Mattson v. Commercial Credit Business Loans, Inc.
Unknown (1986)
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Rule of Law:
A party that converts property acquires no rights in the collateral and therefore cannot grant a valid security interest in the property or its proceeds to a creditor. The rightful owner may trace and recover the identifiable proceeds of the converted property from a third-party transferee, unless that transferee is a bona fide purchaser for value.
Facts:
- Plaintiffs Mattson and Cascade Logging Corporation had a contract with West Coast Lumber Sales, allowing West Coast to cut and sell logs for orders approved by plaintiffs.
- In May 1980, West Coast removed 285,000 board feet of lumber from plaintiffs' site without their approval or authorization.
- In February 1981, Commercial Credit Business Loans, Inc. (defendant) opened a line of credit for West Coast, secured by West Coast's inventory and accounts receivable.
- At the time the credit line was opened, West Coast's attorney informed Commercial Credit that plaintiffs had a pending lawsuit against West Coast for the conversion of lumber.
- West Coast subsequently sold the converted lumber to third parties and turned over the proceeds from these sales to Commercial Credit as part of their revolving credit arrangement.
Procedural Posture:
- In September 1980, plaintiffs sued West Coast Lumber Sales for money damages for conversion in a state trial court.
- In June 1982, the trial court entered a judgment in favor of plaintiffs and against West Coast for $192,011.17.
- Shortly thereafter, West Coast filed a petition for bankruptcy.
- In March 1983, plaintiffs filed the present action against Commercial Credit Business Loans, Inc. in a state trial court, seeking recovery of the proceeds from the converted lumber.
- The trial court granted Commercial Credit's motion for summary judgment.
- Plaintiffs, as appellants, appealed to the Oregon Court of Appeals.
- The Court of Appeals affirmed the trial court's grant of summary judgment without a written opinion.
- Plaintiffs then petitioned the Supreme Court of Oregon for review.
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Issue:
Does the owner of converted goods have a right to recover the identifiable proceeds from the sale of those goods from a third-party creditor who received the proceeds from the converter, particularly when the creditor had notice of the owner's claim?
Opinions:
Majority - Campbell, J.
Yes, the owner of converted goods can recover identifiable proceeds from a third-party creditor who received them from the converter if the creditor is not a bona fide purchaser. The court's reasoning proceeds in several steps. First, Commercial Credit's security interest never attached to the converted lumber or its proceeds. Under ORS 79.2030(1), a security interest only attaches if the debtor has 'rights in the collateral.' A converter or thief, like West Coast, has no rights—not even voidable title—in the stolen property and therefore cannot grant a valid security interest to a creditor. Second, the court affirmed the common law doctrine of tracing, which allows a property owner to follow the proceeds of converted property into the hands of a third-party transferee. This right to trace is only cut off if the transferee is a bona fide purchaser (BFP). Third, whether Commercial Credit qualifies as a BFP is a genuine issue of material fact that makes summary judgment improper. A BFP is an innocent purchaser with no reasonable grounds to suspect the seller lacked good title. Because Commercial Credit knew about plaintiffs' pending conversion lawsuit against West Coast when it entered the financing agreement, a reasonable fact-finder could conclude it was not acting in good faith and was on notice of plaintiffs' claim, thus precluding BFP status. Finally, claims for unjust enrichment may also apply, creating a factual question as to which party was in the better position to prevent the loss.
Analysis:
This decision reinforces the fundamental property law principle that a thief cannot pass good title and clarifies its application within the Uniform Commercial Code (UCC) framework for secured transactions. The case establishes that a debtor's lack of 'rights in the collateral' is fatal to the attachment of a security interest, preventing a creditor from claiming proceeds of stolen goods. It serves as a significant warning to commercial lenders, highlighting that knowledge of a pending lawsuit against a debtor concerning ownership of potential collateral can defeat a lender's bona fide purchaser defense. The ruling places a greater burden on lenders to conduct due diligence when on notice of adverse claims, rather than relying solely on the debtor's representations or a narrow interpretation of their security agreement.
