Sophisticated vendors would generally agree that the best way to protect against loss is to insist upon payment in advance or on very short terms from a Chapter 11 debtor. What most creditors in this situation do not know, however, is whether the monies they were paid constituted cash collateral and whether the debtor had authorization to use such cash in the first place. The March 2010 decision in Marathon Petroleum Co. LLC v. Cohen ( In re Delco Oil ) from the 11th U.S. Circuit Court of Appeals would suggest that the creditor had better find out before delivering any product if it wants to keep that cash.
The facts in Delco are not complicated. According to the opinion, in 2003, Delco Oil Inc. began purchasing petroleum products from Marathon Petroleum Co. LLC. In 2004, Delco entered into a financing agreement with CapitalSource Finance pursuant to which Delco pledged all rights to its personal property, including collections, cash payments and inventory.
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