Opinion ID: 3016918
Heading Depth: 3
Heading Rank: 3

Heading: The Analogy to Sale of Collateral

Text: While few cases directly address the issue of whether a creditor can recover both repaired collateral and the insurance proceeds for damage to that collateral, several courts have examined the situation in which creditors claim both collateral and the sale proceeds of that collateral. Because sale and insurance proceeds are governed by the same UCC provisions, see Ariz. Rev. Stat. § 47-9306(A), these cases provide a helpful analogy to the present case, and inform our understanding of the meaning of “one satisfaction” under § 9-306. To clarify our discussion, we use a hypothetical case. A creditor lends a debtor $100, secured by an engine initially worth $100. The engine’s value then depreciates to $50, and the debtor secretly sells it to a third party for $50. The hypothetical relies on the assumption that the third-party buyer is not a bona fide purchaser or buyer in ordinary course, and has no right to retain the engine. We also assume that the sale price is § 9-306 “proceeds,” and that the creditor’s security interest in it is perfected under § 9- 306(c) & (d). If the debtor then enters Chapter 7 bankruptcy and cannot pay its unsecured debts, may the creditor then claim the $50 14 proceeds from the debtor and proceed against the third party on its perfected security interest in the engine? The language of § 9-306(b) seems clear enough: the creditor’s security interest “continues in collateral notwithstanding sale . . . unless the disposition was authorized by the secured party . . . and also continues in any identifiable proceeds including collections received by the debtor.” Ariz. Rev. Stat. § 47-9306(B). The creditor can thus look to both the sale proceeds and the engine itself (in the third party’s hands). Here again, the creditor “may claim both proceeds and collateral, but may of course have only one satisfaction.” Ariz. Rev. Stat. § 47-9306 cmt 3. The crucial question, in this hypothetical as in the case at bar, is what constitutes a “satisfaction.” Does this comment mean that the creditor may claim both proceeds and collateral, but only receive one of them? Or does it mean that the creditor may receive both proceeds and collateral, so long as its total recovery is less than the value of its debt? In our view, it is clear that the creditor may receive both proceeds and collateral, and is limited only to the amount of its debt, not the value of the underlying property. See, e.g., Taylor Rental Corp. v. J.I. Case Co., 749 F.2d 1526, 1529 (5th Cir. 1985) (interpreting identical Florida UCC provision and stating that “[a] creditor may pursue several remedies until the debt is satisfied”); Standard Dyeing & Finishing Co. v. Arma Textile Printers Corp., 85 Civ. 5399, 1991 WL 49782,  (S.D.N.Y. Mar.25, 1991) (“‘When an unauthorized disposition of collateral has occurred, a secured party has numerous cumulative remedies at its disposal; it is not forced to elect a single remedy. . . . [A] creditor may pursue several remedies until the debt is satisfied.’”) (citation and emphasis omitted); Fleet Capital Corp. v. Yamaha Motor Corp., U.S.A., 2002 WL 31174470,  (S.D.N.Y. 2002); cf. Frantz v. First Nat. Bank & Trust Co. of Wyoming, 687 P.2d 1159, 1162 (Wyo. 1984) (“Although [a creditor] is entitled to only one satisfaction for the underlying debt, he may seek it in different ways.” (emphasis added)). These cases demonstrate that our hypothetical creditor could recover both collateral and proceeds up to the amount of his debt, and present a clear analogy to the case at bar. In our hypothetical case, the creditor is undersecured because of depreciation in the value of the engine; here, the creditor is undersecured because of 15 loss of other collateral specifically covered by crosscollateralization clauses. As discussed above, see supra Part III.A.2, the cross-collateralization clauses allow FINOVA to treat all of its collateral, and the proceeds thereof, as collateral for all of its debts. Thus, by virtue of the loss of its other collateral, FINOVA is in essentially the same situation as our hypothetical creditor whose single piece of collateral has depreciated, and can recover from both the collateral and the proceeds. 12 The Trustee disagrees with this result, citing a Bankruptcy Court case that holds that a secured claim is limited to the sale price of the collateral where it was sold pursuant to a Chapter 11 plan. See In re Broomall Printing Corp., 131 B.R. 32, 36 (Bankr. D. Md. 1991); cf. United Fruit & Produce Co. v. Absolute Exterminating (In re United Fruit & Produce), 242 B.R. 295, 306 (Bankr. W.D. Pa. 1999). We do not think that Broomall is applicable here. Tower is not in Chapter 11, and far from getting court or creditor approval for the “disposition” of the collateral, Tower repaired it without getting FINOVA’s contractually required permission. We note that § 9-306(b) grants a creditor a continuing interest in both collateral and proceeds unless the creditor authorized the transfer, Ariz. Rev. Stat. § 47-9306(B); the fact of authorization in Broomall distinguishes it from the present case. We thus conclude that, under the Arizona UCC as it was in effect at the time relevant to this case, FINOVA was entitled to recover both its collateral and the insurance proceeds from that collateral.