16 CREATION OF SECURITY INTERESTS - Proceeds, Products, and Other Value-Tracing Concepts

Question 1

What are the primary collateral categories?

Answer 1

• Proceeds;
• Accounts;
• Deposit accounts;
• After Acquired Property.

Question 2

What are the rights in collateral with respect to proceeds?

Answer 2

Proceeds are broadly defined as things exchanged for or arising out of collateral:

• Automatically included (doesn’t need to be in the S.A.)
• Products and offspring tend to fit into proceeds definition
• Included proceeds of proceeds, so long as it remains traceable

Question 3

What are the rights in collateral with respect to accounts?

Answer 3

“Accounts” mean a right to payment of a monetary obligation for goods sold or services rendered

• Non-monetary payment is only an account when it is a replacement for money where the original agreement specified monetary payment

Question 4

What are the rights in collateral with respect to “after acquired property?

Answer 4

After Acquired Property – property which fits a collateral category but is acquired after creation of the security interest
• Pairs with ‘equipment’ and ‘inventory’ collateral to ensure future property is included when old equipment is replaced
• While future property acquired using proceeds will be covered by the security agreement, evidentiary issues make including “after acquired property” easier to get it

Question 5

What is the Lowest Intermediate Balance Rule?

Answer 5

Lowest Intermediate Balance Rule: Where proceeds are comingled with non-proceeds in an account, this rule determines what value in the account is proceeds
• Rule: Account holder spends non-proceeds first whenever possible
• Only when non-proceeds are exhausted do withdraws start cutting into proceeds, and once cut into the amount of proceeds in the account cannot expand

Think LIFO