Opinion ID: 515473
Heading Depth: 1
Heading Rank: 5

Heading: cross-collateralization

Text: 19 The Committee argues next that the settlement agreement impermissibly cross-collateralized Union Bank. Cross-collateralization occurs when a debtor provides security for preexisting unsecured debt in return for new loans. See Otte v. Manufacturers Hanover Commercial Corp. (In re Texlon Corp.), 596 F.2d 1092, 1094 (2d Cir.1979). To establish an existing unsecured debt, the Committee argues that Union Bank's original loan to Texas Research was unsecured at the time of the settlement because Union Bank's rights in the Healthdyne contract had little or no value in light of Texas Research's right to rescind. The Committee, therefore, contends that the settlement provided Union Bank with new security, namely the replacement lien, for previously unsecured debt. 20 This contention encounters the same difficulty as did the Committee's insistence that the Bank's willingness to drop its objections to Texas Research's motion had no value. That is, we disagree with the Committee's contention that Union Bank had no interest in the Healthdyne note. Thus, we decline to decide whether the Bankruptcy Code would prohibit cross-collateralization in the situation that the Committee describes. At the time of the settlement, Texas Research had notified Healthdyne that it was rescinding their contract, but the legal effect of such notice on Union Bank's interest was, and is, dubious. Texas Research, as noted above, might not have been able to rescind the contract over Union Bank's objection. We thus find that Union Bank merely exchanged old security of speculative value for new security of speculative value and we conclude that no cross-collateralization could have occurred even if such is proscribed by the Bankruptcy Code. 21 AFFIRMED.