Also known as: tracing rule · rules of tracing · tracing · asset tracing · following the res
Written by attorneys — see sources below.
A method of identifying commingled proceeds of collateral that allows a secured party to maintain its security interest by applying equitable principles or other permitted tracing methods under non-UCC law.
Threshold Capital holds a perfected security interest in Tundra Resources inventory. Tundra sells the inventory and deposits the cash proceeds into an operating account already containing unrelated funds. Threshold Capital applies the lowest intermediate balance rule permitted under state equitable principles to isolate its share of the account balance. The court recognizes the identified amount as proceeds subject to the original security interest.
True North Logistics receives payments from customers that include amounts owed to Talon Security under a financing arrangement. The payments are deposited into a general operating account. True North maintains records showing the exact amounts attributable to Talon Security. Talon Security traces those amounts through the account records using methods allowed by state law for commingled funds. The court treats the traced sums as identifiable proceeds.
The secured party may use any tracing method, including equitable principles, that state law permits for commingled property of the same type. This approach preserves the security interest in the identified portion of the account.
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Yes. A security interest in proceeds is perfected if the interest in the original collateral was perfected. The tracing step determines only whether particular funds qualify as identifiable proceeds.
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The security interest does not attach to the unidentifiable portion of the commingled account. The secured party loses priority as to those funds.
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