Lenders typically take a security interest in the proceeds of the assets of personal property in addition to the asset in which they originally take a security interest. A security interest in the proceeds of personal property attaches automatically pursuant to California law only if there is a properly perfected security interest in the original personal property.
A security interest continues in identifiable proceeds of collateral despite its sale, lease, license, exchange, or other disposition unless the secured party authorizes such disposition free of the security interest. The key is that the proceeds must be identifiable, which may not be easy since they are often commingled by the debtor.
For goods, California law sets forth provisions for identifying commingled proceeds. If the proceeds are not goods, proceeds are identifiable to the extent that the secured party identifies the proceeds by a permitted method of tracing related to the type of property involved. Thus, if the proceeds are cash, common law principles of tracing proceeds, including those based on “equitable principles,” are used to identify the cash proceeds.
If the proceeds are not identifiable cash proceeds, the perfection of the secured party’s security interest continues for a period of 20 days. Thus, a perfected security interest in proceeds may become unperfected on the 21st day after the security interest attaches to the proceeds unless certain conditions are satisfied. The secured party must take steps within this 20‑day period to continue the perfection of its security interest if the proceeds constitute a collateral type that is not already perfected.
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