UCC Expert’s Corner: Buyer Beware – Unauthorized Transfer Provides Secured Party With Multiple Causes of Action
September 29, 2016
By Paul Hodnefield, Esq.
Debtors have been known to sell or otherwise transfer assets subject to a security interest without the knowledge of the secured party. When this occurs, the transferee often takes subject to the security interest, which can be a costly proposition. A buyer discovered this the hard way in the recent case of Beach Community Bank v. Disposal Services, LLC, 2016 Fla. App. LEXIS 14159 (Fla. Ct. App. Sept. 21, 2016).
In this case, Beach Community Bank (“Beach”) was the successor in interest of creditors that made loans to Solid Waste Haulers of Florida (the “Debtor”) in 2006. The loans were secured by a security interest in 308 roll-off trash containers (the “Containers”). The original creditors properly perfected their security interest in the Containers by filing UCC1 financing statements.
Later, the Debtor sold the Containers to Disposal Services, LLC (“Disposal”). The Debtor did not inform Beach of the sale. Nor did the Debtor apply the sale proceeds to outstanding balance of the loans. The Debtor subsequently defaulted on its obligations to Beach.
After learning of the Debtor’s sale of the Containers, Beach made a written demand to Disposal for either repayment of the loans or return of the Containers. After Disposal refused to pay the loans or return the Containers, Beach brought a suit alleging that Disposal converted the Containers.
Disposal brought a motion for summary judgment. The trial court found that Beach could not sue for conversion as a matter of law because the option of replevin was still available and granted Disposal’s motion. In response, Beach moved for a rehearing and leave to amend its complaint to add replevin as a cause of action. The trial court denied Beach’s motions and an appeal ensued.
The appeals court found that the requirements for a conversion claim were satisfied. More importantly, the court noted that a secured party has numerous cumulative remedies at its disposal following the unauthorized disposition of collateral. Beach was not forced to select any particular remedy. Therefore, the appeals court reversed the grant of summary judgment and remanded the case to the trial court.
The important thing to take away from this case is that a buyer of goods that is not a buyer in ordinary course of business should always conduct a UCC search on the seller to determine whether the goods are subject to a security interest. If so, the buyer must make sure that the security interest is released or otherwise satisfied before closing the sale. Otherwise, the buyer may be liable under any of the multiple causes of action available to the aggrieved secured party.
Paul Hodnefield is associate general counsel for Corporation Service Company® and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 61730.
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