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Prejudgment Possession (Replevin) of Equipment Permitted Under Indiana Law

This post falls in line with those of January 31, 2009, December 7, 2010, and January 6, 2011 regarding Indiana’s remedy of replevin, including the right to prejudgment possession of personal property loan collateral.  The Indiana Court of Appeals’ decision in Deere v. New Holland, 2010 Ind. App. LEXIS 1899 (Ind. Ct. App. 2010) (click and save for .pdf) supports the proposition that prejudgment repossession is available in Indiana.  The Court also held that the creditor’s lien survived the debtor’s transfer of the property.

What happened.  The creditor in Deere held a perfected security interest in farm equipment.  The original debtor traded the equipment to another business, which relied upon statements of third parties that the creditor’s lien had been satisfied.  The successor business – the defendant in the suit – did not contact the creditor to verify whether the liens had been released.  There was a default under the applicable security agreement, and the amount due under the agreement was accelerated as a result.  As is often the case, the agreement provided the creditor with the right to recover the equipment upon the default.  The case surrounded the defendant’s (the subsequent owner of the equipment) objection to the creditor’s effort to repossess.

Repossession rules.  The Court in Deere reiterated that, upon a default, creditors have the right to take possession of the collateral securing their claim.  See Indiana Code § 26-1-9.1-601(a) and 609(a)(1).  Significant to Deere, “a security agreement is effective against purchasers of the collateral.”  I.C. § 26-1-9.1-201(a).  Depending upon the circumstances, repossession can occur through self-help or, as in Deere, a suit for replevin.  An Indiana replevin action is a “speedy statutory remedy designed to allow one to recover possession of property wrongfully held or detained as well as any damages incidental to detention.”  A plaintiff/creditor must prove:  (1) it has the right to possession, (2) that the property is unlawfully detained, and (3) that the defendant wrongfully holds possession.  The Court concluded, based upon undisputed facts, that the creditor was entitled to possession, use and disposition of the equipment pending final adjudication of the claims of the parties.

Notice of lien.  The real meaty issue in Deere related to the defendant’s belief, based upon representations made by third parties, that the creditor’s liens had been satisfied.  Indeed proof showed that such representations occurred.  Nevertheless, the evidence was undisputed that the defendant had actual notice that the prior lien existed at a point in time, and the defendant never contacted the creditor to confirm the alleged satisfaction of the lien. 

BFP defense?  The court translated the defendant’s argument as “raising an affirmative defense that it was a bona fide purchaser because it relied in good faith on the information it gleaned from [third parties].”  I have written about the bona fide purchaser defense on a handful of occasions, including on October 4, 2009 when I discussed how actual knowledge defeats Indiana’s bona fide purchaser doctrine.  This knowledge was fatal in the Deere case.  The defendant had actual notice of the perfected security interest in the equipment.  Any reliance on statements by third parties with respect to the satisfaction of liens “simply was not reasonable”: 

As a general rule, we find that it is unreasonable to rely on the statements of third parties – or the [original] debtor – about the current status of security interests.

The lesson for parties acquiring equipment that may be subject to a security interest is to conduct an independent investigation into the status of any liens.  Relying on written or oral representations by the seller will not protect parties from a creditor’s action to foreclose the lien.  From the creditors’ perspective, in cases of clear defaults, Indiana law generally allows repossession (and liquidation) of personal property loan collateral before the entry of judgment.