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Show MONDAY, OCTOBER 21, 1974 covered inventory and the PAGE NINE' INTERMOUNT A IN COMMERCIAL RECORD In The Supreme Court of The State of Utah result necessarily proceeds. be reached, that would is a in Section or judge. To reindependently of the section, by any referee With a quire further tracing would be to demand a futile act. in filed financing statement of record, no one is misled this kind of financing. 08, In Holzman v. L. H. J. Enterprises, Inc. 3 the debtor gave a purchase money security interest on all the inventory of boya' clothing and any and all additions, accessions, and substitutes. At the time a petition for bankruptcy was filed, the debtor had on hand a substantial inventory of boys' clothing of 1. The record indicates that the payments on the note are in default and the note is uncollectible. 2. See 70A as an example. 3. U.S.C.A. 9th, 1973, 12 U. C. C. Reptr. Serv. 385, 387. The interest in the proceeds which are substituted collateral, dates back to the original perfection of the security interest in the financed collateral. . . . ... The author further explained;6 which only a small portion constituted items sold by the secured party. The remainder of the inventory had been purchased by the debtor subsequent to the date of the security agreement. The trustee in bankruptcy sold the inventory, and the issue was whether the secured party's lien attached to the entire proceeds or only that portion which was derived from the inventory actually purchased by the debtor from the secured party. The court framed the issue as whether a lien on after -- acquired inventory can qualify as a purchase money ... that is,understand inventory financing to be literally the financing of inventory, whatever items defined no transfer may from time to time compose it - then there is after the date the original secured transaction has been perfected; . . . Perfection would have occurred when the last of four events happened: a financing statement was filed, a the debtor has rights security agreement was" duly entered into, After-acquirin' the collateral, a value was given. property was acit because new value for to be taken would be deemed in would quired in the ordinary course of business, and it not be, "transis fact, substitute collateral. The property simply ferred" and there is no question of antecedent debt, for the value was necessarily given at the inception of the financing, the time of the transfer. If we security interest. ed The court affirmed the ruling of the district court4 that the secured party's lien extended to inventory and accordingly to the entire of the The sale. court proceeds explained: after-acquir- ed If a purchase money security interest in retail inventory is to have any commercial usefulness, it must accommodate the resale of the inventory under lien. Resale of that inventory is the very reason for its purchase. 6. 70A-9-10- 4 ed U. C. A. Where a secured party makes an advance, incurs an obliga- tion, releases a perfected security interest, or otherwise gives new value which is to be secured in whole or in part by after -acquired property his security interest in the after-acquircollateral shall be deemed' to be taken for new value and not as security for an antecedent debt if the debtor acquires his rights in such collateral either in the ordinary course of his business or under a contract of purchase made pursuant to the security agreement within a reasonable time after new value is given. 70A-9-301(l)- Tn tttm - i ed ' In a comprehensive analysis of the code provisions relevant to the instant action, Ray D. Henson " 'Proceeds' Under The Uniform Commercial 4. In Re Piro, U. S. D. C. , S.D.Calif., 331 F.Supp. 171 (1971). 5. In Re Nickerson fc Nickerson, Inc., U.S. D. C. , D. Neb. 1971, 329 F.Supp. 93, 9 U. C. C. Reptr. Serv. 886, 889-89- 0. Code" 2 U. C. C. Reptr. Serv. 566, 571-5(Reprinted from 65 Col. L. Rev. 86 232, 1965), stated: This section provides that in our situation, where a financer has put new money into a debtor's business to finance constantly changing collateral, the security interest in the new collateral is taken for new value where the debtor's rights are acquired in the ordinary course of business, because as far as individual items of inventory ate concerned the secured party's rights are lost when the items are sold. In effect, the section is simply a provision for recognizing substituted collateral. . . . But where inventory qua inventory is the collateral, the interest in the property is "deemed" to be taken for new value on the theory that the security interest in the inventory (and not in the individual items composing it) relates back to the time of the original attachment and perfection, when new value was given. Tracing the continuous substitutions would be difficult, if not impossible; it would also be unnecessary. . . . 08 The Code provides for a security interest to continue in This interproceeds as inventory is sold. 70A so often seems which mediate step of "proceeds" is the factor ignored by those who argue that as inventory is sold it must be contemporaneously replaced. Under the Code, an interest also continues in whatever is received upon the disposition of the proceeds; in this way, a continuous perfected security interest is provided - inventdry, proceeds, inventory again, more proceeds, and so on. In short, to say that a debtor and secured party legally need not engage in a continuing turnover, pay-ov- er transacarrangement to have a perfected of not redo life facts modern to that tion is simply recognize quire needless acts of no benefit to other creditors. The Code merely allows the financer and debtor to accomplish by a simple means what they could unquestionably do by a more elaborate arrangement. The recognition of substituted collateral non-attacka- ble ,., debtor-assigno- 1953, as amended 1965, provides: . The Security agreement expressly provided that the parties therein should include the successors or assigns of the parties. Section 70A provides that a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action 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. Since the financing statement was properly filed, plaintiff's, assignor had notice of defendant's security interest in the collateral and proceeds, as well as the provision in the security agreement that provided that the collateral, inventory, whenever acquired would secure the obligation U.C.fi. 1953, as amended 1965. Defendants!. covered, Section 70A rights attached to this substitute collateral prior to the assignment. Plaintiff further contends that the financing statement on file at the time of the assignment for the benefit of creditors was deficient because it r, The Company Enterprises. did not contain the name of the The statement on file indicated that the debtor was The Village Brownstone, which provides that a lien creditor Ltd. Plaintiff cites Section 70A includes an assignee for benefit of creditors from the time of the assignment. which provides that an unpcrfected Plaintiff further cites Section a lien creditor without knowof to the rightB security interest is subordinate ledge of the security interest and before it is perfected. 4), 8, ed Plaintiff further contends that the after -- acquired property clause in the defendant's security agreement with the constituent corporation (Village Brownstone, Ltd. ) does not extend to property acquired by the surviving . corporation (The Company Enterprises) after merger. U. C. A. 1953, as amended 1965, recognizes Section a of as collateral. Inventory subject to a security incategory "inventory" be looked upon as a single entity and not as a collection of terest should individual items. The res, which is the subject of the lien, is the merchandise or stock in trade, conceived of as a unit, presently and continuously in existence - a floating mass, the component elements of which may be constantly changing without affecting the identity of the res. Section of 6 . C. C. Reptr. Service. after-acquir- The court, therefore, held that the lien on inventory items subsequently acquired as replacement for the original items subject to lien was a purchase money security interest. The court further observed that the state requirement for giving notice of the financial arrangements served to protect future sellers of inventory as well as general creditors. 70A-9-109(- pages 2 U. inThe defendant had a valid security interest in the 7 ventory of the debtor, Village Brownstone, Ltd. , in the State of Utah. This could be accomplished by an elaborate and cumbersome arrangement whereby the resale of any item subject to lien is permitted by the lienholder, the proceeds of such resale are impounded to apply upon the note, and the lienholder then consents to use of the impounded funds for purchase of replacement items of inventory, taking a new lien on such new purchases. The floating lien on inventory items is but a shorthand version of this arrangement. By consenting to resale of the collateral and use of the proceeds of such re- sale to acquire replacement items the seller (lender) has given value to enable the purchaser (borrower) to acquire the new collateral. In effect, he has renewed his advance by releasing the proceeds of resale. after-acquir- At 585-58- rai of Tn -- - P (V) & C.n. . Tnr. the court ataied: i --Pagrn . JT .v i. ; , Rala ."'. '' - - . Article 9 of the Code does not contain any provision, however, which alters the perfected status of a secured party because the financing statement was filed under the debtor's . . . former name. Although the purpose of the filing provisions of the Code is to afford protection to a creditor by furnishing notice to interested inquiring parties, these provisions are intended merely as "a starting point for investigation which will result in fair warning concerning the transaction contemplated. " Emphasis added. Citation It was not intended, therefore, that interested parties be completely absolved from any inquiry as to the past history of the debtor. (See, e. g. , Uniform )'. To inquire of any change Commercial Code, Section of name, especially where the filed certificate of incorporation has been amended to effect such a change, imposes no greater burden than is already contemplated under the Gode. In the Pasco case, the court held that the secured party held a perfected security interest in the proceeds of the sale of the assignor's inventory which was superior to that of the assignee as a lien creditor. 7. Owens v. McKesson and Robbins Drug Co. , U. S. D. C. , N. D. Fla. 1972, 11 U. C. C. Reptr. Serv. 455; In Re Fibre Glass Boat Corp. , U. S. D. C. , S. D. Co. , Inc., U.S.C.A. Fla. 1971, 9U.C.C. Reptr. Serv. 118; In Re King-Port- er 5th, 1971, 9U.C.C. Reptr. Serv. 339; Rosenberg v. Rudnick, U. S. D. C. , D.Mass. 1967, 262 F.Supp. 635, 4 U.C.C. Reptr. Serv. 8. 8. 354 N. Y.2d 402, 14 U.C.C. Reptr. Serv. 1059, 1062 (1974). The facts in the instant case particularly emphasize the need for investigation. The survivor of the corporate merger continued to do business at two retail outlets under the name of The Village Brownstone. The assignment, itself, provides: "The Company Enterprises, doing business under the name of Village Ltd. , The Company, The Village Brownstone at Salt Lake City and Ogden. " debtor cannot destroy the perfected security interest of a secured party by merely changing its name or corporate structure, particularly when there is no evidence to indicate that the secured party had any knowledge thereof. A Defendant, in its cross -- appeal, contends that the trial court erred by decreeing that the proceeds from the First South store to which defendant was entitled be apportioned between the cash and the promissory note received by plaintiff. The assertion of defendant is correct. The specific terms of the assignment provided: It is understood and agreed that the. said second party I |