## Facts

- Ward and Brenda Delbridge operated a commercial dairy farm and filed a Chapter 11 case.
- Production Credit Association of Mid-Michigan (PCA) held a perfected prepetition security interest in the debtors’ cows and in the cows’ “products and proceeds,” including milk.
- Federal Land Bank held a real estate mortgage and an assignment of milk checks from the milk purchaser but did not hold a security interest in the livestock or their products.
- After the petition date, the dairy operation continued producing milk using the cows, the debtors’ labor, and ongoing operating inputs (e.g., feed and veterinary care).
- The debtors sought a determination that PCA’s lien did not extend to milk produced after the petition date, or alternatively sought authority to use milk proceeds in the reorganization.

## Issues

1. Whether milk produced after the bankruptcy filing is a “product” of prepetition collateral (cows) so that a prepetition security interest continues in that milk or its proceeds under 11 U.S.C. § 552(b), notwithstanding § 552(a).
2. If § 552(b) applies, how the court should limit or condition the secured creditor’s interest in post-petition milk proceeds “based on the equities of the case.”

## Decision

- The court held that post-petition milk is a “product” of the cows and falls within the scope of PCA’s prepetition security interest under § 552(b), as informed by state commercial law treating milk as a farm product.
- The court rejected the argument that post-petition milk is solely the product of the farmer’s labor such that it is entirely new property insulated by § 552(a).
- Applying the “equities of the case” proviso in § 552(b), the court limited PCA’s recovery to a pro rata share of post-petition milk proceeds.
- The court set the allocation so PCA receives the same percentage of post-petition milk proceeds as PCA’s capital contribution bears to the total capital plus direct operating expenses used to produce the milk.
- The remaining portion of milk proceeds was left for the estate, reflecting the estate’s post-petition contributions to production.

## Legal Principles

- Under 11 U.S.C. § 552(a), a prepetition security interest generally does not attach to property acquired after the petition date.
- Under 11 U.S.C. § 552(b), a security interest that extends to prepetition collateral and its “proceeds, products, offspring, or profits” may continue post-petition in those categories, subject to court limitation “based on the equities of the case.”
- For livestock collateral, milk produced post-petition can constitute a “product” of the animals when state law classifies milk as a farm product and the security agreement covers products/proceeds.
- The § 552(b) equities analysis permits apportionment when both (i) prepetition collateral value and (ii) post-petition labor and operating expenditures materially contribute to generating post-petition proceeds.
- An equitable remedy may allocate post-petition proceeds in proportion to the secured creditor’s capital contribution relative to total capital and direct operating expenses required for production.

## Conclusion

The court concluded that a lender’s prepetition lien on dairy cows and their products can reach post-petition milk under § 552(b), but it limited the lender’s interest to a proportionate share of milk proceeds to account for the estate’s post-petition labor and operating costs that helped generate those proceeds.


In re Delbridge, 61 B.R. 484 (Bankr. E.D. Mich. 1986)