HCC Credit Corporation v. Springs Valley Bank & Trust Co.
669 NE 2d 1001 (1996)
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Rule of Law:
A transferee of cash proceeds from a debtor's commingled account takes the funds free of a perfected security interest if the payment was made in the ordinary course of the debtor's business and the transferee did not know, and was not reckless in failing to know, that the payment violated the secured party's interest.
Facts:
- Lindsey Tractor Sales, Inc. ('Lindsey Tractor') financed its inventory of Hesston farm equipment through HCC Credit Corporation ('HCC').
- Under a security agreement, HCC held a perfected security interest in the equipment and all proceeds from its sale, and Lindsey Tractor was required to remit proceeds to HCC immediately upon sale.
- In early 1991, Lindsey Tractor sold 14 Hesston tractors to the State of Indiana for $199,122.00.
- On August 15, 1991, Lindsey Tractor received the payment from the state and deposited the funds into its general business checking account at Springs Valley Bank & Trust Co. ('SVB & T'), commingling them with other funds.
- On August 16, 1991, John P. Lindsey, the principal of Lindsey Tractor, wrote a check from this account for $212,104.75 payable to SVB & T to pay off four outstanding loans, some of which were not yet mature.
- Lindsey Tractor did not inform SVB & T that the payment included proceeds from the sale of HCC-financed equipment.
- SVB & T did not demand the early payment or have any discussion with Lindsey Tractor about the source of the funds before receiving them.
- Shortly thereafter, Lindsey Tractor filed for Chapter 7 bankruptcy and dissolved.
Procedural Posture:
- HCC Credit Corporation filed a complaint in a state trial court against Springs Valley Bank & Trust Co. to recover the proceeds.
- Both parties filed cross-motions for summary judgment, agreeing that there were no genuine issues of material fact.
- The trial court denied HCC's motion for summary judgment.
- Subsequently, the trial court granted summary judgment in favor of SVB & T.
- HCC, as appellant, appealed the trial court's grant of summary judgment to the Indiana Court of Appeals, with SVB & T as appellee.
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Issue:
Does a creditor, who receives a payment from a debtor's commingled bank account to satisfy an antecedent debt, take those funds free of a third party's perfected security interest in the proceeds when the creditor did not have actual knowledge that the payment violated the security interest?
Opinions:
Majority - Chezem, Judge
Yes. A creditor takes funds from a debtor's commingled account free of a third party's security interest unless it knew or was reckless in not knowing that the payment violated that interest. The general rule that a security interest continues in identifiable proceeds is subject to an exception outlined in Comment 2(c) to U.C.C. § 9-306, which protects recipients of funds paid out from a debtor's checking account in the ordinary course of business. Adopting the reasoning of the Seventh Circuit in a similar case, the court holds that a payment is 'in the ordinary course' if it was made in the debtor's business operations and the payee did not know, and was not reckless about whether, the payment violated a third party's security interest. The critical factor is not knowledge of the security interest itself, but knowledge that the payment violates it. Here, the undisputed facts show SVB & T had no actual knowledge; Lindsey paid off the notes voluntarily without telling the bank the source of the funds. The court rejected the argument that the large size of the payment was sufficient to create an inference of recklessness.
Dissenting - Kirsch, Judge
No. Summary judgment was improper because genuine issues of material fact exist regarding the creditor's recklessness. While agreeing with the majority's statement of the law, the dissent argues that its application to the facts is incorrect. SVB & T admitted it knew HCC was financing Lindsey Tractor's inventory. This knowledge, combined with the fact that the payment was for a sum 'greatly in excess of any other' made by the debtor, creates a material question of fact as to whether SVB & T was reckless in accepting the payment without further inquiry. Therefore, the issue should be decided by a trier of fact at trial rather than by summary judgment.
Analysis:
This decision clarifies the 'ordinary course' exception under U.C.C. § 9-306, making it more difficult for secured parties to recover proceeds from third-party transferees. By setting a standard that requires actual knowledge or recklessness regarding the violation of the security interest—not just knowledge of its existence—the court prioritizes the finality of commercial transactions. This ruling places a greater burden on secured creditors to police their debtors' handling of proceeds, for example, by requiring the use of segregated accounts. The decision effectively shifts the risk of a debtor's misconduct from a good-faith transferee to the secured party who was in the best position to control the debtor's actions.
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