In re JKJ Chevrolet, Inc.

Car dealership JKJ Chevrolet, Inc. (JKJ) (debtor) filed for Chapter 11 bankruptcy in 1991. Ford Motor Credit Corporation (Ford Credit) (creditor) held a first-priority security interest in most of JKJ’s assets. JKJ and Ford Credit entered into consent orders that allowed JKJ to use Ford Credit’s cash collateral so that JKJ could continue operating. The final consent order entered by the bankruptcy court authorized JKJ to use cash collateral to pay JKJ’s employees for work performed before the sale of JKJ’s business in March 1992. The consent order (1) required JKJ to make adequate-protection payments to Ford Credit; (2) required JKJ to grant Ford Credit a security interest in JKJ’s post-petition accounts, inventory, and other assets; and (3) imposed other terms and conditions on JKJ’s use of the cash collateral. Following the March 1992 sale, Ford Credit took control of JKJ’s funds and seized JKJ employees’ paychecks. JKJ sought permission to use the seized funds to pay its employees for the work performed prior to the sale. Ford Credit objected, claiming that the value of its collateral had decreased. At a hearing, the parties presented conflicting evidence regarding Ford Credit’s collateral position. JKJ presented evidence indicating that JKJ had always complied with the consent order’s terms and conditions and that Ford Credit had continuously monitored JKJ’s operations to ensure compliance. The bankruptcy court allowed JKJ to use the cash collateral to pay roughly $209,000 in employees’ salaries and associated expenses. On appeal, the district court remanded and instructed the bankruptcy court to determine whether Ford Credit’s security interest was adequately protected.