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59 Am. Bankr. L.J. 289 (1985)
The Legal Justification for the Proper Use of Cross-Collateralization Clauses in Chapter 11 Bankruptcy Cases

handle is hein.journals/ambank59 and id is 297 raw text is: The Legal Justification for the Proper Use of Cross-Collateralization Clauses in Chapter 11 Bankruptcy Cases by Jeff Bohm* I. INTRODUCTION The use of cross-collateralization clauses to obtain postpetition financing has created disagreement among bankruptcy courts and commentators. Some authorities have argued in favor of their use,' and some courts have approved financing orders containing cross-collateralization provisions.2 Other commentators assert that these agreements violate fundamental prin- ciples of bankruptcy law.3 At least one court has retroactively invalidated a financing order containing a cross-collateralization clause in order to uphold these principles.4 The purpose of this article is twofold: (1) To argue that ample legal basis exists to support recognition of cross-collateralization clauses, and therefore that courts may approve these provisions under certain circumstances; and (2) To suggest what factors courts should consider, and what relative weight should be accorded to each factor, in determining whether or not to approve a cross-collateralization clause. To facilitate these objectives, a description of cross-collateralization provisions, and of the attendant issues they raise, is necessary. *Associate, McGinnis, Lochridge & Kilgore, Austin, Texas. The author gives special thanks to Dean David Epstein and Mr. Mickey Sheinfeld for their comments on this article. The author also wishes to thank William H. Daniel and Frank Oliver of the firm's bankruptcy section for their encouragement in the completion of this article. 'See Ordin, Case Comment, 54 AM. BA.R L.J. 173, 176-180 (1980); Weintraub & Resnick, Cross- Collateralization of Prepetition Indebtedness as an Inducement for Post-Petition Financing: A Euphemism Comes of Age, 14 U.C.C. LJ. 86 (1981). 2Se, e.g., In re Vanguard Diversified, Inc., 31 Bankr. 364 (Bankr. E.D.N.Y. 1983); In re General Oil Distributors, Inc., 20 Bankr. 873 (Bankr. E.D.N.Y. 1982); In re Borne Chemical Co., Inc., 9 Bankr. 263 (Bankr. D.N.J. 1981). 3See Comment, Initial Financing Restrictions in Chapter XI Bankruptcy Proceedings, 78 COLuM. L. R y. 1683, 1693-1699 (1978). 4In re Texlon Corporation, 596 F.2d 1092, 1097-1098 (2d Cir. 1979).

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