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C.o. Funk & Son, Inc. v. Sullivan Equipment

OPINION FILED JANUARY 12, 1981.

C.O. FUNK & SON, INC., A/K/A JNF ENTERPRISES, INC., ET AL., PLAINTIFFS-APPELLEES,

v.

SULLIVAN EQUIPMENT, INC., ET AL., DEFENDANTS. — (FIRST NATIONAL BANK AND TRUST COMPANY OF TUSCOLA ET AL., INTERVENING DEFENDANT-APPELLANT.)



APPEAL from the Circuit Court of Piatt County; the Hon. JOHN P. SHONKWILER, Judge, presiding.

MR. JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:

___ N.E.2d ___ First impression. Uniform Commercial Code. Section 9-306(2). How do we define "identifiable proceeds"? We must first look at the background.

On March 31, 1978, plaintiffs (Funk) sold their farm-implement business, including inventory, to defendants (Sullivan). In connection with that sale, Funk retained a security interest in certain specifically listed items of farm-equipment inventory (referred to by the parties as "bill of sale items") and their proceeds. The financing statement which perfected that security interest was filed on April 3, 1978, prior to any other filing concerning that collateral.

The contract of sale between Funk and Sullivan provided that Sullivan, upon selling a bill of sale item, was to deposit into an escrow account 90% of the amount paid for that item. However, during the 18-month period between June 22, 1978, and December 17, 1979, Sullivan's deposits into the escrow account became $29,673.73 in arrears.

On December 18, 1979, Sullivan planned to sell at auction certain items of its farm-implement inventory. On the day before the auction, Funk obtained a temporary restraining order requiring Sullivan to deposit the auction proceeds (less expenses of the auction) with the court. The court also allowed an oral motion by the First National Bank and Trust Company of Tuscola (bank) to intervene. The bank's interest in the suit arose from Sullivan's debt to the bank in the amount of $425,596.78, which was secured at least in part by a security interest in Sullivan's farm-implement inventory and its proceeds. The bank's security interest also covered Sullivan's after-acquired inventory. In this appeal, Funk and the bank each claims that it has a prior perfected security interest in the $29,673.73 now on deposit with the trial court.

The gross receipts of the auction totaled $115,871.52. Some bill of sale items were sold, and the bank has conceded that Funk — under its prior perfected security interest in those items — was entitled to their cash proceeds. Funk, on the other hand, has claimed only the $29,673.73 arrearage, and the parties therefore stipulated to the distribution of all but that amount of the auction receipts.

Thus, the funds now held by the court represent receipts from the sale of farm equipment other than bill of sale items. Funk, however, claims that since its security interest also covered proceeds of bill of sale items, it has a prior perfected security interest in the cash held by the court. That claim is grounded upon sections 9-306(1) and (2) of the UCC (Ill. Rev. Stat. 1979, ch. 26, pars. 9-306(1), (2)):

"(1) `Proceeds' includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement. Money, checks, deposit accounts, and the like are `cash proceeds'. All other proceeds are `non-cash proceeds'.

(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor." (Emphasis added.)

Funk contends that the cash held by the court constitutes "identifiable proceeds" of the bill of sale items.

Funk's identification process takes us through the following steps:

(1) During the 18-month arrearage period, Sullivan sold certain bill of sale items for cash.

(2) The cash from these sales was deposited into Sullivan's general checking account. (Deposits from other sources were also made into this account.)

(3) From the general checking account, Sullivan bought farm equipment inventory which the parties have labeled "second generation inventory." (This account was also used ...


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