Floating Liens

Liens created under a security instrument that can arise on property from time to time, when property comes into existence or is acquired by the borrower. Under the Code, property acquired by the debtor or estate after the commencement of a case is not subject to any lien resulting from a security agreement entered into by the debtor prepetition. The rule’s important exception is set out in Section 552(b), which states that the prepetition lien still applies to “proceeds, products, offspring or profits” of the lender’s collateral, and if the lien is enforceable under the security agreement and under applicable non-bankruptcy law, then the prepetition lien attaches to such proceeds, products, offspring and profits that are acquired after the commencement of the case. Even this exception, however, has an exception. The court has the right to order otherwise, “based on the equities of the case.” This “exception to the exception” of the rule has been used by the courts sparingly. One situation in which it may be invoked is when the debtor spends its own time and money to enhance the value of the creditor’s collateral, making it more equitable that the estate enjoy the benefits of some or all of the proceeds or profits generated by that collateral.

Bankruptcy Code § 552. See also After-Acquired Property Clause, Equities of the Case, Proceeds.

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