Opinion ID: 1821157
Heading Depth: 1
Heading Rank: 3

Heading: whether the plaintiff had a security interest in the funds

Text: It is not disputed that ITT had a perfected security interest in a mobile home which Alabama Mobile Homes sold and that Alabama Mobile Homes did not remit that portion of the proceeds of the sale due to ITT under the terms of the parties' agreement. Under § 7-9-306(2), ITT's security interest in the mobile home continued in the identifiable cash proceeds of the sale. Alabama Mobile Homes argues that the funds in question are not the identifiable cash proceeds of the sale and, therefore, that ITT did not have a security interest in the funds. Alabama Mobile Homes contends that the proceeds from the sale of the mobile home in question were transferred from its bank account to the defendant's attorney for other purposes. When proceeds of a sale of collateral are placed in the debtor's bank account the proceeds remain identifiable and a security interest in the funds continues even if the funds are commingled with other funds. Anderson, Clayton & Co. v. First American Bank, 614 P.2d 1091, 1093, 29 U.C.C.Rep. 280 (Okla.1980). The rules employed to distinguish the identifiable proceeds from other funds are liberally construed in the creditor's favor by use of the intermediate balance rule. See, e.g., C.O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill.2d 27, 59 Ill.Dec. 85, 431 N.E.2d 370 (1982); In re Turner, 32 U.C.C.Rep. 1240, 13 B.R. 15, 22 (Bkrtcy. Neb.1981); In re Martin, 36 U.C.C.Rep., 25 B.R. 25, 28 (Bkrtcy.N.D.Tex.1982). This rule provides a presumption that proceeds of the sale of collateral remain in the account as long as the account balance equals or exceeds the amount of the proceeds. The funds are identified based on the assumption that the debtor spends his own money out of the account before he spends the funds encumbered by the security interest. If the account balance drops below the amount of the proceeds, the security interest in the funds on deposit abates accordingly. This lower balance is not increased if funds are later deposited into the account. See Skilton, The Secured Party's Rights in a Debtor's Bank Account Under Article 9 of the Uniform Commercial Code, 1977 So.Ill.Univ.L.J. 120, 140-143. The rule is analogous to the presumption which arises when a trustee commingles trust funds with his own. In re Turner, supra, 13 B.R. at 22. In this case the proceeds were deposited into the debtor's account. When the garnishment was executed, the account balance was $2,352.50. Under the intermediate balance rule, ITT was entitled to the $2,352.50 unless the balance of the account was lower than $2,352.50 at some time between the deposit of the proceeds and the execution of the garnishment. If there was a lower intermediate balance, then ITT was entitled only to an amount equal to the lower balance. It would appear that the resolution of this issue would depend on where the burden of proof lies. At the hearing on the defendant's motion to quash the writ, was it incumbent on ITT to introduce evidence that the defendant's account balance had not been lower than $2,352.50 at any time since the proceeds of the sale were deposited? Or should it have been incumbent on Alabama Mobile Homes to show that its lowest intermediate balance was less than the amount recovered? Since application of the lowest intermediate balance rule was not discussed in the parties' briefs, the issue of allocating the burden of proof was not argued. Alabama Mobile Homes did, as a part of its due process argument, make the assertion that due process requires that the burden of proof remain with the creditor. The basis of that position is a statement found in North Georgia Finishing, supra. We do not read that case as broadly as the defendant does, however. In that case the Court states, as one of its reasons for striking down the Georgia statute, the fact that There is no provision [in Georgia's pre-judgment garnishment law] for an early hearing at which the creditor would be required to demonstrate at least probable cause for the garnishment. 419 U.S. at 607, 95 S.Ct. at 723. As we read North Georgia Finishing, due process requires only that at the hearing the creditor establish probable cause for the garnishment. In this case it is undisputed that ITT had a security interest in the proceeds and that Alabama Mobile Homes commingled the proceeds with its own money instead of paying the funds to ITT as it had agreed to. It can hardly be disputed that there was sufficient evidence in the record before the court to support a finding of a risk of concealment, transfer, or other disposition of the funds. The defendant's transfer of funds to its attorney could be construed as an attempt to prevent ITT from receiving the proceeds of the sale of its collateral. If the attorney took the funds with knowledge of the creditor's rights in them and if the transfer was not in the ordinary course of business, it would appear that ITT may be entitled to proceed against the funds in the hands of the attorney. See Comment 2(c) to § 7-9-306, Code of Alabama; In re Martin, 25 B.R. 25, 29 (Bkrtcy.N.D.Tex.1982); Anderson, Clayton & Co. v. First American Bank, 614 P.2d 1091, 1094-95 (Okla.1980). Based on our reading of North Georgia Finishing, supra, it appears to us that due process requires the creditor to demonstrate probable cause for the garnishment at the hearing. If this were a case between two innocent parties, we might be inclined to place the entire burden of proof on the creditor. See Funk, supra. To establish probable cause for the garnishment in this case, it was sufficient for the creditor to show that the proceeds were wrongfully withheld from it, that they were placed in the account, that the amount in question was on deposit when the garnishment was executed, and that there was a significant risk of concealment, transfer, or other disposition of the funds between the time the motion was filed and the time a judgment could be taken. If the debtor was able to prove that there was an intermediate balance lower than $2,352.50, or if it was able to present any other evidence that the garnishment was wrongful, it could have presented that evidence at the hearing.