Brown v. Indiana National Bank
40 U.C.C. Rep. Serv. (West) 1401, 1985 Ind. App. LEXIS 2331, 476 N.E. 2d 888 (1985)
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Rule of Law:
Under Uniform Commercial Code Article 9, a secured creditor's duty to provide notice of the disposition of collateral extends only to the debtor and other parties with a security interest in the collateral, not to an employee whose personal services contract is part of the collateral.
Facts:
- In July 1974, Andrew C. Brown signed a five-year contract to play professional hockey for the Indianapolis Racers, then owned by IPS Management, Inc.
- Shortly thereafter, IPS Management sold the franchise to Indianapolis Racers, Ltd. (Racers, Ltd.).
- In late 1974, Racers, Ltd. borrowed funds from Indiana National Bank (INB), granting INB a security interest in its assets, including all player contracts.
- INB perfected its security interest by filing a financing statement in January 1975.
- By 1977, Racers, Ltd. was in financial distress and had borrowed nearly $1,000,000 from INB.
- In April 1977, at INB's request, Racers, Ltd. delivered physical copies of its players' contracts, including Brown's, to the bank.
- On June 3, 1977, INB called Racers, Ltd.'s loans due, took possession of the secured collateral, including Brown's contract, and notified Racers, Ltd. of its intent to sell the assets.
- Brown was paid for the first three years of his contract but received no further payment after the 1976-77 season.
Procedural Posture:
- Andrew C. Brown sued Indiana National Bank (INB) in an Indiana trial court, alleging fraud and breach of a duty of good faith.
- The case was tried before a jury.
- At the close of all the evidence, the trial court granted INB's renewed motion for judgment on the evidence.
- Brown, as Plaintiff-Appellant, appealed the trial court's judgment to the Court of Appeals of Indiana.
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Issue:
Does a secured creditor owe a duty under UCC Article 9 to notify an employee whose personal services contract is used as collateral by the debtor-employer of the security interest or the disposition of the collateral upon default, when the employee is not the debtor or another secured party?
Opinions:
Majority - Conover, Judge
No. A secured creditor does not owe a duty of notification under the UCC to a person whose employment contract is used as collateral when that person is neither the debtor nor a party with a security interest. To succeed on a claim for fraudulent concealment, the plaintiff must first establish that the defendant had a duty to disclose. Under UCC § 9-504(3), the duty to provide notice of the disposition of collateral is limited to three specific classes: (1) the debtor, (2) a party known by the secured party to have a security interest, and (3) a party who has filed a financing statement for a security interest in the same collateral. Brown was not the 'debtor' as he did not owe the underlying obligation to INB, nor was he a guarantor. Furthermore, Brown did not have a security interest in his own contract; his only interest was a right to compensation for his services. The agreement between INB and Racers, Ltd. was a security agreement, not an assignment of the contract, meaning INB did not assume the team's contractual duties to Brown. Because INB owed no initial duty of notification to Brown, his claim that INB breached its duty of good faith also fails, as the good faith obligation attaches only to existing duties under the UCC.
Analysis:
This decision clarifies the narrow scope of a secured party's notification duties under UCC Article 9, specifically § 9-504(3). It establishes that individuals whose contracts or interests are merely part of a collateral package, but who are not themselves liable for the underlying debt, are not entitled to notice of disposition. This holding protects secured creditors from potentially extensive notification burdens to countless third parties who may be economically affected by a debtor's default. The case reinforces a formalistic interpretation of the term 'debtor,' limiting it to obligors and guarantors, thereby providing clear lines for commercial lenders regarding their statutory obligations upon foreclosure.
