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The Secured Party's Rights in a Debtor's Bank Account Under The Secured Party’s Rights in a Debtor’s Bank Account under Section 9-306(4)(d) of the Uniform Commercial Code Robert H. Skilton* I. Introduction* 1 A debtor in a secured transaction coming under Article 9 of the Uniform Commercial Code,2 sells some of his inventory which is cover­ ed by a security agreement (for example, the debtor is an automobile dealer) or collects some of the accounts receivable he has assigned in a security agreement (for example, the debtor sells cotton goods to retail outlets on thirty days unsecured credit). The debtor receives “ cash pro­ ceeds” 3 in the form of money or checks payable to his order, from such * Distinguished Visiting Professor of Law, McGeorge School of Law, University of the Pacific. A.B., 1930; M.A. 1931; LL.B ., 1934; Ph.D., 1943, University of Pennsylvania. 1. This article is a sequel to Skilton, Secured Party's Rights in a Debtor's Bank Account under Article 9 of the Uniform Commercial Code, 1977 S. I I I . U. L. J. 120 (hereinafter cited as Skilton). The introduction of the present article is a condensation of a part of the earlier article. 2. The Uniform Commercial Code is now the law in forty-nine states and the District of Columbia. Article 9 deals with security interests in personal property and fixtures. In 1972 the sponsoring bodies approved amendments to Article 9 (Illinois and Wisconsin have enacted the 1972 amendments, with modifications). A majority of states as of this time are still under the 1962 version. Section 9-306 (Proceeds) is one of the sections of Article 9 which were considerably changed in the 1972 version. The following presentation will be concerned with both versions of § 9306(4)(d). Unless otherwise indicated, citations are to the 1972 version of Article 9. 3. Section 9-306(1) (1972) of the Uniform Commercial Code provides: “ Proceeds" includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Money, checks, deposit accounts, and the like are “ cash proceeds." All other proceeds are "non-cash proceeds.” This version differs from the 1962 version of § 9-306(1), chiefly in specifically providing for the case of insurance payments, and in expressly including "deposit accounts" in the definition of "cash proceeds." As to "cash proceeds": § 1-201 (24) defines "money" in a narrower sense than some economics usage, but in a broader sense than legal tender, as "a medium of exchange authorized or adopted by a domestic or foreign government as a part of its currency." A “ check" is defined in § 3-104(2)(b) as “ a draft drawn on a bank and payable on demand." “ Deposit account" is defined in § 9-I05(l)(e). As to what may be 60 1978] The Secured Party’s Rights in a Debtor’s Bank Account 61 sale or collection, and instead of sending the proceeds intact to the secured party to apply to the secured debt, deposits the cash proceeds in his personal bank account. Sometimes the secured party consents to the debtor4 depositing the cash proceeds in his bank account, or at least has the matter brought to his attention by being paid by the debtor by checks drawn on this account, and so may be in the position of acquiescing in this practice. On the other hand, sometimes such deposit is in violation of the security agreement. If the debtor deposits in the same account funds not covered by the security interest, the proceeds so deposited may be said to be “ comming­ led.” From time to time, the debtor may draw upon this account for his own business and personal purposes. If we applied the tracing-trust funds principles associated with actual and constructive trusts, we would conclude that the secured party, like a beneficiary of an actual or constructive trust, could follow the proceeds subject to his interest into the debtor’s general bank account. Tracking the activity in the account through the lowest intermediate balance after the deposit of the cash proceeds would then enable the secured party to show that part of the cash proceeds which is still present in the account. Section 9-306 of the Uniform Commercial Code governs security interests in proceeds, and applies to the status of proceeds security interests in bank accounts (though section 9-104 provides that original security interests in bank accounts are not covered by Article 9). Section 9-306(2), however, indicates that if a secured party is to be accorded rights in proceeds, he must “ identify” the asset as proceeds from the disposition of collateral covered by the original security interest.5 For some time, there persisted a considerable opinion that “ identifi­ “ the lik e " (the residuary words) perhaps some bills of exchange payable on demand may be "the like" of checks, but not the typical note payable on demand. 4. Unless otherwise indicated, the term “ debtor" when used hereafter refers to the debtor in a secured transaction, who owes money to the secured party because the secured party has made a loan or sold goods to him on credit, and the term “ collateral” refers to the property made security by the security agreement. U.C.C. § 9-105( 1 )(c)(d). “ Cash proceeds” means cash proceeds received by the debtor from the disposal of collateral covered by a security agreement. 5. Section 9-306(2) (1962 and 1972) provides: Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. It is reasonable to read a negative inference into § 9-306(2), and conclude that a "proceeds security interest" is lost when the proceeds cease to be identifiable. 62 Southern Illinois University Law Journal [1978:60 cation” meant something more than tracing; that it was the intent of section 9-306 that identification of a security interest in cash proceeds was lost when the debtor commingled the proceeds with his own assets, either by mixing money in a common till, or by depositing money or checks constituting cash proceeds subject to a security interest in his own bank account. Against this context, section 9-306(4)(d) was viewed as the one exception: in the event of insolvency proceedings, a limited right in the debtor’s bank account is accorded to the secured party. That subsection has undergone successive revisions, and the 1952, 1962, and 1972 versions are quoted in the accompanying footnote.* (i)*46 *(ii) To square the excep­ tion of section 9-306(4)(d) with the supposed basic rule of nonrecogni­ tion, this section was viewed as according only a limited proceeds security interest in ‘‘unidentified proceeds.” Be that as it may, a series of decisions of recent date now tilts the scales toward the view that a secured party does have a proceeds security interest in a debtor’s bank account, provided he can show that cash proceeds subject to his security interest were deposited by the debtor in 6. Section 9-306(2) (1952) provides: In insolvency proceedings a secured party with a perfected security interest has a right to the cash and bank accounts of the debtor equal to the amount of cash proceeds received by the debtor within ten days before the institution of such proceedings less the amount of such proceeds received by the debtor and paid over to the secured party during the ten day period, but no other right to or lien on cash proceeds not subjected to his control before insolvency proceedings are instituted. Nothing in this subsection shall affect any right of set-off which might otherwise exist. Section 9-306(4)(d) (1962) provides: (4) In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest (d) in all cash and bank accounts of the debtor, if other cash proceeds have been commingled or deposited in a bank account, but the perfected security interest under this paragraph (d) is (i) subject to any right of set-off; and (ii) limited to an amount not greater than the amount of any cash proceeds received by the debtor within ten days before the institution of the insolvency proceedings and commingled or deposited in a bank account prior to the insolvency proceed­ ings less the amount of cash proceeds received by the debtor and paid over to the secured party during the ten day period. Section 9-306(4)(d) (1972) provides: (4) In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest only in the following proceeds: (d) in all cash and deposit accounts of the debtor in which proceeds have been commingled with other funds, but the perfected security interest under this paragraph (d) is (i) subject to any right to set-off; and (ii) limited to an amount not greater than the amount of any cash 1978] The Secured Party’s Rights in a Debtor’s Bank Account 63 his bank account and remain present under tracing rules. This normal rule, it is conceived, is applicable to all issues as to which section 9- 306(4)(d) does not apply (i.e., to all cases which are not “ insolvency proceedings” ).
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