## Facts

- Anchorage Boat Sales, Inc., a retailer of pleasure boats, financed operations through secured lending from Midlantic National Bank, including a floor-plan arrangement covering boat inventory and related proceeds.
- From December 1979 to February 1980, Anchorage defaulted on obligations to Midlantic and stopped payment on a check tied to sales of floor-planned boats; Midlantic declared the loans in default on February 14, 1980.
- Anchorage filed a Chapter 11 petition on February 22, 1980, triggering the automatic stay under 11 U.S.C. § 362.
- Midlantic held security interests in substantially all business assets, including inventory and accounts receivable/proceeds.
- The debt to Midlantic exceeded collateral value by approximately $121,575.72, leaving Anchorage with no equity in the encumbered property.
- Evidence showed projected net losses, limited supplier and lender support, and a low likelihood of successful reorganization.
- As Anchorage continued selling inventory post-petition and receiving cash, a dispute arose over protection of Midlantic’s interest in proceeds.

## Issues

1. Whether cause existed under 11 U.S.C. § 362(d) to grant relief from the automatic stay because the debtor lacked equity in the collateral and reorganization was not reasonably likely within a reasonable time.
2. Whether Midlantic’s security interest extended to post-petition proceeds of inventory sales and, if so, what adequate protection was required during the stay.
3. Whether segregating cash proceeds from sales of encumbered inventory was necessary to protect the secured creditor from diminution of its collateral position.

## Decision

- The court found Anchorage had no equity in the collateral and that prospects for a successful reorganization were small.
- The court held Midlantic’s security interest extended to proceeds of the encumbered inventory, including cash collections.
- To provide adequate protection during the automatic stay, the court required the debtor to segregate proceeds from sales of encumbered inventory to prevent dissipation.
- Given the lack of equity and weak reorganization prospects, the secured creditor was entitled to relief from the stay or, at minimum, strict conditions ensuring protection of its collateral value, including segregation of proceeds.

## Legal Principles

- A perfected security interest in inventory generally continues in identifiable proceeds of that collateral under applicable nonbankruptcy law and remains enforceable in bankruptcy absent a contrary Code provision.
- During the automatic stay, a debtor’s continued use, sale, or conversion of a secured creditor’s collateral requires adequate protection sufficient to prevent decline in the value of the creditor’s interest.
- When a Chapter 11 debtor sells encumbered inventory in the ordinary course, segregation of cash proceeds can be an appropriate method of adequate protection to preserve identifiable proceeds for the secured creditor.
- Under 11 U.S.C. § 362(d), relief from stay (or stringent protective conditions) is favored when the debtor has no equity in the property and a successful reorganization is not reasonably likely.

## Conclusion

The bankruptcy court recognized the secured lender’s continuing lien in inventory proceeds and required segregation of those proceeds as adequate protection, with the debtor’s lack of equity and poor reorganization prospects supporting relief from the stay or strict protective conditions.


In re Anchorage Boat Sales, Inc., 4 B.R. 635 (Bankr. E.D.N.Y. 1980)