In re Oriental Rug Warehouse Club, Inc.
United States Bankruptcy Court for the District of Minnesota
205 Bankr. 407 (1997)
Oriental Rug Warehouse Club, Inc. (Oriental) agreed to purchase rugs from Yashar Rug Company, Inc. (Yashar) for $106,073 and to remit all resale proceeds to Yashar against the outstanding balance, but instead used the resale proceeds to buy still more rugs and expand its inventory. Oriental then filed for chapter 11 bankruptcy, and Yashar filed a secured claim seeking the balance owed, arguing that because Oriental's current inventory was purchased with proceeds from reselling Yashar's original rugs, Yashar's security interest carried over into that current inventory. Yashar conceded it could not actually trace the funds used for the new rugs back to the original sale, but argued Oriental, as the debtor, should bear the burden of tracing the proceeds.
Whether, under the Uniform Commercial Code, a creditor may claim an entitlement to proceeds from a debtor's sale of collateral if the creditor fails to establish that the proceeds are derived directly from the sale.