## Facts

- Doug and Vicki Visser sold their business to Charles and Valerie Karle for $85,000 under an Asset Transfer Agreement (ATA) and a lease of the real property where the business operated.
- The Karles paid $20,000 down and executed a $65,000 promissory note payable in monthly installments plus interest.
- The lease required the Karles to pay monthly rent and required the Vissers to make specified property improvements.
- The relationship deteriorated; the Karles stopped paying rent and note installments and sued the Vissers for failing to make the improvements.
- The Vissers counterclaimed for unpaid rent and amounts due under the ATA/note.
- After a jury trial, judgment awarded the Karles damages and rent reduction, and awarded the Vissers lesser damages on their claim.
- An execution sale occurred to satisfy the judgments; after credit bids were applied, part of the Karles’ judgment remained unsatisfied.
- After the execution sale, the Vissers’ attorney, Arthur M. Bistline, entered into a security agreement with the Vissers to secure unpaid and future attorney-fee obligations; the agreement identified the promissory note as collateral and granted Bistline rights in related “proceeds” and “any judgments” from collecting the note.
- Bistline filed a UCC-1 financing statement.
- The Vissers later filed a county-court action to collect unpaid installments on the note; the Karles argued the execution sale extinguished their remaining obligations, but the Vissers obtained summary judgment.
- The Karles then sought to collect the remaining balance of their earlier judgment by obtaining a writ of execution aimed at the Vissers’ rights in the note-collection action.
- Bistline filed a third-party claim of exemption, asserting that his security interest in the note extended to the collection action (and its resulting judgment), so the Karles could not execute against it ahead of him.
- The district court rejected Bistline’s claim, ruling he lacked a valid security interest in the collection action itself, and Bistline appealed.

## Issues

1. Whether, under Idaho’s UCC Article 9, a secured party’s perfected security interest in a promissory note attaches automatically to the debtor’s lawsuit to collect the note, as “proceeds” of the note.
2. Whether the security agreement’s identification of the note as collateral, together with language granting rights in “proceeds” and collection “judgments,” was sufficient even though it did not separately describe “general intangibles” or “choses in action.”

## Decision

- The Idaho Supreme Court reversed the district court.
- The court held that the Vissers’ pending action to collect on the promissory note (and the resulting judgment) constituted “proceeds” of the note within Article 9.
- Because Article 9 provides that a security interest attaches to identifiable proceeds of collateral, Bistline’s security interest in the note attached to the collection action and its fruits.
- The court rejected the view that Bistline needed a separate grant of a security interest in “general intangibles” or a separate description of a “chose in action” to reach the collection suit, where the agreement granted an interest in the note and its proceeds and judgments.

## Legal Principles

- Under UCC Article 9, a security interest in collateral attaches to identifiable “proceeds” of that collateral by operation of law.
- “Proceeds” include rights that arise out of the collateral’s enforcement and collection, not merely cash or property received from a sale.
- A claim or right pursued in litigation to collect payment on an instrument may qualify as proceeds of that instrument for Article 9 purposes.
- A security agreement that grants a security interest in a promissory note and in its “proceeds” (and related collection judgments) can be sufficient to reach the collection action and judgment without separately listing “general intangibles,” so long as the interest in the note is valid and perfected.
- When a secured party’s interest reaches the debtor’s collection rights as proceeds, a judgment creditor’s attempt to levy on those rights is subject to the secured party’s interest.

## Conclusion

The Idaho Supreme Court held that Bistline’s perfected security interest in the Vissers’ promissory note extended to the Vissers’ lawsuit and judgment to collect on that note because the collection rights were Article 9 proceeds, so the district court erred in denying Bistline’s third-party claim of exemption.


Karle v. Visser, 118 P.3d 136 (2005)