Opinion ID: 3016918
Heading Depth: 3
Heading Rank: 1

Heading: The Meaning of “One Satisfaction”

Text: It is perfectly evident that the creditor’s recovery is limited by the amount of its debt: a creditor who lends $100 secured by an engine with a fair market value of $100 cannot recover both the engine (at its full value) and any insurance proceeds on it. This is the minimum meaning of Comment 3. It is equally clear that the creditor’s security interest is limited by the amount of its collateral: a creditor who lends $200 secured only by an engine with a value of $100 is secured only for $100; the remaining $100 of its debt will be only an unsecured claim in bankruptcy. See 11 U.S.C. § 506(a). The difficult case is where the value of the original collateral plus proceeds exceeds the value of the original collateral, but is less than the amount of the debt. In that case, may the creditor recover the collateral and proceeds (limited only by the amount of its debt), or is it limited to the value of its original collateral? This is a vexing question, and one that does not seem to have been directly decided.9 On the one hand, the debtor might 9 Several courts have decided a related but not identical issue. This line of cases involves a confirmed Chapter 11 or 13 plan which includes a cram-down of a secured creditor’s claim on an asset of the estate (often a motor vehicle); after the asset is destroyed, the creditor demands the insurance proceeds to the extent of its original claim rather than its claim as modified by the plan. In these cases, the courts reject the creditor’s attempt to get an additional satisfaction of its debt, stating that the creditor’s “interest in the insurance proceeds flowing from the destruction of the secured collateral is only as great as its interest in the 11 argue that the creditor’s security interest is limited to the value of the collateral, not of the claim. Giving the insurance payment to the creditor would arguably create a larger security interest than the creditor bargained for, and thus lead to a windfall. On the other hand, the plain language of the UCC gives the creditor a security interest in proceeds of the collateral. The creditor’s “windfall” is no different from a situation in which the collateral’s market value increases: the creditor simply gets the benefit of all increases in value of the collateral—whether those increases come by appreciation or by insurance payments—up to the total value of the claim. Because FINOVA’s cross-collateralization, and other facts specific to the case at bar, are enough for FINOVA to recover, we need not decide this question in the general case.10