Opinion ID: 3016918
Heading Depth: 1
Heading Rank: 5

Heading: The Equity Exception

Text: The Trustee also argues that, even if his claim fails as a legal matter, the Bankruptcy Court abused its discretion in refusing to grant him equitable relief under 11 U.S.C. § 552(b), which allows a court to modify security interests as a matter of equity. 16 The Bankruptcy Court reasoned that the equity exception was intended to strike “an appropriate balance between the rights of secured creditors and the rehabilitative purposes of the Bankruptcy Code.” United Va. Bank v. Slab Fork Coal Co., 784 F.2d 1188 (4th Cir. 1986). It noted that the normal application of the equity exception is in Chapter 11 cases, to prevent an oversecured lender from receiving a windfall by taking assets that would otherwise go to rehabilitating the debtor. Section 552(b) is normally relevant in Chapter 11, “to prevent a secured creditor from reaping benefits from collateral that has appreciated in value as a result of the trustee’s/debtor-in-possession’s use of other assets of unless such recovery would constitute a double satisfaction. We look to insurance law, and the Savarese cases, to determine whether FINOVA has a non-bankruptcy right to receive the proceeds without regard to Tower’s repairs. Because FINOVA does have such a right to those proceeds, despite Tower’s repairs, there is less reason to think that the proceeds constitute an unfair double satisfaction. 16 The Bankruptcy Code provides that prepetition security interests extend to postpetition “proceeds, product, offspring, or profits” of prepetition collateral, “to the extent provided by such security agreement and by applicable nonbankruptcy law, except to the extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.” 11 U.S.C. § 552(b)(1) (emphasis added); see also § 552(b)(2) (similar exception for postpetition “fees, charges, accounts, or other payments” paid for use of prepetition collateral). 21 the estate.” In re Bennett Funding Group, Inc., 255 B.R. 616, 634 (N.D.N.Y. 2000) (quoting Great-West Life & Annuity Assurance Co. v. Parke Imperial Canton, Ltd., 177 B.R. 843, 855 (N.D. Ohio 1994)). This case, however, was a Chapter 7 liquidation, Tower was beyond any hope of rehabilitation, and assets of the estate were not used to increase the value of FINOVA’s collateral during bankruptcy proceedings. Indeed, all of the repairs were made long before the bankruptcy petition was filed.17 While the pre-petition repairs to the engine did increase the value of FINOVA’s collateral, Tower’s apparent negligence seems to have caused the destruction of other FINOVA collateral, and left FINOVA greatly undersecured. Thus, FINOVA’s recovery here hardly constitutes a windfall. Instead, FINOVA will simply recover what it is due as a secured creditor with a valid security interest in the insurance proceeds. The Trustee has advanced no reason for us to conclude that this result is inequitable.