Evolution Credit Partners v. First Brands Group LLC (In re First Brands Group LLC), 26-73 (S.D. Tex. Jan. 31, 2026)
Cash Collateral Motions Can’t Rule on the Validity/Invalidity of a Secured Claim
So long as the lender has made a prima facie showing of lien validity, the lender is entitled to adequate protection, a Houston district judge says.
If a secured creditor makes a prima facie showing that the security interest in valid, the creditor “is entitled to adequate protection [for the use of cash collateral] until an adversary proceeding determines the validity, extent, and priority of the asserted property interest,” according to an appellate ruling by District Judge Lee H. Rosenthal of Houston.
Judge Rosenthal’s January 31 opinion means that the bankruptcy court may not consider the likelihood of success on the merits about the validity of the security interest when it comes to granting the use of cash collateral.
The appeal stemmed from the chapter 11 reorganization of First Brands Group LLC begun in Houston in late September. According to unverified news reports, the debtor may have sold or financed the same receivables several times or financed receivables that did not exist.
Under Section 363(c)(2), the debtor sought to use $63 million in cash collateral. Judge Rosenthal described the secured creditor as objecting on the grounds that not enough would remain after usage of cash collateral to satisfy its asserted secured claim of $60.5 million.
The bankruptcy court authorized the use of $60 million in cash collateral. Judge Rosenthal described the bankruptcy court as finding that $49 million would remain in the receivables account after usage of cash collateral. The lender contended that the account would then be $20 million short of protecting its claim in full.
Judge Rosenthal said that “the bankruptcy court did not definitively rule on the validity or nature of [the lender’s security interest] and cautioned that its assessment was preliminary.” Judge Rosenthal went on to say that the bankruptcy court “was not convinced that [the lender] had priority over other creditors.” However, she described the bankruptcy court as authorizing “the release of the funds because, whoever held the priority interest, that interest was adequately protected.”
The lender appealed. Judge Rosenthal granted an expedited hearing.
Procedure on Interim Cash Collateral Usage
Appointed by Chief Justice Roberts in 2007, Judge Rosenthal chaired the Judicial Conference Committee on Rules of Practice and Procedure. Not surprisingly, her opinion focuses on procedure.
Before turning to procedure, Judge Rosenthal cited Section 363(c)(2) for prohibiting a debtor from using cash collateral unless, “after notice and a hearing, [the bankruptcy court] authorizes such use . . . in accordance with the provisions of this section.” Then, Section 363(e) kicks in to provide that the court must “condition such use, sale, or lease as is necessary to provide adequate protection of such interest.”
Turning to procedure, Judge Rosenthal alluded to Bankruptcy Rule 4001(b)(2). “After a preliminary hearing,” the rule provides in part that “the court may authorize using only the cash collateral necessary to avoid immediate and irreparable harm to the estate pending a final hearing.”
In the case on appeal, Judge Rosenthal said,
The bankruptcy court did not consider its ruling authorizing [the debtor] to use up to $60 million in funds to be an “interim” determination. . . . Nor did the bankruptcy court make findings that allowing [the debtor] to use the funds was necessary to avoid immediate and irreparable harm to the estate pending a final hearing . . . . The ruling allowing [the debtor] to spend up to $60 million in cash collateral was a final determination under § 363(e).
Further on procedure, Judge Rosenthal said “that bankruptcy courts ruling under § 363(e) may conduct some examination of lien validity,” because Section 363(p)(2) provides that “the entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of such interest.”
Judge Rosenthal cited cases where “[c]ourts appear to resolve some disputes under § 363(e) on the ground that the entity asserting a property interest could not bear its burden of proving that interest.” However, she said that those cases were in tension with the Bankruptcy Rules and other case law, which suggest that, in the absence of an adversary proceeding, bankruptcy courts addressing requests for relief that raise questions about an asserted property interest should assess only whether the party asserting the interest has made a prima facie showing of the validity and scope of that interest. Consistent with this limited burden, courts may consider whether there is evidence that “clearly refutes a creditor’s claim to the property.”
Quoting the Eighth Circuit Bankruptcy Appellate Panel, Judge Rosenthal said that “the substantive consideration of such evidence should stop as soon as it appears that the” party asserting the property interest “has a ‘colorable claim’ to the property in question.”
Judge Rosenthal explained why the court cannot determine the validity of a lien on a cash collateral motion:
Permitting a broader or deeper inquiry into the validity of an asserted property interest at a preliminary hearing on the use of cash collateral would bypass Rule 7001(b)’s general requirement that parties must challenge lien validity through an adversary proceeding, not an adequate protection hearing.
Judge Rosenthal gave further justification for her ruling:
Weighing the likelihood of success on the merits of establishing a secured interest against the likelihood of success in showing that available cash collateral would adequately protect that interest would also bypass § 363(c)(3)’s and Rule 4001(b)(2)’s rules and regulations for preliminary hearings on the use of cash collateral.
Judge Rosenthal therefore held:
[A]bsent clear evidence or legal precedent that refutes the claimant’s right to an asserted property interest, the claimant is entitled to adequate protection until an adversary proceeding determines the validity, extent, and priority of the asserted property interest.
On Remand
Based on the record as of the time of the cash collateral hearing, Judge Rosenthal decided that the lender was not adequately protected because the account would not contain sufficient funds to cover the lender’s $60.5 million claim. During the appeal, however, the debtor had submitted later-developing facts tending to show that the collection of receivables after filing was replenishing the account with funds to cover the claim in full.
Judge Rosenthal did not reverse. Rather, she remanded for the bankruptcy court to conduct further proceedings in accordance with her order, including, “appropriate procedures” to determine whether the lender had a valid and enforceable lien and whether the lender was adequately protected by the collection of accounts receivable.
If the bankruptcy court on remand finds adequate protection, Judge Rosenthal said that the court “must state specifically what funds or other property, whether currently in the estate or projected to be in the estate (and on what basis), adequately protect [the lender].”