Chapter 22



Chapter 29

Secured Transactions

Case 29.1

143 Cal.App.4th 319, 48 Cal.Rptr.3d 868, 60 UCC Rep.Serv.2d 1399, 06 Cal. Daily Op. Serv. 9051, 2006 Daily Journal D.A.R. 13,003

CORONA FRUITS & VEGGIES, INC., et al., Defendants and Appellants,

v.

FROZSUN FOODS, INC., Plaintiff and Respondent.

No. B184507.

Sept. 25, 2006.

Review Denied Dec. 20, 2006.

, Acting P.J.

*321 Shakespeare asked, “What's in a name?” We supply an answer only for the Uniform Commercial Code lien priority statutes: Everything when the last name is true and **869 nothing when the last name is false. When a creditor files a UCC-1 financing statement, the debtor's true last name is crucial because the financing statements are indexed by last names. A subsequent creditor who loans money to a debtor with the same name is put on notice that it's lien is secondary. The trial court here found that Corona Fruits & Veggies, Inc. and Corona Marketing Company, (appellants) failed to perfect a security interest in a strawberry crop because its UCC-1 financing statement erroneously listed the debtor's last name. We affirm. (; 9506, subd. (b).)

Unless otherwise stated, all statutory references are to the California Uniform Commercial Code.

Facts and Procedural History

In 2001, appellants subleased farm land to a strawberry farmer (debtor) who went by the last name of “Munoz.” The sublease, as well as other documents given to appellants, stated that debtor's name was “Armando *322 Munoz Juarez.” That was and is his full true name. But he signed the sublease “ Armando Munoz.”

Appellants advanced money for payroll and farm production expenses. On July 2, 2001, appellants filed a UCC-1 financing statement listing debtor's name as “Armando Munoz” and a second UCC-1 financing statement on January 17, 2002, listing the same name. In December 2001, debtor contracted with respondent Frozsun Foods, Inc. (Frozsun Foods) to sell processed strawberries. Frozsun Foods advanced money which was secured by a January 17, 2002 UCC-1 financing statement listing debtor's last name as “Armando Juarez.” As of July 26, 2002, debtor owed appellants $230,482.52 and owed Frozsun Foods $19,648.52. When debtor was unable to meet his loan obligations, appellants took back the farm land, harvested the strawberry crop, and kept the crop proceeds. Appellants and Frozsun Foods filed collection actions which were consolidated for trial. (.) The trial court found that debtor's true legal name was “Armando Munoz Juarez, ... as shown on his identification documents as well as the documents of [appellants] and Frozsun, Inc....” The trial court concluded that appellants and Frozsun Foods knew debtor's true legal name, “but only Frozsun Foods, Inc. recorded its UCC-1 statement under that full name[.] [I]ts recording supercedes the two recordings by [appellants] using only part of Munoz's name.”

True Last Name

In California, the filing of a UCC-1 financing statement is generally required to perfect a security interest or agricultural lien. (§ 9310, subd. (a): .) “The requirement that a financing statement provide the debtor's name is particularly important. Financing statements are indexed under the name of the debtor, and those who wish to find finance statements search for them under the debtor's name. [Citations.]” (Id., at pp. 639-640, .)

*323 Substantial evidence supports the finding that debtor's true last name was “Juarez” and not “Munoz.” The pleadings state that debtor's last name is “Juarez,” as do many of appellants' business records. Debtor provided appellants with a photo I.D. and Green Card bearing the name **870 “Armando Munoz Juarez.” The name appears on the sublease and other documents including the Farmer Agreement, a Crop Exhibit, a second sublease agreement (identifying debtor as “Juarez Farms, Armando Munoz Juarez”), a crop assignment, appellants' accounting records, receipts for advances, appellants' letters to debtor, and checks issued by appellants. Debtor identified himself by the last name “Juarez” on two tax returns, in tax documents issued by appellants, in debtor's dealings with the U.S. Department of Agriculture, in debtor's bankruptcy petition, and in debtor's business dealings with Frozsun Foods.

Misleading Financing Statement

Citing appellants argue that the question of whether they have a perfected security interest is subject to de novo review. It addressed whether a UCC financing statement adequately described the collateral in which a bank claimed a security interest. The Court of Appeal held that interpretation of the security agreement was a question of law. We agree with the holding of that the adequacy of a UCC financing statement presents a question of law, and is reviewed independently on appeal. This, however, does not aid appellants. As a general rule, minor errors in a UCC financing statement do not affect the effectiveness of the financing statement unless the errors render the document seriously misleading to other creditors. (See , formerly 9402; [discussing former § 9402]; [same].) , however, provides: “[A] financing statement that fails sufficiently to provide the name of the debtor in accordance with is seriously misleading.” There is a safe harbor. “[I]f a search of the filing office's records under the debtor's correct name, using the filing office's standard search logic, if any, would nevertheless disclose that financing statement, the name *324 provided does not make the financing statement seriously misleading. (” (4 Witkin, Summary of Cal. , at p. 642.) The record indicates that Frozsun's agent conducted a “Juarez” debtor name search and did not discover appellants' UCC-1 financing statement. No evidence was presented that the financing statement would have been discovered under debtor's true legal name, using the filing office's standard search logic. (.) Absent such a showing, the trial court reasonably concluded that the “Armando Munoz” debtor name in appellants' financing statement was seriously misleading. (.) “The secured party, not the debtor or uninvolved third parties, has the duty of insuring proper filing and indexing of the notice.” (

The states in pertinent part: “Subsection (b) contains the general rule: a financing statement that fails sufficiently to provide the debtor's name in accordance with Section 9-503(a) is seriously misleading as a matter of law.”

Naming Convention

Appellants contend that the debtor name requirement is governed by the naming convention of Latin American **871 countries because debtor is from Mexico. We reject the argument because the strawberries were planted in and the debt obligation arose in Santa Barbara County, not Mexico. “In most Latin American countries, the surname is formed by listing first the father's name, then the mother's name.... [T]his is exactly opposite Anglo-American tradition....” Debtor's last name did not change when he crossed the border into the United States. The “naming convention” is legally irrelevant for UCC-1 purposes and, if accepted, would seriously undermine the concept of lien perfection.

Appellants knew that debtor's legal name was “Armando Juarez” or “Armando Munoz Juarez.” Elodia Corona, appellants' account manager, prepared the UCC Financing Statements and testified: “I don't know why I didn't put his [i.e., debtor's] last name [on the UCC-1 financing statement]. I could have made a mistake....” Ms. Corona was asked: “So the last name on all the Agreements is Juarez, but on the Forms, you filed them as Munoz?” Ms. Corona answered, “Yes.”

*325 Conclusion

Appellants are estopped by their pleadings, the contracts, business records, the checks for the cash advances, debtor's identification papers and tax papers, and the testimony of appellants' account manager. Appellants could have protected themselves by using both names on their financing statements. (4 Witkin, Summary of California Law, supra, Secured Transactions in Personal Property, , sub. 7, at p. 640; .) The trial court did not err in finding that the UCC-1 financing statement filed by Frozsun Foods perfected a security interest superior to appellants' liens.

We point out the obvious: Had Frozsun Foods believed that the debtor's last name was Munoz and filed a UCC-1 under that name, it would have found the prior financing statement and would have had notice of the prior lien. It then could have made an informed business decision on whether to loan money to the strawberry farmer or not.

The judgment is affirmed. Frozsun Foods is awarded costs on appeal.

Case 29.2

171 Ohio App.3d 132, 869 N.E.2d 746, 62 UCC Rep.Serv.2d 595, 2007 -Ohio- 1940

Court of Appeals of Ohio, Tenth District, Franklin County.

HEARTLAND BANK, Appellant,

v.

NATIONAL CITY BANK et al., Appellees.

No. 06AP-93.

Decided April 24, 2007.

PETREE, Judge.
{¶ 1} Plaintiff-appellant, Heartland Bank (“Heartland”), appeals from a judgment of the Franklin County Court of Common Pleas granting summary judgment in favor of defendant-appellee National City Bank (“National City”). For the reasons that follow, we affirm the judgment of the trial court.

{¶ 2} The facts of this case are largely undisputed. Heartland is an Ohio banking corporation. National City is a national banking association with its principal place of business in Ohio. Hook & Motter, Inc., d.b.a. Dublin Auto Sales (“Dublin Auto”) was an automobile dealership that sold and leased automobiles to the general public. On or about November 29, 2000, Heartland entered an open-end-credit arrangement with Dublin Auto that was evidenced by a universal promissory note (“the note”). Pursuant to the terms of the note, Dublin Auto was able to borrow up to $300,000 from Heartland. In consideration for the open-end credit and to secure the note, Dublin Auto granted Heartland a security interest in all of Dublin Auto's inventory, including automobiles held by Dublin Auto for sale or lease. Heartland's security interest in the inventory of Dublin Auto was perfected by the filing of financing statements with the Ohio Secretary of State and the Franklin County Recorder. {¶ 3} On December 11, 2001, and pursuant to the arrangement between Heartland and Dublin Auto, Heartland advanced $9,000 to Dublin Auto for the purpose of enabling Dublin Auto to acquire a 1997 Ford F-150 (“F-150”). In view of the $9,000 advance, the certificate of title to the F-150 was physically delivered to Heartland. Heartland has maintained physical possession of the certificate of title since December 11, 2001. The certificate of title designated Dublin Auto as the owner of the motor vehicle. A notation was made on the certificate of title indicating that Heartland was the first lienholder on the motor vehicle. On March 12, 2002, Joe E. Murphy and Michael J. Murphy entered into an agreement with Dublin Auto to purchase the F-150 for a total price of $15,386.63. National City financed the Murphys' purchase of the F-150. Heartland did not receive any funds relating to that sale. On June 12, 2002, a certificate of title was issued designating “Michael J. Murphey” [sic] as the owner of the vehicle, Heartland as the previous owner, Heartland as the first lienholder, and National City as the second lienholder. {¶ 4} On February 28, 2002, and pursuant to the arrangement between Heartland and Dublin Auto, Heartland advanced $13,000 to Dublin Auto for the purpose of enabling Dublin Auto to acquire a 1999 Jeep Cherokee (“Jeep”). In view of the $13,000 advance, the certificate of title to the Jeep was physically delivered to Heartland. Heartland has maintained physical possession of the certificate of title since February 28, 2002. That certificate of title designated Dublin Auto as the owner of the Jeep, with Heartland as the lienholder. On March 7, 2002, Michael E. Laxton entered into an agreement with Dublin Auto to purchase the Jeep for a total price of $14,045. National City financed Mr. Laxton's purchase of the Jeep. Heartland did not receive any funds relating to that sale. On June 26, 2002, a certificate of title was issued designating Michael E. Laxton as the owner of the Jeep, Heartland as the previous owner, and Heartland as the first lienholder. {¶ 5} On July 14, 2003, Heartland filed a declaratory-judgment action in the trial court naming National City, Mr. Laxton, and the Murphys as defendants and seeking a declaration that it is the first lienholder on the two motor vehicles at issue in this case. On September 25, 2003, National City filed its answer to Heartland's complaint, as well as a counterclaim against Heartland. National City's counterclaim alleged that Heartland interfered with its contract rights to collect loan payments from its borrowers in connection with the motor vehicles at issue and sought a declaration that the motor vehicles at issue are not subject to any lien asserted by Heartland. On October 15, 2003, National City filed a cross-claim against Joe E. Murphy. {¶ 6} On March 18, 2004, National City filed a motion for summary judgment as to the declaratory-judgment causes of action in Heartland's complaint and National City's counterclaim. On April 9, 2004, Heartland filed its motion for summary judgment as to the declaratory-judgment causes of action in Heartland's complaint and National City's counterclaim. {¶ 7} On July 15, 2004, the trial court denied the summary-judgment motions of Heartland and National City. The trial court denied the motions on the basis that neither party had briefed the issue, which, in the trial court's view, was central to the case: whether Heartland had any right to retain possession of the certificates of title. {¶ 8} The final pretrial conference was held on September 2, 2004, and the parties agreed to attempt to resolve the matter by means of supplemental motions for summary judgment. Accordingly, on September 20, 2004, both Heartland and National City filed supplemental motions for summary judgment. {¶ 9} On October 20, 2004, Heartland and National City filed a stipulation of dismissal as to National City's counterclaim against Heartland for tortious interference with contract rights. {¶ 10} On August 5, 2005, the trial court issued a decision finding that Heartland's security interest in the two motor vehicles at issue was terminated upon the sale of the vehicles, based on its application of R.C. 1309.320 and 4505.13(B) to the facts of this case. Accordingly, the trial court denied Heartland's supplemental motion for summary judgment and granted National City's supplemental motion for summary judgment. Finding no just reason for delay, the trial court entered judgment on January 4, 2006. {¶ 11} Plaintiff timely appeals and sets forth the following four assignments of error for our review:

Assignment of Error Number One

The trial court erred by rendering summary judgment in favor of defendant-appellee National City Bank and against plaintiff-appellant Heartland Bank because there were no genuine issues of material fact and the evidence was of such a nature that reasonable minds could come to but one conclusion and that conclusion favored plaintiff-appellant Heartland Bank.

Assignment of Error Number Two

The trial court erred by holding that Ohio Revised Code § 1309.320 rather than Ohio Revised Code § 4505.04 controlled the disputes relating to the motor vehicles at issue in this action because the disputes among the plaintiff-appellant Heartland Bank, defendant-appellee National City Bank, and the purchasers involved competing interests in the motor vehicles.

Assignment of Error Number Three

The trial court erred by holding that Ohio Revised Code § 4505.13(b) mandated that plaintiff-appellant Heartland Bank's liens on the motor vehicles at issue were terminated upon the attempted sale of those motor vehicles by its owner because plaintiff-appellant Heartland Bank's liens were properly notated on the certificates of title for the motor vehicles and plaintiff-appellant Heartland Bank maintained physical possession of the certificates of title at all times after its liens were notated thereon.

Assignment of Error Number Four

The trial court erred by holding that plaintiff-appellant Heartland Bank was not entitled to payments on account of its liens on the motor vehicles at issue because plaintiff-appellant Heartland Bank's liens survived any attempted transfer of the motor vehicles. {¶ 12} For ease of analysis, we will address Heartland's first and second assignments of error together. In its first assignment of error, Heartland generally argues that the trial court erred in granting summary judgment in favor of National City because there were no genuine issues of material fact and the evidence was of such a nature that reasonable minds could only reach a conclusion in favor of Heartland. Heartland argues in its second assignment of error that the trial court erred in holding that R.C. 1309.320, rather than R.C. 4505.04, controlled the disputes relating to the motor vehicles at issue in this action. {¶ 13} Appellate review of a trial court's granting of summary judgment is de novo. Mitnaul v. Fairmount Presbyterian Church, 149 Ohio App.3d 769, 2002-Ohio-5833, 778 N.E.2d 1093, at ¶ 27. Summary judgment is proper when a movant for summary judgment demonstrates that (1) no genuine issue of material fact exists, (2) the movant is entitled to judgment as a matter of law, and (3) reasonable minds could come to but one conclusion, and that conclusion is adverse to the party against whom the motion for summary judgment is made, that party being entitled to have the evidence most strongly construed in its favor. Civ.R. 56; State ex rel. Grady v. State Emp. Relations Bd. (1997), 78 Ohio St.3d 181, 183, 677 N.E.2d 343. {¶ 14} This case involves the interplay between Ohio's version of revised Article 9 of the Uniform Commercial Code (“UCC”), which is codified at R.C. Chapter 1309, and Ohio's Certificate of Motor Vehicle Title Law (“Certificate-of-Title Law”), which is embodied in R.C. Chapter 4505. We begin our analysis of Heartland's first and second assignments of error by setting forth the key statutory provisions in those chapters of the Ohio Revised Code that are the subject of this appeal. {¶ 15} R.C. 1309.320(A) provides: [A] buyer in the ordinary course of business * * * takes free of a security interest created by the buyer's seller even if the security interest is perfected and the buyer knows of its existence. {¶ 16} R.C. 4505.04(A) provides: No person acquiring a motor vehicle from its owner, whether the owner is a * * * dealer * * *, shall acquire any right, title, claim, or interest in or to the motor vehicle until there is issued to the person a certificate of title to the motor vehicle * * * and no waiver or estoppel operates in favor of such person against a person having possession of the certificate of title to * * * the motor vehicle, for a valuable consideration. {¶ 17} R.C. 4505.13(A) provides: (1) Chapter 1309. and section 1701.66 of the Revised Code do not permit or require the deposit, filing, or other record of a security interest covering a motor vehicle, except as provided in division (A)(2) of this section. (2) Chapter 1309. of the Revised Code applies to a security interest in a motor vehicle held as inventory for sale by a dealer. The security interest has priority over creditors of the dealer as provided in Chapter 1309. of the Revised Code without notation of the security interest on a certificate of title, without entry of a notation of the security interest into the automated title processing system if a physical certificate of title for the motor vehicle has not been issued, or without the retention of a manufacturer's or importer's certificate. {¶ 18} Additionally, R.C. 4505.13(B) provides: Subject to division (A) of this section, any security agreement covering a security interest in a motor vehicle, if a notation of the agreement has been made by a clerk of a court of common pleas on the face of the certificate of title or the clerk has entered a notation of the agreement into the automated title processing system and a physical certificate of title for the motor vehicle has not been issued, is valid as against the creditors of the debtor, whether armed with process or not, and against subsequent purchasers, secured parties, and other lienholders or claimants. * * * {¶ 19} Heartland contends that the trial court erroneously permitted R.C. Chapter 1309 to usurp the Certificate-of-Title Law. Specifically, Heartland argues that the trial court erred in finding that R.C. 1309.320(A) was made applicable to this action by means of R.C. 4505.13(A)(2). According to Heartland, R.C. 4505.04(A), and not the provisions of R.C. Chapter 1309, controls in this case, and pursuant to R.C. 4505.04(A), its security interests remained protected because the certificates of title remained in its possession. Heartland also argues under its first and second assignments of error that pursuant to R.C. 4505.13(B) its security interests remained protected because they were notated on the certificates of title for the motor vehicles at issue. {¶ 20} In support of its arguments, Heartland relies upon the Supreme Court of Ohio decision in Saturn of Kings Automall, Inc. v. Mike Albert Leasing, Inc. (2001), 92 Ohio St.3d 513, 518, 751 N.E.2d 1019 (“Saturn of Kings”). Saturn of Kings required the Supreme Court to “consider the interplay between Ohio's adoption of Article 2 of the UCC, codified at R.C. Chapter 1302, and Ohio's Certificate of Motor Vehicle Title Law as embodied in R.C. Chapter 4505.” Id. The “primary issue” before the Supreme Court of Ohio in Saturn of Kings was “whether a person may acquire legal ownership of a motor vehicle without transfer to that person of the vehicle's certificate of title.” Id. at 515, 751 N.E.2d 1019. {¶ 21} In Saturn of Kings, Gallatin Auto Sales (“Gallatin”) contracted with Saturn of Kings Automall, Inc. (“Saturn”) and Cronin Motor Company (“Cronin”) for the purchase of motor vehicles from those two dealers. Saturn and Cronin allowed Gallatin to take physical possession of the vehicles before payment was tendered, and both retained possession of the certificates of titles for those vehicles. Gallatin sold three of those motor vehicles to Mike Albert Leasing, Inc. (“Albert Leasing”), who paid Gallatin in full. However, Gallatin failed to remit payment to Saturn and Cronin. Saturn and Cronin sued Albert Leasing and Gallatin, seeking replevin and money damages. See id. at 513-514, 751 N.E.2d 1019. {¶ 22} In its analysis, the Saturn of Kings court cited language from earlier Ohio Supreme Court cases, namely Hughes v. Al Green, Inc. (1981), 65 Ohio St.2d 110, 19 O.O.3d 307, 418 N.E.2d 1355, and Smith v. Nationwide Mut. Ins. Co. (1988), 37 Ohio St.3d 150, 524 N.E.2d 507. Specifically, the court quoted the following statement in Hughes: “R.C. 4505.04 was intended to apply to litigation where the parties were rival claimants to title, i.e., ownership of the automobile; to contests between the alleged owner and lien claimants; to litigation between the owner holding the valid certificate of title and one holding a stolen, forged or otherwise invalidly issued certificate of title; and to similar situations. Kelley Kar Co. v. Finkler (1951), 155 Ohio St. 541 [44 O.O. 494, 99 N.E.2d 665]; 5 W. Reserve L.Rev. 403, 404 (1954).”

Hughes at 115-116, 19 O.O.3d 307, 418 N.E.2d 1355, quoting Grogan Chrysler-Plymouth, Inc. v. Gottfried (1978), 59 Ohio App.2d 91, 94-95, 13 O.O.3d 154, 392 N.E.2d 1283. In addition, the Saturn of Kings court quoted the following language in Smith: “The purpose of the Certificate of Title Act is to prevent the importation of stolen motor vehicles, to protect Ohio bona-fide purchasers against thieves and wrongdoers, and to create an instrument evidencing title to, and ownership of, motor vehicles.” * * * [I]t is apparent that R.C. 4505.04 is irrelevant to all issues of ownership except those regarding the importation of vehicles, rights as between lienholders, rights of bona-fide purchasers, and instruments evidencing title and ownership. Smith, 37 Ohio St.3d at 152-153, 524 N.E.2d 507, quoting Hughes at 115, 19 O.O.3d 307, 418 N.E.2d 1355. {¶ 23} The Saturn of Kings court determined that the above-quoted language from Hughes and Smith resolved the dispute before it, i.e., a dispute between parties with competing claims of ownership and title to the motor vehicles at issue. See Saturn of Kings, 92 Ohio St.3d at 519, 751 N.E.2d 1019. Citing Hughes, the court determined that it had already “clearly and unequivocally stated that R.C. 4505.04 was intended to apply to litigation where the parties were rival claimants to title, i.e., ownership of the automobile.” Id. at 519, 751 N.E.2d 1019. {¶ 24} The Saturn of Kings court expressly held that “in determining competing claims of ownership of a motor vehicle, R.C. 4505.04(A) controls over the provisions of the Uniform Commercial Code” and observed that Saturn and Cronin “retained possession of the certificates of title to the motor vehicles at issue in this dispute.” Id. at 520, 751 N.E.2d 1019. In consideration thereof, the Saturn of Kings court resolved: Pursuant to R.C. 4505.04(A), title to and, thus, ownership of a motor vehicle in this context does not pass without issuance or delivery of the certificate of title. Because the certificates of title were never assigned and delivered to Gallatin, Gallatin was never the lawful owner of the vehicles and, therefore, could not lawfully pass title to appellee. [Saturn and Cronin], by retaining possession of the certificates of title, are the rightful owners of the motor vehicles and, as such, are entitled to the proceeds of sale placed in escrow. Id. {¶ 25} In this appeal, Heartland also relies on First Merit Bank v. Angelini, 159 Ohio App.3d 179, 2004-Ohio-6045, 823 N.E.2d 485, a decision from the Third District Court of Appeals. Angelini involved facts similar to those in the case at bar, and in that case, the Third District found Saturn of Kings and R.C. 4505.04(A) to be controlling. Angelini involved a 2000 Astro van and a 1997 Saturn automobile. Automobile dealer John Angelini sold the two vehicles from his dealership lot. Prior to the sales, Angelini had granted Galion Building & Loan Bank (“Galion”) a security interest in both vehicles as a result of a consolidated loan. A notation of Galion's security interest was made on the certificates of title for the vehicles. Buyers purchased the vehicles with the assistance of financing by Angelini through First Merit Bank (“First Merit”). Payment was made to Angelini for the vehicles, but Angelini did not forward payment to Galion. The buyers took possession of their vehicles on the day of the purchase. However, neither buyer received the certificate of title for his purchased vehicle, as Galion retained physical possession of the certificates of title to the vehicles. See id. at ¶ 2-4, 23. {¶ 26} First Merit filed a complaint against Angelini and Galion, alleging that Angelini had committed fraud when Angelini accepted the funds from First Merit without paying off the vehicles' prior perfected lienholders. First Merit filed a motion for a preliminary injunction, seeking an order to extinguish Galion's perfected security interests in the vehicles and to compel the transfer of the certificates of title. Following a hearing on the matter, the trial court found that Angelini was a dealer of motor vehicles, that the two vehicles were offered for sale as inventory, and that both buyers were buyers in the ordinary course of business. Finding R.C. 1309.320 applicable by means of R.C. 4505.13(A)(2), the trial court concluded that the purchasers were to take free of Galion's security interests and that First Merit was entitled to relief. The trial court granted the motion for the injunction, ordered Galion to release its security interests over the vehicles and to turn over the certificates of title. Galion appealed from the judgment of the trial court. See Angelini at ¶ 5-6. {¶ 27} Angelini reversed the judgment of the trial court. Citing Saturn of Kings, the Angelini court determined that “R.C. 4505.04(A) controls over provisions of the UCC when determining competing claims of ownership in motor vehicles. Like the case sub judice, the Saturn [of Kings] case involved competing interest of ownership in motor vehicles where there had been no transfer of the certificate of title.” Id. at ¶ 11, citing Saturn of Kings, 92 Ohio St.3d at 513, 751 N.E.2d 1019. The Angelini court reasoned as follows: [A]pplying R.C. 4505.04(A) to the case at bar, we hold that Galion's security interests in the vehicles clearly take priority over First Merit's claim. Under R.C. 4505.04(A), “[n]o person acquiring a motor vehicle from its owner, whether the owner is a manufacturer, importer, dealer, or any other person, shall acquire any right, title, claim, or interest in or to the motor vehicle until there is issued to the person a certificate of title to the motor vehicle * * *.” Here Galion properly held and retained possession of the certificates of title to both vehicles at all times. “Pursuant to R.C. 4505.04(A), title to and, thus, ownership * * * does not pass without issuance or delivery of the certificate of title.” Saturn, 92 Ohio St.3d at 520, 751 N.E.2d 1019. Here the certificates of title were never assigned or delivered to either Angelini or First Merit. Thus, under R.C. 4505.04(A) and Saturn, because the certificates of title were never assigned and delivered to Angelini, Angelini was never the lawful owner of the vehicles, and, therefore, could not lawfully pass title to First Merit. Id. Accordingly, by retaining possession of the certificates of title, Galion's security interests in these vehicles remain superior. Id. Id. at ¶ 18. {¶ 28} Additionally, the Angelini court addressed the issue of whether R.C. 4505.13(A)(2) allowed the UCC to “usurp” the Certificate-of-Title Law. Id. at ¶ 21. The court recognized that R.C. 4505.13(A)(2) specifically refers to R.C. Chapter 1309 and that R.C. 4505.13(B) is subject to R.C. 4505.13(A); however, it found the “specific requirements in subsection (B) to be controlling.” Id. at ¶ 23. Applying its interpretation of R.C. 4505.13(B), the Angelini court found that Galion's security interest was “valid as against * * * subsequent purchasers” because notation of Galion's security interest had been made on the face of both certificates of title. Id. {¶ 29} In sum, the Angelini court found that pursuant to R.C. 4505.04(A), Galion's security interests in the motor vehicles remained superior because Galion retained possession of the certificates of title and that pursuant to R.C. 4505.13(B), Galion's security interests remained protected because notations of the security interests had been made on the face of both certificates of title. [1] {¶ 30} In urging that we follow the reasoning in Angelini, Heartland asserts that Angelini was not accepted for review by the Supreme Court of Ohio despite its opportunity to review the case. Heartland suggests that the Supreme Court's decision not to accept the case for review implies that it concurred with the resolution of the case. However, a decision by the Supreme Court of Ohio not to accept an appeal is not a determination on the merits of the case. See S.Ct.Prac.R. III(6). (“After the time for filing jurisdictional memoranda has passed, the Supreme Court will review the jurisdictional memoranda filed and determine whether to accept the appeal and decide the case on the merits.”) Therefore, we draw no inference from the fact that the Supreme Court declined to accept an appeal in Angelini. {¶ 31} Applying the same or similar reasoning as applied in Angelini, Heartland argues that the reasoning of Saturn of Kings applies to the facts of this case because this case involves competing claims between an alleged owner of a motor vehicle and a lienholder. In that regard, Heartland contends that R.C. 4505.04(A) is controlling because the disputes among Heartland, National City, and the purchasers involve competing interests in the motor vehicles. Heartland further argues that based on R.C. 4505.04(A), as well as Saturn of Kings and Angelini, Dublin Auto “did not have the ability to lawfully transfer title to the Purchasers or National City free and clear of Heartland's liens.” Heartland reasons as follows: “Although Heartland subsequently caused certificates of title to the motor vehicles at issue to be issued to the Purchasers, Heartland's liens were not released or cancelled from the certificates. Thus, Heartland's liens survived the attempted transfer of the motor vehicles to the Purchasers and remain the first and best liens on the motor vehicles.” Id. {¶ 32} As to that argument, we find Heartland's reliance on Saturn of Kings, as well as Angelini, misplaced. In Saturn of Kings, the “primary issue” was “whether a person may acquire legal ownership of a motor vehicle without transfer to that person of the vehicle's certificate of title.” Id. at 515, 751 N.E.2d 1019. In resolving that dispute, the Supreme Court of Ohio analyzed the interplay between R.C. Chapters 1302 and 4505. The dispute in this case concerns whether Heartland's security interest in motor vehicles held as inventory for sale by a dealer was extinguished upon the sale of those motor vehicles, and it necessitates an analysis of the interplay between R.C. Chapters 1309 and 4505. In Saturn of Kings, the court did not analyze the interplay between R.C. Chapters 1309 and 4505. Moreover, contrary to Heartland's implicit assertion, Saturn of Kings did not hold that all disputes involving lienholders in a motor vehicle are controlled and resolved by R.C. 4505.04(A). In Angelini, the court determined that the dealer, Angelini, was never the lawful owner of the motor vehicles at issue in that case and therefore could not pass title. Here, the certificates of title designated Dublin Auto, then the retail purchasers, as the title owners of the motor vehicles at issue.FN1 Furthermore, Heartland concedes that certificates of title to the pertinent motor vehicles were issued to the retail purchasers of those motor vehicles. Based on the foregoing, we conclude that neither Saturn of Kings nor the Angelini court's application of Saturn of Kings resolves the dispute in this case.

FN1. Although the certificates of title, issued June 12, 2002, and June 26, 2002, designate Heartland as the previous owner, Heartland has not asserted that it was at any time the title owner of the motor vehicles at issue. Thus, the discrepancies can be explained only as clerical errors, and we find them to be of no consequence to the resolution of this appeal.

{¶ 33} Consistent with the Angelini court's analysis regarding the application of R.C. 4505.13(A)(2), Heartland asserts that although R.C. 4505.13(B) is subject to R.C. 4505.13(A)(2), “the specific requirements in [R.C.] 4505.13(B) are controlling.” Heartland contends that although R.C. 4505.13(A)(2) states that R.C. Chapter 1309 applies to a motor vehicle held as inventory for sale by a dealer, “it does not state that Chapter 1309 applies exclusively to such a motor vehicle.” Thus, according to Heartland, R.C. Chapter 1309 does not apply when a lien is noted on the face of the certificate of title, because the “more specific language” in R.C. 4505.13(B) controls over R.C. 4505.13(A)(2). Pursuant to Heartland's reasoning, R.C. Chapter 1309 generally applies to a security interest in a motor vehicle held as inventory for sale by a dealer, but if a notation of the security interest has been made on the certificate of title, then R.C. 4505.13(B) controls.

{¶ 34} Additionally, Heartland argues that “[t]he clear language of [R.C.] 4505.04(A) mandates an interpretation of [R.C.] 4505.13(B) that protects a security interest in a motor vehicle when the secured party maintains physical possession of the certificate of title.” In support of that argument, Heartland emphasizes the following language in R.C. 4505.04(A): “[N]o waiver or estoppel operates in favor of such person against a person having possession of the certificate of title to * * * the motor vehicle, for a valuable consideration.” Thus, according to Heartland, its security interest remains protected under R.C. 4505.13(B) against subsequent purchasers because of the notation of the security interest on the face of the certificates of title and because of its possession of the certificates of title. {¶ 35} We disagree with Heartland's statutory analysis. R.C. 4505.13(A)(2) provides that R.C. Chapter 1309 (which includes R.C. 1309.320(A)) “applies to a security interest in a motor vehicle held as inventory for sale by a dealer.” Contrary to Heartland's argument, language in the first sentence of R.C. 4505.13(B) does not create an exception to that principle when a notation of a lien is made on the face of the certificate of title. Indeed, R.C. 4505.13(B) provides that “any security agreement covering a security interest in a motor vehicle, if a notation of the agreement has been made * * * on the face of the certificate of title * * * is valid as against * * * subsequent purchasers, secured parties, and other lienholders or claimants.” However, that provision is “[s]ubject to” R.C. 4505.13(A)'s specific designation of R.C. Chapter 1309 as applying to security interests in motor vehicles held as inventory for sale by a dealer. See R.C. 4505.13(B). Thus, as to the perfection and priority of security interests in motor vehicles held as inventory for sale by a dealer, R.C. Chapter 1309 controls. This finding is consistent with the cross-reference within R.C. Chapter 1309 citing R.C. Chapter 4505 as governing the perfection of security interests in motor vehicles that are not inventory held for sale by a dealer. See R.C. 1309.311. See, also, Comment 4 to UCC 9-311, which states: Inventory Covered by Certificate of Title. Under [UCC 9-311(d)], perfection of a security interest in the inventory of a person in the business of selling goods of that kind is governed by the normal perfection rules, even if the inventory is subject to a certificate-of-title statute. Compliance with a certificate-of-title statute is both unnecessary and ineffective to perfect a security interest in inventory to which this subsection applies. Thus, a secured party who finances an automobile dealer that is in the business of selling and leasing its inventory of automobiles can perfect a security interest in all the automobiles by filing a financing statement but not by compliance with a certificate-of-title statute. [2] {¶ 36} Therefore, R.C. Chapter 1309, and necessarily R.C. 1309.320(A), applies to Heartland's security interest in the motor vehicles at issue in this case because, according to Heartland, the vehicles were held as inventory for sale by a dealer. As outlined above, R.C. 1309.320(A) provides that a buyer in the ordinary course of business takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence. It is undisputed that both Laxton and the Murphys were buyers in the ordinary course of business under the Revised Code. Applying R.C. 1309.320(A) to these facts, Heartland's security interest as against Laxton and the Murphys in the motor vehicles at issue was extinguished upon the sale of those motor vehicles. Thus, we conclude that the trial court properly granted summary judgment in favor of National City. Accordingly, we overrule Heartland's first and second assignments of error. {¶ 37} Heartland argues in its third assignment of error that the trial court erred in holding that R.C. 4505.13(B) mandated that Heartland's liens on the motor vehicles at issue were terminated upon the attempted sale of those motor vehicles. In addition to applying R.C. 1309.320(A) to the facts of this case, the trial court, citing the third sentence in R.C. 4505.13(B), determined that the “security interest Heartland held on the two vehicles cannot stay with the vehicles once purchased.” That sentence provides as follows: Exposure for sale of any motor vehicle by its owner, with the knowledge or with the knowledge and consent of the holder of any security interest, lien, mortgage, or encumbrance on it, does not render that security interest, lien, mortgage, or encumbrance ineffective as against the creditors of that owner, or against holders of subsequent security interests, liens, mortgages, or encumbrances upon that motor vehicle. In its analysis, the trial court noted that the omission of “purchaser” from this provision, as one of the entities against whom the lien is effective, has been interpreted to mean that a lienholder's interest is ineffective against a purchaser. See Natl. City Bank, Akron v. Jim Pritz Ford, Inc. (Sept. 4, 1990), Tuscarawas App. No. 90AP020015, 1990 WL 139718. In this appeal, Heartland challenges that analysis. Nonetheless, as to Heartland's first and second assignments of error, we have determined that pursuant to R.C. 1309.320(A), Heartland's security interest in the motor vehicles was extinguished upon their sale. Accordingly, it is unnecessary to analyze whether the additional provision cited by the trial court also operated to extinguish Heartland's security interest in the motor vehicles. Therefore, our disposition of Heartland's first and second assignments of error renders moot its third assignment of error. {¶ 38} In its fourth assignment of error, Heartland argues that the trial court erred in holding that it was not entitled to payments on account of its liens on the motor vehicles at issue, because, according to Heartland, its liens survived any transfer of the motor vehicles. Heartland argues that the motor vehicles at issue are subject to its liens and it is entitled to payment in full in view of those liens, even though it concedes that it has no contractual relationship with any of the purchasers of the motor vehicles at issue. National City argues that if Heartland's security interest survived the sale, then Heartland's only remedy would be as to the motor vehicles. Additionally, National City maintains that Heartland's security interest was terminated and, therefore, it has no rights as against the motor vehicles or the purchasers' payments to National City. On the basis of our determination that Heartland's security interest in the motor vehicles at issue was extinguished upon the sale of the motor vehicles to the retail purchasers, we overrule Heartland's fourth assignment of error. {¶ 39} For the foregoing reasons, Heartland's first, second, and fourth assignments of error are overruled, and its third assignment of error is moot. Accordingly, the judgment of the Franklin County Court of Common Pleas is affirmed.

Judgment affirmed.

Case 29.3

395 F.3d 271, 2005 Fed.App. 0010P

United States Court of Appeals,

Sixth Circuit.

R. Geoff LAYNE; Charles E. Johnson, Jr., Plaintiffs-Appellants,

v.

BANK ONE, KENTUCKY, N.A.; Banc One Securities Corporation, Defendants-Appellees.

No. 03-6062.

Argued: Dec. 6, 2004.

Decided and Filed: Jan. 10, 2005.

MOORE, Circuit Judge.

Plaintiff-Appellant, Charles E. Johnson, Jr. ("Johnson"), appeals the district court's grant of summary judgment in favor of Defendants-Appellees, Bank One, Kentucky, N.A. and Banc One Securities Corporation (collectively, "Bank One"). The district court found that under Kentucky law, Bank One was not liable for the depreciation in value of the shares it held as collateral for a loan to Johnson. Furthermore, the district court found that by selling the stock on a national stock exchange, Bank One acted in a commercially reasonable way in disposing of the collateral. On appeal, Johnson asserts that the district court erred in these findings, as well as by granting Bank One summary judgment on his breach of fiduciary duty and breach of contract claims. Johnson also argues that summary judgment is inappropriate with regards to Bank One's counterclaims against him. We conclude that the district court did not err on any of these issues, and thus, the grant of summary judgment to the defendants is AFFIRMED.

I. BACKGROUND

This case arises out of two loan transactions made by Bank One to plaintiffs Johnson and Geoff Layne ("Layne"). [FN1] Johnson was the founder and CEO of , Inc. ("PurchasePro"); Layne served as the national marketing director of the company. Following a successful initial public offering, both Johnson and Layne had considerable net worth, though their PurchasePro shares were subject to securities laws restricting their sale. [FN2] To increase their liquidity, Johnson and Layne entered into separate loan agreements with Bank One for an approximately $2.8 million and $3.25 million line of credit respectively, secured by their shares of PurchasePro stock. [FN3] The loan agreements included a Loan-to-Value ("LTV") ratio, which conditioned default on the market value of the collateral stock. The LTV ratio was calculated as the outstanding balance on the line of credit over the market value of the collateral stock. Specifically, Layne's loan agreement had a 50% LTV ratio, which meant that the market value of the collateral stock must be at least twice the outstanding balance on the line; Johnson's loan agreement had a 40% LTV ratio, which meant that the market value must remain two and a half times the outstanding balance. [FN4] The credit agreements provided that if the LTV ratio exceeded those specified percentages, Johnson and Layne had five days to notify Bank One and either increase the collateral or reduce the outstanding balance such that the target LTV ratios were met. Failure to remedy the situation would be an immediate default and Bank One "may exercise any and all rights and remedies" including, "at Lender's discretion," selling the shares. Joint Appendix ("J.A.") at 353-54 (Comm. Pledge & Sec. Agmt.) (emphasis added). If Bank One intended to sell the shares, it had to give Johnson written notice ten days prior to the sale. Pursuant to these agreements, Johnson and Layne entered into trade authorization agreements that enabled Bank One to sell the shares without their consent. Though Bank One had the option of selling the collateral shares if the LTV ratios were not met, nothing in the loan agreements obligated it to do so.

FN1. On March 29, 2004, Bank One and Layne entered into a settlement agreement of all of their claims. As a result, Layne agreed to voluntarily dismiss his appeal pursuant to Fed. R.App. P. 42(b). Johnson's appeal remains before us for determination.

FN2. Johnson and Layne were considered "affiliates" of PurchasePro as defined under SEC Rule 144 and therefore, their shares in the company were restricted. 17 C.F.R. § 230.144. Pursuant to Rule 144, an affiliate may not sell restricted securities unless certain conditions are met, including a minimum holding period, a limitation on the amount to be sold, and the manner of the sale. 17 C.F.R. § 230.144(d)-(f).

FN3. It is unclear from the record if other assets were offered or accepted to secure the loans. With regards to their PurchasePro shares, Layne pledged 482, 142 shares to secure his $3.25 million credit line, while Johnson pledged 410,000 shares for his $2.8 million credit line.

FN4. For example, if Johnson utilized the entire line of credit, approximately $2.8 million, the market value of his collateral stock would need to be approximately $6.9 million to comply with the required LTV ratio of 40%.

In February 2001, along with the rest of the Internet sector, the stock price of PurchasePro fell considerably, such that both loans exceeded their respective LTV ratios. [FN5] Rather than selling the collateral stock, Bank One entered into discussions with Johnson and Layne to pledge more collateral. The record reveals that Layne and Johnson repeatedly stated their intentions to pledge additional collateral to meet the LTV requirements. On March 6, 2001, Layne wrote that he had "been able to hold [Bank One] off from calling it in because of additional collateral that I have pledged." J.A. at 355 (Email from Layne to Lichtenberger). On March 19, 2001, Johnson sent an email to Layne inquiring about whether Bank One was "hanging in there." J.A. at 517 (Email from Johnson to Layne). On March 22, 2001, Bank One sent a letter to Layne informing him that the loan was in default. J.A. at 362 (Letter from Holton to Layne). That same day, in a conversation with Bank One, Layne stated that "[you] guys have been great ... holding on for this long," but he indicated he would like to begin selling some of the collateral stock. J.A. at 357 (Tr. of call between Layne and Thompson). After this conversation, Bank One began taking steps to liquidate the collateral stock for both loans. Later that same day, however, Johnson sent an email to Layne under the subject heading "Bank 1" which stated "they want to sell our shares and I want to stop it with additional collateral-pls call." J.A. at 364 (Email from Johnson to Layne). Later that night, Layne sent an email to Burr Holton ("Holton"), Bank One's loan officer, under the heading "[h]old off on selling" which stated that "[Johnson] is putting together a collateral package (real estate, additional shares, etc.) to secure the note at acceptable levels." J.A. at 366 (Email from Layne to Holton). Early the next morning, Layne left a voicemail for Doug Thompson, Bank One's senior trader, stating "[i]t's a possibility that ... [Johnson]'s gonna put up some additional securities to secure his note and my note and maybe we don't sell right now. So I just wanna put a hold on any ... trading activity until [Johnson] talks with [the loan officer]." J.A. at 365 (Voice Message from Layne to Thompson). On April 3, 2001, Layne called Holton and stated that "he was ready to sell his [collateral] stock as soon as possible" and that "he has decided not [to work] with Mr. Johnson on combining their loans and adding additional collateral, which would have cured their default." J.A. at 367 (Memo. from Holton to File). The next day, April 4, 2001, Layne faxed a letter to Holton which stated that he would not be able to provide additional collateral to satisfy the loan agreement. J.A. at 491 (Letter from Layne to Holton); 634 (Layne Dep.). The following day, however, Layne changed his mind again and faxed Holton a letter which stated:

FN5. Because the loans were over-collateralized, though the market value of the stock was below the required LTV level, it was still greater than the outstanding loan balances. Thus, Bank One could have sold the stock in February, recouped the value of the loans, and returned the surplus proceeds to Layne and Johnson.

[Johnson] and myself are putting together a collateral package to secure our notes with Bank One. I DO NOT wish for the bank to proceed with any liquidation whatsoever of my PurchasePro stock at this time. I believe we have a strong company and that market conditions will improve, thus enabling the stock to recover to a price that allows me to pay my debt to Bank One in it's [sic] entirety. And that is certainly in everybody's best interest.

J.A. at 371 (Letter from Layne to Holton). The same day, Layne sent an email to Holton which stated "[Johnson] will be back this afternoon and we will firm the plan then. I would like to have time to discuss this [sic] him before we start liquidation." J.A. at 369 (Email from Layne to Holton). The record reveals that Johnson and Bank One were involved in discussions in the end of April and May to pay down the balance or pledge additional collateral including his house in Las Vegas. At the end of May, the proposed deal fell through and Bank One sent letters to Johnson notifying him of his continued default on the loans. Throughout the entire time from February to May 2001, Layne and Johnson continued to make principal and interest payments under the terms of the agreement, but both loans significantly exceeded their respective LTV ratios. Bank One finally sold Johnson's PurchasePro shares over four days in July, recovering $524,757.39 in net proceeds to pay down his debt, leaving approximately a $2.2 million unpaid balance. [FN6]

FN6. If the full $2.8 million credit line was used, the market price of the 410,000 shares would need to be approximately $16.89 in order to maintain an LTV ratio of 40%. In July, the shares were sold at an average price of $1.28 over the four-day period. The LTV ratio at the time the collateral was sold was approximately 530%.

Layne and Johnson separately filed suit against Bank One in the United States District Court for the Eastern District of Kentucky on a number of counts. On January 30, 2002, the cases were consolidated. Bank One filed counterclaims against Johnson and Layne, seeking payment for the deficiencies on the loans. On November 1, 2002, Bank One filed a motion for summary judgment on all counts as well as its counterclaims. On March 26, 2003, the district court granted Bank One's motion. Johnson appeals from that ruling.

II. ANALYSIS

A. Standard of Review

[1] We review "the grant of summary judgment de novo, viewing all evidence in the light most favorable to the nonmoving party." Boone v. Spurgess, 385 F.3d 923, 927 (6th Cir.2004). "Under Rule 56(c), summary judgment is proper 'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' " Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.P. 56(c)).

B. Duty to Preserve Collateral

[2] We first consider Johnson's argument that Bank One violated a duty under Kentucky law to preserve the value of the collateral held in its possession. With respect to the regulation of secured transactions, Kentucky has adopted the Uniform Commercial Code ("U.C.C."), which states that "a secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed." Ky.Rev.Stat. Ann. § 355.9-207. Whether a secured party's duty to preserve collateral applies to pledged shares is an issue of first impression in Kentucky. Because our jurisdiction in this case is based on a diversity of citizenship among the parties, "[w]e are in effect sitting as a state appellate court in Kentucky, with the obligation to decide the case as we believe the Kentucky Supreme Court would do." Stalbosky v. Belew, 205 F.3d 890, 893 (6th Cir.2000). As the district court noted below, although Kentucky courts have not reviewed the matter, several courts around the country have addressed the issue of whether § 9-207 applies to pledged stock. Before analyzing their holdings, however, we begin our analysis with the U.C.C. itself.

The comment to § 9-207 states that the provision "imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral," and cites to § § 17-18 of the Restatement of Security. U.C.C. § 9-207 cmt. 2. Section 17 of the Restatement is essentially identical to the first sentence of § 9-207, and its accompanying explanatory comment states that "[t]he rule of reasonable care expressed in this Section is confined to the physical care of the chattel, whether an object such as a horse or piece of jewelry, or a negotiable instrument or document of title." Restatement of Security § 17 cmt. a (1941) (emphasis added). Section 18 of the Restatement mirrors the second sentence of § 9-207 and addresses "instruments representing claims of the pledgor against third persons." Restatement of Security § 18. Though it deals with negotiable instruments rather than equity investments, § 18 sheds light on the topic of preserving collateral value. Specifically, the explanatory comment accompanying the section states "[t]he pledgee is not liable for a decline in the value of pledged instruments, even if timely action could have prevented such decline." Restatement of Security § 18 cmt. a (1941) (emphasis added). In the context of pledged stock, courts have used this language from the Restatement to hold that "a bank has no duty to its borrower to sell collateral stock of declining value." Capos v. Mid-Am. Nat'l Bank, 581 F.2d 676, 680 (7th Cir.1978). See also Tepper v. Chase Manhattan Bank, N.A., 376 So.2d 35, 36 (Fla.Dist.Ct.App.1979) (holding that "a pledgee is not liable for a decline in the value of pledged instruments"); Honolulu Fed. Sav. & Loan Ass'n v. Murphy, 7 Haw.App. 196, 753 P.2d 807, 816 (1988) (finding that a lender has no duty to preserve the value of pledged securities by financially supporting the issuing company); FDIC v. Air Atl., Inc., 389 Mass. 950, 452 N.E.2d 1143, 1147 (1983) (finding a lender not liable for the "ruinous" decline in the market value of pledged stock); Marriott Employees' Fed. Credit Union v. Harris, 897 S.W.2d 723, 728 (1995) (holding that the duty of reasonable care "refers to the physical possession of the stock certificates" and does not impose liability for depreciation in value); Dubman v. N. Shore Bank, 85 Wis.2d 819, 271 N.W.2d 148, 151 (1978) (concluding that "our law does not hold a pledgee responsible for a decline in market value of securities pledged to it as collateral for a loan absent a showing of bad faith or a negligent refusal to sell after demand"). As the Seventh Circuit stated, "[i]t is the borrower who makes the investment decision to purchase stock. A lender in these situations merely accepts the stock as collateral, and does not thereby itself invest in the issuing firm." [FN7] Capos, 581 F.2d at 680. "Given the volatility of the stock market, a requirement that a secured party sell shares ... held as collateral, at a particular time, would be to shift the investment risk from the borrower to the lender." Air Atl., Inc., 452 N.E.2d at 1147.

FN7. As noted by the district court, the few courts which have found differently involved cases in which the securities held as collateral were convertible debentures, and the secured party failed to covert them into stock. Reed v. Cent. Nat'l Bank, 421 F.2d 113, 118 (10th Cir.1970); Grace v. Sterling, Grace & Co., 30 A.D.2d 61, 289 N.Y.S.2d 632, 638 (N.Y.App.Div.1968). The courts in those cases held that § 9-207 requires the pledgee to take the necessary steps to preserve the value of the securities. As the district court correctly noted, however, "the losses occasioned by the secured creditor's failure to convert the debentures were clearly foreseeable, because the creditors had specific knowledge of an event that would materially affect the value of the securities." J.A. at 260-61 n. 7 (Dist.Ct.Order). By contrast, where the collateral held by the secured party is stock, "there is no similar, pre-defined event which the creditor knows will impact the value of the stock." J.A. at 261 n. 7 (Dist.Ct.Order). Because the fluctuation in value is not foreseeable, to require a creditor to preserve value of stock is to "foist that role [of investment adviser] upon it." Capos, 581 F.2d at 680.

[3] We agree with the reasoning of these courts and believe that the Kentucky Supreme Court would adopt a similar approach with regards to Ky.Rev.Stat. Ann. § 355.9-207. Specifically, we conclude that under Kentucky law a lender has no obligation to sell pledged stock held as collateral merely because of a market decline. If the borrower is concerned with the decline in the share value, it is his responsibility, rather than that of the lender, to take appropriate remedial steps, such as paying off the loan in return for the collateral, substituting the pledged stock with other equally valued assets, or selling the pledged stock himself and paying off the loan. [FN8]

FN8. Johnson argues that these options were not available to him in this case because he did not have other assets to substitute and was unable to sell the stock on his own because of his insider status. Appellant's Reply Br. at 13-14. Particularized facts of the borrower's situation, however, are insufficient to alter the law and burden the lender with the responsibility of being an investment adviser. The fact that the borrower adopted a risky investment strategy does not transform the legal obligations of the lender unless explicitly specified in the contract. Moreover, the record does not support Johnson's contention that he could not avail himself of other options to preserve the value of his collateral. Johnson had other assets which he could have substituted for the collateral stock. In his deposition, Johnson stated that his house in Las Vegas was valued at around $5.0 million and was free of any mortgages and encumbrances. J.A. at 591-92 (Johnson Dep.). Discussions were held between Bank One and Johnson during the months of April and May specifically about using the Las Vegas house as additional collateral. Furthermore. despite the fact that he was an insider, Johnson could have sold his restricted stock through a Rule 144 transaction so long as he ensured the sale was not a result of any material, non-public information. 17 C.F.R. § 230.144(b). See, e.g., J.A. at 513-16 (Layne's Stock Selling Plan). Johnson stated in his deposition that he was intending to sell his restricted shares pursuant to a selling plan, the proceeds of which he would use "to pay [Bank One] off one hundred percent." J.A. at 591 (Johnson Dep.). Unfortunately, the sale of Johnson's shares under the plan was triggered by the stock reaching a certain price, which it never did.

In his brief, Johnson attempts to distinguish his case from the several cases outlined above, by arguing that in the situation where a loan is over-secured, the pledgee has a duty to preserve the surplus. Johnson argues that where a loan is over-secured, the amount of collateral greater than the loan value belongs to the borrower and a duty should be imposed on the secured party to protect that surplus because the secured party has no incentive to do so on its own. By contrast, Johnson argues, where a loan is under-secured, the secured party's incentive is the same as that of the borrower, and thus no statutory duty to preserve the value of the collateral is necessary. In support of his argument, Johnson cites to two district court opinions which distinguish between over-secured and under-secured loans. Unfortunately, his theory is neither supported by these cases nor compelling on its own. Generally, the dual purpose of collateral is to secure financing for the borrower and hedge against credit risk for the lender. Where a lender extends credit solely on the basis of over-secured collateral, it is because of perceived heightened risk, and therefore over-collateralization provides the lender with more flexibility. In this case, Bank One agreed to loan Johnson $2.8 million dollars only if he pledged two-and-a-half times that value in PurchasePro stock, or $6.9 million. The underlying rationale was that unless the surplus value was included, the collateral may be insufficient at the time of any default. The LTV ratio was to provide a cushion so that Bank One could either wait for the stock to rebound, restructure the loan, solicit additional collateral, or call the loan with enough time to sell the stock to recoup the value. If accepted, Johnson's argument would bifurcate the collateral amount between the actual value of the loan and the surplus value, and impose a duty upon the lender to preserve the latter. Requiring preservation of the surplus value, however, leaves only the actual value of the loan to serve as collateral and wipes out any flexibility for the lender. Under Johnson's theory, Bank One would have had only $2.8 million worth of stock as collateral for the $2.8 million loan and would have been required to preserve the remaining $4.1 million of surplus. On the first day the market value of the stock fell below the LTV requirement, Bank One would have called the loan or risked liability under § 9-207. Imposing automatic liability for the decreased value of the surplus defeats the inherent purpose of requiring over-collateralization in the first place. The two cases Johnson cites for support do not stand for the proposition that over-collateralization necessarily implies a duty of the lender to preserve, but rather suggest that the borrower does have a valid interest in the surplus value and therefore his wishes should not be ignored in over-collateralized situations. In Fidelity Bank & Trust Co. v. Production Metals Corp., 366 F.Supp. 613, 618 (E.D.Pa.1973), the district court found that "where the value of the collateral exceeds the amount of the debtor's entire obligation ... there is no justification for a rule authorizing the pledgee to disregard [the pledgor's] interest in the collateral and deprive him of the right to control its disposition for the benefit of both parties." The district court noted that where the pledgee, "upon request of the pledgor " fails to take steps to preserve the value of the collateral, "a question should properly be raised as to whether the pledgee has exercised reasonable care under the circumstances." Id. (emphasis added). The Fidelity court noted, however, that "where the entire obligation of the pledgor exceeds the value of the collateral held by the pledgee ... the pledgee's refusal to sell the collateral upon request of the pledgor would not, as a matter of law, constitute a breach of his duty to preserve its value." Id. at 619. Similarly, in FDIC v. Caliendo, 802 F.Supp. 575, 583-84 (D.N.H.1992), the district court, citing Fidelity Bank, ruled that a pledgor could bring a claim under § 9-207, where there is an over-collateralized loan, a default by the pledgor, and "the receipt of a reasonable request by the pledgor/borrower to either sell or have the stock redeemed." These two cases do not provide any support for Johnson's argument that a duty to preserve collateral arises simply because of an over-collateralized situation; rather, where there is over-collateralization and the pledgor has requested liquidation, the pledgee should respect the pledgor's interest in the surplus value. These two cases are inapposite to Johnson's case, because the record is clear that he never made a request to the bank to sell the collateral to preserve his surplus, but rather urged Bank One as late as May 1, 2001, to do the opposite. In sum, we conclude that, under Kentucky law, a lender is not under any duty or obligation to sell collateral in its possession merely because the collateral is declining in value, regardless of whether the loan is over-collateralized. Therefore, the district court's grant of summary judgment on this issue is affirmed.

C. Commercially Reasonable Disposition

[4][5] Johnson's second argument raised on appeal is that Bank One violated Kentucky law by failing to dispose of the PurchasePro stock in a commercially reasonable manner. Following the U.C.C., Kentucky law requires that "[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable." Ky.Rev.Stat. Ann. § 355.9-610. The purpose of the provision is to protect the debtor's interest by ensuring he will "receive the market price of his collateral." Ocean Nat'l Bank v. Odell, 444 A.2d 422, 426 (Me.1982). The law also provides a "recognized market" safe harbor, which states that:

[a] disposition of collateral is made in a commercially reasonable manner if the disposition is made:

(a) In the usual manner on any recognized market;

(b) At the price current in any recognized market at the time of disposition; or

(c) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

Ky.Rev.Stat. Ann. § 355.9-627(2). The U.C.C. comments define a "recognized market" as "one in which the items sold are fungible and prices are not subject to individual negotiation. For example, the New York Stock Exchange is a recognized market." U.C.C. § 9-610 cmt. 9. Sales on a recognized market are commercially reasonable "because the price on the recognized market represents the fair market value [of the collateral] from day to day." Nelson v. Monarch Inv. Plan of Henderson, Inc., 452 S.W.2d 375, 377 (Ky.1970); see also FDIC v. Blanton, 918 F.2d 524, 527-28 (5th Cir.1990) ("A recognized market assures a fair price through neutral market forces, and thus obviates the debtor's need for protection through redemption, appraisal, or monitoring the sale."). Therefore, where the collateral is sold in a recognized market, Kentucky courts have found the transaction to be commercially reasonable as a matter of law. Bailey v. Navistar Fin. Corp., 709 S.W.2d 841, 842 (Ky.Ct.App.1986). Courts in other states have held similarly that a sale on a recognized market is per se commercially reasonable. See Blanton, 918 F.2d at 529 (noting that under Texas law, sale of collateral on a recognized market is commercially reasonable); Suffield Bank v. LaRoche, 752 F.Supp. 54, 59 (D.R.I.1990) (holding that the sale of pledged stock on the American Stock Exchange "ensured that its sale was commercially reasonable and beyond the scrutiny of this Court"). Moreover, the law provides that "[t]he fact that a greater amount could have been obtained by ... disposition ... at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the ... disposition ... was made in a commercially reasonable manner." Ky.Rev.Stat. Ann. § 355.9-627(1).

[6] Applying the U.C.C. provisions to this case, the district court was correct to find that Bank One's disposition of the PurchasePro shares through a sale on the NASDAQ national market was commercially reasonable. Johnson rehashes his arguments about preserving collateral value to contend that delaying the sale of the pledged stock from February was commercially unreasonable. Appellant's Br. at 45. Johnson's argument, however, misinterprets the statute. Section 9-610 does not impose an obligation on a lender to liquidate and sell the collateral stock at a specific time during the life of the loan. Put another way, § 9-610 does not address whether a lender should dispose of its collateral, but rather once that decision has been made, how the disposition should occur. When Johnson's loan fell below the LTV ratio, Bank One attempted to restructure the loan and secure additional collateral rather than sell the shares. Under the pledge agreement and Kentucky law, Bank One was not under any obligation to sell the stock at that point. In late May, after repeated negotiations with Johnson fell through, Bank One decided to begin the liquidation process, which was completed by July. [FN9] The sale of the stock was on the NASDAQ, a recognized market, and thus ensured that Johnson received the fair market value for his stock shortly after the decision to liquidate was made, which is all that § 9-610 requires. [FN10] Therefore, we conclude that the sale of Johnson's PurchasePro stock was commercially reasonable and the district court's grant of summary judgment on this issue is affirmed.

FN9. Johnson argues in the alternative that the delay from the time of the liquidation decision in May until July was commercially unreasonable because the stock value dropped during these months. This argument is similarly unpersuasive. As § 355.9-627(1) states, the mere fact that a higher value could have been obtained earlier, by itself, is not sufficient to show that a transaction was commercially unreasonable. Moreover, there is no evidence in the record that Bank One unreasonably delayed the sale of the stock. The record demonstrates that during the month and a half between the decision to liquidate and the actual sale, Bank One was in discussions with PurchasePro's counsel to ensure that the sale of stock owned by Layne and Johnson was not in violation of any securities laws. Specifically, Bank One delayed the sale to ensure compliance with Rule 144 requirements. 17 C.F.R. § 230.144(b); see Rice v. Liberty Surplus Ins. Corp., 113 Fed.Appx. 116, 2004 WL 2413393, at *3 (6th Cir. Oct.28, 2004) (noting that under Rule 144 restricted stock may not be sold unless issuing corporation files a letter with the SEC certifying that the conditions of the rule have been met). Because the stock was lightly traded in the market, the shares were sold over a four-day period to avoid dumping a large block and further depressing the price. Such a delay is not commercially unreasonable. Finally, Johnson's argument rests on the unproven assumption that Bank One should have known that a delay in the sale of the shares would necessarily result in a lower market value. PurchasePro shares were highly volatile, and it was plausible that the price could have rebounded. As a result, it could be commercially reasonable for Bank One to have delayed the sale to see if the market would return. See U.C.C. § 9-610 cmt. 3 (explaining that the U.C.C. "does not specify a period within which a secured party must dispose of collateral," because there may be times when it is "prudent not to dispose of goods when the market has collapsed").

FN10. Johnson argues that the recognized-market exception cannot be per-se reasonable as to timing because it would allow a lender to delay potentially a sale for years, which would be an unreasonable result. Appellant's Br. at 45. We need not address the issue about whether a disposition of collateral on a recognized market is per-se reasonable, because the facts in this case reveal that Bank One sold the stock shortly after negotiations with Johnson broke down, after ensuring compliance with the securities laws and taking into account market volume. See supra note 9. Addressing Johnson's issue, however, in the situation where a loan has been called, the lender has an incentive to sell the collateral for the greatest value possible so as to pay off the outstanding debt. The situation where a lender would hold off on the sale of collateral until the price drops precipitously and thereby risk the ability to recover its loan would be rare. The comment to § 9-610 states, however, that where a secured party does not dispose of collateral and "there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a 'commercially reasonable' manner." U.C.C. § 9- 610 cmt. 3. Though the language seems at odds with § 9-627(a), the comment to that section states there is no inconsistency, but rather while a low price is insufficient of itself to prove commercial unreasonableness, in such a situation "a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable." U.C.C. § 9-627 cmt. 2. Despite this language, courts have been reluctant to second-guess the timing of the disposition of collateral in most situations, even where the price has declined precipitously. See, e.g., Air Atl. Inc., 452 N.E.2d at 1147 (finding that a five-year delay from the decision to liquidate until the actual sale of stock was not commercially unreasonable, even where "the market declined 'ruinously' and the decline was 'notorious' ").

D. Breach of Fiduciary Duty

[7][8] The third argument Johnson raises on appeal is that Bank One breached a fiduciary duty by failing to sell the PurchasePro stock when the LTV ratio exceeded 40%. Under Kentucky law, a fiduciary relationship is "founded on trust or confidence reposed by one person in the integrity and fidelity of another and which also necessarily involves an undertaking in which a duty is created in one person to act primarily for another's benefit in matters connected with such undertaking." Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 485 (Ky.1991) (emphasis added). In interpreting Kentucky law, we have held that "[e]xcept in special circumstances, a bank does not have a fiduciary relationship with its borrowers." Sallee v. Fort Knox Nat'l Bank, N.A., 286 F.3d 878, 893 (6th Cir.2002). We have stated that:

banks do not generally have fiduciary relationships with their debtors. This flows from the nature of the creditor-debtor relationship. As a matter of business, banks seek to maximize their earnings by charging interest rates or fees as high as the market will allow. Banks seek as much security for their loans as they can obtain. In contrast, debtors hope to pay the lowest possible interest rate and fee charges and give as little security as possible. Without a great deal more, a mere confidence that a bank will act fairly does not create a fiduciary relationship obligating the bank to act in the borrower's interest ahead of its own interest.

Id. As one court noted, "it would be absurd to think that [a bank] could never take its own interests into account, or that [the borrowers'] interest had to be absolutely paramount at all times and in all situations." Harris v. Key Bank Nat'l Ass'n, 193 F.Supp.2d 707, 717 (W.D.N.Y.2002). That court concluded, "[o]bviously it would have been in [the borrowers'] best interests for [the bank] simply to have forgiven their debt altogether, but the law imposes no duty on a creditor to do so." Id.

[9] Applying these principles to this case, we conclude that Bank One did not breach a fiduciary duty owed to Johnson by failing to sell the collateral stock earlier. Johnson relies on language in the pledge asset agreement which authorized Bank One "as my agent and attorney in fact to buy, sell ... and trade" securities. J.A. at 399 (Pledge Asset Agmt.). The agreement also states that Bank One "as attorney in fact is authorized to act for me and in my behalf in the same manner and with the same force and effect as I might or could do." J.A. at 399 (Pledge Asset Agmt.). Johnson contends that the effect of this language is to create a fiduciary relationship where Bank One must act in his best interests. In his deposition, Johnson stated that he believed the language created an automatic trigger whereby Bank One was obligated to sell the stock if the LTV ratio exceeded 40% because he "did not want to get [his] personal opinion or feelings at the time involved." J.A. at 566 (Johnson Dep.). Indeed, it appears from his deposition that Johnson viewed the agreement similar to a stop-order transaction, whereby the stock would be sold if it fell below a certain value. While that might have been Johnson's intention, the agreement did not reflect it. The language which Johnson cites in his brief does not create a fiduciary relationship, but rather merely authorizes Bank One to trade his stock. Nowhere in the agreement does it say that Bank One's trading must be done in Johnson's best interests. In fact, the commercial pledge and security agreement explicitly states otherwise--in the event of default, "Lender may exercise any one or more of the [prescribed] rights and remedies." J.A. at 353 (Comm. Pledge & Sec. Agmt.) (emphasis added). One of the prescribed remedies in the event of a default is "[s]ell the Collateral, at Lender's discretion." J.A. at 353 (Comm. Pledge & Sec. Agmt.) (emphasis added). "Lender shall not be obligated to make any sale of Collateral regardless of a notice of sale having been given." J.A. at 353 (Comm. Pledge & Sec. Agmt.) (emphasis added). The language clearly sets forth that Bank One entered into the loan agreement with Johnson with the sole intention to act in the best interests of its shareholders. Pursuant to that intention, Bank One determined that it was better to add collateral and maintain the loan rather than call it in and sell the shares. Because neither Kentucky law nor the contract created a fiduciary relationship between the parties, we affirm the district court's grant of summary judgment to Bank One on this issue.

E. Breach of Contract and the Implied Covenant of Good Faith

[10] Johnson's next argument on appeal is that Bank One is liable for breach of contract or for breach of the implied covenant of good faith. Rather than providing new arguments, Johnson restyles his earlier ones into contract claims. Specifically, he argues that because Bank One had a duty to preserve the value of the collateral and parties cannot contract away U.C.C. duties, Bank One is liable for a breach of contract. Appellant's Br. at 58. Having concluded that U.C.C. § 9-207 does not impose such a duty on a secured party, we affirm the grant of summary judgment on the breach of contract claim. Similarly, with regards to the breach of the implied covenant of good faith, Johnson argues that under the objective standard of good faith prescribed by the U.C.C., parties must act in "observance of reasonable commercial standards of fair dealing." Ky.Rev.Stat. Ann. § 355.9- 102(1)(aq). Restyling his earlier arguments about commercial reasonableness, he argues that it was unreasonable for Bank One not to have called the loan earlier and sold the collateral stock, and therefore it acted in bad faith. Having concluded that Bank One was not obligated to preserve the value of the collateral, that it acted in a commercially reasonable manner in disposing of the collateral, and that it did not owe a fiduciary duty to Johnson, we hold that Bank One did not breach the implied covenant of good faith, and therefore the grant of summary judgment on this issue is affirmed as well.

F. Bank One's Counterclaims

Finally, Johnson appeals the grant of summary judgment to Bank One on its counterclaim for the deficiency on the loan. Johnson failed to raise any arguments other than the ones dismissed above about why Bank One should not prevail on its collection claims. As the district court noted, Johnson has not "disputed [that he] knowingly and willingly executed the loan agreements in question or that he defaulted on the loans." J.A. at 270 (Dist.Ct.Order). Accordingly, we affirm the grant of summary judgment on this issue as well.

III. CONCLUSION

In summary, we conclude that none of issues Johnson raises on appeal are compelling, and therefore we AFFIRM the grant of summary judgment in favor of Bank One.

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