Special Priority Rules for Proceeds from Sale of Collateral
When Collateral is Sold, Who has Priority in the Proceeds?
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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 the sale of that collateral. Per 9-322(b), 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.
- Relevant Law: 9-322(c)-(e) contains numerous special priority rules for proceeds from the sale of unique types of collateral (chattel paper, deposit accounts, negotiable documents, instruments, investment property, and letter of credit) that generally are perfected through control or possession.
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. 9-327 thru 9-331
Example: Mark and Jay have security interests in Toms asset. Marks 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. Marks 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. 9-322(d) and (e)
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.
Next Article: Secured Party's Priority in Future Advances to a Debtor Back to: SECURED TRANSACTIONS
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. Oscars 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?