(a) Except as otherwise provided in Chapter 55, Article 9 NMSA 1978, the Farm Products Secured Interest Act [56-13-1 to 56-13-14 NMSA 1978] and in Subsection (2) of Section 55-2-403 NMSA 1978:

(1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien; and

(2) a security interest attaches to any identifiable proceeds of collateral.

(b) Proceeds that are commingled with other property are identifiable proceeds:

(1) if the proceeds are goods, to the extent provided by Section 55-9-336 NMSA 1978; and

(2) if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law other than Chapter 55, Article 9 NMSA 1978 with respect to commingled property of the type involved.

(c) A security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected.

(d) A perfected security interest in proceeds becomes unperfected on the twenty-first day after the security interest attaches to the proceeds unless:

(1) the following conditions are satisfied:

(A) a filed financing statement covers the original collateral;

(B) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and

(C) the proceeds are not acquired with cash proceeds;

(2) the proceeds are identifiable cash proceeds; or

(3) the security interest in the proceeds is perfected other than under Subsection (c) of this section when the security interest attaches to the proceeds or within twenty days thereafter.

(e) If a filed financing statement covers the original collateral, a security interest in proceeds which remains perfected under Paragraph (1) of Subsection (d) of this section becomes unperfected at the later of:

(1) when the effectiveness of the filed financing statement lapses under Section 55-9-515 NMSA 1978 or is terminated under Section 55-9-513 NMSA 1978; or

(2) the twenty-first day after the security interest attaches to the proceeds.

History: 1978 Comp., § 55-9-315, enacted by Laws 2001, ch. 139, § 35.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

1. Source. Former section 9-306.

2. Continuation of Security Interest or Agricultural Lien Following Disposition of Collateral. Subsection (a)(1)(A), which derives from former section 9-306(2), contains the general rule that a security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transferee or, in an appropriate case, maintain an action for conversion. The secured party may claim both any proceeds and the original collateral but, of course, may have only one satisfaction.

In many cases, a purchaser or other transferee of collateral will take free of a security interest, and the secured party's only right will be to proceeds. For example, the general rule does not apply, and a security interest does not continue in collateral, if the secured party authorized the disposition, in the agreement that contains the security agreement or otherwise. Subsection (a)(1)(A) adopts the view of PEB Commentary No. 3 and makes explicit that the authorized disposition to which it refers is an authorized disposition "free of" the security interest or agricultural lien. The secured party's right to proceeds under this section or under the express terms of an agreement does not in itself constitute an authorization of disposition. The change in language from former section 9-306(2) is not intended to address the frequently litigated situation in which the effectiveness of the secured party's consent to a disposition is conditioned upon the secured party's receipt of the proceeds. In that situation, subsection (a) leaves the determination of authorization to the courts, as under former article 9.

This article contains several provisions under which a transferee takes free of a security interest or agricultural lien. For example, section 9-317 states when transferees take free of unperfected security interests; sections 9-320 and 9-321 on goods, 9-321 on general intangibles, 9-330 on chattel paper and instruments, and 9-331 on negotiable instruments, negotiable documents, and securities state when purchasers of such collateral take free of a security interest, even though perfected and even though the disposition was not authorized. Section 9-332 enables most transferees (including nonpurchasers) of funds from a deposit account and most transferees of money to take free of a perfected security interest in the deposit account or money.

Likewise, the general rule that a security interest survives disposition does not apply if the secured party entrusts goods collateral to a merchant who deals in goods of that kind and the merchant sells the collateral to a buyer in ordinary course of business. Section 2-403(2) gives the merchant the power to transfer all the secured party's rights to the buyer, even if the sale is wrongful as against the secured party. Thus, under subsection (a)(1)(A), an entrusting secured party runs the same risk as any other entruster.

3. Secured Party's Right to Identifiable Proceeds. Under subsection (a)(1)(B), which derives from former section 9-306(2), a security interest attaches to any identifiable "proceeds," as defined in section 9-102. See also section 9-203(f). Subsection (b) is new. It indicates when proceeds commingled with other property are identifiable proceeds and permits the use of whatever methods of tracing other law permits with respect to the type of property involved. Among the "equitable principles" whose use other law may permit is the "lowest intermediate balance rule." See Restatement (2d), Trusts section 202.

4. Automatic Perfection in Proceeds: General Rule. Under subsection (c), a security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected. This article extends the period of automatic perfection in proceeds from 10 days to 20 days. Generally, a security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds. See subsection (d). The loss of perfected status under subsection (d) is prospective only. Compare, e.g., section 9-515(c) (deeming security interest unperfected retroactively).

5. Automatic Perfection in Proceeds: Proceeds Acquired with Cash Proceeds. Subsection (d)(1) derives from former section 9-306(3)(a). It carries forward the basic rule that a security interest in proceeds remains perfected beyond the period of automatic perfection if a filed financing statement covers the original collateral (e.g., inventory) and the proceeds are collateral in which a security interest may be perfected by filing in the office where the financing statement has been filed (e.g., equipment). A different rule applies if the proceeds are acquired with cash proceeds, as is the case if the original collateral (inventory) is sold for cash (cash proceeds) that is used to purchase equipment (proceeds). Under these circumstances, the security interest in the equipment proceeds remains perfected only if the description in the filed financing statement indicates the type of property constituting the proceeds (e.g., "equipment").

This section reaches the same result but takes a different approach. It recognizes that the treatment of proceeds acquired with cash proceeds under former section 9-306(3)(a) essentially was superfluous. In the example, had the filing covered "equipment" as well as "inventory," the security interest in the proceeds would have been perfected under the usual rules governing after-acquired equipment (see former sections 9-302 and 9-303); paragraph (3)(a) added only an exception to the general rule. Subsection (d)(1)(C) of this section takes a more direct approach. It makes the general rule of continued perfection inapplicable to proceeds acquired with cash proceeds, leaving perfection of a security interest in those proceeds to the generally applicable perfection rules under subsection (d)(3).

Example 1: Lender perfects a security interest in Debtor's inventory by filing a financing statement covering "inventory." Debtor sells the inventory and deposits the buyer's check into a deposit account. Debtor draws a check on the deposit account and uses it to pay for equipment. Under the "lowest intermediate balance rule," which is a permitted method of tracing in the relevant jurisdiction, see comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period.

Example 2: Lender perfects a security interest in Debtor's inventory by filing a financing statement covering "all debtor's property." As in Example 1, Debtor sells the inventory, deposits the buyer's check into a deposit account, draws a check on the deposit account, and uses the check to pay for equipment. Under the "lowest intermediate balance rule," which is a permitted method of tracing in the relevant jurisdiction, see comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period. However, because the financing statement is sufficient to perfect a security interest in debtor's equipment, under subsection (d)(3) the security interest in the equipment proceeds remains perfected beyond the 20-day period.

6. Automatic Perfection in Proceeds: Lapse or Termination of Financing Statement During 20-Day Period; Perfection Under Other Statute or Treaty. Subsection (e) provides that a security interest in proceeds perfected under subsection (d)(1) ceases to be perfected when the financing statement covering the original collateral lapses or is terminated. If the lapse or termination occurs before the 21st day after the security interest attaches, however, the security interest in the proceeds remains perfected until the 21st day. Section 9-311(b) provides that compliance with the perfection requirements of a statute or treaty described in section 9-311(a) "is equivalent to the filing of a financing statement." It follows that collateral subject to a security interest perfected by such compliance under section 9-311(b) is covered by a "filed financing statement" within the meaning of section 9-315(d) and (e).

7. Automatic Perfection in Proceeds: Continuation of Perfection in Cash Proceeds. Former section 9-306(3)(b) provided that if a filed financing statement covered original collateral, a security interest in identifiable cash proceeds of the collateral remained perfected beyond the ten-day period of automatic perfection. Former section 9-306(3)(c) contained a similar rule with respect to identifiable cash proceeds of investment property. Subsection (d)(2) extends the benefits of former sections 9-306(3)(b) and (3)(c) to identifiable cash proceeds of all types of original collateral in which a security interest is perfected by any method. Under subsection (d)(2), if the security interest in the original collateral was perfected, a security interest in identifiable cash proceeds will remain perfected indefinitely, regardless of whether the security interest in the original collateral remains perfected. In many cases, however, a purchaser or other transferee of the cash proceeds will take free of the perfected security interest. See, e.g., sections 9-330(d) (purchaser of check), 9-331 (holder in due course of check), and 9-332 (transferee of money or funds from a deposit account).

8. Insolvency Proceedings; Returned and Repossessed Goods. This article deletes former section 9-306(4), which dealt with proceeds in insolvency proceedings. Except as otherwise provided by the Bankruptcy Code, the debtor's entering into bankruptcy does not affect a secured party's right to proceeds.

This article also deletes former section 9-306(5), which dealt with returned and repossessed goods. Section 9-330, comments 9 to 11, explain and clarify the application of priority rules to returned and repossessed goods as proceeds of chattel paper.

9. Proceeds of Collateral Subject to Agricultural Lien. This article does not determine whether a lien extends to proceeds of farm products encumbered by an agricultural lien. If, however, the proceeds are themselves farm products on which an "agricultural lien" (defined in section 9-102) arises under other law, then the agricultural-lien provisions of this article apply to the agricultural lien on the proceeds in the same way in which they would apply had the farm products not been proceeds.

Repeals and reenactments. — Laws 2001, ch. 139, § 35 repealed former 55-9-315 NMSA 1978, as enacted by Laws 1961, ch. 96, § 9-315, and enacted a new section, effective July 1, 2001.

Decisions under former 55-9-306 NMSA 1978. — In light of the similarity of this section and former Section 55-9-306 NMSA 1978, annotations decided under former 55-9-306 NMSA 1978 have been included in the annotations in this section.

I. GENERAL CONSIDERATION.

Purpose of filing requirements. — The underlying purpose of filing financing statements is to provide an opportunity for the debtor's other creditors and transferees to independently ascertain whether the property they will rely on as backup for the payment of claims against the debtor is subject to prior claims. Case Credit Corp. v. Portales Nat'l Bank, 1998-NMSC-035, 126 N.M. 89, 966 P.2d 1172 (decided under former law).

Federal law applicable when federal government holds security interest. — Federal law applies instead of state law to determine whether a defendant is liable for conversion of livestock in which the government holds a perfected security interest and whether the government has an interest in the proceeds. A uniform federal rule is essential to protect the security interests of the United States and to prevent such interests from being detrimentally affected through the uncertainty that would arise from the application of disparate state rules. United States v. Bunker Livestock Comm'n, Inc., 437 F. Supp. 1079 (D.N.M. 1977) (decided under former law).

II. CONTINUITY OF SECURITY INTEREST IN COLLATERAL AND PROCEEDS.

Ability to transfer collateral does not destroy perfected security interest. — The fact that collateral may be transferred voluntarily or involuntarily does not destroy or adversely affect a prior perfected security interest. Brummund v. First Nat'l Bank, 1983-NMSC-002, 99 N.M. 221, 656 P.2d 884 (decided under former law).

When new financing statement not necessary after transfer of property. — Since creditor had no notice or knowledge of a transfer of the property covered by the security agreement by the debtor to the debtor's corporation, it was not necessary for creditor to file a new financing statement, showing the transferee as a new debtor, to preserve their lien under the security agreement. Ryan v. Rolland, 434 F.2d 353 (10th Cir. 1970) (decided under former law).

Identifiable proceeds might be goods purchased with money received from sale of original collateral. Clovis Nat'l Bank v. Thomas, 1967-NMSC-061, 77 N.M. 554, 425 P.2d 726 (decided under former law).

Bank's disbursement of proceeds constituted conversion. — Actions of payee bank, which also held a junior lien on debtor's tractor, in disbursing to debtor the proceeds of an unauthorized sale of the tractor, constituted unlawful conversion as against petitioner, which held a prior security interest in the tractor. Case Credit Corp. v. Portales Nat'l Bank, 1998-NMSC-035, 126 N.M. 89, 966 P.2d 1172 (decided under former law).

Law reviews. — For comment, "New Mexico's Uniform Commercial Code in Oil and Gas Transactions," see 10 Nat. Resources J. 361 (1970).

Am. Jur. 2d, A.L.R. and C.J.S. references. — Validity as to creditors of the buyer or consignee of reservation of title to goods delivered under implied or express authority to resell, 63 A.L.R. 355.

Liability of mortgagor as affected by transaction between chattel mortgagee and purchaser of mortgaged chattel, 93 A.L.R. 1203.

Chattel mortgagee's consent to sale of mortgaged property as waiver of lien, 97 A.L.R. 646.

Personal liability of purchaser of property subject to chattel mortgage, to the mortgagee, 100 A.L.R. 1038.

Rights in proceeds of vehicle collision policy, under "loss-payable" clause, of conditional seller, chattel mortgagee, or the like, of vehicle where there has been improper repossession or foreclosure after damage, 46 A.L.R.2d 992.

Effectiveness of original financing statement under UCC Article 9 after change in debtor's name, identity, or business structure, 99 A.L.R.3d 1194.

Effect of UCC Article 9 upon conflict, as to funds in debtor's bank account, between secured creditor and bank claiming right of setoff, 3 A.L.R.4th 998.

What constitutes secured party's authorization to transfer collateral free of lien under U.C.C. § 9-306(2), 37 A.L.R.4th 787.

Construction and effect of UCC § 9-311 giving debtor right to transfer his interest in collateral, 45 A.L.R.4th 411.

Secured transactions: government agricultural program payments as "proceeds" of agricultural products under UCC § 9-306, 79 A.L.R.4th 903.