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Click here for the full text of this decision FACTS:Stephen Pate is the chief operating officer for Pate & Pate Enterprises Inc. and Pate Brothers Construction Inc., both of which had accounts at Citizens Bank. Enterprises and another company, Pate & Pate LLC, also had accounts at Wells Fargo Bank Texas and Wells Fargo Ohio. Enterprises used its Citizens Bank account to hold funds used to buy cashier’s checks from Citizens. Enterprises used the cashier’s checks to bid on large construction projects. Enterprises also wrote checks on its Wells Fargo Ohio account to deposit in its Citizens’ account. When Enterprises began exceeding its limit on getting cashier’s checks on uncollected funds, Citizens contacted Wells Fargo Texas to see if there were problems with Enterprises’ account there and to note that it was taking a long time for checks written on the Wells Fargo Ohio account to clear. Fearing a possible check-kiting scheme, Wells Fargo put the Enterprises and Pate & Pate accounts on hold. Wells Fargo returned approximately $8 million in checks written on its checks, and Citizens returned $2.7 million in checks to Wells Fargo, leaving Citizens with a $5 million deficit. Citizens sued all of the Pate entities and Wells Fargo for breach of depository agreement, untimely notice of nonpayment and late return of checks, misrepresentation, negligence, breach of duty of good faith and breach of warranty of presentment. Citizens filed for a prejudgment writ of garnishment against the two Wells Fargo banks. Citizens and Wells Fargo worked out a settlement where Wells Fargo applied more than $167,000 from Enterprises’ account to offset Enterprises’ debt to Wells Fargo, and released more than $892,000 to Citizens from the same account. Madisonville State Bank, which had extended an $8 million line of credit to Enterprises, intervened in the garnishment action, claiming it had a superior security interest in all of Enterprises’ collateral, defined as “accounts receivable, instruments, inventory, chattel paper, documents, equipment, and their proceeds.” Madisonville sought to recover the $167,000 and $892,000 transfers. The trial court consolidated Citizens’ suits, then severed Madisonville’s claims. All parties sought summary judgment. The trial court granted those filed by Citizens and Wells Fargo, and denied the one filed by Madisonville. HOLDING:Affirmed. The court first addresses whether Madisonville possessed a security interest in the funds in the account. The court finds that for Madisonville’s security interest to extend to the proceeds of collateral, it must trace those proceeds to the original collateral. Pate testified that the funds distributed to Citizens and Wells Fargo constituted proceeds of the companies’ accounts receivables. He was unable to offer specifics, though, and the court finds his testimony equivocal. Furthermore, Madisonville’s own expert presented evidence that a large portion of the funds in Enterprises’ operating account was derived from other sources. Consequently, Madisonville did not produce enough evidence to show that the funds in the Citizens and Wells Fargo accounts were proceeds of the accounts receivable. OPINION:McKeithen, CJ; McKeithen, CJ, Gaultney and Horton, JJ.

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