Secured Transactions-Insurance-A Security Interest in the “Proceeds” of Secured Collateral Does Not Include Insurance Proceeds-Universal C.I.T. Corp. v. Prudential Investment Corp.

In return for a loan, a debtor executed a promissory note to codefendant, Prudential Investment Corporation, and entered into a written agreement to secure this note, designating as collateral a semi-tractor and the proceeds therefrom. Under this type of arrangement, Prudential’s security interest would attach automatically to any property received from a sale, exchange, or other disposition of the tractor. Petitioner, Universal C.I.T. Corp., held the conditional sales contract which was executed in financing the purchase of the tractor and was named as loss payee in the insurance contract covering the tractor. When the tractor was totally destroyed, petitioner collected insurance proceeds equal to the amount still owing under the conditional sales contract and filed an action in interpleader to determine whether the balance of the insurance money belonged to Prudential as “proceeds” under the security agreement or to the assignee of the debtor’s interest in the insurance policy. On an agreed statement of facts, the Rhode Island Supreme Court held that insurance proceeds do not constitute “proceeds” within the meaning of section 9-306(1) of the Uniform Commercial Code (Code) and that therefore Prudential’s security interest did not attach to the insurance funds. Consequently, the assignee of the debtor’s interest in the insurance contract was awarded the balance of the insurance money.