Summary of a Recent
Judicial Development in
Secured Transactions

Security Interest in Identifiable Proceeds of Collateral

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Community Trust Bank v. First National Bank, 924 So.2d 498 (La. Ct. App. 2006), the Louisiana Court of Appeal held that a creditor failed to prove that funds in dispute were identifiable proceeds of its collateral, and dismissed its complaint.

Background

Ruston Timber borrowed money from Community Trust Bank (CTB) to finance its lumber operations. Id. at 499. CTB had perfected security interests in all of Ruston's timber located on a certain parcel of property, along with all the rest of Ruston's inventory. Id. Ruston Timber later opened an account and borrowed money from First National Bank (FNB), and its account agreement provided a right of setoff. Id. Ruston defaulted on its loans, and FNB notified Ruston that it had exercised its right of setoff against its account. Id. at 501. CTB filed suit, claiming all deposits in Ruston's account as proceeds arising out of the sale of secured collateral. Id. The trial court dismissed CTB's complaint against FNB and found that CTB had failed to show that it had a security interest in any standing timber from which monies were derived for deposit to the FNB account. Id. The trial court also concluded that CTB's security agreement and financing statements did not adequately notify third parties that a particular lot of cut timber was subject to the security interest, and CTB appealed the ruling. Id.

Arguments

FNB argued that CTB's financing statements were too broad and insufficient to put third parties on notice of any encumbrance on specific lots of timber. Id. at 502. It further argued that CTB had no interest in the funds deposited in Ruston's account because the funds were not proceeds from the sale of inventory from Ruston's wood yard. Id. at 504.

CTB argued that its financing statements were adequate and created a superior security interest in the cut timber, even if the tract of timber from which it had been cut had been financed by FNB ( i.e., that all cut timber in Ruston's possession was inventory in which CTB had a security interest). Id.

Analysis and Holdings

The appellate court found that CTB's UCC-1 financing statements, which covered "All Inventory, Chattel Paper, Accounts, Equipment, and General Intangibles" was sufficient to put FNB on notice that CTB may have had a security interest in Ruston's assets. Id. at 502. Regarding whether CTB had a security interest in the funds deposited into Ruston's account, the evidence clearly showed that the funds were not realized from the sale of inventory located at the wood yard, but CTB argued that its security interest reached throughout the chain all the way to the proceeds of all of Ruston's timber sales no matter who financed the cutting of the timber. Id. at 504. However, the court disagreed and explained that collateral must be more specifically identified in a security agreement than in a financing statement, and found that the language in CTB's security agreement, "all inventory," did not provide a reasonable identification of collateral. Id. at 506. Therefore the court held that CTB had failed to prove that the funds in Ruston's account were the identifiable proceeds of its collateral, and affirmed the judgment of the trial court. Id. at 507.

The case was decided on March 15, 2006.