In the Matter of Gibson Products of Arizona, a Limited Partnership, Debtor. Arizona Wholesale Supply Co. v. George J. Itule

On this appeal we must referee a collision between the “proceeds” provision of the Uniform Commercial Code (U.C.C. § 9-306(4), A.R.S. § 44-3127(D) ) and the bank ruptcy trustee’s power to avoid preferences under Section 60 of the Bankruptcy Act. The provisions collide under circumstances that place the creditor, asserting a perfected security interest in the debtor’s bank account, in the dimmest equitable light: If the creditor prevails, it receives $19,505.27 from the debtor’s account on proof that the debtor, within ten days of the insolvency, deposited $10 in the account from the sale of a hair dryer in which the creditor had a perfected security interest. The district court affirmed the bankruptcy judge’s order awarding $19,505.27 to the secured creditor. We reverse because we conclude that the operation of U.C.C. Section 9-306(4)(d) created a voidable preference by the transfer to the creditor of a perfected security interest in the cash deposited in the debtor’s account that exceeded the amount of the creditor’s proceeds.

The creditor, Arizona Wholesale Supply Co. (“Wholesale”) sold General Electric and Proctor-Silex appliances to the debtor, Gibson Products of Arizona…