Summary of a Recent
Judicial Development in
Secured Transactions

Creditor is Only Entitled to One Satisfaction of Its Debt

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Five Star Bank v. CNH Capital America, LLC, 865 N.Y.S.2d 190 (N.Y. App. Div. 2008), the New York Supreme Court, Appellate Division, held that although a defendant had converted collateral in which the plaintiff had a perfected security interest, the plaintiff was not entitled to relief because it had already released the original owners of the collateral from their obligation and was only entitled to one satisfaction of its debt.

Background

A secured creditor brought this action against a farm supply company for conversion of farm equipment in which it had a perfected security interest. Id. at 192. Plaintiff's debtors had traded in the collateral to purchase new equipment from the farm supply company, and the company had then resold the collateral in the course of its business. Id.

Analysis and Holdings

The court explained that to establish a cause of action in conversion, "the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question . . . to the exclusion of the plaintiff's rights." Id. The court found that the defendant had exercised dominion and control over the secured equipment, but the exercise was not unauthorized, and therefore the conversion did not occur, until the equipment was sold. Id. The court concluded that the plaintiff had failed to establish that it sustained any damages based on the conversion, because it had already reached a settlement with the debtors and released them from their obligation and a creditor is entitled to only one satisfaction of its debt. Id. at 193.

The case was decided on October 3, 2008.