Title 11 of the United States Code (the “Bankruptcy Code”) provides valuable protections for secured creditors. A secured creditor of a chapter 7 debtor is entitled to distribution of any debtor property (or its value) in which they have an interest before any other creditors are paid. Even if the debtor has filed under chapter 11 or 13, a secured creditor is still entitled to receipt of their collateral or its value.
Under Article 9 of the Uniform Commercial Code (“UCC”), commercial tort claims and their proceeds may collateralize secured liens. Hence, creditors believing they are secured by a debtor’s commercial tort litigation proceeds may expect to receive the protections the Bankruptcy Code grants secured creditors. However, creditors’ receipt of those protections is contingent upon the answers to two important questions. One, did the proceeds arise from commercial tort or breach of contract litigation? Two, are the proceeds properly attached to the creditor’s interest and therefore part of the creditor’s collateral to begin with?
This article, in examining those two questions, will answer in the affirmative the larger question of whether, in bankruptcy, a creditor may recover a debtor’s commercial tort litigation recovery through a security interest. Part I will analyze the two most common tests courts use to distinguish commercial tort actions from breach of contract actions. Part II will analyze the UCC’s requirements for a collateral description which includes the proceeds of a commercial tort action.