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. 9-315(c). This is a form of temporary automatic perfection. 

How do you extend the temporary automatic perfection in proceeds from the sale of goods?

The temporary period for automatic perfection terminates at the end of the 20 days. Per 9-315(d), 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.

Related Topics

• Secured Transactions Law (Intro)
• What is a Security Interest?
• Collateral 
• Pledge as Collateral
• Collateralize
• Cross Collateralization
• After-Acquired Collateral
• Unsecured Loan Definition
  
• Unencumbered Asset
• What is a Secured Creditor?
• Unsecured Creditor
• What are the benefits of security interests for creditors?
• Limited Recourse Debt
• Uniform Commercial Code - Article 9
  
• What are the common types of security interest in real property (land)?
• What is a mortgage?
• How does a security interest protect the mortgage holder?
• Lis Pendens
• Deficiency Judgment
• What is a Deed of Trust or Security Deed?
• What is a Land Sale Contract?
• What is a security interest in personal property?
• How does one establish a security interest in personal property?
• What is Perfection of a security interest?
• What are the methods of perfecting a security interest in personal property?
• UCC-1 Statement
• How does one establish a security interest in real property (land)?
• Register of Deeds
• What is Automatic Perfection of a security interest?
• What is a Purchase Money Security Interest (PMSI) in consumer goods?
• What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
• How does one continue perfection of a PMSI in non-consumer goods?
• What is Temporary Automatic Perfection in Proceeds from the sale of goods?
• How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
• How does one perfect a security interest by Possession of the collateral?
• How does on perfect a security interest by Control of collateral?
• How does one perfect a security interest by Filing a Financing Statement?
• What authorization is required to file a financing statement?
• Where is the appropriate office to file a financing statement?
• Defeasance
• Continuation Statement
• What is Priority of a security interest?
• What role does perfection play in establishing the Priority of a secured party?
• What are the common conflicts arising as to priority of a security interest?
• What is the priority of parties secured by common law and statutory liens?
• Lien - Definition
• Blanket Lien Definition
• Unperfected Lien
• Possessory Lien 
• Non-Possessory Lien 
• Tax Lien
• Mechanics Lien Definition
• Construction Lien
• Cloud on Title
• What is the priority of a buyer of collateral that is subject to a security interest?
• What is required to be a buyer in the ordinary course of business?
• How does 9-320(b) protect consumers who purchase goods from other consumers?
• What is the Shelter Principle?
• What are the general Priority Rules for Conflicting security interests?
• Subordination Agreement
• Who has Priority in Proceeds from the sale of collateral?
• What is a secured party's priority in future advances to a debtor?
• What is the priority of a PMSI in goods (other than inventory and livestock)?
• What is the priority of a PMSI in inventory?
• What is the priority of conflicting PMSIs?
• What is the priority of security interests in fixtures?
• What is the scope of fixture priority rules?