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."

In Southmark, the parent corporation paid a creditor with a check drawn on a concentration account. The cash concentration deposit account was titled solely in the name of the parent corporation. Moreover, the parent corporation had "unfettered" discretion to pay creditors as the parent corporation desired.

The check, however, listed a subsidiary as the remitter. All of that subsidiary's receipts and disbursements were funneled through the concentration account. The receipts and disbursements were separated on the books and records of the parent and its subsidiaries.

The parent corporation subsequently filed bankruptcy and commenced an action to recover the payment as a preference. The creditor asserted that the challenged transfer was not a transfer of the parent corporation's "property." Rather, the creditor argued, the transferred funds belonged to the subsidiary-remitter.

Rejecting the creditor's argument, the Fifth Circuit held that the funds transferred to the creditor were property of the parent corporation. The Court reasoned that the parent corporation held complete legal title, all indicia of ownership, and "unfettered discretion" over the account pursuant to which the parent corporation "could have totally depleted the [cash concentration] account to pay its own creditors . . without regard to any . . . subsidiary's contribution to or balance remaining in the account." The Court stated that "[t]his last point is particularly important, as the primary consideration in determining if funds are [the debtor's] property . . . is whether the payment of those funds diminished the resources from which the debtor's creditors could have sought payment."

Although the Fifth Circuit held that the transferred funds were property of the parent corporation, the Fifth Circuit did not hold that the subsidiary had no interest in the funds. Rather, the Court noted that it was treating the funds as the parent corporation's property "whether or not the parent corporation "actually own[ed] the funds." The extent of the subsidiary's rights in the funds in the account was not further discussed.

In In re Amdura Corp., 75 F.3d 1447 (10th Cir. 1996), the Tenth Circuit considered a subsidiary's rights to funds in a concentration account. Specifically, the Tenth Circuit considered whether funds in a concentration account were property of the bankrupt parent corporation or its bankrupt subsidiary. The subsidiary sought an order (i) enjoining the parent corporation from paying such funds to the parent corporation's creditors and (ii) requiring the parent corporation to turn over such funds representing the subsidiary's balance in the account.

The parent corporation was a holding corporation that provided certain management, accounting and financial services to its subsidiaries. As part of its cash management system, the parent corporation concentrated its subsidiaries' receipts in a single deposit account. The account was held solely in the parent corporation's name. The parent corporation had "complete control" over the concentration account, including the right to disburse such funds without regard to "whose money" it was spending.

The parent corporation paid its expenses, and its subsidiaries' expenses, from the concentration account without regard to the amount of funds each subsidiary deposited therein. The debtors' books and records, however, did account for the deposits made by, and expenses paid on behalf of, each subsidiary. As of the petition date, the subsidiary had a balance of approximately $1,700,000 in the cash concentration account.

The Tenth Circuit denied the subsidiary's requests for relief. The Court relied upon the fact that the receipts deposited into the concentration account were not segregated, but rather were commingled. The Court also relied upon the parent corporation's complete control over the account to conclude that the subsidiary did not own the funds in the concentration account.