Transfers of Cash Proceeds Under U.C.C. Article 9

Transfers of Cash Proceeds Under U.C.C. Article 9

 
Despite a pro-secured creditor treatment of cash proceeds, the Uniform Commercial Code puts at least one significant limitation on the secured party's ability to recover cash proceeds upon the debtor's default. If the debtor transfers cash proceeds to certain good faith transferees, those transferees take free of even perfected security interests. This was put to the test recently in a case involving payments to one affiliated with the debtor.
 
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Professor Livingston writes:
 
Article 9 secured parties desire to maintain attachment and perfection of their security interests not only in their original collateral but also in proceeds generated from the disposition of their collateral. Article 9 of the Uniform Commercial Code helpfully provides that security interests continue in “identifiable proceeds” of original collateral. U.C.C. § 9-315 (a)(2). Very often proceeds take the form of cash generated from the sale of inventory or the collection of accounts. See U.C.C. § 9-102 (a)(64) (defining proceeds). Cash proceeds consist of “money, checks, deposit accounts, or the like.” U.C.C. § 9-102 (a)(9). Article 9 further assists secured parties by continuing indefinitely perfection of security interests in “identifiable cash proceeds” if the security interest in the original collateral was properly perfected. U.C.C. § 9-315 (c), (d)(2).

Despite this pro-secured creditor treatment of cash proceeds, the Code puts at least one significant limitation on the secured party's ability to recover cash proceeds upon the debtor's default. If the debtor transfers cash proceeds to certain good faith transferees, those transferees take free of even perfected security interests. U.C.C. § 9-332. Article 9 takes the position that the traditional liquidity of cash and cash-like instruments (i.e., checks) should trump the secured party's security interest in those assets as proceeds: “Broad protection for transferees helps to ensure that security interests . . . do not impair the free flow of funds.” U.C.C. § 9-332, cmt. 3.

The protection of good faith transferees was put to the test recently in a federal bankruptcy decision involving cash payments to an individual affiliated with the debtor. Ag Venture Financial Services, Inc. v. Montagne (In re Montagne), 413 B.R. 148 (Bankr. D. Vt. 2009). In In re Montagne, the secured party, Ag Ventures, lent $457,000 to the debtor, Montagne Heifers, Inc. (“MHI”), a dairy farm operation, in exchange for a security interest in the debtor's “livestock” and “proceeds.” 413 B.R. at 151. Michael Montagne was the debtor's owner and president; his spouse, Diane Montagne, was the debtor's treasurer. Diane, as well as Michael, signed the security agreement with Ag Ventures in November 2005 in her individual and corporate capacities. Over the course of the next two years, Diane and Michael separated, Ag Ventures released Diane from liability for MHI's debt to it, and MHI sold a herd of milk cows for $500,000. 413 B.R. at 152. Shortly after the sale of the cows, on November 28, 2007, MHI gave Diane a check for $240,000, part of the sale proceeds, and Diane deposited the check into her attorney's client trust account. 413 B.R. at 151.
 
 
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