Secured Transactions Assignment 11

1
Secured TransactionsAssignment 11

• Tracing Collateral Value During Bankruptcy

2
The Big Picture

• Chapters 1 and 2. Creditors Remedies
• Chapter 3. Creation of Security Interests
• Assignment 8 Formalities for Attachment
• Assignment 9 What Collateral and Obligations
  are Covered?
• Assignment 10 Proceeds (State Law)
• Assignment 11 Proceeds (Bankruptcy)

3
Basic Concepts
After acquired property clauses arent good in
bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition
4
Basic Concepts
After acquired property clauses arent good in
bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition

• 552(a). Except as provided in subsection (b) .
  . . property acquired by the estate . . . after
  the commencement of the case

5
Basic Concepts
After acquired property clauses arent good in
bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition

• 552(a). Except as provided in subsection (b) .
  . . property acquired by the estate . . . after
  the commencement of the case is not subject to
  any lien resulting from any security agreement
  entered into by the debtor before the
  commencement of the case.

6
Basic Concepts
The secured partys right to proceeds continues
in bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition
7
Basic Concepts
The secured partys right to proceeds continues
in bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition

• 552(b)(1). . . . If the debtor and an entity
  entered into a security agreement before
  commencement and if the security interest . . .
  extends to property . . . acquired before
  commencement and to proceeds . . . then such
  security interest extends to proceeds . . .
  except to the extent that the court . . . based
  on the equities of the case, orders otherwise.

8
Basic Concepts
The secured partys right to proceeds continues
in bankruptcy
Commencement of bankruptcy
Security agreement
Property acquisition

• 552(b)(1). . . . If the debtor and an entity
  entered into a security agreement before
  commencement and if the security interest . . .
  extends to property . . . acquired before
  commencement and to proceeds . . . then such
  security interest extends to proceeds . . .
  acquired after commencement . . . except to the
  extent that the court . . . based on the equities
  of the case, orders otherwise.

9
Basic Concepts
10
Basic Concepts
11
Basic Concepts
12
Basic Concepts
13
Basic Concepts
14
Basic Concepts
15
Basic Concepts
16
Basic Concepts

• Proceeds is broader than value tracing. Example
• Bank has SI in the inventory of Furniture Store
• Furniture Store buys a sofa for 500 and incurs
  labor costs to sells it for 1000.
• Bank has a SI in the entire 1000.
  9-102(a)(64)
• Proceeds is narrower than value tracing.
  Example
• Bank has SI in the inventory of Riveter
• Riveter uses 500 of rivets fulfilling a 1
  million contract on a 100 million ship.
• The 1 million is not proceeds of the rivets.
• Equities of the case provision solves at least
  the first problem
• But only in bankruptcy

17
Two measures of the equities rule
Delbridge rule The contributors to proceeds
Labor
Expenses
Collateral
Contributions
18
Two measures of the equities rule
Delbridge rule The contributors to proceeds
Labor
Expenses
Collateral
Contributions
Proceeds
19
Two measures of the equities rule
Delbridge rule The contributors to proceeds
share in proportion to their contributions . . .
Labor
Labor
Expenses
Expenses
Collateral
Collateral
Contributions
Proceeds
20
Two measures of the equities rule
Delbridge rule The contributors to proceeds
share in proportion to their contributions . . .
Labor
Expenses
Collateral
Contributions
Proceeds
21
Two measures of the equities rule
Delbridge rule The contributors to proceeds
share in proportion to their contributions . . .
Labor
Labor
Expenses
Expenses
Collateral
Collateral
Contributions
Proceeds
22
Two measures of the equities rule
Gunnison rule Labor and expenses are reimbursed
what is left is proceeds.
Collateral
Labor
Expenses
Contributions
23
Two measures of the equities rule
Gunnison rule Labor and expenses are reimbursed
what is left is proceeds.
Collateral
Labor
Expenses
Contributions
Proceeds
24
Two measures of the equities rule
Gunnison rule Labor and expenses are reimbursed
what is left is proceeds.
Collateral
Collateral
Labor
Labor
Expenses
Expenses
Contributions
Proceeds
25
Two measures of the equities rule
Gunnison rule Labor and expenses are reimbursed
what is left is proceeds.
Collateral
Labor
Expenses
Contributions
Proceeds
26
Two measures of the equities rule
Gunnison rule Labor and expenses are reimbursed
what is left is proceeds.
Collateral
Labor
Labor
Labor
Expenses
Expenses
Expenses
Contributions
Proceeds
27
Problem 11.1, page 194
Horace wins purse
Security agreement
Problem 10.3. Horace wins the purse. Is the
purse proceeds? Answer Maybe.
28
Problem 11.1, page 194
Track pays purse
Horace wins purse
Bankruptcy
Security agreement
Problem 10.3. Horace wins the purse. Is the
purse proceeds? Answer Maybe. Problem 11.1.
Debtor files bankruptcy and track pays. Is the
secured partys case stronger, weaker, or
unchanged?
29
Problem 11.1, page 194
Track pays purse
Horace wins purse
Bankruptcy
Security agreement
Problem 10.3. Horace wins the purse. Is the
purse proceeds? Answer Maybe. Problem 11.1.
Debtor files bankruptcy and track pays. Is the
secured partys case stronger, weaker, or
unchanged? Answer Unchanged. 552(a) does not
apply to the purse
30
Problem 11.1, page 194
Track pays purse
Horace wins purse
Bankruptcy
Security agreement
Problem 10.3. Horace wins the purse. Is the
purse proceeds? Answer Maybe. Problem 11.1.
Debtor files bankruptcy and track pays. Is the
secured partys case stronger, weaker, or
unchanged? Answer Unchanged. 552(a) does not
apply to the purse
Purse payable
Horace
Money
31
Problem 11.2, page 194
Security agreement
Description of collateral Equipment, inventory,
and accounts.
32
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts.
33
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?

34
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property?
35
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property? 552(a). Except as
provided in subsection (b) . . . property
acquired by the estate . . . after the
commencement of the case . . .
36
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property? 552(a). Except as
provided in subsection (b) . . . property
acquired by the estate . . . after the
commencement of the case is not subject to any
lien resulting from any security agreement
entered into by the debtor before the
commencement of the case.
37
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property? 552(a). Except as
provided in subsection (b) . . . property
acquired by the estate . . . after the
commencement of the case is not subject to any
lien resulting from any security agreement
entered into by the debtor before the
commencement of the case. No.
38
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property? 552(a). Except as
provided in subsection (b) . . . property
acquired by the estate . . . after the
commencement of the case is not subject to any
lien resulting from any security agreement
entered into by the debtor before the
commencement of the case. No. As proceeds?
39
Problem 11.2, page 194
Polly files bankruptcy
Polly works
Customer pays
Security agreement
Description of collateral Equipment, inventory,
and accounts. Did the work create an account?
Will the account be collateral?
As after acquired property? 552(a). Except as
provided in subsection (b) . . . property
acquired by the estate . . . after the
commencement of the case is not subject to any
lien resulting from any security agreement
entered into by the debtor before the
commencement of the case. No. As proceeds?
Must be of collateral, not services, 9-102(a)(64)
40
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Same facts as Problem 10.5
41
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy.
42
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy. What is ELPs collateral?
43
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy. What is ELPs collateral? 6,000,
maybe the new copier.
44
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy. What is ELPs collateral? 6,000,
maybe the new copier. Did the debtor violate
363(c)(2)?
45
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy. What is ELPs collateral? 6,000,
maybe the new copier. Did the debtor violate
363(c)(2)? Does ELP have a remedy?
46
Problem 11.3, page 194
Check to rent
XT-100 Copier XEX30
Insurance payable
Bank account
Check
New copier
Bankruptcy
Same facts as Problem 10.5, except debtor filed
bankruptcy. What is ELPs collateral? 6,000,
maybe the new copier. Did the debtor violate
363(c)(2)? Does ELP have a remedy? Maybe under
Craddock-Terry Shoe, page 102.
47
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
48
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
49
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
a. If the court follows Gunnison, how much is
cash collateral? 363(a)
50
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
a. If the court follows Gunnison, how much is
cash collateral? 363(a) The net room revenues,
which is zero
51
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
a. If the court follows Gunnison, how much is
cash collateral? 363(a) The net room revenues,
which is zero What about the food/drink revenues?
52
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
a. If the court follows Gunnison, how much is
cash collateral? 363(a) The net room revenues,
which is zero What about the food/drink
revenues? 11,000 if they are proceeds at all!
53
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
b. If the court follows Delbridge, how much is
cash collateral? CC D x P
DEL
54
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
b. If the court follows Delbridge, how much is
cash collateral? CC D x P
DEL Depreciation is zero, so cash
collateral is zero.
55
Problem 11.4, page 195
Description of collateral real property,
equipment, inventory . . . and all income, rents,
royalties, revenues, issues, profits,
fees, accounts, and other proceeds (including
without limitation, room sales and revenues from
sales of services, food and drink), currently
owned or after acquired.
b. If the court follows Delbridge, how much is
cash collateral? CC D x P
DEL Depreciation is zero, so cash
collateral is zero. Is that formula right?
56
Delbridge rule The contributors to proceeds . .
.
Labor
Expenses
Collateral
Contributions
Proceeds
57
Delbridge rule The contributors to proceeds
share in proportion to their contributions
Labor
Labor
Expenses
Expenses
Collateral
Collateral
Contributions
Proceeds
58
Problem 11.4, page 195
552(b)(2). If the security interest created
by such security agreement extends to . . .
amounts paid as . . . the fees, charges,
accounts, or other payments for the use or
occupancy of rooms and other public facilities in
hotels . . . then such SI extends to . . . such
payments acquired after filing.
c. If the court reads 552(b)(2) literally, how
much is cash collateral?
59
Problem 11.4, page 195
552(b)(2). If the security interest created
by such security agreement extends to . . .
amounts paid as . . . the fees, charges,
accounts, or other payments for the use or
occupancy of rooms and other public facilities in
hotels . . . then such SI extends to . . . such
payments acquired after filing.
c. If the court reads 552(b)(2) literally, how
much is cash collateral? 510K. The statute does
not authorize deduction of expenses. The food
and drink revenue still may not be proceeds.
60
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds

900K
700K
61
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing

900K
700K
62
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month

900K
700K
63
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing?

900K
700K
64
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K

900K
700K
65
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection?

900K
700K
66
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.

900K
700K
67
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral?

900K
700K
68
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).

900K
700K
69
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).
• If debtor uses the rent, is Globus entitled to
  adequate protection?

900K
700K
70
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).
• If debtor uses the rent, is Globus entitled to
  adequate protection? Yes. 363(e).

900K
700K
71
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).
• If debtor uses the rent, is Globus entitled to
  adequate protection? Yes. 363(e). No, quote
  at bottom of page 185.

900K
700K
72
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).
• If debtor uses the rent, is Globus entitled to
  adequate protection? Yes. 363(e). No, quote
  at bottom of page 185.
• If yes, how will debtor provide it?

900K
700K
73
Problem 11.5, page 195

• Description of collateral building and rents
  and proceeds
• Building is debtors only asset, value is
• not changing
• Rents are 10K per month
• What is Globus secured claim at filing? 700K
• Was Globus entitled to interest or adequate
  protection? No. Timbers.
• Is the rent received collateral? Yes. 552(b).
• If debtor uses the rent, is Globus entitled to
  adequate protection? Yes. 363(e). No, quote
  at bottom of page 185.
• If yes, how will debtor provide it? Debtor cant
  unless court applies equities exception. End
  of reorganization.

900K
700K