Abstract

The "malformed mouse" is section 9-306(4)(d) of the Uniform Commercial Code. It provides a formula that determines the extent to which an insolvent debtor's commingled bank account contains funds subject to a security interest. A special entitlement is necessary because it is impossible to physically distinguish this collateral after commingling. The label malformed mouse is appropriate if one agrees with critics who have questioned the mouse's statutory architecture and underlying rationale. The image of an elusive creature is also apt. The mouse continues to elude understanding, although it has been part of the Code for many years and the subject of uniform clarifying amendments. The "brattle" or clatter caused by section 9-306(4)(d) is disproportionate to the mouse's stature. In the breast of the malformed mouse is its drafters' concern that secured creditors recover at least some commingled funds in bankruptcy. The creature's ability to withstand the avoiding powers of bankruptcy trustees is a leitmotiv in this commentary. The malformed mouse's entitlement assumes that most of the funds in a bankrupt debtor's bank account are proceeds from the liquidation of original collateral.

The lowest intermediate balance rule (LIBR) and related restitutionary doctrine provide a second means for determining a secured creditor's entitlement to commingled funds. The LIBR assumes that collateral deposited in a commingled account is immiscible with and floats upon the other funds in the account. Oil floating upon water is an appropriate analogy.

Although there is authority to the contrary, the generally accepted view is that Article Nine provides an asymmetric constellation of entitlements to commingled funds. Extra-Code tracing principles, including the LIBR, may be employed to reach funds of the debtor when the debtor is not in insolvency proceedings. In these proceedings extra-Code tracing is preempted by section 9-306(4)(d). There is uncertainty concerning the entitlement to commingled funds transferred by the debtor to a third party prior to bankruptcy.

This article analyzes the recovery of funds subject to a security interest in or out of bankruptcy. Part II considers the mechanics of section 9-306(4)(d) and restitutionary tracing rules, including the LIBR. Part III examines the roles envisioned for these entitlements by the Code drafters. It also considers remedial and priority issues in secured claims to commingled cash proceeds and offers a general perspective on the relationship between restitutionary theory and Article Nine. Part IV explores the wisdom of the drafters' entitlement scheme. It initially considers the reasons for providing any entitlement to commingled cash proceeds. It then isolates sources of credit cost that may be reduced by an entitlement, and incorporates them into an analysis of whether the malformed mouse or restitutionary tracing theory more closely approaches optimality. The article's conclusion weighs the merits of altering the Code's current asymmetric constellation of entitlements.

Document Type

Article

Publication Date

1989

Notes/Citation Information

Annual Review of Banking Law, Vol. 8, No. 1 (1989), pp. 269-324

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