Consignment Cash Proceeds Tracing under Uniform Commercial Code
Perfecting consignment cash proceeds requires UCC-1 filings, prior inventory lender notices, and deposit account control agreements to defeat bank set-offs.
Section 9-315
Meaning
Statutory provisions governing the continuation of a security interest in collateral that is sold or otherwise disposed of determine how a lender’s rights attach to the resulting proceeds. In distribution financing, section 9-315 establishes that a manufacturer’s security interest automatically shifts from the physical inventory to the cash received from retail sales.
Security Extension
Financing agreements rely on the continuous attachment of liens to protect the capital extended to distributors. Under section 9-315, the creditor’s rights survive the sale of the inventory to a third party, attaching to the accounts receivable generated by that transaction. This continuity ensures that the lender is not left unsecured once the physical stock is sold.
Proceeds Tracking
Securing the cash generated from sales requires that the proceeds remain identifiable within the distributor’s bank accounts. If the funds are commingled with other revenues, the protection offered by section 9-315 can become difficult to enforce in court. Distributors are therefore often required to maintain separate lockbox accounts for invoice payments.
This structural arrangement allows the financier to monitor cash flows and instantly claim the funds owed to them.
Lien Preservation
The automatic perfection of the security interest in proceeds continues for a limited period, typically twenty days, unless specific filing conditions are met. Financing contracts require the distributor to cooperate with any filings needed to extend this protection indefinitely. This obligation maintains the lender’s priority status throughout the lifecycle of the loan.