## Facts

- Sarah Michaels, Inc., a customer of Certified Packaging Corp. (Certified), entered bankruptcy, and its trustee, Brenda P. Helms, sued Certified to avoid transfers.
- Helms obtained a default judgment against Certified for about $2 million and sought to collect as a judgment lien creditor.
- Before these events, Certified had borrowed from LaSalle Bank, which held a perfected security interest in Certified’s equipment and related collateral (later assigned to CPC Acquisition, Inc.).
- A fire damaged equipment at Certified’s plant and shut operations for weeks, causing business losses far exceeding the property damage.
- Certified filed an Illinois negligence action against its insurance broker (Rothschild) for failing to obtain business-loss coverage; it settled for $88,000 net.
- Certified also sued Commonwealth Edison (Com Ed), alleging negligent maintenance caused the fire; the claim sought about $2 million, with roughly 10% for property damage and 90% for business-interruption/lost profits.
- Helms and LaSalle asserted competing rights to the Rothschild settlement proceeds and to any recovery in the Com Ed action.

## Issues

1. Whether LaSalle’s security interest in Certified’s equipment extended, as “proceeds” under Article 9, to the Rothschild settlement from the insurance-broker negligence claim.
2. Whether LaSalle’s security interest extended, as “proceeds,” to any future recovery in the Com Ed action, particularly the business-interruption/lost-profits component.
3. How priority should be allocated between a prior perfected secured creditor and a later judgment lien creditor as to these litigation proceeds.

## Decision

- The Seventh Circuit affirmed the district court’s allocation.
- LaSalle was entitled to the Rothschild settlement because it constituted proceeds of collateral.
- Helms (for the bankruptcy estate) was entitled to the business-loss portion of any Com Ed recovery because it was not proceeds of the equipment collateral.
- The court recognized that the property-damage portion of any Com Ed recovery would be treated differently from business-interruption damages, with the secured creditor’s lien attaching to the former as proceeds.

## Legal Principles

- Under Article 9, a security interest in collateral extends to “proceeds” of the collateral, but not to all value connected to the debtor’s business.
- A claim against an insurance broker for failing to procure coverage may be treated as proceeds when it functions as a substitute for insurance proceeds that would have been payable due to damage to the secured collateral.
- Tort recovery attributable to physical damage to secured collateral is typically proceeds of that collateral; recovery for business interruption or lost profits is not, absent a security interest covering those intangibles.
- A perfected secured creditor has priority over a later judgment lien creditor as to collateral and its proceeds; a judgment lien creditor may reach assets not encumbered by the secured creditor’s perfected interest.

## Conclusion

The court held that the secured creditor’s lien reached the broker-malpractice settlement as a substitute for insurance proceeds tied to damaged equipment, but did not reach tort damages for business interruption and lost profits because those damages were not proceeds of the equipment collateral; priority followed that classification.


Helms v. Certified Packaging Corp., 551 F.3d 675 (7th Cir. 2008)