Part V Perfecting an Article 9 Security Interest
Chapter 16 Perfecting Security Interests in Proceeds and Other Later Acquired Property
A. Generally
In Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem) we saw that under new Article 9, section 9-315(a)(2), as was true under former Article 9, a secured party is given an interest in identifiable proceeds without the need for an agreement as to proceeds. We also saw that under new section 9-203(f) a security interest in proceeds is enforceable without regard to whether the requirements applicable to original collateral have been met. Consequently, a security interest (but not an agricultural lien -- except as the statute creating it so provides) attaches to proceeds as soon as property constituting identifiable proceeds of original collateral comes into existence.
As for perfection, again as was true under former Article 9, under new section 9-315(c) a security interest in identifiable proceeds is perfected at the moment of attachment without the need for further action so long as the security interest in the original collateral is perfected. To this extent a security interest in identifiable proceeds is perfected automatically.
There is an issue as to how long the perfection in proceeds conferred by Article 9 continues. Under former section 9-306(3)(d), except as to specified cases, perfection of a security in proceeds would continue beyond ten days only if action to perfect the security interest as if the proceeds were original collateral was taken.
New sections 9-315(d) and (e) retain the basic scheme of former Article 9 but extend the period of conferred protection to twenty days. The situations in which no action need be taken to continue the perfection in proceeds beyond the twenty-day period and actions that must be taken to continue perfection in other cases are considered in Chapter 24 (Continuing Perfection -- Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).
In Problems 9-6 to 9-10 in Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem) the question was whether and as to which property the secured party had an enforceable security interest. Each of those problems has been revised to raise the question whether or not, and under what circumstances, any enforceable security interest the secured party may have is perfected. You may put aside for now the question of how long any perfection would continue without further action.
Problem 16.1 (interactive)
Leslie Lender has a security interest in Danielle Debtor's "equipment, existing and after-acquired." Leslie files a financing statement covering "All Debtor's Equipment." The security agreement makes no mention of proceeds. The agreement does provide that Danielle is not to dispose of any equipment without the Leslie's express written consent. Danielle sells a drill press to Byron Buyer without Leslie's express written consent. Danielle receives cash in the amount of $1,000 and a check for $1,500. Danielle uses the cash to purchase a newer and less expensive drill press. She places the check in a cash drawer.
Does Leslie have a perfected security interest in enforceable security interest in the $1,500 check?
Does Leslie have a perfected security interest in the new drill press?
Problem 16.2 (interactive)
Assume the facts of Problem 16.1. Assume further, however, that Leslie Lender would be unable to show the new drill press is identifiable proceeds.
Could Leslie still have a perfected security interest in that drill press?
Would your answer be the same if Leslie had filed a financing statement indicating that the collateral is the drill press (that Danielle eventually sold to Byron Buyer)?
Problem 16.3 (interactive)
Ready Lender has a security interest in Donald's prize racing greyhound, Black Streak. Ready has filed a financing statement covering "Black Streak."
Does Ready have a perfected security interest in Black Streak's winnings?
If Ready Lender decides to go the original collateral route what should Ready do to be sure the security interest in the winnings as original collateral is perfected?
Problem 16.4 (interactive)
Delia Debtor operates a gambling casino. Your client holds a security interest on Delia's slot machines under a security agreement that describes the collateral as "Debtor's equipment, existing and hereafter acquired. " Your client has filed a financing statement covering equipment.
Does your client have a perfected security interest in the quarters and silver dollars placed in the slot machines?
If your client decides to go the original collateral route what should your client do to be sure the security interest in the coins as original collateral is perfected?
Problem 16.5 (interactive)
Assume the facts of Problem 16.2 (Leslie Lender has a security interest in Danielle Debtor's "equipment, existing and after-acquired." The security agreement makes no mention of proceeds. The agreement does provide that Danielle is not to dispose of any equipment without the Lender's express written consent. Danielle sells a drill press to Byron Buyer without Leslie's express written consent. Danielle receives cash in the amount of $1,000 and a check for $1,500. Danielle uses the cash to purchase a newer and less expensive drill press; Danielle places the check in a cash drawer). Assume the following additional facts:
Danielle deposits the $1,500 check in a checking account in First Bank; At the time of the deposit the balance in the account is $4,000 all of which was from the deposit of non-proceeds; Danielle defaulted owing Leslie $2,000; Leslie could not win in a priority dispute over the drill press with Byron Buyer (we will consider possible reasons in Part VI); Before Leslie learned of the foregoing, Danielle withdrew $3,000 from the bank account; Danielle took the cash and blew it at the dog track; Just after the withdrawal there was an automatic deposit of $500 made by First Bank to Danielle's account to correct an earlier overcharge to the account; There have been no other changes to the bank account balance.
We saw in Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem) that under the Lowest Intermediate Balance (LIB) of proceeds analysis Leslie would have a security interest in $1,500 of Danielle's bank account. (If you do not see how this is so you should review the treatment of Problem 9.11 in Chapter 9.)
Is Leslie's security interest in Danielle's bank account perfected?
B. Proceeds in Bankruptcy
As has been noted bankruptcy is viewed as the "acid test" of whether you have done your job properly in representing a secured creditor. It has been noted that security interests in original collateral that are not perfected on the date of bankruptcy are at risk of being avoided by a trustee under BRA § 544(a) leaving the creditor unsecured. Perfection is every bit as essential as to security interests in proceeds.
Indeed, perfection is the more important insofar as security interests in collateral acquired after a petition in bankruptcy is filed are unenforceable except where the collateral is proceeds. See BRA § 552 and Chapter 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem).
The interaction of BRA § 544(a) and BRA § 552 and complexities introduced by BRA § 547 (avoidable preferences) as to certain commercial collateral, such as inventory and accounts, and the proceeds thereof, will be explored at length in Chapter 30 (Secured Party Versus Trustee in Bankruptcy).
CASE COMMENTARY
In re Clayson, __ B.R. __, 2006 WL 864299 (Bkcy W.D.N.Y March 24, 2006)
2009-02-01 update