Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
Section 552(a) of title 11 of the United States Code (the "Bankruptcy Code") states that "property acquired by the estate" after the commencement of the case is not subject to any secured lien possessed by a secured creditor that was created before the commencement of the case. A secured lien is a "legal right or interest of a creditor in a debtor’s property, which lasts until the debt it secures is satisfied." Section 552(b)(1) provides limited exceptions to the general rule in Section 552(a). If a debtor and a creditor entered into a security agreement before the commencement of the bankruptcy case and if the interest created by such security agreement extends to property of the debtor 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.
Bankruptcy Courts have found that sale proceeds from a prepetition sale of the debtor’s real property constituted an "account" to which a creditor’s security interest attached post-petition when a debtor used sale proceeds. When determining if sale proceeds acquired post-petition rather than pre-petition can be used, it would have to fall under a 552(b) exception.
This memorandum explores whether a creditor’s secured lien on "accounts" extends to sale proceeds from a postposition sale of real property. Part I focuses on what is considered an "account" and when a secured creditor can be paid based on their lien on accounts. Part II focuses on interpretation of whether Section 552 of the Bankruptcy Code allows post-petition sale proceeds of real property to pay creditors on their lien on accounts.