IRS’ Replacement Lien On Cash Collateral Extends to Debtor’s 363 Sale Proceeds As a result of several years of unpaid federal taxes, the IRS obtained

IRS’ Replacement Lien On Cash Collateral Extends to Debtor’s 363 Sale Proceeds As a result of several years of unpaid federal taxes, the IRS obtained

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lien on all of a debtor’s prepetition property. After the debtor filed a voluntary chapter 11 petition, it requested court authorization to use cash collateral. To provide adequate protection, the debtor proposed to grant postpetition replacement liens in the same amounts and priority as the secured sarties’ existing rights in the cash collateral. The request was granted.

The bankruptcy court subsequently approved the debtor’s request to sell substantially all of its assets under 11 U.S.C. 363, as well as a stipulation between the IRS and the debtor, under which the sale proceeds would be distributed first to the secured lender, second to cover certain administrative expenses, and third to the IRS.

On appeal, the Unsecured Creditors Committee challenged the approval of the 363 sale as well as the approval of the IRS stipulation. According to the UCC, the sale proceeds did not qualify as cash collateral and thus were not subject to the IRS’ post-petition replacement liens. The BAP disagreed, concluding that, under section 363(a), cash collateral includes cash, cash equivalents, and proceeds.

The UCC also argued that account receivables and work-in-progress were not cash collateral, which meant that the proceeds attributable to the sale of those assets were not subject to the IRS' lien. The BAP rejected that position because, under California law, accounts receivable are generally considered to be cash collateral.

Similarly, it noted that because the IRS had a lien on all the debtor’s prepetition assets, including the debtor’s work-in-progress, such lien extended to the proceeds acquired from their disposition.