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The Bankruptcy Hotline
Secured Creditor May Collect Insurance on Damaged Collateral
In an issue of first impression in the Third Circuit, the appeals court has ruled that 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. Stanziale v. Finova Capital Corp. (In re Tower Air Inc.), No. 03-3101 (Feb. 10).
The court held that under the relevant Uniform Commercial Code (' 9-306 of the Arizona UCC), the finance company, as an undersecured and cross-collateralized creditor, was entitled to recover both the collateral (an aircraft engine) and the insurance proceeds. The court relied on the language of both the contractual agreements and insurance documents. In the contractual agreements between the debtor and the secured creditor, the creditor retained the right of approval over any use of insurance proceeds. As for the insurance proceeds, the court noted that the insurance documents conferred upon the secured creditor the significant status of a mortgagee payee, and not a mere loss payee.
The court further rejected the Trustee's equitable exception argument under ' 552(b). The court reasoned that because this was a Chapter 7 liquidation with no hope of rehabilitation, the assets of the estate were not used to increase the value of the secured creditor's collateral during the bankruptcy proceedings. The repairs to the damaged collateral were made pre-petition and while they did increase the value of the collateral, the debtor's apparent negligence also seems to have caused the destruction of other collateral, leaving the creditor greatly undersecured. Therefore, the finance company would only recover what it is due as a secured creditor with a valid security interest in the insurance proceeds.
Secured Creditor May Collect Insurance on Damaged Collateral
In an issue of first impression in the Third Circuit, the appeals court has ruled that 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. Stanziale v. Finova Capital Corp. (In re Tower Air Inc.), No. 03-3101 (Feb. 10).
The court held that under the relevant Uniform Commercial Code (' 9-306 of the Arizona UCC), the finance company, as an undersecured and cross-collateralized creditor, was entitled to recover both the collateral (an aircraft engine) and the insurance proceeds. The court relied on the language of both the contractual agreements and insurance documents. In the contractual agreements between the debtor and the secured creditor, the creditor retained the right of approval over any use of insurance proceeds. As for the insurance proceeds, the court noted that the insurance documents conferred upon the secured creditor the significant status of a mortgagee payee, and not a mere loss payee.
The court further rejected the Trustee's equitable exception argument under ' 552(b). The court reasoned that because this was a Chapter 7 liquidation with no hope of rehabilitation, the assets of the estate were not used to increase the value of the secured creditor's collateral during the bankruptcy proceedings. The repairs to the damaged collateral were made pre-petition and while they did increase the value of the collateral, the debtor's apparent negligence also seems to have caused the destruction of other collateral, leaving the creditor greatly undersecured. Therefore, the finance company would only recover what it is due as a secured creditor with a valid security interest in the insurance proceeds.
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