Cash Concentration Accounts in Bankruptcy: "Property" of a Parent Corporation or its Subsidiaries

CASH CONCENTRATION ACCOUNTS IN BANKRUPTCY: "PROPERTY" OF A PARENT CORPORATION OR ITS SUBSIDIARIES

Parent corporations and their subsidiaries have increasingly deposited their funds into cash concentration accounts as part of their cash management programs. Where a parent corporation and its subsidiaries file bankruptcy, disputes often arise concerning their respective rights in such a concentration account. Two United States Courts of Appeals have recently decided such disputes.

In 1995, the United States Court of Appeals for the Fifth Circuit considered in In re Southmark Corporation, 49 F.3d 1111 (5th Cir. 1995), whether a concentration account constituted "property" of the bankrupt parent corporation for purposes of the parent corporation's action to recover a "preference." Generally, a preference is a payment made by an insolvent debtor to an undersecured creditor within 90 days preceding the debtor's bankruptcy. To recover a preference, a debtor must establish, inter alia, that the challenged payment involved the debtor's "property."