## Facts

- Metropolitan National Bank loaned money to North Little Rock Materials, Inc. (NLRM) and obtained a security interest in NLRM’s accounts receivable and their proceeds.
- The Bank perfected its security interest under UCC Article 9.
- NLRM maintained a deposit account at the Bank into which it deposited collections on accounts receivable along with other non-proceeds funds; NLRM paid expenses from the same account, commingling funds.
- La Sher Oil Company obtained a judgment against NLRM for about $133,967.44 and served the Bank with a writ of garnishment targeting NLRM’s deposit account.
- The Bank asserted priority based on its perfected security interest in proceeds and moved to quash the garnishment as to account funds.
- La Sher argued some account deposits were not proceeds, but offered no evidence identifying non-proceeds funds.
- The circuit court denied the motion to quash, reasoning the Bank failed to identify which commingled funds were proceeds because it did not tie deposits to specific receivables; the order was stayed pending appeal.

## Issues

1. Whether a secured creditor with a perfected security interest in accounts receivable and their proceeds sufficiently identified and traced “identifiable proceeds” in a commingled deposit account to defeat a judgment creditor’s garnishment.
2. Whether proceeds in a commingled account remain “identifiable proceeds” under UCC Article 9 through application of the intermediate-balance (lowest intermediate balance) tracing rule.
3. Whether the trial court clearly erred by requiring transaction-specific proof rather than applying a recognized tracing presumption for fungible funds.

## Decision

- The Arkansas Court of Appeals reversed and remanded.
- The trial court clearly erred in finding the Bank failed to identify or trace proceeds in the commingled account.
- Proceeds deposited into a debtor’s bank account remain identifiable even when commingled, and the secured party’s interest continues in those proceeds.
- The court adopted and applied the intermediate-balance rule to determine the extent of identifiable proceeds in the account.
- The Bank’s perfected security interest in identifiable proceeds had priority over La Sher’s later garnishment to the extent determined under the intermediate-balance rule.

## Legal Principles

- On appeal from a bench trial, factual findings are reviewed for clear error.
- A secured creditor bears the burden to trace and identify proceeds of collateral.
- Proceeds deposited into a bank account remain “identifiable proceeds,” and the security interest continues, notwithstanding commingling with other funds.
- Under the intermediate-balance (lowest intermediate balance) rule:
  - Proceeds are presumed to remain in the account as long as the balance equals or exceeds the amount of proceeds deposited.
  - Withdrawals are presumed to be from non-proceeds first.
  - If the balance falls below the proceeds amount, the secured party’s recoverable proceeds are limited to the lowest intermediate balance and do not increase based on later non-proceeds deposits.
- A perfected security interest in identifiable proceeds has priority over a subsequent judgment creditor’s garnishment lien as to those proceeds.

## Conclusion

The court held that commingling in a deposit account does not defeat a perfected security interest in proceeds, and that the secured creditor may establish identifiable proceeds through the intermediate-balance tracing rule; accordingly, the Bank’s perfected interest took priority over La Sher’s garnishment to the extent of identifiable proceeds determined on remand.


Metropolitan Nat’l Bank v. La Sher Oil Co., 101 S.W.3d 252 (Ark. Ct. App. 2003)