North Carolina § 25-9-205 - Use or disposition of collateral permissible.

§ 25-9-205. Use or disposition of collateral permissible.

When security interest not invalid or fraudulent. - A security interest is not invalid or fraudulent against creditors solely because: The debtor has the right or ability to: Use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods; Collect, compromise, enforce, or otherwise deal with collateral; Accept the return of collateral or make repossessions; or Use, commingle, or dispose of proceeds; or The secured party fails to require the debtor to account for proceeds or replace collateral. Requirements of possession not relaxed. - This section does not relax the requirements of possession if attachment, perfection, or enforcement of a security interest depends upon possession of the collateral by the secured party. History (1945, c. 196, s. 7; 1965, c. 700, s. 1; 1975, c. 862, s. 7; 2000-169, s. 1.) AMENDED OFFICIAL COMMENT (2001 EDITION) 1. Source. Former section 9-205. 2. Validity of Unrestricted "Floating Lien." This article expressly validates the "floating lien" on shifting collateral. See sections 9-201, 9-204, and comment 2. This section provides that a security interest is not invalid or fraudulent by reason of the debtor's liberty to dispose of the collateral without being required to account to the secured party for proceeds or substitute new collateral. As did former section 9-205, this section repeals the rule of Benedict v. Ratner, 268 U.S. 353 (1925), and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over collateral. The Benedict rule did not effectively discourage or eliminate security transactions in inventory and receivables. Instead, it forced financing arrangements to be self-liquidating. Although this section repeals Benedict, the filing and other perfection requirements (see part 3, subpart 2, and part 5) provide for public notice that overcomes any potential misleading effects of a debtor's use and control of collateral. Moreover, nothing in this section prevents the debtor and secured party from agreeing to procedures by which the secured party polices or monitors collateral or to restrictions on the debtor's dominion. However, this article leaves these matters to agreement based on business considerations, not on legal requirements. 3. Possessory Security Interests. Subsection (b) makes clear that this section does not relax the requirements for perfection by possession under section 9-313. If a secured party allows the debtor access to and control over collateral its security interest may be or become unperfected. 4. Permissible Freedom for Debtor to Enforce Collateral. Former section 9-205 referred to a debtor's "liberty ... to collect or compromise accounts or chattel paper." This section recognizes the broader rights of a debtor to "enforce," as well as to "collect" and "compromise" collateral. This section's reference to collecting, compromising, and enforcing "collateral" instead of "accounts or chattel paper" contemplates the many other types of collateral that a debtor may wish to "collect, compromise, or enforce": E.g., deposit accounts, documents, general intangibles, instruments, investment property, and letter-of-credit rights.