A prepetition UCC lien on “all assets” and “accounts” does not attach to proceeds from the postpetition sale of real property, according to Bankruptcy Judge Christopher M. Lopez of Houston.
More precisely, a UCC lien on “accounts” would attach to proceeds from the sale of real property if there were no bankruptcy. However, Section 552(b)(1) prevented the lien from attaching in the case before Judge Lopez because the sale occurred after filing.
The January 24 opinion by Judge Lopez means that a UCC lien on “all assets” and “accounts” won’t be the equivalent of a mortgage on real property in bankruptcy.
Before bankruptcy, a bank had a security interest in all of the debtor’s assets and “accounts.” The bank perfected the security interest by filing the required UCC financing statement. However, the bank did not have a mortgage on real property belonging to the debtor.
In chapter 11, the court entered a so-called cash collateral order giving the bank a replacement lien and a superpriority administrative claim to the extent that the bank had a perfected security interest in cash.
After bankruptcy, the debtor obtained court approval to sell a parcel of real property that generated almost $500,000 in net proceeds. There were no mortgages on the property.
The bank contended that its perfected lien on “accounts” included the account receivable created by the sale. The debtor agreed and sought court approval to use some $150,000 of the proceeds to pay off the bank.
An unsecured creditor objected to paying off the bank, and Judge Lopez denied the motion.
To parse the argument, Judge Lopez first cited Section 9-102(a)(2) of the Texas Uniform Commercial Code, which defines an “account” to include “a right to payment of . . . property that has been or is to be sold . . . .” However, Section 9-109(d)(11) of the Texas UCC says that Article 9 does not apply to “the creation or transfer of an interest in or lien on real property . . . .”
So, does Section 9-109(d)(11) mean that the UCC did not give rise to a lien on the account created by the sale of the real property? “No,” Judge Lopez concluded.
Citing a decision by a bankruptcy judge in New York, Judge Lopez said that the “plain language” of Section 9-102(a)(2) means that the UCC would have given rise outside of bankruptcy to a lien on an account arising from a contract to sell real property. But Section 9-102(a)(2) wasn’t the end of the story.
Section 552(a) of the Bankruptcy Code says:
Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
Judge Lopez explained that Section 552(a) “applies to after-acquired clauses providing, for example — like in this case — a blanket lien on all accounts,” whether owned or later acquired.
In the case before him, Judge Lopez said that none of the exceptions in Section 552(b) applied, because, for instance, the bank did not have a lien on inventory and the proceeds of inventory.
Since the account did not arise until after filing, Judge Lopez held that the bank’s lien did not “extend to the sale proceeds.”
The bank had another argument: The adequate-protection order gave it the proceeds from the sale.
Judge Lopez made short shrift of the argument. In one paragraph, he said there was “no evidence in the record of a diminution in the value of [the bank’s] lien on cash.” He therefore denied the debtor’s motion to pay the bank.
A prepetition UCC lien on “all assets” and “accounts” does not attach to proceeds from the postpetition sale of real property, according to Bankruptcy Judge Christopher M. Lopez of Houston.
More precisely, a UCC lien on “accounts” would attach to proceeds from the sale of real property if there were no bankruptcy. However, Section 552(b)(1) prevented the lien from attaching in the case before Judge Lopez because the sale occurred after filing.
The January 24 opinion by Judge Lopez means that a UCC lien on “all assets” and “accounts” won’t be the equivalent of a mortgage on real property in bankruptcy.