Perfection in Proceeds Under Revised Article 9

Journal Article: 

As discussed in last issue’s column, revised Article 9 greatly expands the definition of “proceeds” so that a security interest in specific collateral will automatically extend to after-acquired property that is derived from the original collateral, even if there is no disposition of the original collateral. Thus, even in the absence of any language in the security agreement, the secured party will automatically get a lien on whatever is received when the original collateral is sold, leased, licensed or disposed of, and on whatever is collected on, or distributed on account of, the collateral. See §§9-315(a)(2) & 9-102(64)(A & B).

In addition, the lien will extend to any rights arising out of the collateral and claims arising from, or insurance payable as a result of, loss, damage, defects, nonconformity or interference with the use of, or infringement of rights in, the collateral. See §9-102(64)(C, D & E).

 

This expansion of the reach of the creditor’s security interest has implications both in and out of the bankruptcy context. Outside of bankruptcy, it gives the creditor the ability to reach property generated by its collateral, instead of merely property that replaces the original collateral. As a result, it will reduce the amount of unencumbered assets that are available to unsecured creditors. The expanded scope of proceeds will also increase the likelihood of priority disputes where two different secured creditors claim the same property as collateral.

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