When a business petitions for bankruptcy, the business often requires the use of property that is subject to a creditor's lien. For example, a business that has accounts receivable may need the payments coming into the business from the accounts receivable in order to continue to operate. These matters are routinely resolved in the first few days of a bankruptcy case by the business paying the creditor for the continued use of the secured property and by giving the creditor a replacement lien on any new property that is an offspring from the used-up property.
Post-Petition Collateral is not Subject to Creditors' Lien Which results from a Security Agreement
A different result occurs when the new post-petition property is not proceeds, products, offspring, or profits resulting from the pre-petition collateral. Bankruptcy Code Section 552(a) provides that "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." 3 11 U.S.C. § 552(a). A limited exception to this general rule is provided by Bankruptcy Code section 552(b)(1). For that exception to apply, however, the following criteria must be met: (i) the security interest created by the security agreement must cover "proceeds, products, offspring, or profits" of the underlying collateral; (ii) the post-petition assets at issue must in fact be "proceeds, products, offspring, or profits" of the prepetition collateral; and (iii) the Court must not order a different result "based on the equities of the case." 11 U.S.C. § 552(b)(1).
A different result occurs when the new post-petition property is not proceeds, products, offspring, or profits resulting from the pre-petition collateral. Bankruptcy Code Section 552(a) provides that "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." 3 11 U.S.C. § 552(a). A limited exception to this general rule is provided by Bankruptcy Code section 552(b)(1). For that exception to apply, however, the following criteria must be met: (i) the security interest created by the security agreement must cover "proceeds, products, offspring, or profits" of the underlying collateral; (ii) the post-petition assets at issue must in fact be "proceeds, products, offspring, or profits" of the prepetition collateral; and (iii) the Court must not order a different result "based on the equities of the case." 11 U.S.C. § 552(b)(1).
It bears noting that section 552(a) has no application to a statutory lien such as that held by the IRS. See, e.g., Alliance Capital Management L.P. v. County of Orange (In re County of Orange), 189 B.R. 499, 502 (C.D. Cal. 1995) ("By its terms, section 552(a) only applies to liens resulting from security agreements, not other types of liens such as statutory liens.");United States v. Lincoln Sav. Bank (In re Commercial Millwright Serv. Corp.), 245 B.R. 585, 596 (Bankr. N.D. Iowa 1998) ("Neither the language of the confirmed plan nor section 552(a) prohibit the attachment of the tax liens to after-acquired property."). Learn more about business bankruptcy.
