Seller’s Delivery Of Defective Or Non-Conforming Equipment To Buyer/Borrower Did Not Impair Lender’s Rights In the Collateral

Lesson.  A borrower’s complaints about equipment it purchases and pledges as loan collateral do not affect a lender’s rights in the collateral. 

Case cite.  1^st Source v. Minnie Moore Resources, 2019 WL 2161679 (N.D. Ind. 2019) (PDF).

Legal issue.  Whether a creditor (lender) lacked an enforceable security interest in debtor’s equipment because the equipment differed from what the debtor (borrower/owner) thought it was purchasing.

Vital facts.  Lender loaned borrower money to buy three pieces of mining equipment worth about 350k.  The loan was secured by the equipment pursuant to a security agreement and a UCC financing statement.  Borrower defaulted on the loan, and lender sued to foreclose on the equipment.  Borrower contended that the equipment was defective, and varied from what the borrower had ordered from the seller.  The seller was not a party to the lawsuit. 

Procedural history.  Lender filed a motion for summary judgment.  1^st Source is the summary judgment opinion and order entered by the U.S. District Court for the Norther District of Indiana.

Key rules.  1^st Source essentially is about Article 9.1 attachment.

“A security interest will attach and be enforceable when three elements are present: (1) value has been given; (2) the debtor has rights in the collateral; and (3) the debtor has authenticated a security agreement that provides a description of the collateral.”  “Perfecting a security interest is only necessary to make the security interest effective against third parties; a security interest is enforceable “as between the secured party and the debtor” upon meeting the three requirements for attachment.”

The UCC clarifies what is sufficient for a description of the collateral: “a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”  I.C. § 26-1-9.1-108(a).  The Court noted, “that can be done by providing a ‘specific listing’ or a ‘category,’ or by ‘any other method, if the identity of the collateral is objectively determinable.’ Id. § 26-1-9.1-108(b).

Holding.  The Court granted lender’s motion for summary judgment and held that lender was entitled to take possession of and foreclose on the equipment.

Policy/rationale.  Borrower asserted two contentions in support of its argument that the security agreement was unenforceable:  (1) the security agreement did not identify the model years of the equipment and (2) there were discrepancies in the serial numbers between those on the equipment and those identified in the security agreement.  Basically, borrower asserted that the equipment it purchased was slightly older and less valuable than the equipment it intended to buy.    

On the first contention, the Court concluded that the security agreement reasonably identified the collateral.  Evidently there is no law supporting the proposition that a model year must be included in a security agreement to reasonably identify the collateral. 

On the second contention, the promissory note identified each piece of equipment by its name, serial number, and purchase price, and it directed lender to disburse loan proceeds directly to the seller.  The minor numerical error in a serial number “would not create a genuine question as to what equipment the parties intended to serve as collateral.”        

The Court summed up its finding as follows: 

[borrower’s] complaint that the equipment is defective and nonconforming is a dispute for [it] to take up with Interval Equipment Solutions, which sold the equipment.  It does not affect [lender’s] rights in the collateral, so [lender] is entitled to exercise its rights in that collateral.

Related posts. 

• Hyper Technical Error In Debtor’s Name Dooms Creditor’s UCC Financing Statement/Lien
• UCC Security Interest Lesson: Nemo Dat Quot Non Habet

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My practice includes the representation of parties in disputes arising out of loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.