Article by R. Wilson Freyermuth
This Article provides a careful analysis of the proper scope of the term “proceeds” under Section 9-306. Parts II and III develop a coherent conception of the term “proceeds” by focusing upon the proper interpretation of Section 9-306 in its current form. Part II evaluates the passage of title conception of proceeds in light of the 1972 and 1987 amendments to Article 9 and demonstrates that this conception is fundamentally inconsistent with the economic, value-based conception of proceeds that emerges from those amendments. Using this emerging conception of proceeds, which focuses upon the occurrence of an event that exhausts or consumes the collateral's economic value or productive capacity, Part II demonstrates the correct interpretation of Section 9-306(1) in cases involving casualty insurance proceeds, lease rentals, stock dividends, and tort settlements. In Part III, the Article examines the nonexistent collateral problem and demonstrates that it is a formalistic, outmoded concept that both frustrates the ex ante bargain of the reasonable debtor and secured party and fails to give effect to the emerging value-based conception of the term “proceeds.” Part III further demonstrates the correct interpretation of the current Section 9-306(1) in cases involving government agricultural subsidy payments and business interruption insurance payments.
In Part IV, the Article shifts its focus toward the need to revise Section 9-306 to express a clear, coherent definition of proceeds that is consistent with the emerging value-based conception of that term. Part IV begins by reviewing and evaluating the recommendations of the PEB Report concerning Section 9-306 and the scope of the term “proceeds.” The Article criticizes two specific problems with the PEB Report's recommendations. First, in an attempt to identify the standards for what constitutes proceeds, the PEB Report identified two ostensibly different conceptions of proceeds: “exchange and replacement” proceeds and “close association” proceeds. Part IV criticizes this dichotomy, which makes it appear that there is no unifying conception to provide a basis for defining the term “proceeds.” Instead, as Part IV argues, the definition should be based upon one unified conception-that the term “proceeds” includes any asset received as a consequence of some event that consumes a portion of the bargained-for collateral's economic value or productive capacity.
Second, in an attempt to limit the scope of the term “proceeds,” the PEB Report asserted that certain assets were too attenuated to constitute proceeds even though a debtor received them by virtue of events that resulted in a diminution of the collateral's value. As Part IV demonstrates, this attempted qualification places an incoherent and economically unjustified restraint upon the term “proceeds.” Further, the PEB Report confuses the question of whether an asset constitutes proceeds of collateral with the question of whether a security interest continues against that asset. Instead of encouraging courts to place unjustified limitations upon the scope of the term “proceeds,” the Drafting Committee should instead direct courts to focus upon the identifiability of proceeds as the key to the secured party's ability to obtain continuing proceeds coverage under Section 9-306. The Article concludes with an appendix setting forth proposed statutory language and commentary for the Drafting Committee's consideration as it revises Section 9-306.
About the Author
R. Wilson Freyermuth. Associate Professor of Law, University of Missouri-Columbia.
Citation
69 Tul. L. Rev. 645 (1995)