The U.S. Court of Appeals for the Sixth Circuit, in what it characterized as an issue of first impression under Tennessee law, concluded that the term "proceeds," as used financing statements used to perfect UCC Article 9 security interests, does not include the debtor's accounts receivable.
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0326p-06.pdf
At issue was the specific language used in the financing statements of secured creditors. Beginning in late 2004, the plaintiff entered into a series of secured transactions with the debtors for the sale or lease of certain tractors and trailers. The parties executed security agreements that gave the plaintiff a security interest in the debtors' tractors and/or trailers, accounts, and in the proceeds from the agreed-upon collateral.
The plaintiff filed financing statements in connection with the security agreements, and the financing statements identified the collateral as the specified tractors and/or trailers and "all proceeds thereof, including rental and/or lease receipts." The plaintiff's financing statements did not include the term "accounts" or "accounts receivable."
Around the same time that the plaintiff entered into the secured transactions with the debtors – but after the plaintiff filed its financing statements – the defendants also entered into secured transactions with the same debtors. The defendants filed their financing statements, which specifically stated that the defendants had a security interest in "all accounts receivable now outstanding and hereafter arising."
In 2009 the debtors defaulted. While the plaintiff took possession the collateral securing the agreements, the defendants took possession of the debtors' accounts receivable. The plaintiff brought suit, asserting that it possessed a perfected security interest – and thus had first priority – in the debtors' accounts receivable. The plaintiff argued that the term "and all proceeds thereof" in its financing statements included the accounts receivable. The district court granted the defendants' motion for summary judgment, finding that the plaintiff's financing statements were not sufficient to put defendants on notice that plaintiff claimed a security interest in the accounts receivable, and holding as a matter of law that the term "proceeds," as used in a financing statement, does not include a debtor's accounts receivable.
On appeal, the Sixth Circuit focused on the specific language of the financing statements at issue and analyzed the term "proceeds" under Tennessee's Commercial Code. The court acknowledged that the plaintiff took the proper steps necessary for its security interest to attach to debtors' accounts. The issue, clarified the court, was whether the plaintiff properly perfected its security interest in the debtors' accounts.
Like the Uniform Commercial Code, Tennessee's Commercial Code required the secured creditor to file a financing statement that describes the collateral covered by the financing statement in order to perfect the security interest. The Court stated that although "minor mistakes" on financing statements are not fatal, the financing statements are required to be sufficiently accurate such that third parties are put on notice.
In determining that the plaintiff's financing statements were not sufficient to put the defendants on notice that plaintiff had a security interest in the debtors accounts receivable, the Sixth Circuit was critical of the language the plaintiff chose to include (and not include) in the financing statements. The "financing statements identified specific pieces of equipment and several types of collateral. . . However, the description of collateral in plaintiff's financing statement did not list 'account' or 'accounts receivable.' Pursuant to the maxim, expressio unius est exclusio alterius, (the mention of one subject in a statute means the exclusion of other subjects that are not mentioned), the limiting language of plaintiff's financing statements identified only items that were subject to the security interest." Without the term "account" or "accounts receivable," the Sixth Circuit held, the defendants had no reason to know or expect that plaintiff claimed a security interest in them.
Next, the Sixth Circuit analyzed whether accounts or accounts receivable constituted "proceeds" under Tennessee's Commercial Code. The plaintiff attempted to argue that the phrase "all proceeds thereof" in its financing statements encompassed the debtors' accounts receivable. The Court, relying on the statutory construction of "proceeds" under the Commercial Code, disagreed. Although the Sixth Circuit acknowledged that the term "proceeds" under Chapter 9 of the Tennessee Commercial Code was broadly defined, the Court held that to include "accounts" and "accounts receivable" in that definition would render the term "accounts" – which was separately defined under the Commercial Code – meaningless: "we decline to expand the definition of the general term, 'proceeds,' in such a way that it would subsume the specific term, 'accounts.'"
In further support of its limited interpretation of the term "proceeds," the Sixth Circuit relied on the Commentary to the UCC where the drafters explained that "proceeds" does not refer to "income generated from the debtor's own use and possession of goods" or to situations where there was "no disposition of the goods by the security lease." PEB Commentary No. 8 § 9-306(1). The Sixth Circuit agreed with the district court that in order for rights to "arise out of collateral," they must have been obtained as a result of some loss or dispossession of the party's interest in that collateral, not simply the use. Finally, the Court reviewed other courts' interpretation of the UCC and concluded that those cases support the position that revenues earned through the use of collateral are not proceeds.
Accordingly, the Sixth Circuit affirmed the district court's findings that the financing statements did not sufficiently put defendants on notice, and that the term "proceeds" in a financing statement does not include the accounts receivable of the debtor. Because the plaintiff's security interest in debtors' accounts was not perfected, plaintiff's security interest was subordinate to defendants' perfected security interest.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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