A bank made a multimillion-dollar loan to a trailer merchant, secured by a blanket inventory security interest covering all assets held as inventory by the dealer. A few years into the lending relationship, the debtor transferred five trailers to an affiliated leasing company without reducing the loan balance or obtaining a release of the security interests from the bank. Following this transfer, both the dealer and the leasing affiliate filed for Chapter 11 bankruptcy, and a trustee was appointed to liquidate their assets. The trustee sold the trailers and distributed proceeds to another lender that had filed security interests against the affiliated leasing company. The bank disputed this distribution and commenced an adversary proceeding in the bankruptcy court, arguing that its security interest in the inventory had priority over the security interest of the affiliate’s lender, that the security interest continued to attach to the trailers despite the transfer, and that it was entitled to recover the proceeds from the trustee’s sale of the inventory. The opposing lender never filed an answer to the amended complaint, leaving the bank’s factual allegations uncontested. Instead, the opposing lender objected to the validity of the bank’s evidence, opposed the bank's motion for summary judgment, and asserted that its perfected security interests had priority over the bank’s security interests.
In Greeneville Fed. Bank, FSB v. First Midwest Equip. Fin. Co. (In re K&L Trailer Leasing, Inc.), 672 B.R. 24 (Bankr. E.D. Tenn. 2025), the court agreed with the bank and granted its motion for summary judgment. First, in applying Tennessee’s version of UCC Article 9, the court ruled that, as a matter of law, a secured party’s perfected inventory security interest remains attached to collateral unless the disposition is authorized or the buyer qualifies as a buyer in the ordinary course of business. Tenn. Code Ann. Sections 47-2-403(2), 47-9-315(a)(1). Thus, because the transfer was between affiliated entities and not in the ordinary course of business to buyers, the security interest followed the trailers into the hands of the affiliated leasing company. Second, the court rejected the evidentiary objections raised by the opposing lender, who argued the bank’s evidence was hearsay and, therefore, inadmissible. The court did not find this convincing, because the bank’s loan and security documents had been accepted without prior objection in multiple related proceedings, and the court further found that the defendant had never filed an answer to the amended complaint disputing the claims. Third, the court ruled that permitting technical objections to derail summary judgment would be inefficient and contrary to principles of judicial economy, especially in cases where the essential evidence was admissible at trial. Thus, the court granted summary judgment to the bank, holding that its perfected security interest in the inventory had priority in the proceeds from the sale of inventory.
By Landon Womack [email protected]
Edited By Jace Brown [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]