The debtor obtained two loans for operating capital from the bank, and to secure to loan, the bank obtained a security interest on all inventory, including proceeds from the sale of the inventory. In the interest of encouraging the debtor’s profitability, the terms of the loan allowed the debtor to sell inventory so long as it maintained a minimum amount of inventory. Furthermore, in accordance with U.S. Small Business Administration loan requirements, to which one loan was subject, the creditor did not require the debtor use sale proceeds to repay the bank. After two years, the debtor experienced financial difficulties, leading it to enter into a consignment agreement with an existing supplier, the payee. The payee later sued the debtor for violating the consignment agreement, and the bank intervened and filed a motion for a declaratory judgment that the inventory in question was its collateral. The bank also asserted a claim for conversion against the payee for the proceeds of the inventory that the debtor had transferred to it. The issue on appeal was whether the transfer of proceeds of the inventory made the payee liable to the bank for conversion.
In Shinsho Am. Corp. v. TransPecos Banks, SSB, No. 23-20520, 2024 WL 3738476, 2024 U.S. App. LEXIS 20102 (5th Cir. Aug. 9, 2024) (unpublished opinion), the Fifth Circuit Court of Appeals affirmed the district court’s dismissal of the bank’s conversion claim. To show proof of conversion in Texas, a party must control the property of another without authorization in violation of the owner’s rights. The court found that the bank had authorized the transfer of sale proceeds to the payee and, in effect, released its security interest. Once the court decided that the transfer had been authorized, the bank’s claim lacked a required element of conversion, and therefore failed.
By Taylor O’Brien [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott: [email protected]