WHAT ARE PROCEEDS? AND ATTACHMENT, PERFECTION, AND PRIORITY IN PROCEEDS

Question 1

What is a proceed

What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 1

Proceeds means the following property:

Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;

Whatever is collected on, or distributed on account of, collateral;

Rights arising out of collateral;

To the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or

To the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral

Question 2

What are noncash and cash proceeds

What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 2

Noncash proceeds means proceeds other than cash proceeds while cash proceeds means proceeds that are “money, checks, deposit accounts, or the like”

Question 3

When commingled proceeds are identifiable

What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 3

Proceeds that are commingled with other property are identifiable proceeds:

If the proceeds are goods; and

If the proceeds re not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than this article with respect to commingled property of the type involved

Question 4

When a security interest in proceeds is perfected

What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 4

A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected

Question 5

When a perfected security interest in proceeds becomes unperfected
What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 5

A perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless:

(1) the following conditions are satisfied:
(A) a filed financing statement covers the original collateral;
(B) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
(C) the proceeds are not acquired with cash proceed;

(2) the proceeds are identifiable cash proceeds; or
(3) the security interest in the proceeds is perfected other than under subsection (c) when the security interest attaches to the proceeds or within 20 days thereafter

Question 6

Timing for perfection with proceeds when the original security interest lapses
What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 6

If a filed financing statement covers the original collateral, a security interest in proceeds which remains perfected under subsection (d)(1) becomes unperfected at the later of:

When the effectiveness of the filed financing statement lapses; or

The 21st day after the security interest attaches to the proceeds

Question 7

When money can have a secured interest

What are Proceeds? And Attachment, Perfection, and Priority in Proceeds

Answer 7

A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.

Question 8

Attachment generally

Answer 8

Attachment is synonymous with creating the security interest

Means creating the security interest

Deals with those steps that are legally required to give the secured party a security interest in the collateral that is effective as against the debtor

Attachment is all about the relationship between the creditor and the debtor

You’re not a secured creditor until attachment

Question 9

Three requirements for attachment

Answer 9

(1) security agreement
(2) value has been given
(3) debtor has rights in the collateral

Question 10

General rule for a the security agreement requirement of attachment

Answer 10

Unless collateral is in the possession or control of the secured party pursuant to an agreement, a written security agreement is required

Question 11

Security agreement requirement of attachment - possession

Answer 11

You can have a security interest created by possession. If in the possession of a secured party pursuant to an oral security agreement. (I loan you $500, but I’m gonna hang on to your watch and if you don’t pay me back, I’m gonna sell your watch).

Oral agreement requires also possession to meet the security agreement requirement. This is called a pledge – oral security agreement and secured creditor is in possession of the collateral.

Pledges are rare – most debtors need their collateral.

Question 12

Security agreement requirement of attachment - control

Answer 12

Control – if collateral is a non-consumer deposit account or electronic chattel paper or investment property, security agreement can be evidenced by control

Method by which control can be obtained will depend on the type of collateral involved.

Question 13

Security agreement requirement of attachment - four sub-requirements for a written security agreement

Answer 13

(1) must be evidenced by a record (digital age word for writing)
(2) has to show an intent to create a security interest – no magic language is necessary to accomplish this.
(3) agreement must be authenticated by the debtor – means signed. Technically the definition under art 9 includes any symbol including electronic symbol made with the present intent to authenticate the record. Even an “x” or a smiley face with present intent to approve the record works under this authentication requirement.
(4) must contain a description of the collateral – description must “reasonably identify” the collateral.

Question 14

Meaning of the “value given” requirement of attachment

Answer 14

Value given – what does value mean under article 9 – any consideration that is sufficient to support a simple contract is enough. Even past consideration is enough. Every debtor normally gives value through implicit promise to pay back – issue is whether the creditor gives value

Question 15

Meaning of the “debtor has rights in the collateral” requirement of attachment

Answer 15

Debtor must have rights in the collateral because debtor cannot grant a contingent property interest in property it doesn’t own.

Question 16

Future advances

Answer 16

Security interest may encompass future advances – future advance clause – secured party often contemplates making a future loan to the debtor and wants to secure it in the present.

Creditor essentially says this doesn’t just cover the loan we’re doing today, it also covers any loan I might make you in the future.

Question 17

After-acquired property clause

Answer 17

After acquired property clause – when secured creditor obtains SI not just in debtor’s current property, but in any property the debtor may obtain in the future. This is permissible. (SI granted in equipment now owned or hereafter acquired – makes it clear taking SI in not just equipment owned at the time of the SI but also equipment acquired after the agreement).

Question 18

After-acquired property clause - general rule

Answer 18

General rule – if you don’t have an explicit after acquired property clause in security agreement then your security interest only reaches collateral the debtor had at the time they signed the security agreement

Question 19

After-acquired property clause - exception

Answer 19

Exception – even with no explicit after acquired property clause, courts will imply there is one when the collateral is of the type that is rapidly depleted and replenished (thinks like inventory and accounts) – courts assume the parties must have intended after-acquired property, otherwise SI would be in nothing.