Opinion ID: 3016918
Heading Depth: 2
Heading Rank: 1

Heading: The Meaning of Proceeds

Text: Our starting point is perforce UCC § 9-306, which defines the term “proceeds” and governs a secured creditor’s rights to the proceeds of his collateral. The relevant parts of this section are set forth in the margin. 6 The definition of “proceeds” is found in 6 Section 9-306, as numbered in the Arizona statute, reads: § 47-9306. “Proceeds”; secured party’s rights on disposition of collateral A. “Proceeds” includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Any payments or distributions made with respect to investment property collateral are proceeds. Money, checks, deposit accounts and the like are “cash proceeds”. All other proceeds are “non-cash proceeds”. B. Except where this chapter otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. C. The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected ten days after receipt of the proceeds by the debtor unless: ... 2. A filed financing statement covers the original collateral and the proceeds are identifiable cash proceeds; ... 7 subsection (a), the first sentence of which defines the term to include “whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.” Ariz. Rev. Stat. § 47-9306(A). The following sentence reads: “Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement.” Id. The plain language of § 9-306(a) leaves no doubt that the insurance money at issue here constitutes proceeds of the engine, because it was “[i]nsurance payable by reason of loss or damage to the collateral.” FINOVA, by perfecting its security interest in the engine, was entitled to look to those proceeds as collateral under § 9-306(b). Under 11 U.S.C. § 552(b), prepetition security interests that apply to proceeds of collateral also apply to proceeds of such collateral acquired after the bankruptcy petition. It is undisputed that FINOVA had perfected its security interest in the engine prior to Tower’s bankruptcy. FINOVA’s interest in those proceeds was therefore also perfected, because Tower had not received them prior to entering bankruptcy. See Ariz. Rev. Stat. § 47-9306(D)(2) & (3). The Trustee argues that the first sentence of § 9-306(a), which requires a “sale, exchange, collection or other disposition” of property, limits the definition of “proceeds” to encompass only the results of a “transforming event.” Under this view, a creditor D. In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest only in the following proceeds: ... 2. In identifiable cash proceeds in the form of money which is neither commingled with other money nor deposited in a deposit account prior to the insolvency proceedings; 3. In identifiable cash proceeds in the form of checks and the like which are not deposited in a deposit account prior to the insolvency proceedings; . . . . Ariz. Rev. Stat. § 47-9306 (1999). 8 can obtain the proceeds only as a substitute for the original collateral, not as an addition to it. But this interpretation is contradicted by the clear language of the second sentence (“Insurance payable by reason of loss or damage to the collateral is proceeds . . .”), and we have found no case that supports it.7 7 The Trustee cites a number of cases that contain general statements that insurance is proceeds where the collateral is completely lost. But these cases do not support the inverse proposition that insurance is not proceeds where the collateral survives in some form. See Miller v. Norwest Bank Minn., N.A. (In re Inv. & Tax Servs., Inc.), 148 B.R. 571, 573 (Bankr. D. Minn. 1992) (“Where the creditor requires the debtor to insure the collateral and the collateral is subsequently destroyed, the insurance proceeds are in essence proceeds from the disposition of the collateral.”); Stodd v. Reynard (In re Shooting Star Enters., Inc.), 76 B.R. 154, 156 (B.A.P. 9th Cir. 1987) (“Although it is well recognized that the term ‘proceeds’ is to be given a broad and flexible interpretation, it is also recognized that ‘[p]roceeds constitute whatever is substituted for the original collateral.’”) (quoting In re Judkins, 41 B.R. 369, 372 (Bankr. M.D. Tenn. 1984)); Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027, 1030 (11th Cir. 1997) (“In the context of the insurance policy on the truck, therefore, the proceeds act as a substitute for the insured collateral.”). Similarly, the Trustee cites an academic article for the proposition that “[i]f one attempted to hypothesize the ex ante bargain of the reasonable debtor and secured party, one would expect them to understand that insurance monies would stand in the stead of damaged collateral.” R. Wilson Freyermuth, Rethinking Proceeds: The History, Misinterpretation and Revision of U.C.C. Section 9-306, 69 Tul. L. Rev. 645, 658 (1995). This article does not support the Trustee’s position. First of all, Professor Freyermuth, like the cases discussed in the previous paragraph, merely argues that proceeds should include (at a minimum) “substitutes” for damaged collateral, not that they should include only such substitutes. In fact, he argues for a liberalized definition of proceeds, one that would include lease payments, id. at 65967, and cash dividends on stock, id. at 668-72, neither of which are substitutes for the underlying collateral. Furthermore, Freyermuth relies on the hypothetical ex ante bargain between debor and creditor, while in this case we can examine the actual ex ante bargain, which granted FINOVA an absolute right of approval over the insurance proceeds, see infra Part IV.A, and a mortgagee payee interest in those proceeds, see infra Part IV.B. Together, these agreements constitute strong evidence 9 We are also confident that the Arizona courts would reject the Trustee’s view. The Arizona Court of Appeals has read the second sentence of § 9-306(a) independently of the first and held that “the meaning of [the second sentence of § 47-9306(A)] is clear on its face,” and that “the ‘right to payment’ under an insurance policy constitutes ‘proceeds’ subject to Article 9 of the UCC.” Valley Nat’l Bank of Ariz. v. Cotton Growers Hail Ins., Inc., 747 P.2d 1225, 1231 (Ariz. Ct. App. 1987). We note too that Airwork Corp. v. Markair Express, Inc. (In re Markair, Inc.), 172 B.R. 638 (B.A.P. 9th Cir. 1994), a (non-Arizona) Ninth Circuit Bankruptcy Appellate Panel case, assumed, though it did not directly hold, that a secured creditor could be entitled to keep both a repaired aircraft engine and the insurance proceeds thereof. We therefore are not convinced that § 9-306(a) limits the definition of “proceeds” to encompass only those proceeds that entirely replace collateral. Instead, it is quite clear that the insurance money at issue here constitutes “proceeds” under the UCC’s definition.