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 aren’t good in bankruptcy: Commencement of bankruptcy Security agreement Property acquisition

4. Basic Concepts After acquired property clauses aren’t good in bankruptcy: §552(a). Except as provided in subsection (b) . . . property acquired by the estate . . . after the commencement of the case Commencement of bankruptcy Security agreement Property acquisition

5. Basic Concepts After acquired property clauses aren’t good in bankruptcy: §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. Commencement of bankruptcy Security agreement Property acquisition

6. Basic Concepts The secured party’s right to proceeds continues in bankruptcy: Commencement of bankruptcy Security agreement Property acquisition

7. Basic Concepts The secured party’s right to proceeds continues in bankruptcy: §552(b)(1). . . . [If] the debtor and an entity entered into a security agreement before [commencement] andif the security interest . . .extends to property . . . acquired before [commencement] and toproceeds, products, offspring or profits. . .tensuch security interest extends to proceeds . . . except to the extent that the court . . . based on the equities of the case, orders otherwise. Commencement of bankruptcy Security agreement Property acquisition

8. Basic Concepts The secured party’s right to proceeds continues in bankruptcy: §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 . . .thensuch security interest extends to proceeds, products, offspring or profits acquired after [commencement] . . . except to the extent that the court . . . based on the equities of the case, orders otherwise. Commencement of bankruptcy Security agreement Property acquisition

9. Basic Concepts The secured party’s right to proceeds continues in bankruptcy: §552(b)(2). . . . if the debtor and an entity entered into a security agreement before [commencement] and if the security interest . . . extends to property of the debtor acquired before the commencement of the case and to amounts paid as rents of such property or the fees, charges, accounts, or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties, then such security interest extends to such rents and such fees, charges, accounts, or other payments . . ., except to any extent that the court, . . . based on the equities of the case, orders otherwise. Commencement of bankruptcy Security agreement Property acquisition

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17. 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 Carpenter (nails) Carpenter uses $170,000 of services and $50 worth of nails fulfilling a $200,000 contract to build floats for a parade. Probably none of the $200,000 account is proceeds of the nails. Inman, page 186.

18. Basic Concepts “Equities of the case” exception to the right to proceeds:

19. Basic Concepts “Equities of the case” exception to the right to proceeds: §552(b)(1).Except as provided in sections 363 and 548 of this title,ifthe debtor and an entity entered into a security agreement before the commencement of the case andifthe security interest created by such security agreement extends(to property acquired before the commencement of the case)and(to proceeds, products, offspring, or profits of such property), thensuch security interest extends(to such proceeds, products, offspring or profits acquired by the estate after the commencement of the case) to the extent provided by such security agreement and by applicable bankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.

20. Basic Concepts “Equities of the case” exception to the right to proceeds: §552(b)(1).Except as provided in sections 363 and 548 of this title,ifthe debtor and an entity entered into a security agreement before the commencement of the case andifthe security interest created by such security agreement extends(to property acquired before the commencement of the case) and (to proceeds, products, offspring, or profits of such property), thensuch security interest extends(to such proceeds, products, offspring or profits acquired by the estate after the commencement of the case) to the extent provided by such security agreement and by applicable bankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. Interpretation: strict value-tracing

21. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed Labor and expenses Collateral Contributions

22. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed Labor and expenses Collateral Contributions Proceeds

23. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed Labor and expenses Collateral Collateral Contributions Proceeds

24. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed; what remains is not proceeds Labor and expenses Labor and expenses Collateral Collateral Contributions Proceeds

25. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed; what remains is not proceeds Labor and expenses Collateral Contributions Proceeds

26. Three “equitable” ways to trace value Cafeteria Operators rule: The cost of collateral is reimbursed; what remains is not proceeds Labor and expenses Labor and expenses Collateral Collateral Contributions Proceeds

27. Three “equitable” ways to trace value Delbridge rule: The contributors to proceeds Labor and expenses Collateral Contributions

28. Three “equitable” ways to trace value Delbridge rule: The contributors to proceeds Labor and expenses Collateral Contributions Proceeds

29. Three “equitable” ways to trace value Delbridge rule: The contributors to proceeds share in proportion to their contributions . . . Labor and expenses Labor and expenses Collateral Collateral Contributions Proceeds

30. Three “equitable” ways to trace value Delbridge rule: The contributors to proceeds share in proportion to their contributions . . . Labor and expenses Collateral Contributions Proceeds

31. Three “equitable” ways to trace value Delbridge rule: The contributors to proceeds share in proportion to their contributions . . . Labor and expenses Labor and expenses Collateral Collateral Contributions Proceeds

32. Three “equitable” ways to trace value Gunnison rule: Labor and expenses are reimbursed; what is left is proceeds. Collateral Labor and expenses Contributions

33. Three “equitable” ways to trace value Gunnison rule: Labor and expenses are reimbursed; what is left is proceeds. Collateral Labor and expenses Contributions Proceeds

34. Three “equitable” ways to trace value Gunnison rule: Labor and expenses are reimbursed; what is left is proceeds. Collateral Collateral Labor and expenses Labor and expenses Contributions Proceeds

35. Three “equitable” ways to trace value Gunnison rule: Labor and expenses are reimbursed; what is left is proceeds. Collateral Labor and expenses Contributions Proceeds

36. Three “equitable” ways to trace value Gunnison rule: Labor and expenses are reimbursed; what is left is proceeds. Collateral Labor and expenses Labor Labor and expenses Expenses Contributions Proceeds

42. Basic Concepts • 363(c) regulates the use of cash collateral in bankruptcy. • Must have creditor’s consent or order of the court to use cash collateral. Need to give adequate protection • E.g. Use cash to make new inventory and give a lien in the new “after acquired” inventory to the cash collateral secured party in exchange.

43. Problem 11.1, page 194 Horace wins purse Security agreement Problem 10.3. Horace wins the purse. Is the purse “proceeds?” Answer: Maybe.

44. Problem 11.1, page 194 Horace wins purse Track pays purse Security agreement Bankruptcy 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 party’s case stronger, weaker, or unchanged?

45. Problem 11.1, page 194 Horace wins purse Track pays purse Security agreement Bankruptcy 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 party’s case stronger, weaker, or unchanged? Answer: Unchanged. §552(a) does not apply to the purse

46. Basic Concepts §552(b)(1).Except as provided in sections 363 and 548 of this title,if the debtor and an entity entered into a security agreement before the commencement of the case andif the security interest created by such security agreement extends (to property acquired before the commencement of the case)and(to proceeds, products, offspring, or profits of such property), then such security interest extends(to such proceeds, products, offspring or profits acquired by the estate after the commencement of the case) to the extent provided by such security agreement and by applicable bankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.

47. Problem 11.1, page 194 Horace wins purse Track pays purse Security agreement Bankruptcy Problem 10.3. Horace wins the purse. Is the purse “proceeds?” Answer: Probably. Problem 11.1. Debtor files bankruptcy and track pays. Is the secured party’s case stronger, weaker, or unchanged? Answer: Unchanged. §552(b) does not apply to the purse winning. Article 9 does apply. Article 9 552(b) Purse payable Horace Money

48. Problem 11.2, page 194 Security agreement Description of collateral: “Equipment, inventory, and accounts.”

49. Problem 11.2, page 194 Polly files bankruptcy Polly works Customer pays Security agreement Description of collateral: “Equipment, inventory, and accounts.”

50. 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?