Recovering Runaway Collateral (Even Across State Lines)

Stites & Harbison recently tried and won a bench trial on behalf of a creditor-client seeking to recover its dump-trailer collateral that it had financed but which landed in the hands of a third-party buyer in a different state. The facts of the case were tricky and unusual, but the fundamental question was simple: Did the third-party buyer have the protections of UCC § 9-320, commonly known as the buyer in the ordinary course of business defense to a creditor’s security interest, where (a) the security interest was not created by the trailer’s seller, and (b) the buyer’s business, background, and trailer registration suggested he would not be using the trailer for personal, family, or household purposes?

The answer was no, and, surprisingly, a great many attorneys who practice in this area of law forget this legal caveat.

First, a quick overview on the two most common components of the buyer in the ordinary course defense, both of which arose in this case: Section 9-320 exists to permit certain buyers of goods to take the goods without concern of a creditor’s security interests in the property. Consumers’ most frequent—but unknowing—interaction with this UCC provision is found under subsection (a), where they purchase any good from a store. The store from which the goods were purchased very likely has financed the goods, and the bank that financed the store’s purchase of those goods possesses a security interest in those goods. Section 9-320(a) permits that store’s patrons to not worry about the store’s creditor tracking down the consumer to recover the car or vacuum or other good purchased. The second common circumstance where this defense arises is found in UCC § 9-320(b). This provision—commonly called the yard-sale exception—provides protection to any buyer of goods where (1) the seller used the goods for personal, family or household purposes, and (2) the buyer similarly plans to use the goods primarily for personal use at her home.

Stites’ client (“Bank”) financed its customer’s (“Customer”) purchase of the trailer and, in exchange, obtained a first priority lien against the trailer. Unbeknownst to Bank, Customer ran into financial difficulty and transferred the trailer to his father (“Dad”), who then sold the trailer to the third-party buyer (“Buyer”) in a different state. Moreover, Buyer received what appeared to be an authentic certificate of origin, which suggested the trailer had never been titled. Buyer then took that certificate to its state’s titling authority and titled the trailer in a company name, without Bank’s lien appearing on the title. This title, Buyer argued, proved his ignorance of the lien and justification for keeping the trailer in the face of Bank’s security interest. Stites anticipated that, in legal terms, Buyer was relying on UCC § 9-320, which protects purchasers in the ordinary course of business.

Unfortunately for Buyer, the UCC did not protect him as he had hoped. Buyer’s seller—Dad—did not create the security interest. Rather, Customer created the security interest. Therefore, the defense set forth in UCC § 9-320(a) did not allow Buyer to take free of Bank’s security interest. This is true even though Buyer could state—under oath—that he had no clue that the trailer had a security interest on it. UCC § 9-320(a).

Buyer’s fallback position was to argue that he bought the trailer for personal use and should be protected under UCC § 9-320(b). But the facts—and common sense—did not support that argument. After all, it is rare that a commercial dump-trailer that connects to a semi-tractor will be used for “personal, family or household purposes.” UCC § 9-320(b). Additionally, Buyer had titled the trailer in a business name instead of his own name. Making matters worse for Buyer was the fact that the company he titled the trailer in was in the business of auto sales and pawning of industrial equipment. As a consequence, the Court did not let Buyer use that defense, either.

Not only were we confident in our client’s ability to overcome UCC § 9-320, we did not think it wise to spend time and our client’s money “dotting every i and crossing every t” through discovery and pre-trial motion practices, as prudent litigators rightfully prefer.

In this case, our client knew where the trailer was, who purchased it, who sold it, and how it was titled—all from public information. Our client was happy to provide that information rather than paying us to obtain it. Moreover, there was no need for depositions or significant written discovery to further “develop” those indisputable and admissible facts. It took only one letter to Buyer’s attorney to affirm the defense we anticipated, and once we learned that, there was no reason to drag out the litigation. Doing so would only allow Buyer or his attorney to wise up on the likely result or develop another defense.

Similarly, a motion for pre-judgment possession of the trailer or summary judgment seemed short-sighted. First, we were not optimistic that a judge would summarily take away a paid-for piece of equipment from a buyer who had no knowledge of our client’s lien. We predicted a judge would decide that waiting for live testimony at trial would be a more equitable way to judge the case than through affidavits and stale deposition testimony. And, if the judge opted to await trial, the buyer would have time and notice to get up to speed on that area of the law ahead of the bench trial and, if need be, change his position.

When you are chasing down secured collateral that travels well and easily changes hands, do not be fooled by buyers of the property who want to argue innocence and stake their claim in the buyer in the ordinary course defense. Remember who you loaned money to, find out if the buyer bought the property from that debtor, and ask the right questions to show that no personal, family, or household use of the equipment will take place. And, of course, contact Stites & Harbison for efficient and effective counsel that will aid you in your recovery efforts.