Michigan National Bank v. Flowers Mobile Homes Sales, Inc.

PARKER, Judge. [1, 2] G.S. 25-9-306(2) provides that when property subject to a security interest is sold by the debtor, the security interest “continues in any identifiable proceeds including collections received by the debtor.” Under this statutory provision there can be no question but that plaintiff obtained a valid security interest in the $6,400.00 which Flowers received from the sale of the Madison Mobile Home at the time Flowers first collected that amount from its customer. The question presented by this appeal is whether the proceeds of that sale remained “identifiable proceeds” so as to be subject to plaintiff’s security interest after they were deposited in Flowers’s regular checking account. We hold that they did. Under G.S. 25-9-306(3), if the security interest in the origiT nal collateral was perfected and the filed financing statement covering the original collateral also covers proceeds, as is true in the present case, the security interest in the proceeds is a “continuously perfected security interest.” And under G.S. 25-9-205 “[a] security interest is not invalid or fraudulent against creditors by reason of liberty in the debtor to use, commingle or dispose of all or part of the collateral ... or to use, commingle or dispose of proceeds, or by reason of the failure of the secured party to require the debtor to account for proceeds or replace collateral.” Although neither of these statutory- provisions, speaks directly to the problem with which we are here concerned, they do indicate strongly the spirit in which the Uniform Commercial Code is to be applied. *694 While we have found no statutory definition of “identifiable proceeds” as that term is used in G.S. 25-9-306 (2), we also find no express limitation on the right of a secured party to trace proceeds subject to his security interest into a bank account of the debtor. This lack of limitation is not without significance. The U.C.C. provides that “[u] nless displaced by the particular provisions of this chapter, the principles of law and equity . . . shall supplement its provisions.” G.S. 25-1-103. One such principle, which by analogy has application to the present case, is the doctrine of trust pursuit under which a cestui que trust is enabled to follow the trust funds through changes in their state and form in the hands of the trustee. Trust Co. v. Barrett, 238 N.C. 579, 78 S.E. 2d 730 (1953) ; see 7 Strong, N. C. Index 2d, Trusts, § 21. From application of this doctrine in cases throughout this country there has evolved the general rule that the act of a trustee in mingling trust funds in a mixed bank account will not destroy their identity so as' to prevent their reclamation. See Annot., 102 A.L.R. 372 (1936) (Supplementing annotations in 26 A.L.R. 3 (1923) ; 35 A.L.R. 747 (1925) ; and 55 A.L.R. 1275 (1928) ; D. Dobbs, Handbook on the Law of Remedies, § 5.16 at 427-28 (1973). Although the relationship between a secured party and his debtor is certainly not identical with that between a cestui que trust and his trustee, in each case the problem of tracing and identifying funds is sufficiently similar so that at least some of the tracing rules developed in the context of one relationship have logical application in the other. Under the basic tracing rule developed in the trust situation, it is presumed that any withdrawals made by the trustee for his own purposes form the mixed account subsequent to the deposit of the trust funds are made from the personal moneys of the trustee, and the funds being traced are presumed to remain idle in the bank account. The record of Flowers’s account No. 7-027-845 in Wachovia for the period from 18 September 1970, when the $6,400.00 proceeds from the sale of the Madison Mobile Home were deposited, until 31 October 1970, when the balance in the account was paid over to the Sheriff, which was introduced as an exhibit in this case, discloses a number of deposits and a large number of withdrawals. However, at all times during that period there remained in the account a balance of more than the $5,607.00 on which plaintiff now claims a security interest. Indeed, the balance in the account during that period at all times exceeded the $6,400.00 proceeds from the sale of the original collateral. *695 Applying the .standard tracing rule, the proceeds from the sale of the original collateral would thus be “identifiable,” because it is presumed that they remained untouched in the bank from the day of their deposit to the day the checking account was seized. The proceeds in the account thus remained subject to plaintiff’s security interest. It may be conceded that had plaintiff required its debtor, Flowers, to maintain a separate bank account into which there should be deposited only the proceeds of sale of items of original collateral and from which no withdrawals could be made until plaintiff’s security interest should be satisfied, and had plaintiff further adequately policed Flowers’s handling of such an account, the problem of tracing “identifiable proceeds” would have been greatly simplified. Such cumbersome formalities, however, seem hardly compatible with the stated underlying purpose of the Uniform Commercial Code “to simplify . . . the law governing commercial transactions” and “to permit the continued expansion of commercial practices through custom, usage and agreement of the parties.” G.S. 25-1-102(2). Our decision here is supported by the opinions in Brown & Williamson T. Corp. v. First Nat. Bk. of Blue Island, 504 F. 2d 998 (7th Cir. 1974) ; Universal C.I.T. Credit Corp. v. Farmers Bank of P., 358 F. Supp. 317 (E.D. Mo. 1973) ; Associates Discount Corp. v. Fidelity Union Trust Co., 111 N.J. Super. 353, 268 A. 2d 330 (1970) ; Girard Trust Corn Exchange Bank v. Warren Lepley Ford, Inc., 25 Pa. D. & C. 2d 395, 1 U.C.C. Rep. Serv. 531 (Pa. Ct. C.P. 1958). G.S. 25-9-306(4), referred to in the briefs of the parties, is not here applicable. That section applies “[i]n the event of insolvency proceedings instituted by or against a debtor,” and so far as .the record before us discloses no such insolvency proceedings have been instituted by or against the debtor in this case. The judgment appealed from is reversed and this case is remanded for entry of judgment consistent herewith. Reversed and remanded. Judges Britt and Vaughn concur.