UCC proceeds classification headache - inventory vs equipment distinction
Running into a wall here with a proceeds issue that's got me second-guessing everything. We've got a commercial borrower who manufactures custom metal fabrication equipment. The original UCC-1 filing lists "inventory" as collateral, but now they're selling some of the finished equipment they built (not raw materials) and the buyer's lender is questioning whether our security interest covers the sale proceeds. The equipment was built using raw steel and components that were clearly inventory when we filed, but once assembled into finished machines, does it transform into equipment? And if so, are the proceeds from selling these machines still covered under our original "inventory" collateral description? The borrower insists everything was inventory when we made the loan 2 years ago, but I'm worried we might have a coverage gap. Has anyone dealt with this type of proceeds classification issue where the collateral arguably changes categories during the manufacturing process?
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Dylan Evans
This is actually a pretty common issue in manufacturing deals. The key is understanding that proceeds follow the original collateral classification. If your UCC-1 covers inventory and the steel/components started as inventory, then the finished equipment and its sale proceeds should still be covered as proceeds of inventory. The transformation during manufacturing doesn't break the proceeds chain.
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Sofia Gomez
•That makes sense but what if the borrower holds the finished equipment for sale over an extended period? At what point does it stop being proceeds of inventory and start being equipment?
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Dylan Evans
•The classification depends on the borrower's intent and business model. If they're manufacturing for sale, it remains inventory (and proceeds thereof) even if held for months. Only becomes equipment if they start using it in their own operations.
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StormChaser
I'd be careful here - you might want to verify your original collateral description was broad enough. "Inventory" alone might not cover all the proceeds scenarios you're dealing with. What exactly did your UCC-1 say?
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Fatima Al-Mansour
•The original filing just says "inventory" - pretty basic description. Now I'm wondering if we should have been more comprehensive from the start.
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Dmitry Petrov
•Yeah that's pretty narrow. Most lenders use something like "inventory, equipment, accounts, general intangibles, and proceeds" to avoid exactly this type of gap.
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Ava Williams
Had a similar mess last year with a furniture manufacturer. Spent weeks going back and forth on whether finished pieces were inventory or equipment. Finally used Certana.ai to upload all our loan docs and UCC filings - their system flagged the collateral description gaps immediately and showed us exactly what wasn't covered. Saved us from a potential disaster when the borrower defaulted.
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Miguel Castro
•How does that work exactly? You just upload the documents and it tells you what's missing?
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Ava Williams
•Pretty much - upload your loan agreement, UCC-1, any amendments, and it cross-references everything. Shows you coverage gaps, naming inconsistencies, all that stuff automatically.
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Zainab Ibrahim
•That sounds too good to be true but honestly after dealing with manual document reviews for years, automation makes sense.
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Connor O'Neill
The proceeds issue is tricky but you're probably overthinking it. UCC 9-315 is pretty clear that security interests continue in identifiable proceeds. As long as you can trace the sale proceeds back to your original inventory collateral, you should be covered.
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Fatima Al-Mansour
•Right but what about the argument that the finished equipment is no longer "inventory" once it's manufactured? Does that break the proceeds chain?
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Connor O'Neill
•No, because the security interest attaches to the raw materials as inventory, then continues in the product during manufacturing, then continues in the proceeds from sale. The chain doesn't break just because the physical form changes.
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LunarEclipse
This is exactly why I always file with the broadest possible collateral description. "All assets" or "all personal property" saves so much headache down the road.
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Dylan Evans
•Some states have gotten stricter about super-generic descriptions though. Better to be specific about the main categories you need.
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Yara Khalil
•True but at least "inventory, equipment, accounts, chattel paper, instruments, documents, goods, general intangibles and proceeds" covers most scenarios without being too vague.
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Keisha Brown
UGH this stuff makes my head spin. Why can't the UCC just have clearer rules about when something stops being one type of collateral and becomes another?? I swear every deal has some weird edge case like this.
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Dylan Evans
•The rules are actually pretty clear - it's just that business reality is messy. Manufacturing operations especially blur the lines between inventory and equipment.
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Keisha Brown
•Yeah well "pretty clear" doesn't help when you're trying to explain to a client why their security interest might not cover what they thought it did...
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Paolo Esposito
Had this exact issue come up in a bankruptcy case. Court ruled that the security interest in inventory continued in the manufactured goods and their proceeds. But it was a close call and very fact-specific.
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Fatima Al-Mansour
•Do you remember which circuit or state? Would be helpful to see the actual reasoning.
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Paolo Esposito
•This was in Ohio about 3 years ago. I can probably dig up the case citation if you need it.
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Connor O'Neill
•Would love to see that citation - these proceeds cases are so fact-dependent that any precedent helps.
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Amina Toure
Maybe I'm missing something but couldn't you just file a UCC-3 amendment to add equipment and broader proceeds language to clean this up going forward?
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Fatima Al-Mansour
•Yeah we're definitely considering that. Just worried about the gap period and whether we're covered for the proceeds that have already been generated.
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Amina Toure
•The amendment won't help with past proceeds but at least you'll be protected going forward. Better than doing nothing.
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Oliver Weber
This is why I love working with equipment finance companies - they always file on everything and ask questions later. Consumer lenders could learn something from that approach.
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FireflyDreams
•True but over-filing has its own costs and complications. Sometimes you end up with competing security interests or priority disputes you didn't need.
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Oliver Weber
•Fair point but I'd rather have too much coverage than not enough, especially in a default situation.
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Natasha Kuznetsova
Just went through something similar and ended up using Certana.ai to map out all our collateral descriptions across multiple UCC filings. Found several gaps we didn't even know existed. Really eye-opening to see everything laid out visually.
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Javier Morales
•How long did that process take? We've got hundreds of UCC filings and the thought of reviewing them all manually is terrifying.
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Natasha Kuznetsova
•That's the beauty of it - just bulk upload your PDFs and the system does the analysis automatically. Took maybe an hour to upload everything and then got results immediately.
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Emma Anderson
Bottom line - you're probably fine on the proceeds issue but definitely should consider broadening your collateral description for future deals. This type of classification problem only gets worse as businesses evolve and change their operations.
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Fatima Al-Mansour
•Yeah that's kind of where I'm landing too. Probably covered under current filing but need to be more comprehensive going forward.
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Malik Thompson
•Exactly - learn from this one and adjust your standard forms. Most of these problems are preventable with better initial documentation.
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