The borrower contracted (the “2016 timber agreement”) with Elk, granting Elk the right to remove timber from the borrower’s land. The borrower also entered into an agreement with a lender, assigning its royalty interests in the timber to a lender and granting the lender a security interest in the timber. Later, the borrower entered into another Elk agreement (the “2017 timber agreement). Later, the lender sued the borrower in federal court to collect on the note the borrower had failed to pay. The court ordered the borrower to repay the remaining balance of the loan. The lender also sought to have the court hold that its security interest the borrower had granted it in the timber was superior to Elk’s interest. The court declared that even though it appeared the lender had a superior interest, it declined to grant summary judgment because the lender had failed to show its agreement with the borrower subordinated Elk’s interest or that the lender could take an interest in the borrower’s uncut timber "when all parties were on notice that [the borrower] did not own its timber in 2016." Then, in 2022, Elk filed a motion for summary judgment seeking an order to permit it to harvest timber on the borrower’s land. The lender renewed its motion for summary judgment and again requested that the court find its interest to be superior. The court made five key determinations when it granted the lender’s summary judgment motion: (1) the lender’s claim was not barred by res judicata; (2) the lender had obtained an enforceable security interest in the borrower’s standing timber; (3) Elk did not have a security interest in the borrower’s timber; (4) the lender’s interest was not impaired by any royalty agreements; and (5) Elk had not purchased the timber in the ordinary course of business. Under the Article 9 of the UCC, an entity that purchases collateral from a merchant in the ordinary course of business (as that term is defined in the UCC) takes free and clear of a security interest in the inventory. However, the court found that the sale had not been in the ordinary course of business and therefore the lender’s security interest in the timber had not been extinguished. Elk requested that the court reconsider its Memorandum Opinion and Order.
In HBKY, LLC v. Kingdom Energy Res., LLC, Civil No. 6:21-cv-00101-GFVT, 2024 WL 4244594, 2024 U.S. Dist. LEXIS 171771 (E.D. Ky., Aug. 23, 2024) (opinion not yet released for publication), the district court found in favor of the lender and rejected Elk’s arguments. The court analyzed Elk’s three arguments: (1) the court’s failure to consider whether the 2017 timber agreement conveyed title of the timber to the lender; (2) the court’s failure to consider the borrower’s breach of the 2017 timber agreement; and (3) Elk’s argument that it was a buyer in the ordinary course of business. First, the court found that it had considered and analyzed the 2017 timber agreement in its order. However, the lender had never previously raised the issue of whether the 2017 timber agreement conveyed title of the timber to it. The court found that, even if it were to agree that the title passed in the 2017 timber agreement, Elk failed to prove that it was a buyer of the timber in the ordinary course of business. Second, the lender never raised the issue of the borrower’s breach of the 2017 agreement to the court; therefore, the court had not considered that issue. Third, the court found that Elk failed to prove it was a buyer of in the ordinary course of business because : (1) Elk had not alleged that the borrower was in the business of selling timber; (2) Elk had not alleged that it bought the timber in good faith; and (3) Elk neither received title for the timber nor identified the timber it intended to harvest. Elk attempted to rely on the explicit language of the agreements; however, if the court had allowed this argument to proceed, it would have committed a legal error. In conclusion, the court held that none of the lender’s arguments were convincing and ruled in favor of the assignee.
By Olivia Lewis [email protected]
Edited By Conor Doris [email protected]
Edited By Hayden Mariott [email protected]