Secured Transactions

Supplemental Outline for Assignment 11

I Procedural Introduction. This outline covers the key principles I want you to understand from
Assignment 11. You are not responsible for anything relating to Assignment 11 other than what is
in this outline. Thus, for example, you need not read any of the statutes or pages from LoPucki &
Warren cited herein.
II Substantive Introduction.
A Assignment 9 explained, among other things, that security interests may attach to after-
acquired property under Article 9. See UCC § 9-204(a) (“[A] security agreement may create
or provide for a security interest in after-acquired collateral.”).
B Assignment 10 explained “value-tracing rules” under Article 9. See, e.g., UCC §§ 9-102(a)
(64) (defining proceeds); 9-203(f) & 9-315(a), (b) (together providing that security interests
continue in proceeds).
C When a debtor declares bankruptcy, however, there are some changes. The Bankruptcy Code
modifies the rules.
III The Bankruptcy Code’s Impact on After-Acquired Property and Value-Tracing Rules.
A After-Acquired Property Clauses are Invalid in Bankruptcy: After-acquired property
clauses have no impact after the debtor declares bankruptcy. See 11 U.S.C. § 552(a); L&W p.
182. As a result, once the debtor is in bankruptcy, the secured creditor can no longer pick up
additional collateral by means of an after-acquired property clause.
B Value-Tracing Rules Generally Still Apply: In bankruptcy, a security interest generally
still attaches to proceeds, products, offspring, rents and profits of collateral if the security
interest would have attached to such proceeds, products, offspring, rents or profits under the
security agreement and non-bankruptcy law (i.e., Article 9). See 11 U.S.C. § 552(b).
1 Qualification: A bankruptcy court can limit the right to proceeds based on the equities
of the case. Hence my use of the word “generally.” However, I will leave this issue to
the bankruptcy course.
C Example:
1 Facts: Suppose a security agreement says that the secured party has a security interest
in “all inventory and after-acquired inventory of the debtor.” Debtor declares
bankruptcy. Then Debtor sells some inventory in exchange for accounts – i.e., its
customers’ promises to pay for the inventory. Result: The accounts would be proceeds,
and thus the security interest would attach to the accounts.
2 Facts: Subsequently, the customers pay the debtor cash to extinguish the accounts.
Result: The cash would be proceeds of the accounts, and thus the security interest
would attach to the cash.
3 Facts: Then, the debtor uses the cash to buy inventory. Result: This new inventory is
proceeds of the cash, and thus the security interest would attach to the new inventory.
a Important: The security interest attaches to the new inventory because it is
proceeds, NOT because it is covered by the after-acquired property language
in the contract.
4 Facts: At last, the debtor obtains a new loan from another party and buys additional
inventory with that loan. Result: This second set of inventory is after-acquired
1
 property, but not proceeds. Therefore, the security interest would not attach to the
second set of inventory because after-acquired property clauses are invalid in
bankruptcy.
D Basic Impact of Bankruptcy Code Rules: The basic result flowing from the nullification of
after-acquired property clauses and the continued allowance of value-tracing is this: the
secured creditor generally can keep what collateral value it has as of the filing of the
bankruptcy case, even if that collateral value is transformed [i.e., value-tracing allowed], but
cannot acquire additional collateral value during bankruptcy [i.e., after-acquired property
clauses invalid].
1 In essence, value tracing is the only way a security interest may attach to different
collateral after the debtor declares bankruptcy.