17. What is “temporary automatic perfection” in “proceeds” from the sale of goods?
Proceeds is the money, assets, or value received in exchange for selling or transferring something. A perfected security interest in collateral automatically extends to the proceeds from the sale of that collateral (with certain exceptions) for 20 days following the sale. This is a form of temporary automatic perfection. The temporary period for automatic perfection terminates at the end of the 20 days. Any of the following scenarios will extend the period of temporary perfection past the 20-day period:
• Financing Statement & Similar Type of Collateral – The secured party must have a filed financing statement covering the original collateral at the time it was sold. Further, the secured party must be able to perfect a security interest in the proceeds of sale of that collateral by filing a financing statement in the same government office. This means that the proceeds from sale must also be some form of goods.
⁃ Note: If the proceeds are cash (rather than more assets) then the perfected security interest may continue if the original security agreement identifies assets that could be purchased with cash proceeds and the seller indeed uses those proceeds to purchase that type of asset.
⁃ Example: ABC Corp has a security interest in equipment owned by 123 Corp. ABC files its security interest in the appropriate government office. 123 Corp later sells or trades the equipment for a newer model of equipment. ABC would file a security interest in the new equipment in the same government office. As such, the security interest filing extends to the newly acquired equipment.
• Identifiable Proceeds – The cash or other proceeds from the sale of the collateral must be identifiable. This means that the cash or other proceeds is not so intermingled with other funds so as to no longer be traceable to the sale of the subject collateral. This can be an issue when cash proceeds are disbursed into multiple accounts that have constantly rising and falling balances.
⁃ Note: Article 9 contains several rules for tracing proceeds and when proceeds remain identifiable.
⁃ Example: ABC Corp has a security interest in equipment owned by 123 Corp. 123 Corp later sells or trades the equipment for cash. The cash is deposited in a specific bank account and no funds are spent from that account. The funds are easily traceable and the security interest in the original collateral extends to these proceeds.
• File New Financing Statement – The party may perfect a new security interest in the proceeds within 20 days of the sale of the collateral. If so, the security interest continues from the date of the original security interest in the collateral.
⁃ Note: This applies when new collateral is purchased with or received as proceeds. The proceeds are not the same type as sold or there is no security interest filed before the sale.
⁃ Example: ABC Corp has a security interest in equipment owned by 123 Corp. 123 Corp later sells or trades the equipment for a different type of equipment. ABC Corp may continue its security interest by filing a new financing statement against the newly acquired equipment.
It is important to note that a debtor generally cannot sell property subject to a security interest without the permission of the secured party. Further, selling an asset to a party and failing to indicate that it is subject to a security interest may constitute fraud against the purchaser.
• Discussion: Why do you think it is important to grant a secured party a continued security interest in the proceeds from the sale of goods? In the same vein, what do you think is the justification for extending this security interest beyond 20 days in each of the above-indicated scenarios? Should the above protections of secured parties be balanced against the rights of the subsequent purchaser?
• Practice Question: ABC Corp sells equipment to 123 Corp and attaches a security interest. ABC later files the security interest in the appropriate state office. 123 Corp later sells the equipment in exchange for a combination of cash and other equipment. What are ABC Corp’s options for maintaining its security interest in the proceeds of the sale?