Proceeds

     Article 9 provides that a security interest attaches to any  identifiable proceeds of the collateral. U.C.C. 9-315 (a)(2).  Proceeds are defined in U.C.C. 9-102(a)(64).  Attachment of an Article 9 security interest to proceeds is automatic; a security agreement need not provide that the security interest continues in proceeds. 

     We explore the need for and the operation of this protection in two examples.  In Chrysler Credit Corp. v. Superior Court a secured party with a security interest in the inventory (automobiles) of an automobile dealer sought to claim funds (proceeds) received by the dealer upon the sale of automobiles, because the security interest in the automobiles was extinguished by the sale (see U.C.C. 9-320(a)).   In Problem.Proceeds a secured party with a security interest in the equipment of a farmer seeks to claim funds traceable to the farmer's trade-in of one piece of equipment.  While the security interest continues in the equipment notwithstanding its trade-in (U.C.C. 9-201(a)), unlike the security interest in the automobiles in Chrysler Credit, the equipment may be difficult or expensive to locate, may be impractical or expensive to repossess, or may have depreciated significantly or been damaged or destroyed.  

     A lien on real property, in contrast, is not vulnerable to sale of the real property.   A recorded lien on real property will  survive sale of the real property unless the holder of the lien is paid through escrow with proceeds of the sale (in which case, of course, the holder of the lien no longer cares).  Moreover, real property will never be difficult or expensive to locate and is less likely to have depreciated than many forms of personal property.   Accordingly, where the holder of the lien is not paid through escrow, the holder of a lien on real property doesn't need to worry about having a lien on the proceeds of sale.    

     However, real property, like personal property, can be damaged and improvements on real property can be destroyed. While raw land cannot be destroyed, its value can be significantly reduced by natural catastrophe (fire, flood, earthquake) or by human hands (toxic contamination). In addition, real property can be condemned by public authority. In each of these cases a pool of money, typically insurance proceeds or a condemnation award, may stand in lieu of the property or some of its value. Article 9 expressly identifies insurance payments as proceeds (see U.C.C. 9-102(a)(64)(E)) and real property security law treats insurance payments and condemnation in similar fashion. For example, in Los Angeles Trust & Savings Bank v. Bortenstein, 47 Cal.App. 421(1920), the court stated:

It is a well-recognized rule of equity, based upon the doctrine of equitable conversion, that when land is taken for public use, the money awarded for such land remains, and is to be considered, as land in respect to all rights and interests relating thereto. The money in such cases, is deemed to represent the land, and is applied in equity to discharge the liens upon it, precisely in accordance with the legal or equitable rights of creditors or encumbrancers in respect to such land.

     The use to which real property insurance proceeds or condemnation awards may or must be put  presents some interesting issues that we do not explore in these materials. Those interested can begin with Schoolcraft v. Ross, 81 Cal. App. 3d 75 (1978) and Department of Transportation v. Redwood Baseline, Ltd., 84 Cal. App. 3d 662 (1978).