Keywords: collateral proceeds, UCC financing statement, commercial code, UCC filling
The US Court of Appeals for the Sixth Circuit has ruled that a lender's security interest in accounts was not perfected because a reference to "proceeds" in the lender's UCC financing statement did not expressly refer to "accounts." The Sixth Circuit surprisingly interpreted the definition of "proceeds"1 in Article 9 of the Uniform Commercial Code to exclude "accounts"2 (despite and without reference to provisions of UCC Article 9 to the contrary). While the Sixth Circuit's stated basis for this decision is questionable, this decision illustrates the risk of a security interest not being perfected when the collateral description in a UCC filing does not match the collateral description in the related security agreement.3
In 1st Source Bank v. Wilson Bank & Trust et al., 2013 WL 5942056 (No. 13-5088, Nov. 7, 2013), the Sixth Circuit settled a priority dispute between 1st Source and a group of other secured lenders over their respective security interests in accounts receivable of two debtors.
The security agreements in favor of 1st Source granted security interests in, among other things, tractors, trailers and accounts, as well as the proceeds of the agreed-upon collateral. 1st Source's UCC financing statements filed against the debtors described the collateral, in relevant part, as specific pieces of equipment and several types of collateral, "together with all present and future attachments, accessories, replacement parts, repairs, additions and exchanges thereto and therefore [sic], documents and certificates of title, ownership or origin, with respect to the equipment, and all proceeds thereof, including rental and/or lease receipts." The UCC financing statement collateral descriptions, however, unlike the security agreements, did not use the terms "accounts," "accounts receivable" or other similar language.
The other lenders' UCC financing statements were filed later than 1st Source's UCC financing statements. However, unlike 1st Source's UCC financing statements, their UCC financing statements expressly included in their identified collateral "all accounts receivable now outstanding or hereafter arising."
Applying Tennessee law, the Sixth Circuit ruled that 1st Source did not have perfected security interests in the accounts receivable because accounts receivable were not included in the reference to proceeds in 1st Source's UCC financing statements...
