Opinion ID: 3016918
Heading Depth: 3
Heading Rank: 2

Heading: The Cross-Collateralization

Text: collateral itself.” Ford Motor Corp. v. Stevens (In re Stevens), 130 F.3d 1027, 1030 (11th Cir. 1997); accord Ford Motor Corp. v. Feher, 202 B.R. 966 (Bankr. S.D. Ill. 1996); In re Arkell, 165 B.R. 432 (Bankr. M.D. Tenn.); see also In re Jones, No. 99-43196, 2004 WL 2191692 (Bankr. S.D. Ga. June 4, 2004). These cases are easily distinguishable: in the Stevens line, the creditor’s secured claim had already been modified, and it was asking for insurance proceeds that exceeded the value of its allowed claim under the plan. The Stevens creditor was asking for more than “one satisfaction” of its secured debt, as modified by the debtor’s court-approved plan. Tower, on the other hand, is in Chapter 7, and no plan has been approved that could modify FINOVA’s secured claim. Moreover, unlike in Stevens, the engine at issue here was not being used by the estate under a cram-down; rather, it had already been returned to FINOVA as part of Tower’s liquidation. 10 We note that the revised UCC might allow the creditor to recover only the original value of his collateral; the revised Code now defines “proceeds” to include insurance only “to the extent of the value of collateral.” Ariz. Rev. Stat. § 47-9102(64) (2004). While this language is not perfectly clear, it would seem to limit recovery to the value of the original collateral; insurance payments beyond that value would, it seems, not constitute “proceeds.” But, of course, the revised UCC was not in effect at any time relevant to this case, and we have already concluded that the insurance money did constitute “proceeds” under the old UCC, see supra Part III.A. 12 FINOVA’s loans to Tower were cross-collateralized; that is, under the May 6, 1996, agreements between Tower and FINOVA, numerous Tower assets became collateral for numerous loans by FINOVA. In FINOVA’s submission, Tower owed FINOVA some $56 million when it filed for bankruptcy, and returned collateral worth $36 million, leaving some $20 million still due. Much of FINOVA’s collateral was apparently damaged or impaired due to Tower’s negligence. The result of this cross-collateralization is that the original value of FINOVA’s collateral was not merely the original value of the aircraft engine at issue in this case. Instead, FINOVA had numerous pieces of collateral collectively worth millions of dollars. Much of this collateral was impaired or damaged at some point between the time Tower entered the financing agreements and the time the disputed insurance proceeds were paid. This fact is important because it eliminates any concern we might have about giving FINOVA a windfall by allowing it to recover those proceeds. As we note above, there may be some reason to think that the UCC’s limitation to “one satisfaction” limits secured creditors to the original value of their collateral, although we will ultimately conclude, based on an analogy to sale proceeds, that the better view is to allow creditors to recover up to the value of their debt, see infra Part III.B.3. But even if we were to limit FINOVA to the original value of its collateral, the fact of cross-collateralization means that it will certainly recover less than the original value of all of its collateral. The effect of the cross-collateralization clauses was to make some large quantity of Tower’s assets collateral for all $56 million of its debt to FINOVA.11 If the only impairment to FINOVA’s collateral were the damage to the engine, and if that damage were fully repaired, then the insurance proceeds would increase the value of the collateral, and create a difficult case, see supra Part III.B.2. But in fact collateral worth millions of dollars was destroyed. Thus it is misleading to state that Tower returned the 11 The record does not reflect the exact value of the assets involved in the cross-collateralization agreements. In any case, it would seem to be significantly greater than the $36 million worth of collateral that was ultimately returned to FINOVA. At all events, our analysis does not depend on the exact figure. 13 collateral at issue here in fully repaired condition. The specific aircraft engine was returned fully repaired, but much other collateral was destroyed, damaged, or subject to liens, and all of this collateral secured the same loans. We therefore should not view the insurance proceeds on one particular engine as increasing the value of that specific piece of collateral, and thus creating a windfall; rather, we should view it as only partially compensating for the destruction of several other pieces of collateral. On that view, awarding those proceeds to FINOVA does not create more than one satisfaction, as the overall value of the collateral is still significantly impaired. The cross-collateralization clauses, and the fact that FINOVA’s other collateral was impaired, leave us satisfied that awarding the insurance proceeds to FINOVA would not create a windfall or a double satisfaction. Even if it recovers both the engine and the insurance proceeds, FINOVA will still recover less than its entire debt, and also less than the original value of its collateral. In such circumstances, a double recovery is impossible.