After-Acquired Property Clause

A security agreement provision granting a security interest in property to be acquired by the debtor in the future.

Section 552 terminates the after-acquired property clause as of the bankruptcy filing. But if the security agreement extends to proceeds, products, offspring, or profits of the collateral, the security interest continues in those items unless the court orders otherwise based on the “equities of the case” (see Equities of the Case). Since the collateral covered by an after-acquired property clause usually constitutes proceeds (see Proceeds), the otherwise potentially devastating consequences of terminating the after-acquired property clause are mitigated. But courts sometimes do not want to extend the proceeds coverage to “secondary” and “tertiary” proceeds (inventory becomes accounts, accounts become cash, cash purchases inventory etc.). The lender usually protects itself from losing its collateral somewhere along the proceeds chain by provisions in cash collateral or DIP financing orders.

Bankruptcy Code § 552. See also Cash Collateral Order, DIP Financing, DIP Financing Order, Equities of the Case, Proceeds.

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