The federal bank entered into a Revolving Loan Agreement with the debtor, as well as a Security Agreement that granted the federal bank a security interest in substantially all assets of the debtor. Further, the Security Agreement also prohibited the debtor from selling, assigning, or further encumbering the collateral. After the agreements were signed, the federal bank filed a financing statement with the Tennessee Secretary of State to perfect its security interests. Subsequently, the debtor transferred ten trailers, which were covered by the federal bank’s blanket security interest, to a related entity (the “leasing debtor”). The leasing debtor later executed a Commercial Security Agreement granting the community bank a security interest in the same trailers. When the debtors filed for bankruptcy, the federal bank commenced an adversary proceeding seeking a judgment that its security interest had priority over the community bank’s interest. Both parties moved for summary judgment.
In Greeneville Fed. Bank, FSB v. First Farmers & Commer. Bank (K&L Trailer Leasing, Inc.), 665 B.R. 364 (Bankr. E.D. Tenn. Nov. 4, 2024), the court held that the federal bank’s interest in the ten trailers had priority over the community bank’s interest. The community bank argued that Tenn. Code Ann. § 47-9-311(d) applied, which would have extinguished the federal bank’s security interest in the trailers and create an exception to the general rule that a perfected security interest continues after collateral is transferred. However, the court focused on Tenn. Code Ann. § 47-2-403(2), which also creates an exception to the general rule that “sale of inventory in the ordinary course of business” would not allow the perfected security interest to continue. The federal bank asserted that the trailers had not been transferred in the ordinary course of business because, under the UCC, a buyer in the ordinary course of business must lack knowledge that the sale violates another party’s rights in the goods. Tenn. Code Ann. § 47-1-201(9). In determining whether the leasing debtor was a buyer in the ordinary course of business, the court reviewed the unambiguous Security Agreement and Revolving Loan Agreement, relying on the plain language of these documents. The evidence established that the leasing debtor was not a buyer in the ordinary course of business in the trailer transaction because both the debtor and the leasing debtor knew that the sale violated another party’s rights in the trailers. Ultimately, the court granted summary judgment in favor of the federal bank because the transaction occurred outside the ordinary course of business, and the leasing debtor was deemed to know that the transfer violated the federal bank’s inventory security interest.
By Jace Brown [email protected]
Edited By Conor Doris [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]