Who gets the income from income-producing collateral during bankruptcy—the debtor or the undersecured creditor? Throughout the history of bankruptcy law in America, this question has not had a bright-line answer. It is one of those indelible questions whose answer lies even to this day within the equitable power of courts of equity. In 2014, the First Circuit looked at this question and adopted the Fifth Circuit’s “flexible approach.”
With the flexible approach growing in popularity, the lower courts’ tendency to adopt rigid valuation methodologies should fade. Instead of taking positions on either the addition method or the subtraction method, bankruptcy courts should exercise their congressionally-mandated equitable powers to develop standards based on non-exclusive factor tests. Over time, the factors used and weights assigned to each will hopefully begin to provide a measure of clarity to this heavily facts-and-circumstances-dependent area of the law.
- income-producing collateral flexible approach single dual valuation undersecured creditor bankruptcy finance
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