Uncuffing the Debtor: Developing Approaches to § 345(b)

By Lisa Bittle Tancredi

Section 345(b) of the Bankruptcy Code creates a tension between the need to preserve assets of the estate and the need to maximize liquidity and minimize operational disruption. Parties and courts have long struggled to ensure that the debtors’ accounts comply with § 345(b), which was enacted to protect the debtors’ funds from a bank failure while bearing in mind the practical realities of the markets, so that debtors’ reorganizations are not jeopardized by a strict application of the statute.

Generally, the Code requires that deposit and investment accounts be insured by the Federal Deposit Insurance Corp. (FDIC), collateralized or bonded. FDIC insurance is unfortunately of limited utility. Debtors — and their bank accounts — have grown exponentially larger, while the FDIC coverage limit has stagnated at $250,000 since the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010.1 For frame of reference, when the Dodd-Frank Act was enacted, only about 61.3 “mega-cases” were filed each year.2 As of March 26, 2025, the U.S. Bankruptcy Court for the Southern District of New York alone was hearing 66 cases with cumulative assets or liabilities in excess of $100 million.3

Section 345(b) provides that, to the extent that deposit or investment accounts are not insured or otherwise guaranteed by the U.S., the trustee “shall require” from the institution where the money was deposited or invested either: (1) a bond that meets certain requirements; or (2) “the deposit of securities of the kind specified in section 9303 of title 31, unless the court for cause orders otherwise.”4 The U.S. Trustee maintains lists, by district, of approved banking institutions offering deposit services covered by uniform depository agreements that satisfy the statute’s requirements. Not all institutions, however, are on the U.S. Trustee’s lists.

The “Orders Otherwise” Clause Provides Flexibility to Manage Cash

The “orders otherwise” clause was added in 1994 to reverse the Third Circuit’s decision in In re Columbia Gas Systems Inc., in which the court strictly applied § 345(b) and held that the only options to safeguard cash and investments were those expressly provided by the statute.5 The legislative history explains, “While this requirement is wise in the case of a smaller debtor with limited funds that cannot afford a risky investment to be lost, it can work to needlessly handcuff larger, more sophisticated debtors. This section would amend the [Bankruptcy] Code to allow the courts to approve investments other than those permitted by section 345(b) for just cause, thereby overruling In re Columbia Gas Sys. Inc.”6

In 1999, Hon. George C. Paine established a comprehensive framework for determining whether sufficient cause exists to apply the “orders otherwise” clause in the Service Merchandise decision, and courts have used this framework ever since.7 Despite the importance of this issue to a debtor’s operations and the decision’s ubiquitous presence in first-day cash-management motions, only three published decisions have cited Service Merchandise, with mixed results.8

Even though Congress has afforded flexibility through the “orders otherwise” clause, courts can still be reluctant to stray from the express confines of § 345(b). The U.S. Bankruptcy Court for the District of Kansas recently held that a debtor failed to establish cause for a permanent waiver of § 345(b) because its deposit banks were not willing to post collateral to the Federal Reserve to secure the debtor’s deposits, nor were they eager to obtain surety bonds.9 The debtor presented evidence that compliance with § 345(b) would burden accounting personnel, disrupt operations and potentially result in a loss of business. The court was unpersuaded and held that avoidance of cost and inconvenience was an insufficient reason to waive the requirements of § 345(b). According to the court’s docket, as of April 1, 2025, the debtor was still working to achieve compliance with § 345(b).10

Insured Cash Sweep: A Potential Solution?

The collapse of Silicon Valley Bank and Signature Bank in 2023 renewed concerns about the safety of deposit accounts in the event of a bank failure, with a potential solution for some cases being an insured cash sweep (ICS) program. ICS programs spread funds among a custodian bank and other partner banks in a network, so that no bank holds more than the $250,000 FDIC-insured limit in demand deposit accounts and money market deposit accounts.11 A similar program, the certificate of deposit account registry service (CDARS), spreads deposits among certificates of deposits (CDs) in network banks, but given the nature of CDs, the CDARS program might not offer sufficient liquidity for debtors.12

These programs could offer a way to satisfy § 345(b)’s requirements. ICS has appeared in cash-management systems in at least two recent cases. BlockFi Inc. sought obtain approval to use an ICS program to satisfy § 345(b), but the U.S. Trustee’s office objected, noting concerns that banks in the ICS network might not be parties to uniform depository agreements, and that if the debtors placed $25 million in the ICS, at least 100 banks would have to be involved.13 Ultimately, BlockFi did not obtain court approval to use ICS.14

In contrast, Silvergate Capital Corp. had better success. In this case, the debtors described their ICS as an integral part of their cash-management system, as it held approximately $160 million of the debtors’ $164 million in cash.15 The final cash-management order approved the cash-management system.16

Flexibility with Investments

With respect to investments, the U.S. Trustee Program has argued in some cases that compliance with § 345(b) requires debtors to liquidate their holdings. Certain nonprofit institutions rely heavily on invested endowments for operating income, and liquidation of their investments might severely restrict — or even eliminate — their ability to provide services or fulfill their missions. Such situations are good candidates for the “orders otherwise” clause and creative approaches. Investments can also present less risk than deposit accounts when portfolios are diversified and contain many holdings, so that the failure of any one or two securities is not catastrophic.

For example, in In re Franciscan Friars of California Inc., the U.S. Bankruptcy Court for the Northern District of California entered a final cash-management order authorizing the debtor to maintain its investment account without providing a bond, on the condition that the debtor sweep into an approved depository account (1) any cash and cash equivalents that were currently in the account, and (2), for as long as the case was pending, proceeds of bonds as they mature and any other cash or cash equivalents that might subsequently be held in the investment account.17

The U.S. Bankruptcy Court for the Northern District of New York followed a different path in In re The Roman Catholic Diocese of Syracuse, granting a § 345(b) waiver but requiring the debtor to file investment holdings statements. It granted the committee and the U.S. Trustee the right to request that the court reconsider the waiver in the event of a material and sustained diminution in the investment accounts.18

Both of these cases reached solutions that preserved the debtors’ investment opportunities and simultaneously safeguarded the assets of the estates.

Conclusion

Cash-management systems and financial products have evolved and will continue to do so. The challenge of protecting assets while also maintaining liquidity and generating acceptable returns will continue, limited only by the creativity of professionals. Consequently, the “orders otherwise” clause of § 345(b) is a useful tool, and it promises to remain so into the future.

Lisa Bittle Tancredi is a partner in Womble Bond Dickinson (US) LLP’s Wilmington, Del., and Baltimore offices.