Commercial Law: Deposit Accounts and Cash Proceeds.

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Presentation transcript:

Commercial Law: Deposit Accounts and Cash Proceeds

Deposit Accounts Two ways to perfect in money in a bank account: Perfection by CONTROL directly against the bank account as original collateral. [9-314] Perfection in OTHER COLLATERAL that is then sold for PROCEEDS deposited in the account. [9-315]

Perfection by Control of Deposit Accounts Perfection by Control Accomplished in three ways:  BE the depository bank. [9-104(a)(1)];  AGREE with the three parties (SP, Debtor, and Dep. Bank) that the bank will let SP control the account. [9-104(a)(2)];  BECOME the account owner (SP becomes the bank’s customer. [9-104(a)(3)]

Priorities in Deposit Accounts Perfection by Control > Perfection by other means (proceeds); [9-327(1)] Control by Bank > Control by agreement and Proceeds. [9-327(3)] Control by Ownership or subordination agreement > Control by Bank. [9-327 (4) and 9-339]

Advanced Priority in Deposit Accounts Control > Control in order of TIME. [9-327(2)] Proceeds > Proceeds in order of priorities in original security interest.

Moving Money in Deposit Accounts  What to do about money that LEAVES the bank account (can you go get it back?)  What to do about money that STAYS and is COMMINGLED in the bank account (whose money is whose?)

Part I: Transfers Out of Bank Accounts Money (proceeds OR original collateral) that is transferred to someone else out of a bank account is free and clear once it is transferred. [9-332] Example: I sell inventory, deposit proceeds in a bank account. I then write a check on the bank account to pay for groceries. The grocery store is free and clear. Collusion standard: If the transferee COLLUDES with the debtor to transfer the money, the court can undo the payment. [9- 332(a), (b)]

Part II: Commingling and Tracing What about money that stays in the bank account? The problem: money that is proceeds of sales of collateral gets mixed with non-proceeds money in the same account. USUAL case: merchant mixes proceeds from sales of inventory in with everything else in his general operating account.

Commingling (con’t) Commingling isn’t a problem if the SP has a DIRECT interest, secured by control, in the bank account. Then, all the money that comes into that account is collateral. Commingling IS a problem for proceeds of sales of collateral.

Tracing Most common tracing rule is Lowest Intermediate Balance. (non-Code law). [9-315(b)(2)] This is a rule of logic: if the account balance drops below the amount of proceeds deposited, then that amount of proceeds logically MUST have been dissipated.

Practical LIB Step 1: When account balance dips below proceeds amount, that is the new LIB; Step 2: Add all new deposits of proceeds that come after the LIB above (i.e., LIB + new proceeds deposits is your new total); Step 3: If the account balance dips again below the new total in Step 2, that’s the new LIB. Go back to step 1.

Practice LIB: Example DateTransactionBalanceProceeds Nonproc’ds Jan 1 $ 300,000 proceeds $300,000 $0 Jan 3 $200,000 nonproc’ds dep. $500,000$300,000$200,000 Jan 15 $250,000 withdrawal $250,000 $0 Jan 20 $200,000 nonproc’ds dep. $450,000$250,000$200,000 (LIB)$250,000

Practice LIB: Most Common Case DateTransactionBalProceedsNon- Proceeds Jan. 1 $2000 proceeds dep. $5000$2000$3000 Jan. 5 $4700 withdrawal $300 $0 Jan. 10 $300 withdrawal $0 Jan. 15 $9000 nonproc’d dep. $9000$0$9,000 LIB:$0

Practice LIB: Subsequent Deposits DateTransactionBalProceeds Non- Proc’ds Jan. 1$2000 proceeds dep. $5000$2000$3000 Jan. 5-$4700 withdrawal $300 $0 Jan. 10 $9000 nonproc’d dep. $9300$300$9000 Jan. 15 $3000 proceeds dep. $12300$3300$9000 Jan. 20 -$4000 withdrawal $8300$3300$5000 LIB:$3300

Practice LIB: Overdraft (Chrysler) DateTransactionBalProceeds Non- Proceeds Jan. 1 $2000 proceeds dep. $5000$2000$3000 Jan. 5 -$4700 withdrawal $300 $0 Jan. 10 -$2000 withdrawal -$1700$0 Jan. 15 $1000 proceeds dep. -$700$0 Jan. 20 $9000 nonproc’d dep. $8300$0$8300 LIB:$0

So What do Sophisticated Parties Do? Perfect in pledgeable collateral (chattel paper, notes) by possession, to prevent sales to third parties; Create lock-box accounts that limit the debtor’s ability to commingle and transfer proceeds.

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20 Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22-$2,000 withdrawn$14,000??

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22-$2,000 withdrawn$14,000B -$1,000$13,000 June 1-$13,500 withdrawn$500??

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22-$2,000 withdrawn$14,000B -$1,000$13,000 June 1-$13,500 withdrawn$500B -$500$0 June 4-$100 withdrawn$400??

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22-$2,000 withdrawn$14,000B -$1,000$13,000 June 1-$13,500 withdrawn$500B -$500$0 June 4-$100 withdrawn$400B - $400$0 June 10Deposit $500 Inventory proceeds $900??

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20 Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22 -$2,000 withdrawn $14,000B -$1,000$13,000 June 1-$13,500 withdrawn$500B -$500$0 June 4-$100 withdrawn$400B - $400$0 June 10 Deposit $500 Inventory proceeds $900B- $400 F - $500 $0 June 15Deposit $3000 Accounts proceeds $3,900 ??

LIB Rule Problem on p. 236 DateTransactionBalProceedsNon- Proceeds May 1$10,000 loan$15,000$0$15,000 May 20Deposit $1,000 Accounts proceeds $16,000B- $1,000$15,000 May 22-$2,000 withdrawn$14,000B -$1,000$13,000 June 1-$13,500 withdrawn$500B -$500$0 June 4-$100 withdrawn$400B - $400$0 June 10Deposit $500 Inventory proceeds $900B- $400 F - $500 $0 June 15Deposit $3000 Accounts proceeds $3,900B -$3,400 F -$500 $0