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Special Priority Rules for Proceeds from Sale of Collateral

33. Who has “priority in proceeds” from the sale of collateral?

A secured party who perfects her security interest in collateral may have a continued security interest in the proceeds from the sale of that collateral. Thus, a secured party with priority in collateral will also maintain priority in the proceeds from sale of that collateral. In this case, the date of perfection of the security interest in the proceeds is the same as the perfection date for a security interest in the collateral. The priority of secured parties following the sale of collateral is generally as follows:

•    Cash or Similar Property Proceeds – A secured party has priority over a conflicting security interest in proceeds if she has perfected her security interest and the proceeds of sale are cash or of the same type as the collateral.

⁃    Example: Mark and Jay have security interests in Tom’s asset. Mark’s security interest has priority over Jays. If Tom sells the asset and receive cash or another similar asset, Mark and Jay maintain a security interest in the cash or similar equipment. Mark’s security interest retains priority.

•    Non-Filing Collateral – Special rules apply to a security interest in collateral that can only be perfected in a manner other than filing (control or possession). Common types of collateral perfected by possession include chattel paper, deposit accounts, negotiable documents, instruments, investment property, and letter of credit. Priority of security interests in the proceeds from the sale of non-filing collateral ranks according to the time of filing of a security interest in that collateral. This rule provides priority to the first secured party to file a security interest in the newly acquired proceeds. Secured parties that have already filed a security interest on “all equipment” of the debtor at the time of sale of the non-filing collateral generally have priority.

⁃    Example: Leo has numerous creditors who have security interests in all of his assets. He owns and has possession over some chattel paper. When he sells the chattel paper and acquires equipment, his creditors have priority in the equipment based upon the timing of filing of a security interest.

•    Discussion: Do you agree with the premise that a secured party should have priority in proceeds from the sale of the collateral? Why do you think special rules exist for non-filing collateral? Do you agree with the first-to-file rule applicable to non-filing collateral? Why or why not?

•    Practice Question: Merrill has a security interest in “all assets” of Nancy. Oscar also has a security interest in “all assets” of Nancy, but it was filed at a later time. Oscar’s security agreement contains a provision providing for a security interest in “after-acquired collateral”. Nancy later sells some negotiable instruments and receive some cash and a painting. Merrill immediately files a financing statement covering the painting. Who has priority in the proceeds and why?

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