4.6 Property Generated Postpetition

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

4.6 PROPERTY GENERATED POSTPETITION

4.601 In General. Under section 541(a)(6), the bankruptcy estate includes "proceeds, product, offspring, rents, or profits of or from the property of the estate, except such as are earnings from services performed by an individual debtor after commencement of the case." The derivatives that accrue from property of the estate "even after the estate has been created" are property of the estate. ¹⁸³ There is a distinction between proceeds from estate property and "earnings from services performed by an individual debtor after commencement of the case." ¹⁸⁴ "[C]ompensation for current services" is not property of the estate. ¹⁸⁵

4.602 Proceeds.

A. Definition. The Bankruptcy Code does not define the term "proceeds." ¹⁸⁶ However, the House and Senate Committee reports to the Bankruptcy Reform Act of 1978 state that the term "proceeds" as used in the Bankruptcy Code is intended to have a broader meaning than it does in the UCC. ¹⁸⁷

B. Dividends. A debtor's shareholder interest in a corporation includes dividends that arise solely from that shareholder interest. ¹⁸⁸ Postpe-tition appreciation of a debtor shareholder's stock in a corporation owned solely by the debtor has been held to be proceeds of property of the estate and not compensation for services performed postpetition. ¹⁸⁹

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C. Insurance Proceeds. Fire insurance and other property loss insurance is estate property. ¹⁹⁰ The right to collect proceeds under the policy belongs to the debtor, and that interest "fall[s] within that part of the definition of the debtor's estate which includes proceeds, products, rents and profits from property of the estate. . . ." ¹⁹¹ Payouts from policies issued to the debtor postpetition are not property of the estate. ¹⁹²

4.603 Rents. The definition of "cash collateral" includes rents. ¹⁹³ Prior to the Bankruptcy Reform Act of 1994, ¹⁹⁴ a security interest only extended to postpetition rents when "perfected" under state law. ¹⁹⁵ At that time, Virginia law governed the determination of "whether an assignment of rents clause is perfected such that the postpetition rents become cash collateral in a Chapter 11 proceeding." ¹⁹⁶ The Bankruptcy Reform Act of 1994 amended the Bankruptcy Code and added a provision ¹⁹⁷ intended to eliminate the application of state law in determining the right to postpetition rental income. ¹⁹⁸ Nevertheless, the scope of the new rents provision is still somewhat ambiguous.

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The determination of postpetition interests in rents remains subject to certain other sections of the Bankruptcy Code, including the section 544 "strong-arm power." ¹⁹⁹ Notably, section 544 incorporates nonbankruptcy law in determining the enforceability of security interests. ²⁰⁰ However, should a court find that the reference triggers state law, Virginia law provides...