Summary of a Recent
Judicial Development in
Secured Transactions

Junior Creditor's Challenge to Disposition of Collateral

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Border State Bank, N.A. v. AgCountry Farm Credit Services, 535 F.3d 779 (8th Cir. 2008), the Eighth Circuit Court of Appeals held that a junior creditor was not entitled to notice of disposition of collateral where the sale was made by the debtor and not a secured party, and that it was not entitled to an accounting because the proceeds were insufficient to satisfy the debt to the senior creditors.

Background

Border State Bank brought an action against two other lenders, PCA and FLCA, which had a priority security interest in collateral in which the Bank also had a security interest, alleging that they had improperly retained sale proceeds in excess of their secured interests and had failed to provide notice of the sale and an accounting of the proceeds. Id. at 780. The district court granted summary judgment for the defendants, and the Bank appealed. Id.

Arguments

The Bank argued that there was a genuine issue of material fact concerning whether FLCA had a valid security interest in the debtor's assets when the assets were sold, because it never loaned money directly to the debtor. Id. at 782. It also argued that the other creditors were required by statute to provide it with notice of the disposition, and that it was entitled to an accounting of the proceeds. Id. at 784.

FLCA and PCA argued that FLCA had a valid security interest in the assets, that it was not required to provide the Bank notice of the sale, and that the Bank was not entitled to an accounting of the proceeds. Id. at 782-84.

Analysis and Holdings

The court found that FLCA had a security interest in the assets at the time of the sale because when the debtor reorganized, it had purchased the assets subject to FLCA's previously-acquired security interest, and the debt to FLCA had not been satisfied. Id. at 782-83. Minn.Stat. § 336.9-611 provides that a secured party "shall send . . . a reasonable authenticated notification of disposition" to specified persons, including any other secured party with a properly perfected interest. Id. at 784. The court pointed out, however, that the section only addresses a secured party which disposes of collateral, as opposed to a debtor which sells encumbered property, as was the case here. Id. Neither FLCA nor PCA foreclosed on or possessed the collateral prior to the sale, so no notice was required. Id. Lastly, the court concluded that the way that FLCA and PCA applied the proceeds to their debt was immaterial because it was undisputed that the proceeds were insufficient to satisfy the balance owed to them and that the Bank, as a junior creditor, would not receive any of the proceeds. Id. at 784-85.

The case was decided on August 1, 2008.