In May and June 2016, a timber purchaser and a secured lender entered into separate agreements with a borrower. The timber purchaser contracted with the borrower to cut down trees on the borrower’s land. Around that time, the secured lender, on behalf of multiple lenders, extended a loan valued at approximately $22 million to the borrower. As part of the loan agreement, the borrower granted the secured lender a security interest in the collateral, which included the same land and its standing timber. After the parties executed a revised contract in March 2017, the borrower breached the timber agreement by ousting the timber purchaser from the property and subsequently defaulted on the loan. The secured lender then obtained a judgment against the borrower, declaring the borrower in default, and then registered that judgment in the Eastern District of Kentucky before initiating foreclosure proceedings against the collateral located there. The timber purchaser was joined as a defendant because it claimed an interest in the standing timber. The timber purchaser argued that it had superior title because (1) the timber contract constituted an authorized sale, (2) its interest was superior to the secured lender’s interest in the timber, and (3) it qualified as a buyer in the ordinary course of business. The district court granted summary judgment for the secured lender, and the timber purchaser appealed issues (1) and (3).
In HBKY, LLC v. Elk River Exp., LLC, 150 F.4th 480 (6th Cir. 2025), the court of appeals affirmed summary judgment for the secured lender. The court first held that the loan agreement granted the secured lender a continuing first-priority security interest in the timber. The timber purchaser argued that language in the loan agreement, the note purchase agreement, and royalty assignment showed that the timber could be sold unencumbered of the secured lender’s lien. However, the court rejected this argument because the language explicitly created an expectation that the sale of collateral would not impair the lender’s security interest. Thus, the borrower could not extinguish the security interest through such a sale. The court then rejected the timber purchaser’s argument that it was a buyer in the ordinary course of business. To qualify as such a purchaser, a party must purchase the goods in good faith, without knowledge that the goods were encumbered by another party’s security interest, and from a seller in the business of selling goods of that kind. Ky. Rev. Stat. Ann. § 355.1-201(2)(i). Although the court recognized that the timber purchaser appeared to have acted in good faith and that standing timber qualified as a good under Kentucky law, the purchaser failed to present evidence that the borrower was in the business of selling timber or that the sale occurred in the normal course of business. Because the timber purchaser offered only a third-party contract to show that the borrower was in the business of selling timber and offered no other evidence at the summary judgment hearing, the court concluded that the defense had failed and affirmed summary judgment for the secured lender.
By Conor Doris [email protected]
Edited By Landon Womack [email protected]
Edited By Hayden Mariott [email protected]