Law School Case Brief
HCC Credit Corp. v. Springs Valley Bank & Tr. - 712 N.E.2d 952 (Ind. 1999)
U.C.C. § 9-306 cmt. 2(c) is the law of Indiana: a recipient of a payment made in the ordinary course by a debtor takes that payment free and clear of any claim that a secured party may have in the payment as proceeds. Whether a transfer of proceeds is in the ordinary course requires an assessment of both (1) the extent to which the payment was made in the routine operation of the debtor's business and (2) the extent to which the recipient was aware that it was acting to the prejudice of the secured party.
Lindsey Tractor Sales, Inc. purchased wholesale farm equipment from Hesston Corporation for resale in Lindsey's French Lick farm machinery sales and service business. The purchases were financed by secured creditor HCC Credit Corporation. Written contracts governed the relationship between Hesston and HCC and Lindsey, including a security agreement. In the security agreement, Lindsey granted HCC a security interest in all the equipment it purchased from Hesston and in the proceeds from the sale of the equipment. Lindsey also agreed to pay HCC immediately for equipment sold from the proceeds of the sale. However, at no time did Hesston or HCC require Lindsey to deposit or segregate proceeds from the sale of Hesston products in a separate account. In 1991, the Indiana State Department of Transportation agreed to purchase from Lindsey 14 Hesston tractors. Lindsey acquired the tractors from Hesston on credit provided by, and subject to the security agreement in favor of, HCC. Lindsey received payment from the State on August 15, 1991, and deposited the proceeds of $ 199,122 in the company's checking account at Springs Valley Bank & Trust. At the time of the deposit, Lindsey had $ 22,870 in other monies on deposit in the account. On the next day, August 16, 1991, Lindsey wrote a check on this account payable to the bank for $ 212,104. Lindsey's payment to the bank of the proceeds from the sale of the tractors was applied to pay debts owed by Lindsey to the bank. These debts were evidenced by four promissory notes dated January 23, 1987, November 19, 1990, February 7, 1991, and February 13, 1991. All four represented previously refinanced debts and three of them were not yet due when they were paid on August 16. The bank and Lindsey did not discuss paying off the four notes with Lindsey prior to their payment, nor did the bank seize the account to pay the notes. More specifically, Lindsey did not tell anyone associated with the bank that $ 199,122 of the $ 212,104 used to pay off the notes was from the sale of Hesston products. After the notes were paid with the proceeds from the sale of the tractors, Lindsey owed the bank between $ 2,000 and $ 15,000. Lindsey filed a bankruptcy liquidation proceeding in December of 1991 and dissolved shortly thereafter. In the trial court, HCC sought to recover the $ 199,122 in proceeds from the sale of Hesston tractors that the bank received from Lindsey. Each party moved for summary judgment, agreeing that there were no genuine issues of material fact. The trial court granted summary judgment in favor of the bank. On appeal, the Court of Appeals affirmed.
In this case involving a security interest, identifiable proceeds of collateral, and payments that were not made in the ordinary course of business, did the lower court err in its decision to grant summary judgment in favor of Springs Valley Bank & Trust?
The Supreme Court of Indiana reversed the trial court's grant of summary judgment in favor of Springs Valley Bank. The Court found that HCC had a binding and enforceable security agreement against Lindsey. The Court held that Lindsey understood the purpose and effect of the security agreement, and HCC’s security interest was valid and perfected as to equipment and proceeds from the sale of that equipment. The Court also concluded that summary judgment could not be granted to defendant bank because it did not receive proceeds from the sale of secured equipment in debtor Lindsey’s ordinary course of business where the payment amount was extraordinary, and three of the notes paid were not yet due. Because the payment to the bank was not in the ordinary course of the operation of Lindsey's business, HCC is entitled to recover the $ 199,122. The payment to the bank constituted the proceeds of collateral in which HCC had a valid and perfected security interest. The exception to the Indiana U.C.C.'s priority rules provided by Comment 2(c) did not apply. For the bank to prevail would result in a windfall.
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