in-possession. With respect to the motion for authority to use cash collateral, however, the court did not make a decision until November 6, 2006—almost three weeks after the petition date—on which date, the bankruptcy court denied the motion. Between October 18th and November 6th, Delco distributed over US$1.9 million in cash to Marathon in exchange for petroleum products pursuant to the sales agreement.

In December 2006, Delco voluntarily converted its Chapter 11 reorganization to a case under Chapter 7. Upon the appointment of Aaron R. Cohen as Chapter 7 trustee, an adversary proceeding was commenced against Marathon to avoid the post-petition cash transfers.

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