Jerke Construction, Inc. v. Home Federal Savings Bank
693 N.W.2d 59, 56 U.C.C. Rep. Serv. 2d (West) 125, 2005 SD 19 (2005)
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Rule of Law:
A debtor possessing property without a bill of sale, contractual right, or other indicia of ownership has only 'naked possession,' which is insufficient to create 'rights in the collateral' necessary for a creditor's security interest to attach. The true owner is not estopped from asserting their ownership if the creditor failed to make reasonable inquiries to ascertain true ownership beyond the debtor's mere possession.
Facts:
- Justin Peck entered into a written agreement with Sweetman Corporation to purchase a D-9 bulldozer.
- Jerke Construction Corporation subsequently paid Sweetman the full purchase price for the bulldozer, plus additional repair costs.
- Upon final payment, Sweetman Corporation issued the bill of sale for the bulldozer directly to Jerke.
- The bulldozer was delivered to Peck and remained in his physical possession for approximately three years.
- During this period, Peck used the bulldozer to perform some work for Jerke as a form of repayment, but the value of the work did not cover the full cost paid by Jerke.
- Peck never received a bill of sale from Jerke, did not claim tax depreciation for the bulldozer, and was aware that Jerke was claiming it as its asset for tax purposes.
- Peck listed the bulldozer as a personal asset to secure a $400,000 loan from Home Federal Savings Bank.
- Before issuing the loan, Bank only observed the bulldozer on Peck's property once and conducted a UCC search, but did not request a bill of sale or other proof of Peck's ownership.
Procedural Posture:
- Jerke Construction Corporation initiated a declaratory judgment action against Home Federal Savings Bank in a state trial court to establish ownership of a bulldozer.
- After a trial, the court found that Justin Peck had only 'naked possession' of the bulldozer and thus lacked sufficient rights for Bank's security interest to attach.
- The trial court entered an order in favor of Jerke, declaring it the owner entitled to possession.
- Home Federal Savings Bank (appellant) appealed the trial court's order to the Supreme Court of South Dakota.
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Issue:
Does a debtor have sufficient 'rights in the collateral' for a security interest to attach when the debtor has only physical possession of the property, while another party paid for the property, holds the bill of sale, and claims it for tax purposes?
Opinions:
Majority - Tice, Circuit Judge
No, a debtor does not have sufficient 'rights in the collateral' under these circumstances. To attach, a security interest requires that the debtor has rights in the collateral, which must be more than mere 'naked possession.' Peck’s conduct, such as not obtaining a bill of sale and not claiming depreciation, indicated he had no ownership interest. Jerke established a prima facie case of ownership with the bill of sale and proof of payment, shifting the burden to Bank, which it failed to meet. Furthermore, Jerke is not estopped from claiming ownership because estoppel does not apply when the creditor fails to make reasonable efforts to ascertain the true owner. Bank’s investigation was inadequate as it relied only on Peck's word and physical possession without requesting a bill of sale, tax records, or other proof of title, which would have revealed Jerke's interest.
Concurring - Zinter, Justice
No. The record reflects hopelessly conflicting testimony and evidence regarding the bulldozer's purchase and ownership, with Peck holding the purchase agreement and Jerke holding the bill of sale. The outcome of this case rested entirely on the trial court's determination of witness credibility. Because the case is so fact-specific and dependent on credibility findings, it provides little meaningful precedent for future cases.
Analysis:
This decision reinforces the UCC's 'rights in the collateral' requirement, clarifying that lenders cannot rely on a debtor's physical possession of an asset alone. It establishes that a creditor has a duty of reasonable inquiry to verify a debtor's ownership claims, especially for high-value, non-titled property. By refusing to apply estoppel due to the lender's inadequate investigation, the court protects true owners who lend property from losing it to the borrower's creditors. The case signals to secured lenders that their due diligence must extend beyond a UCC search to include requests for bills of sale, purchase agreements, or tax records.
