proceeds, regardless of whether the financing statements
included the term “proceeds.”
Conclusion
The litigation leading to the Sixth Circuit’s decision could
have easily been avoided if 1st Source had included a reference to “accounts” or “accounts receivable” in the description
of collateral in the financing statements. All creditors seeking
to perfect a security interest in assets taken as collateral for the
payment of their claims should make it a practice to conform
the description of their collateral in the security agreement
and UCC financing statement. The alternative, which all creditors should strive to avoid, is costly ligation over the technical
issue of what categories of collateral the terms used in a UCC
financing statement actually cover and the risk that the creditor loses its perfected security interest in some or all of the
collateral described in its security agreement.
1. The term “proceeds” is defined in §47-9-102(a)(64) of the Tennessee
UCC as:
(
A) whatever is acquired upon the sale, lease, license, exchange, or
other disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(
D) to the extent of the value of collateral, claims arising out of
the loss, nonconformity, or interference with the use of, defects or
infringement of rights in, or damage to, the collateral; or
(
E) to the extent of the value of collateral and to the extent payable
to the debtor or the secured party, insurance payable by reason of
the loss or nonconformity of, defects or infringement of rights in, or
damage to, the collateral.
(emphasis added).
2. Quoting the lower court’s decision, the Sixth Circuit observed,
“If fruits and products from the use of collateral were treated as
proceeds, every creditor with a security interest in equipment would
have a security interest in all items produced from the equipment.
The Court will not extend the meaning of ‘proceeds’ to such an extent.”
(quotations omitted).
Bruce S. Nathan, Esq. is a partner in the New York office of the law
firm of Lowenstein Sandler LLP, practices in the firm’s Bankruptcy,
Financial Reorganization and Creditors’ Rights Group and is a
recognized expert on trade creditors’ rights and the representation of
creditors in bankruptcy and other legal matters. He is a member of
NACM and is a former member of the Board of Directors of the
American Bankruptcy Institute and is a former co-chair of ABI’s
Unsecured Trade Creditors Committee. Bruce is also the co-chair of the
Avoiding Powers Advisory Committee working with ABI’s commission
to study the reform of Chapter 11. He can be reached via email at
[email protected].
Eric S. Chafetz, Esq. is counsel at the law firm of Lowenstein Sandler
LLP. He can be reached at [email protected].
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