Also known as: tracing rules · trace rule · tracing · rule of tracing
Written by attorneys · grounded in primary & secondary sources — see below
A method permitted under non-UCC law for identifying proceeds of collateral that have been commingled with other property.
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Terra Financial held a security interest in Thaddeus Tran's equipment. After default, Thaddeus deposited sale proceeds into an account containing other funds. Terra identified its share of the account balance by applying the lowest-intermediate-balance method permitted under state equitable tracing principles. The court treated the traced amount as identifiable proceeds subject to the security interest.
Talia Torres granted a security interest in equipment to a lender. After default she deposited sale proceeds into a joint account that also held personal funds. During enforcement proceedings Talia traced the collateral deposits and subsequent withdrawals using bank records showing the lowest intermediate balance. The court classified the remaining traceable balance as identifiable proceeds subject to the security interest.
Titan Industries held a perfected security interest in Tracy Torres's inventory. Tracy sold items and deposited the cash into a general operating account. Titan applied equitable tracing rules to show that specific withdrawals matched the sale proceeds. The court upheld Titan's security interest in the traced funds.
Theodore Tucker assigned rents from an apartment building to Torchlight Media as collateral. After commingling the rents with other receipts, Theodore used the funds to pay operating expenses. Torchlight traced the rents through the account using permitted state-law methods and recovered the identifiable portion.
The secured party may use any method of tracing permitted under other law, including equitable principles such as the lowest-intermediate-balance rule. This identification determines whether the security interest continues in the proceeds.
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The rule applies to proceeds that are not goods. For non-goods proceeds that are commingled, the secured party must identify them through a permitted tracing method under non-UCC law.
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Once identified, the security interest remains perfected if the original interest was perfected. The traced proceeds are treated as identifiable collateral subject to the secured party's claim.
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