Although the lender’s security interest in after-acquired property is cut off as of the commencement of the bankruptcy case (see After-Acquired Property Clause), its security interest extends to proceeds, products, offspring, profits, and rents (including hotel revenues) unless the bankruptcy court refuses to allow such extension “based on the equities of the case.” Although equities of the case is an obviously vague standard that allows the court a great deal of discretion, it is usually interpreted to require only that the lender pay for the expenses incurred by the debtor in completing or enhancing the collateral in some way, for example where the debtor turns raw materials into finished goods inventory and incurs payroll and other expenses to do so. The lender is not allowed to obtain a windfall by collecting the proceeds without paying the cost of creating the proceeds.
Bankruptcy Code § 552. See also After-Acquired Property Clause.