## Facts

- Machinery, Inc. rented and leased aerial lifts and financed lift purchases through General Electric Capital Corporation (GE), which held a security interest in the financed lifts and “all proceeds” of those lifts.
- Union Planters Bank, N.A. (UPB) provided Machinery a revolving line of credit secured by a blanket lien on Machinery’s inventory, accounts, and related proceeds, and served as Machinery’s depository bank.
- Machinery confirmed a Chapter 11 plan; GE objected to plan treatment that would have given UPB a senior interest in cash proceeds, and the court confirmed GE’s senior interest in the lifts and their proceeds.
- After confirmation, Machinery deposited all revenues (including lift-related proceeds) into a general operating deposit account at UPB, commingling those proceeds with other funds.
- Machinery later defaulted under the plan, and GE demanded that UPB remit cash proceeds attributable to GE-financed lifts.
- UPB refused and applied funds in the deposit account against Machinery’s obligations to the bank.
- GE brought an adversary proceeding seeking a judgment that it was entitled to the lift proceeds held and applied by UPB.

## Issues

1. Whether GE’s perfected, senior security interest in lifts and “all proceeds” gave it an enforceable right to recover cash proceeds after they were deposited into Machinery’s UPB account.
2. Whether UPB, as recipient of funds from the deposit account and a creditor applying the funds, qualified as a protected “transferee” that took the funds free of GE’s proceeds security interest.
3. Whether the confirmed Chapter 11 plan’s recognition of GE’s senior interest in lift proceeds altered the commercial-law rules governing UPB’s receipt and application of deposited funds.

## Decision

- Judgment was entered for UPB.
- The court concluded that UPB was a transferee of the lift proceeds and took the funds free of GE’s superior security interest.
- GE was not entitled to recover from UPB the deposited and applied cash proceeds attributable to GE-financed lifts.

## Legal Principles

- A secured creditor’s lien on collateral “proceeds” can be cut off as to certain recipients of funds from a deposit account under U.C.C. transferee protections, absent collusion.
- Commingling of cash proceeds in a general operating account limits a secured creditor’s ability to reclaim specific funds from a depository bank that receives and applies those funds.
- Recognition of a creditor’s senior interest in proceeds does not, without more, create segregation or control rights in a deposit account that displace Article 9 rules governing transfer of funds.

## Conclusion

The court held that although GE had a senior security interest in lifts and their proceeds, UPB took the deposited lift proceeds free of that interest when it received and applied funds from Machinery’s deposit account, so GE could not compel UPB to turn over the proceeds.


In re Machinery, Inc., 342 B.R. 790 (Bankr. E.D. Mo. 2006)