Bankruptcy Forms: Filing Bankruptcy Chapter 7 Bankruptcy Software Chapter 13

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TITLE 11–BANKRUPTCY

CHAPTER 5–CREDITORS, THE DEBTOR, AND THE ESTATE

Sub Chapter III – The Estate

Sec. 552. Postpetition effect of security interest

    (a) Except as provided in subsection (b) of this section, property 
acquired by the estate or by the debtor 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.
    (b)(1) Except as provided in sections 363, 506(c), 522, 544, 545, 
547, and 548 of this title, if the debtor and an entity entered into a 
security agreement before the commencement of the case and if the 
security interest created by such security agreement extends to property 
of the debtor acquired before the commencement of the case and to 
proceeds, product, offspring, or profits of such property, then such 
security interest extends to such proceeds, product, offspring, or 
profits acquired by the estate after the commencement of the case to the 
extent provided by such security agreement and by applicable 
nonbankruptcy law, except to any extent that the court, after notice and 
a hearing and based on the equities of the case, orders otherwise.
    (2) Except as provided in sections 363, 506(c), 522, 544, 545, 547, 
and 548 of this title, and notwithstanding section 546(b) of this title, 
if the debtor and an entity entered into a security agreement before the 
commencement of the case and if the security interest created by such 
security agreement 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 acquired by 
the estate after the commencement of the case to the extent provided in 
such security agreement, except to any extent that the court, after 
notice and a hearing and based on the equities of the case, orders 
otherwise.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2602; Pub. L. 98-353, title III, 
Sec. 466, July 10, 1984, 98 Stat. 380; Pub. L. 103-394, title II, 
Sec. 214(a), Oct. 22, 1994, 108 Stat. 4126.)


                      Historical and Revision Notes

                         legislative statements

    Section 552(a) is derived from the House bill and the alternative 
provision in the Senate amendment is rejected. Section 552(b) represents 
a compromise between the House bill and the Senate amendment. Proceeds 
coverage, but not after acquired property clauses, are valid under title 
11. The provision allows the court to consider the equities in each 
case. In the course of such consideration the court may evaluate any 
expenditures by the estate relating to proceeds and any related 
improvement in position of the secured party. Although this section 
grants a secured party a security interest in proceeds, product, 
offspring, rents, or profits, the section is explicitly subject to other 
sections of title 11. For example, the trustee or debtor in possession 
may use, sell, or lease proceeds, product, offspring, rents or profits 
under section 363.


                        senate report no. 95-989

    Under the Uniform Commercial Code, article 9, creditors may take 
security interests in after-acquired property. Section 552 governs the 
effect of such a prepetition security interest in postpetition property. 
It applies to all security interests as defined in section 101(37) of 
the bankruptcy code, not only to U.C.C. security interests.
    As a general rule, if a security agreement is entered into before 
the commencement of the case, then property that the estate acquires is 
not subject to the security interest created by a provision in the 
security agreement extending the security interest to after-acquired 
property. Subsection (b) provides an important exception consistent with 
the Uniform Commercial Code. If the security agreement extends to 
proceeds, product, offspring, rents, or profits of the property in 
question, then the proceeds would continue to be subject to the security 
interest pursuant to the terms of the security agreement and provisions 
of applicable law, except to the extent that where the estate acquires 
the proceeds at the expense of other creditors holding unsecured claims, 
the expenditure resulted in an improvement in the position of the 
secured party.
    The exception covers the situation where raw materials, for example, 
are converted into inventory, or inventory into accounts, at some 
expense to the estate, thus depleting the fund available for general 
unsecured creditors, but is limited to the benefit inuring to the 
secured party thereby. Situations in which the estate incurs expense in 
simply protecting collateral are governed by 11 U.S.C. 506(c). In 
ordinary circumstances, the risk of loss in continued operations will 
remain with the estate.


                         house report no. 95-595

    Under the Uniform Commercial Code, Article 9, creditors may take 
security interests in after-acquired property. This section governs the 
effect of such a prepetition security interest in postpetition property. 
It applies to all security interests as defined in section 101 of the 
bankruptcy code, not only to U.C.C. security interests.
    As a general rule, if a security agreement is entered into before 
the case, then property that the estate acquires is not subject to the 
security interest created by the security agreement. Subsection (b) 
provides the only exception. If the security agreement extends to 
proceeds, product, offspring, rents, or profits of property that the 
debtor had before the commencement of the case, then the proceeds, etc., 
continue to be subject to the security interest, except to the extent 
that the estate acquired the proceeds to the prejudice of other 
creditors holding unsecured claims. ``Extends to'' as used here would 
include an automatically arising security interest in proceeds, as 
permitted under the 1972 version of the Uniform Commercial Code, as well 
as an interest in proceeds specifically designated, as required under 
the 1962 Code or similar statutes covering property not covered by the 
Code. ``Prejudice'' is not intended to be a broad term here, but is 
designed to cover the situation where the estate expends funds that 
result in an increase in the value of collateral. The exception is to 
cover the situation where raw materials, for example, are converted into 
inventory, or inventory into accounts, at some expense to the estate, 
thus depleting the fund available for general unsecured creditors. The 
term ``proceeds'' is not limited to the technical definition of that 
term in the U.C.C., but covers any property into which property subject 
to the security interest is converted.


                               Amendments

    1994--Subsec. (b). Pub. L. 103-394 designated existing provisions as 
par. (1), struck out ``rents,'' after ``offspring,'' in two places, and 
added par. (2).
    1984--Subsec. (b). Pub. L. 98-353 inserted ``522,'' after 
``506(c),'', substituted ``an entity entered'' for ``a secured party 
enter'', and substituted ``except to any extent'' for ``except to the 
extent''.


                    Effective Date of 1994 Amendment

    Amendment by Pub. L. 103-394 effective Oct. 22, 1994, and not 
applicable with respect to cases commenced under this title before Oct. 
22, 1994, see section 702 of Pub. L. 103-394, set out as a note under 
section 101 of this title.


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 106, 363, 901, 928 of this 
title; title 26 section 1398.

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Legal Resource Center: United States Code TITLE 11 Filing Bankruptcy Forms Software