#10 - Value Tracing & Proceeds Flashcards
Value Tracing
This is about tracking the value of existing collateral as it changes form. It also addresses situations where the debtor transfers collateral without the creditor’s consent.
Ramifications: collateral changing hands or changing form could give a creditor more or less security than they used to have
Relevant UCC Provisions
9-102(a)(64) = Defines proceeds as the stuff exchanged for collateral. Proceeds are collateral. Proceeds of proceeds are also collateral.
9-203(f); 9-315(a) = security interest attaches to IDENTIFIABLE proceeds. Under 9-315(b), the creditor bears the burden of proof to identify proceeds through tracing rules such as the lowest intermediate balance rule. See In re Oriental Rug Warehouse Club.
9-201, 9-315(a), 9-401 = debtor may transfer ownership of collateral, but security interest may continue in that collateral (though buyer is not bound by the security agreement). The new buyer’s liability is in rem, not in personam.
The Difference Between AAP and Proceeds
Proceeds are NOT AAP problems. They are separate from FUTURE ADVANCE and DRAGNET questions too. So proceeds are VALUE TRACING concepts. We follow the value of a particular item of collateral. Whereas AAP is about security interests attaching to NEW pieces of property.
Unlike with AAP, even if you never say the word proceeds in your sec agr, it’s always there. Art 9 automatically gives creditors proceeds. But that is NOT the case for (most) AAP (only inventory and accounts are automatic).
Parties can change Art 9’s default rules by agreement, including the definition of proceeds.
The Multiplication Issue of Proceeds
There is no rule in the proceeds doctrine for conservation of collateral. Meaning the value of the collateral and body of collateral can increase indefinitely in a way that may and probably will result in overall collateral value increasing past what the debtor originally bargained for. Basically, the collateral multiplies.
Example: Say you have a bulldozer you bought for 75k. Then it depreciated and declined in value down to 25k. Then you sold it for 25k and used another 65k of your own money to buy a new bulldozer for 90k. Now, the entire new bulldozer is proceeds, despite the fact that there has been value injected into the new bulldozer that was not originally collateral.
More Proceeds Names
Product = something the collateral produces; not defined in UCC and possibly encompassed by ”proceeds” as “arising out of collateral”
Profit = revenue less expenses; not defined in UCC and possibly encompassed by “proceeds” as “collected on… collateral”
Rents = money paid for temporary use of collateral; not defined in UCC and possibly encompassed by “proceeds” as “collected on… collateral”
Offspring = product of animal; not defined in UCC and possibly encompassed by “proceeds” as “arising out of collateral”
Lowest Intermediate Balance Rule
Those commingling their own funds with those not belonging to them are considered to have spent their own funds first, and only then to have begun spending the funds not belonging to them. This is known as the ‘lowest intermediate balance rule.’
Commingling
Commingling: aggregate collateral such that no one can distinguish the sum from its individual parts.
