Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-10-2005

In Re Tower Air Inc
Precedential or Non-Precedential: Precedential

Docket No. 03-3101

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                                    PRECEDENTIAL

  UNITED STATES COURT OF APPEALS
       FOR THE THIRD CIRCUIT

                 No. 03-3101

         IN RE: TOWER AIR, INC.,

                    Debtor

      CHARLES A. STANZIALE, JR.,
     Chapter 7 Trustee of Tower Air, Inc.,

                  Appellant

                      v.

    FINOVA CAPITAL CORPORATION

On Appeal from the United States District Court
           for the District of Delaware
             (D.C. No. 01-cv-00792)
District Judge: The Honorable Gregory M. Sleet

          Argued: October 26, 2004

 Before: SCIRICA, Chief Judge, FISHER and
          BECKER, Circuit Judges

          (Filed: February 10, 2005)
DIANE E. VUOCOLO (ARGUED)
Duane M orris
1650 Market Street
One Liberty Place, 37 th Floor
Philadelphia, PA 19103
Attorney for Appellant

JEFFREY M. SCHLERF
The Bayard Firm
222 Delaware Avenue
P.O. Box 25130, 9th Floor
Wilmington, DE 19899

JILL LEVI (ARGUED)
Todd & Levi
444 Madison Avenue
Suite 1202
New York, NY 10022
Attorneys for Appellee

                      OPINION OF THE COURT

BECKER, Circuit Judge.

         This appeal by Charles Stanziale, the Chapter 7 trustee (“the
Trustee”) of debtor Tower Air, Inc., presents a question of first
impression for us: whether a secured creditor in a Chapter 7
bankruptcy may recover the insurance proceeds intended to pay for
damage to its collateral, while retaining the fully repaired
collateral. We conclude that, under the circumstances of this case,
it can. More specifically, we are satisfied that, under the language
of section 9-306 of the Arizona Uniform Commercial Code (UCC)
in effect at the relevant times, appellee FINOVA Capital
Corporation, as an undersecured and cross-collateralized creditor,
is entitled to recover both the collateral (an aircraft engine) and the
proceeds. This conclusion is also supported: (1) by the language of
the controlling agreements between Tower and FINOVA, which

                                  2
grant FINOVA a right of approval over any use of insurance
proceeds; and (2) by the fact that the insurance documents
conferred upon FINOVA the status of a mortgagee payee, and not
a mere loss payee. Finally, we reject the Trustee’s contention that
the equitable exception of § 552(b) of the Bankruptcy Code applies
to prevent this result. We will therefore affirm the order of the
District Court, which affirmed the order of the Bankruptcy Court
awarding some $950,000 in insurance proceeds to FINOVA.

                                 I. Facts

        On May 6, 1996, Tower, a then-solvent airline, borrowed
$21 million from FINOVA to finance the purchase of a Boeing 747
and four aircraft engines. In connection with this transaction,
Tower entered a series of agreements—including a security
agreement, a promissory note, and a mortgage—giving FINOVA
a security interest in the financed collateral, including the aircraft
engine at issue in this case. The agreements specified that
insurance proceeds of the engines were part of FINOVA’s
collateral.1 Tower also covenanted to maintain insurance on the
aircraft, and to submit any plans for use of insurance proceeds to
FINOVA for approval.2

       1
           The mortgage agreement defined the term “Collateral” to
include:

       the Aircraft [defined to include the airframe and engines,
       including the engine at issue] together with any and all
       attachments, accessories, improvements and betterments
       thereto and replacements thereof and all general
       intangibles and contract rights, including, but not limited
       to, all rents, issues, proceeds, insurance proceeds,
       properties, revenues and other income in respect of such
       aircraft and engines.
       2
           Paragraph 5.4(a) of the security agreement provides:

       In the event of any payment made to the Borrower
       [Tower] by an insurer in connection with the Aircraft
       pursuant to a claim by the Borrower, the Borrower shall
       submit to the Lender [FINOVA] for approval a proposal

                                     3
       FINOVA also financed a number of Tower’s other
purchases, and had cross-collateralization agreements on all of
those borrowings. Under these agreements, FINOVA’s collateral
for previous loans would become collateral for the May 6 loan, and
the May 6 collateral (including the engine) would become
collateral for the previous loans.3
       FINOVA perfected its security interest by filing UCC
financing statements with the State of New York and with Queens
County, and by filing the mortgage with the FAA.4 Both the
financing statements and the mortgage explicitly provide for a
security interest in any insurance proceeds arising from the aircraft
and engines.
       On August 23, 1997, the engine at issue in this appeal was
severely damaged in an in-flight accident. Tower fully repaired the

        for the use of such insurance proceeds. Notwithstanding
        the foregoing, subject to subparagraph 5.4(b) below
        [relating to total loss of the aircraft, and not relevant
        here], the Lender may in its sole discretion, apply such
        sum to the satisfaction of the Obligations and to the
        extent not so applied shall be paid over to the Borrower.

Paragraph 5.3 required Tower to maintain insurance on the aircraft and
engines.
        3
       The cross-collateralization was created in page 2 of the Aircraft
Mortgage, in paragraph 7.1(b) of the Aircraft Loan and Security
Agreement, and in Article 2 of the First Amendment to Consolidated,
Amended and Restated Aircraft and Engine Loan and Security
Agreement.
        4
         To perfect a security interest in aircraft or aircraft engines, a
secured party must file its mortgage with the Federal Aviation
Administration (FAA). See 49 U.S.C. § 44107. Under the Arizona UCC,
which governed the parties’ obligations under ¶ 9.4 of the security
agreement, if a federal statute provides for national registration of
security interests in a given type of property, a secured party need not file
a UCC financing statement to perfect an interest in such property. Ariz.
Rev. Stat. § 47-9302(C) (1999). As 49 U.S.C. § 44107 is such a statute,
FINOVA perfected by filing with the FAA, and its UCC filings in New
York were unnecessary. The Trustee does not dispute that FINOVA
properly perfected its security interest in the engine.

                                     4
engine at a total cost of $2,251,747.51, of which $1,951,503.26
was directly attributable to the accident.
        On February 29, 2000, Tower filed a voluntary Chapter 11
petition in the Bankruptcy Court for the District of Delaware.
Tower operated as a debtor-in-possession until December 2000,
when it converted to Chapter 7. Charles A. Stanziale, Jr., who had
been the Chapter 11 trustee, was appointed Chapter 7 trustee.
FINOVA claims that, at the time of the bankruptcy, Tower owed
FINOVA some $56 million under various loan agreements
collateralized by, among other assets, the engine at issue here.
During the bankruptcy proceedings in 2004, the engine was
returned to FINOVA, in partial satisfaction of FINOVA’s secured
claim. Some of FINOVA’s other collateral was apparently
destroyed or impaired by Tower, but there is no dispute that the
engine was returned in fully repaired condition. FINOVA contends
that the total value of all returned collateral was some $36 million,
leaving it undersecured by some $20 million.
        In performing his due diligence, the Trustee discovered that
Tower maintained an accident insurance policy on the engine. He
therefore submitted a claim for $1,951,503.26 to the insurers. The
insurers agreed to settle the claim for $951,503.26—the claim
amount minus the policy’s $1 million deductible—in May 2001.
The Trustee then filed a motion in the Bankruptcy Court seeking
approval to enter the settlement. FINOVA timely objected,
claiming that it, not the estate, was entitled to the insurance
proceeds. The Bankruptcy Court approved the settlement, but
directed the Trustee to hold the funds in escrow pending a decision
on this issue.
        On August 27, 2001, the Bankruptcy Court awarded the
proceeds to FINOVA. In re Tower Air, Inc., 268 B.R. 404 (Bankr.
D. Del. 2001). The Trustee appealed to the District Court, which
entered an order affirming the Bankruptcy Court’s opinion.
Stanziale v. FINOVA Capital Corp. (In re Tower Air, Inc.), No.
01-CV-792, 2003 U.S. Dist. LEXIS 10108, 2003 WL 21398007
(D. Del. June 16, 2003). This appeal followed.

             II. Jurisdiction and Standard of Review

      The Bankruptcy Court had subject matter jurisdiction
pursuant to 28 U.S.C. § 157. The District Court had jurisdiction

                                 5
under §§ 158(a) and 1334, and this Court has appellate jurisdiction
under § 158(d). We exercise plenary review of the District Court’s
conclusions of law. Prof’l Ins. Mgmt. v. The Ohio Group of Ins.
Cos. (In re Prof’l Ins. Mgmt.), 285 F.3d 268, 282-83 (3d Cir.
2002). Since the District Court sat as an appellate court to review
the Bankruptcy Court, “we review the Bankruptcy C ourt’s legal
determinations de novo, its factual findings for clear error, and its
exercises of discretion for abuse thereof.” Id. (citing In re Engel,
124 F.3d 567, 571 (3d Cir.1997)).
       The Trustee appeals the Bankruptcy Court’s decision that
the insurance proceeds were part of FINOVA’s collateral under the
Arizona UCC. This is a legal determination that we review de
novo. The Trustee also appeals the Bankruptcy Court’s refusal to
grant him equitable relief under 11 U.S.C. § 552(b). The decision
whether to apply the equitable exception under § 552(b) is
reviewed for abuse of discretion. See Halvajian v. Bank of N.Y. (In
re Halvajian), 216 B.R. 502, 508 (D.N.J. 1998), aff’d 168 F.3d 478
(3d Cir. 1998); Am. Jur. Bankruptcy § 3512.
       The parties agree that this dispute is governed by Arizona
law, as provided by paragraph 9.4 of the security agreement.

                      III. The UCC Provisions

       This case turns primarily on the provisions of the Arizona
UCC that govern a creditor’s rights to the proceeds of his
collateral.5 The default rule is that a security interest in property
includes an interest in the proceeds of that property. Ariz. Rev.
Stat. § 47-9203(C) (1999) (“Unless otherwise agreed a security
agreement gives the secured party the rights to proceeds provided
by § 47-9306.”). The parties here did not opt out of this default;
rather, they explicitly granted FINOVA a security interest in
proceeds in the mortgage. The Trustee argues, however, that this
security interest does not give FINOVA a right to the disputed
insurance money, because that money is not “proceeds” properly
understood, and because awarding it to FINOVA would constitute

       5
         In July 2001, Arizona adopted a revised UCC Article 9. See
1999 Ariz. Sess. Laws ch. 203. The pre-revision Arizona UCC was in
place at all relevant times during this controversy; we will refer mainly
to that Code, and will do so in the present tense.

                                   6
a double recovery forbidden by the UCC. We consider each of
these contentions in turn.

                      A. The Meaning of Proceeds

       Our starting point is perforce UCC § 9-306, which defines
the term “proceeds” and governs a secured creditor’s rights to the
proceeds of his collateral. The relevant parts of this section are set
forth in the margin. 6 The definition of “proceeds” is found in

       6
           Section 9-306, as numbered in the Arizona statute, reads:

       § 47-9306. “Proceeds”; secured party’s rights on
       disposition of collateral
       A. “Proceeds” includes whatever is received upon the
       sale, exchange, collection or other disposition of
       collateral or proceeds. Insurance payable by reason of
       loss or damage to the collateral is proceeds, except to the
       extent that it is payable to a person other than a party to
       the security agreement. Any payments or distributions
       made with respect to investment property collateral are
       proceeds. Money, checks, deposit accounts and the like
       are “cash proceeds”. All other proceeds are “non-cash
       proceeds”.
       B. Except where this chapter otherwise provides, a
       security interest continues in collateral notwithstanding
       sale, exchange or other disposition thereof unless the
       disposition was authorized by the secured party in the
       security agreement or otherwise, and also continues in
       any identifiable proceeds including collections received
       by the debtor.
       C. The security interest in proceeds is a continuously
       perfected security interest if the interest in the original
       collateral was perfected but it ceases to be a perfected
       security interest and becomes unperfected ten days after
       receipt of the proceeds by the debtor unless:
               ...
               2. A filed financing statement covers the
               original collateral and the proceeds are
               identifiable cash proceeds;
               ...

                                     7
subsection (a), the first sentence of which defines the term to
include “whatever is received upon the sale, exchange, collection
or other disposition of collateral or proceeds.” Ariz. Rev. Stat.
§ 47-9306(A). The following sentence reads: “Insurance payable
by reason of loss or damage to the collateral is proceeds, except to
the extent that it is payable to a person other than a party to the
security agreement.” Id.
        The plain language of § 9-306(a) leaves no doubt that the
insurance money at issue here constitutes proceeds of the engine,
because it was “[i]nsurance payable by reason of loss or damage to
the collateral.” FINOVA, by perfecting its security interest in the
engine, was entitled to look to those proceeds as collateral under
§ 9-306(b). Under 11 U.S.C. § 552(b), prepetition security interests
that apply to proceeds of collateral also apply to proceeds of such
collateral acquired after the bankruptcy petition. It is undisputed
that FINOVA had perfected its security interest in the engine prior
to Tower’s bankruptcy. FINOVA’s interest in those proceeds was
therefore also perfected, because Tower had not received them
prior to entering bankruptcy. See Ariz. Rev. Stat. § 47-9306(D)(2)
& (3).
        The Trustee argues that the first sentence of § 9-306(a),
which requires a “sale, exchange, collection or other disposition”
of property, limits the definition of “proceeds” to encompass only
the results of a “transforming event.” Under this view, a creditor

       D. In the event of insolvency proceedings instituted by or
       against a debtor, a secured party with a perfected security
       interest in proceeds has a perfected security interest only
       in the following proceeds:
               ...
               2. In identifiable cash proceeds in the
               form of money which is neither
               commingled with other money nor
               deposited in a deposit account prior to the
               insolvency proceedings;
               3. In identifiable cash proceeds in the
               form of checks and the like which are not
               deposited in a deposit account prior to the
               insolvency proceedings; . . . .

Ariz. Rev. Stat. § 47-9306 (1999).

                                     8
can obtain the proceeds only as a substitute for the original
collateral, not as an addition to it. But this interpretation is
contradicted by the clear language of the second sentence
(“Insurance payable by reason of loss or damage to the collateral
is proceeds . . .”), and we have found no case that supports it.7

        7
          The Trustee cites a number of cases that contain general
statements that insurance is proceeds where the collateral is completely
lost. But these cases do not support the inverse proposition that insurance
is not proceeds where the collateral survives in some form. See Miller v.
Norwest Bank Minn., N.A. (In re Inv. & Tax Servs., Inc.), 148 B.R. 571,
573 (Bankr. D. Minn. 1992) (“Where the creditor requires the debtor to
insure the collateral and the collateral is subsequently destroyed, the
insurance proceeds are in essence proceeds from the disposition of the
collateral.”); Stodd v. Reynard (In re Shooting Star Enters., Inc.), 76
B.R. 154, 156 (B.A.P. 9th Cir. 1987) (“Although it is well recognized
that the term ‘proceeds’ is to be given a broad and flexible interpretation,
it is also recognized that ‘[p]roceeds constitute whatever is substituted
for the original collateral.’”) (quoting In re Judkins, 41 B.R. 369, 372
(Bankr. M.D. Tenn. 1984)); Ford Motor Credit Co. v. Stevens (In re
Stevens), 130 F.3d 1027, 1030 (11th Cir. 1997) (“In the context of the
insurance policy on the truck, therefore, the proceeds act as a substitute
for the insured collateral.”).
         Similarly, the Trustee cites an academic article for the
proposition that “[i]f one attempted to hypothesize the ex ante bargain
of the reasonable debtor and secured party, one would expect them to
understand that insurance monies would stand in the stead of damaged
collateral.” R. Wilson Freyermuth, Rethinking Proceeds: The History,
Misinterpretation and Revision of U.C.C. Section 9-306, 69 Tul. L. Rev.
645, 658 (1995). This article does not support the Trustee’s position.
First of all, Professor Freyermuth, like the cases discussed in the
previous paragraph, merely argues that proceeds should include (at a
minimum) “substitutes” for damaged collateral, not that they should
include only such substitutes. In fact, he argues for a liberalized
definition of proceeds, one that would include lease payments, id. at 659-
67, and cash dividends on stock, id. at 668-72, neither of which are
substitutes for the underlying collateral. Furthermore, Freyermuth relies
on the hypothetical ex ante bargain between debor and creditor, while in
this case we can examine the actual ex ante bargain, which granted
FINOVA an absolute right of approval over the insurance proceeds, see
infra Part IV.A, and a mortgagee payee interest in those proceeds, see
infra Part IV.B. Together, these agreements constitute strong evidence

                                     9
        We are also confident that the Arizona courts would reject
the Trustee’s view. The Arizona Court of Appeals has read the
second sentence of § 9-306(a) independently of the first and held
that “the meaning of [the second sentence of § 47-9306(A)] is clear
on its face,” and that “the ‘right to payment’ under an insurance
policy constitutes ‘proceeds’ subject to Article 9 of the UCC.”
Valley Nat’l Bank of Ariz. v. Cotton Growers Hail Ins., Inc., 747
P.2d 1225, 1231 (Ariz. Ct. App. 1987). We note too that Airwork
Corp. v. Markair Express, Inc. (In re Markair, Inc.), 172 B.R. 638
(B.A.P. 9th Cir. 1994), a (non-Arizona) Ninth Circuit Bankruptcy
Appellate Panel case, assumed, though it did not directly hold, that
a secured creditor could be entitled to keep both a repaired aircraft
engine and the insurance proceeds thereof.
        We therefore are not convinced that § 9-306(a) limits the
definition of “proceeds” to encompass only those proceeds that
entirely replace collateral. Instead, it is quite clear that the
insurance money at issue here constitutes “proceeds” under the
UCC’s definition.

                B. The Limitation to One Recovery

       We acknowledge that there is significant intuitive appeal to
the notion that a creditor should not be able to recover both his
collateral and the proceeds thereof. Such a situation bears a
resemblance to a double recovery. The UCC provides that “The
secured party may claim both proceeds and collateral, but may of
course have only one satisfaction.” Ariz. Rev. Stat. § 47-9306 cmt.
3 (1999).8 Thus, while we have decided that the insurance money

that the expectations of the parties favor allowing FINOVA to recover.
       8
         The revised UCC moves this limitation to one recovery from the
official comments to the statutory text, and changes its wording
significantly. See Ariz. Rev. Stat. § 47-9102(64) (2004) (“Proceeds . . .
means . . . (e) to the extent of the value of collateral and to the extent
payable to the debtor or the secured party, insurance payable by reason
of the loss or noncomformity of, defects or infringement of rights in, or
damage to the collateral.” (emphasis added)). This provision was not, of
course, in effect at the times relevant to the current dispute; hence we
need not explore its meaning.

                                   10
constitutes “proceeds,” we must conduct a further inquiry before
deciding conclusively that FINOVA is entitled to recover it.
FINOVA has a claim to any proceeds of its collateral under UCC
§ 9-306 and 11 U.S.C. § 552(b), but that claim may be superseded
by the UCC’s limitation to “one satisfaction.” We examine that
limitation below, both in the general case and as applied to cross-
collateralized creditors. We also draw an analogy to the case in
which the collateral is sold, rather than damaged, and use the
courts’ treatment of sale proceeds to inform our treatment of
insurance proceeds.

                1. The Meaning of “One Satisfaction”

       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

                   2. The Cross-Collateralization

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.

                3. The Analogy to Sale of Collateral

        While few cases directly address the issue of whether a
creditor can recover both repaired collateral and the insurance
proceeds for damage to that collateral, several courts have
examined the situation in which creditors claim both collateral and
the sale proceeds of that collateral. Because sale and insurance
proceeds are governed by the same UCC provisions, see Ariz. Rev.
Stat. § 47-9306(A), these cases provide a helpful analogy to the
present case, and inform our understanding of the meaning of “one
satisfaction” under § 9-306.
        To clarify our discussion, we use a hypothetical case. A
creditor lends a debtor $100, secured by an engine initially worth
$100. The engine’s value then depreciates to $50, and the debtor
secretly sells it to a third party for $50. The hypothetical relies on
the assumption that the third-party buyer is not a bona fide
purchaser or buyer in ordinary course, and has no right to retain the
engine. We also assume that the sale price is § 9-306 “proceeds,”
and that the creditor’s security interest in it is perfected under § 9-
306(c) & (d). If the debtor then enters Chapter 7 bankruptcy and
cannot pay its unsecured debts, may the creditor then claim the $50

                                  14
proceeds from the debtor and proceed against the third party on its
perfected security interest in the engine?
         The language of § 9-306(b) seems clear enough: the
creditor’s security interest “continues in collateral notwithstanding
sale . . . unless the disposition was authorized by the secured party
. . . and also continues in any identifiable proceeds including
collections received by the debtor.” Ariz. Rev. Stat. § 47-9306(B).
The creditor can thus look to both the sale proceeds and the engine
itself (in the third party’s hands).
         Here again, the creditor “may claim both proceeds and
collateral, but may of course have only one satisfaction.” Ariz. Rev.
Stat. § 47-9306 cmt 3. The crucial question, in this hypothetical as
in the case at bar, is what constitutes a “satisfaction.” Does this
comment mean that the creditor may claim both proceeds and
collateral, but only receive one of them? Or does it mean that the
creditor may receive both proceeds and collateral, so long as its
total recovery is less than the value of its debt?
         In our view, it is clear that the creditor may receive both
proceeds and collateral, and is limited only to the amount of its
debt, not the value of the underlying property. See, e.g., Taylor
Rental Corp. v. J.I. Case Co., 749 F.2d 1526, 1529 (5th Cir. 1985)
(interpreting identical Florida UCC provision and stating that “[a]
creditor may pursue several remedies until the debt is satisfied”);
Standard Dyeing & Finishing Co. v. Arma Textile Printers Corp.,
85 Civ. 5399, 1991 WL 49782, *7 (S.D.N.Y. Mar.25, 1991)
(“‘When an unauthorized disposition of collateral has occurred, a
secured party has numerous cumulative remedies at its disposal; it
is not forced to elect a single remedy. . . . [A] creditor may pursue
several remedies until the debt is satisfied.’”) (citation and
emphasis omitted); Fleet Capital Corp. v. Yamaha Motor Corp.,
U.S.A., 2002 WL 31174470, *12 (S.D.N.Y. 2002); cf. Frantz v.
First Nat. Bank & Trust Co. of Wyoming, 687 P.2d 1159, 1162
(Wyo. 1984) (“Although [a creditor] is entitled to only one
satisfaction for the underlying debt, he may seek it in different
ways.” (emphasis added)).
         These cases demonstrate that our hypothetical creditor could
recover both collateral and proceeds up to the amount of his debt,
and present a clear analogy to the case at bar. In our hypothetical
case, the creditor is undersecured because of depreciation in the
value of the engine; here, the creditor is undersecured because of

                                 15
loss of other collateral specifically covered by cross-
collateralization clauses. As discussed above, see supra Part
III.A.2, the cross-collateralization clauses allow FINOVA to treat
all of its collateral, and the proceeds thereof, as collateral for all of
its debts. Thus, by virtue of the loss of its other collateral, FINOVA
is in essentially the same situation as our hypothetical creditor
whose single piece of collateral has depreciated, and can recover
from both the collateral and the proceeds. 12
         The Trustee disagrees with this result, citing a Bankruptcy
Court case that holds that a secured claim is limited to the sale price
of the collateral where it was sold pursuant to a Chapter 11 plan.
See In re Broomall Printing Corp., 131 B.R. 32, 36 (Bankr. D. Md.
1991); cf. United Fruit & Produce Co. v. Absolute Exterminating
(In re United Fruit & Produce), 242 B.R. 295, 306 (Bankr. W.D.
Pa. 1999). We do not think that Broomall is applicable here. Tower
is not in Chapter 11, and far from getting court or creditor approval
for the “disposition” of the collateral, Tower repaired it without
getting FINOVA’s contractually required permission. We note that
§ 9-306(b) grants a creditor a continuing interest in both collateral
and proceeds unless the creditor authorized the transfer, Ariz. Rev.
Stat. § 47-9306(B); the fact of authorization in Broomall
distinguishes it from the present case.
         We thus conclude that, under the Arizona UCC as it was in
effect at the time relevant to this case, FINOVA was entitled to
recover both its collateral and the insurance proceeds from that
collateral.

                   IV. The Contractual Provisions

       Our UCC holding is also supported by several provisions in
the agreements between Tower and FINOVA, which strengthen
FINOVA’s claim to the insurance proceeds. The first of these is a
contract clause that granted FINOVA a right of approval over any
use of insurance proceeds; the second is the insurance agreement,
which gave FINOVA the (extensive) rights of a “mortgagee payee.”

       12
         We take no position on what the result might be under the
revised UCC, see supra note 10, either in our hypothetical or in the case
at bar.

                                   16
                 A. FINOVA’s Right of Approval

         Paragraph 5.4(a) of the security agreement gives FINOVA
the right to approve any use of any insurance proceeds by Tower,
and allows FINOVA the right to, “in its sole discretion, apply such
[proceeds] to the satisfaction of the Obligations.”
         It is undisputed that Tower repaired the engine without
either filing an insurance claim or asking for FINOVA’s approval.
But the contract unequivocally grants FINOVA, not Tower, the
right to decide how to use any insurance proceeds. FINOVA had
the “sole discretion” to decide to apply the insurance proceeds to
the satisfaction of Tower’s debt, rather than to repairing the engine.
Tower’s decision to repair the engine, rather than file an insurance
claim and get FINOVA’s approval on the use of the proceeds,
deprived FINOVA of the benefit of ¶ 5.4(a).
         The Bankruptcy Court cited Pima County v. Ina/Oldfather
4.7 Acres Trust #2292, 145 Ariz. 179, 700 P.2d 877 (Ariz. Ct. App.
1984), for the proposition that Arizona courts would enforce
contract clauses similar to ¶ 5.4(a). The Pima County court upheld
clauses in a mortgage agreement that allowed the mortgagee to
apply any fire insurance proceeds or condemnation awards to the
amount of the debt, hold the proceeds as additional security, or
release them to the mortgagors, at the mortgagee’s discretion. 700
P.2d at 879. The mortgagors in that case argued that an award for
partial condemnation of the property should have been split
between themselves and the mortgagee, because giving the full
award to the mortgagee left it oversecured. Id. The Arizona court
rejected this argument and gave the entire award to the mortgagee,
requiring it to use the award either as additional security or to
reduce the amount of the mortgagors’ indebtedness. Pima County
strongly suggests that Arizona courts will give secured parties the
benefit of their bargain with regard to use-of-proceeds clauses, even
if it leaves them with what might appear to be a recovery greater
than their security interest (but less than or equal to the amount of
the underlying debt). The Bankruptcy Court correctly took this as
an indication that Arizona courts would uphold ¶ 5.4(a) and let
FINOVA decide how to use the insurance proceeds.
         FINOVA thus had an interest in the insurance proceeds,
payable to it independent of any action (including repairs) taken by
Tower. It had the right to approve Tower’s use of the proceeds, and

                                 17
to apply them to its own debt rather than to repairing the engine.
The Trustee states in his brief that FINOVA “made a bad deal with
the Debtor resulting in FINOVA holding a secured and unsecured
claims against the Debtor.” But in fact it is difficult to see how
FINOVA could have made its deal any more bulletproof than this.
It bargained for, and received, an absolute right to the insurance
proceeds, and the Trustee’s attempts to restrict that right are
unavailing.13

             B. The Standard Mortgage Policy Language

        It is well settled, in non-UCC (mainly real property)
contexts, that certain mortgagees can claim insurance proceeds on
their collateral, even when they suffer no loss. See, e.g., Savarese
v. Ohio Farmers Ins. Co., 260 N.Y. 45, 57, 182 N.E. 665, 668
(N.Y. 1932). The cases that so hold depend on the nature of the
insurance clause involved.
        The Bankruptcy Court cited one representative example,
Grange Mut. Cas. Co. v. Central Trust Co., N.A., 774 S.W.2d 838,
840 (Ky. Ct. App. 1989), in which a mortgagee bank sued an
insurer who refused to pay out on a fire insurance policy because
the mortgagor had, at his own expense, repaired the mortgaged
property. The Kentucky court stated:

        The right of the mortgagee under a standard
        mortgage [insurance] clause is not dependent upon
        his sustaining loss. That is, the mortgagee under such
        a clause acquires a right to the insurance proceeds
        even though he suffers no actual loss, as when the
        building was restored to its former condition by the
        mortgagor.

        13
          At oral argument, counsel for the Trustee sought to minimize
the effect of this contractual provision, noting that many contracts are
invalidated or modified in bankruptcy. We think, however, that Pima
County indicates that the Arizona courts would look to contractual
provisions like ¶ 5.4(a) to help define a creditor’s security interest. If
¶ 5.4(a) gave FINOVA the right to apply insurance proceeds to increase
its security interest, then those proceeds are part of its secured claim and
so belong to FINOVA, not the bankruptcy estate.

                                    18
Id. This language applies to mortgagee payees, but not to loss
payees.
        The difference between mortgagee and loss payees has been
spelled out by an Arizona court. A loss payee is “a mere appointee
to receive the proceeds to the extent of his interest.” Granite State
Ins. Co. v. Employers Mut. Ins. Co., 609 P.2d 90, 92 (Ariz. Ct. App.
1980) (quoting 5A J. Appleman, Insurance Law and Practice
§ 3335). In loss-payee cases “the policy [is] subject to any act or
omission of the insured which might void, terminate, or adversely
affect the coverage; and if the policy is not collectible by the
insured, the appointee, likewise, cannot recover thereunder.” Id.
(quoting Appleman, supra, § 3335). On the other hand, “[i]n
contradistinction with a basic loss payee whose rights are totally
derivative, a mortgagee payee has an independent agreement with
the insurer.” Id. The mortgagee payee is treated “just as if [he or
she] had applied for the insurance entirely independently of the
mortgagor.” Id. at 93 (quoting Appleman, supra, § 3401).
        The choice of which category the payee falls under depends
on the language of the insurance clause: a “standard” or “union”
clause creates a mortgagee payee, while a “simple” clause creates
a loss payee. See 4 Lee R. Russ et al., Couch on Insurance §§ 65:8,
9, 32 (3d ed. 1984) (hereinafter Couch). The main difference is that
the loss payee “is subject to such defenses as the insurer may have
against the mortgagor, while the [mortgagee payee] is not.” Id.
§ 65:9.
        It seems clear that FINOVA is a mortgagee payee. The
insurance certificate issued to FINOVA provides that “[w]ith
respect to the interest of the Certificate Holder, the insurance
afforded shall not be invalidated by any act or neglect of the Named
Insured,” which creates a mortgagee-payee interest. The certificate
also does not specifically state that FINOVA may receive proceeds
only to the extent of its interest, which is a normal element of the
“simple” (loss payee) clause, see 4 Couch § 65:9.
        Because FINOVA is a mortgagee payee, it can, by analogy
to non-UCC insurance law, recover the proceeds to the extent of its
debt, even though Tower repaired the damage to its collateral:

       A mortgagee may recover policy proceeds under a
       standard mortgage clause, even though, because of a

                                 19
       restoration of the property by the mortgagor, the
       mortgagee has suffered no actual loss. . . . As a
       corollary of the view that restoration does not defeat
       the right of the mortgagee to recover, it is held that
       the fact that the mortgagor has repaired the damage
       does not entitle him or her to recover the proceeds of
       the insurance.

4 Couch § 65:62 (emphasis added). The mortgagee’s “loss is
measured in terms of the value of the debt, not the actual economic
loss to the mortgagee.” Id. § 65:36.14
        The Trustee argues that that it was “erroneous and improper”
for the Bankruptcy Court to rely on non-UCC, non-bankruptcy
mortgage cases. We are not persuaded. We agree that, if relevant
UCC precedents clearly established that Tower has a right to the
proceeds, reliance on contrary non-UCC law would be misplaced.
Where, however, there are no UCC cases directly on point, see
supra Part III.B.1, and what cases there are suggest that FINOVA
can recover the proceeds, see supra Part III.B.3, we think it is
reasonable to look to analogous non-UCC law to strengthen our
conclusion that this recovery accords with basic fairness and the
common law.15

       14
          On the other hand, the mortgagee’s right to retain insurance
proceeds “is limited by the mortgagee’s duty, under § 4.7(b), to permit
use of the funds for restoration of the loss or damage to the real estate.”
Restatement (Third) of Property: Mortgages § 4.7, cmt. d (2004); see
also id. § 4.7(b); 12 Couch § 178:58. This provides little guidance in
cases where the mortgagor has already restored (and then liquidated) the
property—or in cases, such as this one, where a contractual clause
specifically gives the mortgagee the discretion of how to apply proceeds.
Had Tower followed the requirements of ¶ 5.4(a) of the security
agreement, and demanded that FINOVA allow it to use the insurance
funds to repair the engine, the Restatement’s approach might apply. In
the case at bar, it does not.
       15
         Similarly, we see no reason to ignore the line of cases
exemplified by Savarese, supra, merely because they occurred outside
of bankruptcy. As we have already determined that the insurance
payments are proceeds of collateral for UCC purposes, see supra Part
III.A, FINOVA can recover them under § 552 of the Bankruptcy Code

                                    20
        In sum, FINOVA’s contractual right of approval over
Tower’s use of the insurance proceeds, and its mortgagee payee
rights in the insurance contracts, further support its claim to treat
the insurance proceeds as part of its security. Because this accords
with our UCC conclusion in Part III, we conclude that FINOVA is
entitled to recover the insurance proceeds under the UCC and the
Bankruptcy Code.

                       V. The Equity Exception

        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.

                            VI. Conclusion

       We hold that the Bankruptcy Court was correct in awarding
the insurance proceeds to FINOVA, and did not abuse its discretion
in refusing to invoke the equitable exception. We will therefore
affirm the order of the District Court.

       17
          From this fact, the Bankruptcy Court drew the conclusion that
the insurance proceeds would not otherwise have been part of Tower’s
estate, and thus available to pay its general unsecured creditors. We find
this conclusion inexplicable; the insurance proceeds are simply a pool of
money, and if they were not reserved to FINOVA, then they would seem
to be assets of the estate and available to pay general creditors.

                                   22