In a recent bankruptcy case, the debtor bought goods from the vendor and paid the vendor $1.9 million for the goods.  A court held that the vendor had to return those payments because the payments were not properly authorized by the bankruptcy court.  The payments - for the purchase of inventory from the vendor in the ordinary course of business - were made from the debtor’s operating account, and had to be repaid by the vendor even though the vendor gave the debtor equivalent value in inventory.  This painful lesson for that vendor is a warning to all that a vendor’s obligation to return payments from a bankruptcy debtor is absolute when the payments have not been authorized by the bankruptcy court.  There are no “harmless” or “innocent vendor” exceptions to a bankruptcy trustee’s power to recover such payments.

In a bankruptcy, cash collateral is cash or its equivalent, in which both the debtor and another entity, usually a secured lender, have an interest.  A debtor cannot use its cash collateral unless...