Opinion ID: 358075
Heading Depth: 1
Heading Rank: 2

Heading: Does the mortgagee have a security interest in the insurance fund?

Text: 12 Even though the disputed insurance fund is property belonging to the mortgagor, we conclude that the mortgagee is entitled to the fund because he has a security interest in the fund that is valid against the federal tax lien. 13
14 The federal tax lien statute provides that the federal tax lien shall not be valid against a security interest existing before the tax lien filing. 26 U.S.C. § 6323(a). Security interest is defined to mean any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. 26 U.S.C. § 6323(h)(1). 15 The mortgagee had a U.C.C. security interest in the building and personal property. The government does not contest on appeal that this security interest was perfected. The mortgagee also had a U.C.C. security interest in proceeds. We believe the Florida Supreme Court would hold that the disputed insurance fund constituted proceeds. 16 Florida has enacted the 1966 version of U.C.C. § 9-306(1), which provides:Proceeds includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are cash proceeds. All other proceeds are non-cash proceeds. 17 19C Fla.Stat.Ann. § 679.9-306(1). Florida has not enacted the 1972 version of U.C.C. § 9-306(1), which added another sentence: 18 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. 19 Of this additional language the Official Comment says, It makes clear that insurance proceeds from casualty loss of collateral are proceeds within the meaning of this section. 20 There is a split of authority whether the 1966 version of U.C.C. § 9-306(1) should be construed to include insurance payable by reason of loss or damage to collateral. Many courts have held that such an insurance fund cannot constitute proceeds under the 1966 version, 10 but their arguments have been soundly rebutted by the Second Circuit in PPG Industries, Inc. v. Hartford Fire Insurance Co., 531 F.2d 58 (CA2, 1976) (construing New York law). 11 See also Boroff, Insurance Proceeds Under Section 9-306: Before and After, 1974 Commercial L.J. 442; Henson, Insurance Proceeds as Proceeds Under Article 9, 18 Catholic U.L.Rev. 453 (1968). 21 Two principal arguments have been advanced against construing § 9-306(1) to include insurance payable by reason of loss or damage to collateral. 12 First, § 9-104(g) provides that the U.C.C. does not apply to a transfer of an interest or claim in or under any policy of insurance. Section 9-104(g), however, is directed not at the insurance of collateral but the creation of a security interest in an insurance policy by making the policy itself the collateral. See Comment 7 to § 9-104. Second, the scope of § 9-306(1) is ambiguous and can be read as limited to voluntary disposition of the collateral. The section speaks of collateral being sold, exchanged, collected or otherwise disposed of. The verb disposed of connotes an action, and all of the examples specifically given concern voluntary disposition. The 1966 version of § 9-306(2) supports this reading by its reference to the debtor's actions. 13 But the ambiguity of § 9-306 can just as easily be resolved to favor the secured party. Despite the examples, the section is not expressly limited to voluntary dispositions, and the inference from § 9-306(2) is hardly compelling. Section 9-306(2) basically says that a security interest does not continue in collateral when the secured party authorizes its disposition. It is hard to imagine a secured party authorizing an involuntary disposition. Thus the subsection on authorized dispositions may logically refer only to voluntary dispositions even though the general section on proceeds has a broader scope. 22 Because § 9-306(1) can reasonably be construed to include insurance payable by reason of loss or damage to the collateral, we agree with the Second Circuit that the amendment to § 9-306 incorporated in the 1972 version of the U.C.C. is a persuasive indication of the effect which § 9-306 was originally intended to have. PPG Industries, supra, 531 F.2d at 61. 23
24 It is not enough, however, that the mortgagee has a U.C.C. security interest in the disputed insurance fund. The federal tax lien statute defines security interest to require that the security property be in existence when the federal tax lien is filed. 25 A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth. 26 26 U.S.C. § 6323(h)(1). In this case the property, the disputed insurance fund, arguably did not come into existence until the time of loss or perhaps not until the insurance company admitted its liability under the policy. However, we agree with the Second Circuit in PPG Industries, supra, 531 F.2d at 62, that the insurance fund is merely the collateral in another form. Accordingly, we regard the insurance fund and the original collateral as one and the same property for the purpose of determining when the property came into existence. 14 27 Thus although the federal tax lien can attach to the disputed insurance fund because the fund is property belonging to the mortgagor, the mortgagee has a security interest in the fund that is valid against the federal tax lien. 28 The judgment of the district court is AFFIRMED.