Replacement Lien

A postpetition lien provided to a lender covering property acquired by the debtor after the bankruptcy filing.

Lenders are often entitled to adequate protection of their interests in collateral, especially where the debtor proposes to use or sell the collateral. Section 361 describes various means for providing adequate protection, including replacement liens. A replacement lien is especially important to a lender whose loan is secured in whole or in part by inventory and accounts that are consumed in the debtor’s Chapter 11 operations. Since Section 552 cuts off the lender’s security interest in inventory and accounts generated postpetition, the lender soon would have no collateral left. Instead, the lender is given a “replacement lien” in inventory and accounts generated after the Chapter 11 filing to “replace” what the lender has lost by the debtor’s consumption of its prepetition collateral. Unfortunately for the lender, the “replacement” may not be a dollar-for-dollar equivalent of what has been consumed.

Bankruptcy Code §§ 361(2), 552(a). See also Adequate Protection, Indubitable Equivalent, Reverse Alchemy.

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