Problem.Proceeds

     Bank of Whitewater lent farmer $15,000 to purchase feed for his hogs (and by this we do not mean fuel for his motorcycles). The loan was secured by the farmer's tractor. Farmer decided, without the authorization of the bank, to trade in the tractor for a new tractor sold by a farm implements dealer. A fire destroyed the new tractor shortly after farmer took possession of it. As required by the security agreement, farmer had insured his tractors (including any replacements) but, in violation of the security agreement, the insurance policy named farmer, not the Bank of Whitewater, as beneficiary. The insurance company paid $10,000, the appropriate amount under the policy, to farmer who immediately deposited it into his general checking account at Bank of Stone. Just prior to the deposit, his checking account reflected a balance of $16,000. Immediately after this deposit, farmer wrote a check on this account for $20,000 to pay for his daughter's wedding, and then deposited in this account a $5,000 federal income tax refund.

     Farmer has continued to make timely loan payments to Bank of Whitewater. When the Bank of Whitewater discovers these events, what, if anything, can it do? See U.C.C. 9-315(a)(2), (b); U.C.C. 9-102(a)(64); U.C.C. 9-102(a)(12); Chrysler Credit Corp. v Superior Court.

     Suppose instead that, as a condition to the extension of credit, the Bank of Whitewater had required farmer to open a general checking account with the bank and that farmer had deposited the insurance proceeds for the tractor into that account.  Farmer also regularly deposited funds from all sources in that checking account.  As above, at the time of the $10,000 deposit, the bank account had a balance of $16,000.  Following the deposit, the farmer first wrote a $20,000 check and then deposited a $5,000 check.Would the right of set-off afford Bank of Whitewater any greater right to funds in the account than a right to traceable proceeds?