Blanken v. Kentucky Highlands Investment Corporation et al

Filing 121

MEMORANDUM OPINION & ORDER: Dft's Motion for Summary Judgment (Doc. # 95 ) is granted with respect to Pla's declaratory judgment and conversion claims and denied with respect to Pla's tortious interference claim, because there is a genuine issue of material fact as to whether Dfts' disposition of the roll former was commercially reasonable. IT IS FURTHER ORDERED that Pla's Motion for Summary Judgment (Doc. # 96 ) is denied in full. Signed by Judge David L. Bunning on 01/25/2016.(KJA)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
AT LONDON
CIVIL ACTION NO. 13-47-DLB-HAI
ROGER L. BLANKEN

V.

PLAINTIFF

MEMORANDUM OPINION AND ORDER

KENTUCKY HIGHLANDS
INVESTMENT CORPORATION, et al.
***
I.

DEFENDANTS

***

***

***

INTRODUCTION
This matter is before the Court on Defendants’ and Plaintiff’s cross-motions for

summary judgment. (Docs. # 95, 96, 97, 98, 100, & 101). At its core, this tort action
presents a priority dispute between two secured creditors. Defendant Kentucky Highlands
Investment Corporation, a perfected secured creditor, took possession of and disposed of
the debtor Leading Edge Earth Products, Inc.’s collateral - an industrial roll former - over
the objection of Plaintiff Roger Blanken, an unperfected secured creditor. Defendants
Kentucky Highlands Investment Corporation (“Kentucky Highlands”), Outdoor Venture
Corporation (“OVC”), and Stearns Manufacturing, LLC, (collectively “Defendants”) move
for summary judgment on Plaintiff’s conversion, tortious interference, and declaratory relief
claims, arguing that Plaintiff was not the owner of the collateral and that Defendants had
legal justification for the repossession and disposal of the roll former. Plaintiff also moves
for summary judgment, insisting that he acquired ownership of the roll former under Section

1

9-620 of the Uniform Commercial Code (“UCC”). The Court has jurisdiction over this
matter pursuant to 28 U.S.C. § 1332.
II.

FACTUAL AND PROCEDURAL BACKGROUND
In 1999, Leading Edge Earth Products, Inc., (“LEEP”) purchased an industrial roll

former with financing provided by Wells Fargo. (Doc. # 18-1). Although the Financing
Agreement was structured as a traditional lease, with Wells Fargo owning the roll former
and leasing it to LEEP, the Agreement contained a provision that allowed LEEP to
purchase the roll former at the end of the lease term for only $1. (Doc. # 18-1, 4). As this
Court previously held, this type of “sham lease” transaction is considered a traditional
secured transaction under the UCC. (Doc. # 44, 2). LEEP purchased the roll former, Wells
Fargo financed the purchase, and Wells Fargo promptly filed a financing statement in
Oregon, where LEEP was incorporated, establishing itself as a perfected secured party with
priority. (Doc. # 18-3, at 45). LEEP had possession of the roll former for many years and
used it in the course of business.
On July 29, 2004, LEEP entered into a Financing Agreement with Fortress Credit
Corp. (“Fortress”). (Doc. # 1-7). That Agreement gave Fortress a security interest in
LEEP’s assets, including its equipment. (Doc. # 1-7). Notably, the Agreement excluded
certain property from Fortress’s security interest, including “any contract, lease, license, or
other agreement” that contained provisions restricting further encumbrance. (Doc. # 1-7,
7). This Court held in its prior Memorandum Opinion and Order that the plain meaning of
the exclusionary clause contained in the Financing Agreement did not exclude the roll
former from the collateral pledged to Fortress. (Doc. # 44, 4-13).

2

As early as August 2004, LEEP began to fall behind on its payments to Wells Fargo.
Shortly thereafter, Wells Fargo filed another financing statement in Oregon to maintain its
priority and the effectiveness of the financing statements. (Doc. # 1-8). Some efforts were
made to adjust or delay the lease payments over the next few years, but in April 2008,
Wells Fargo sent a letter notifying LEEP that it had defaulted on its roll former payments.
(Doc. # 18-5, 24). A few weeks later, Wells Fargo sued LEEP in the Middle District of
Pennsylvania for breach of contract. (Doc. # 18-4). On August 8, 2008, Wells Fargo settled
with LEEP on the condition that LEEP pay Wells Fargo $125,000 within ninety (90) days
of settling. The settlement agreement also provided that if LEEP did not pay Wells Fargo
within the agreed upon time frame, the district court would enter a consent judgment
against LEEP. (Doc. # 18-5, 32-35).
On November 6, 2008, ninety (90) days after the parties entered into the settlement
agreement, multiple transactions occurred. According to Plaintiff, these were all part of the
same agreement between him, Wells Fargo, and LEEP. (Doc. # 32, 5). As part of these
transactions (the “November 6th transactions”) Wells Fargo assigned its security interest
to Plaintiff, a LEEP shareholder, for $125,000. (Doc. # 1-9). This extinguished Wells
Fargo’s interests in the roll former. On the same day, Plaintiff and LEEP executed a
Second Amendment to Lease, which amended the assigned “loan documents” to reduce
LEEP’s monthly payments, eliminate LEEP’s purchase rights, and provide under its terms
that Plaintiff was the owner of the roll former. (Doc. # 1-10, 2).
In 2012, Fortress assigned its security interest to Kentucky Highlands and Kentucky
Highlands filed a financing statement shortly thereafter. (Doc. # 95-22, Ex. 21).

In

December 2012, Kentucky Highlands notified LEEP of its default and expressed an intent
3

to take possession of and dispose of LEEP’s assets, including the roll former. Although
Plaintiff sent Kentucky Highlands a letter, in which he claimed ownership and objected to
the sale, Kentucky Highlands repossessed the roll former from LEEP and disposed of it
by private sale. (Doc. # 1-12). Plaintiff immediately filed suit against Defendants.
It seems apparent that Plaintiff and LEEP did not appreciate the legal consequences
of the November 6th transactions. Their transaction was premised on the mistaken belief
that Wells Fargo was the true owner of the roll former, and thus, had transferred ownership
of the roll former to Plaintiff. However, Wells Fargo was simply the possessor of a security
interest in the roll former that LEEP owned. As a consequence of this misunderstanding,
Plaintiff did not file a financing statement to perfect his interest in the roll former. Due to
Plaintiff’s confusion, his arguments do not easily fit within the UCC; however, a party’s
actions are interpreted in accordance with the UCC’s rules, regardless of whether or not
the parties were aware of the rules.1
Defendants previously filed a Motion to Dismiss Plaintiff’s Complaint. (Doc. # 9).
This Court granted Defendants’ Motion in part, finding that the exclusionary clause in the
Fortress Financing Agreement did not preclude Defendants’ security interest from attaching
to the roll former. (Doc. # 44). It also held that the November 6th transactions did not
trigger a strict foreclosure under Section 9-620 of the UCC because LEEP had not
consented to transferring ownership of the roll former to Plaintiff. Id. Therefore, the Court
left only one avenue open for Plaintiff - a disposition of collateral after default under UCC

1

In the Court’s prior Memorandum Opinion and Order, the Court explained that Plaintiff
is “trying to fit a square peg (the language used during the November 6 transaction) into a round
hole (the UCC)”. (Doc. # 44, 4).
4

Section 9-610. Id.
III.

ANALYSIS
A.

Standard of Review

Summary judgment is appropriate when there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(a). If there is a dispute over facts that might affect the outcome of the case under
governing law, then entry of summary judgment is precluded. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). The moving party has the ultimate burden of persuading
the court that there are no disputed material facts and that he is entitled to judgment as a
matter of law. Id. Once a party files a properly supported motion for summary judgment,
by either affirmatively negating an essential element of the non-moving party’s claim or
establishing an affirmative defense, “the adverse party must set forth specific facts showing
that there is a genuine issue for trial.” Id. at 250. “The mere existence of a scintilla of
evidence in support of the [non-moving party’s] position will be insufficient; there must be
evidence on which the jury could reasonably find for the [non-moving party].” Id. at 252.
B.

Choice of Law

Before considering the issues raised in the parties’ cross-motions for summary
judgment, the Court must determine which state’s law governs. The parties pay little
attention to the choice of law issue, claiming they can “easily sidestep” the question, but
this is a short-sighted approach. (Doc. # 95-1, 2, n.1). Although the UCC provisions are
substantially the same in each of the jurisdictions for which a choice of law argument might
be made, this case cannot be disposed of by interpreting UCC provisions. After all,

5

Plaintiff’s conversion and tortious interference claims sound in tort.2 To adequately address
Plaintiff’s conversion and tortious interference claims, the Court must determine which
state’s substantive tort law will apply.3
As a federal court sitting in diversity, this Court must apply “the choice of law rules
of the forum state.” See Miller v. State Farm Mut. Auto. Ins. Co., 87 F.3d 822 (6th Cir.
1996); Klaxon Co. v. Stentor Elec. Mfg., 313 U.S. 487, 496 (1941). Accordingly, Kentucky
choice of law rules apply. Under Kentucky law, the first step in a choice of law analysis is
to identify the substantive area of law from which the instant claim arises. See Petro v.
Jones, 2013 WL 756756, *7 (E.D. Ky. Feb. 27, 2013) citing Miller Truck Lines, LLC v. Cent.
Refrigerated Serv., Inc., 781 F. Supp.2d 488, 491 (W.D. Ky. 2011). If the claim sounds in
tort, the Court should apply the significant contact test. Saleba v. Schrand, 300 S.W.3d
177, 181 (Ky. 2009). The “significant contact test” requires a court to apply Kentucky law
“if there are significant contacts - not necessarily the most significant contacts - with
Kentucky.” Foster v. Leggett, 484 S.W.2d 827, 829 (Ky. 1972). Thus, the significant
contact test is heavily weighted in favor of applying Kentucky law. Paine v. La Quinta Motor
Inns, Inc., 736 S.W.2d 355, 357 (Ky. Ct. App. 1987) (observing that Kentucky courts “are
very egocentric or protective concerning choice of law questions”), overruled on other

2

In the Court’s prior Memorandum Opinion and Order, NY UCC law was cited
throughout. Although NY UCC law governed the interpretation of the Fortress Financing
Agreement (and whether the roll former was excluded property) because of a forum selection
clause contained in the Financing Agreement, New York law does not govern whether Plaintiff
was the owner of the roll former or Plaintiff’s tort claims generally.
3

Based on the significant contacts test, there are two states whose law may govern: (1)
Kentucky and (2) Pennsylvania (where LEEP has operations and where the roll former was
repossessed). Whether Kentucky law or Pennsylvania law governs, the outcome is the same.
See U.S. Claims, Inc. v. Flomenhaft, 519 F.Supp.2d 532 (E.D. Pa. 2007).
6

grounds by Oliver v. Schultz, 885 S.W.2d 699 (Ky. 1994).
In the present case, Plaintiff’s claims for conversion and tortious interference claims
sound in tort. Examining Kentucky’s contacts with the case, the Court considers that
Defendants reside in Kentucky, the debtor (LEEP) has operations in Kentucky, disposition
of the roll former occurred in Kentucky, and the roll former is currently located in Kentucky.
Because these contacts with Kentucky are significant, Kentucky law governs this dispute.4
C.

Nature of the Parties’ Interests

To determine whether summary judgment is appropriate for either party, the Court
must first ascertain whether and to what extent the parties have interests in the roll former.
When parties have competing secured interests in collateral, Article 9 of the UCC
establishes which party’s interest takes “priority.” Ky. Rev. Stat. Ann. §§ 355.9-317-9-339.
Article 9's comprehensive scheme for the regulation of security interests fosters confidence
and predictability in commercial transactions by enabling creditors to rely on the perfection
and priority rules. However, before Article 9's priority rules can be applied, the Court must
determine the nature of the interests held by both Plaintiff and Defendants.
The parties have presented the Court with three versions of this story: (1) what
Plaintiff thought was happening on November 6, 2008; (2) what Plaintiff wishes would have
happened on November 6, 2008; and (3) what actually happened. As the Court explained

4

Kentucky’s UCC also dictates that Kentucky law should govern. See Ky. Rev. Stat.
Ann. § 355.9-301(1) (“Except as otherwise provided in this section, while a debtor is located in a
jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or
nonperfection, and the priority of a security interest in collateral.”) See also Ky. Rev. Stat. Ann. §
355.9-301(2) (“While collateral is located in a jurisdiction, the local law of that jurisdiction
governs perfection, the effect of perfection or nonperfection, and the priority of a possessor
security interest in that collateral.”)
7

in its prior Memorandum Opinion and Order, although LEEP’s Financing Agreement with
Wells Fargo was structured as a traditional lease, the “lease” was simply a disguised
security agreement under the UCC. (Doc. # 44, 2). As a result, Plaintiff misunderstood the
nature of the November 6th transactions at the time they occurred, believing that he
acquired ownership of the roll former from Wells Fargo and leased it to LEEP pursuant to
the Second Amendment to Lease. Accordingly, the Court dismissed the first version of this
story - what Plaintiff thought was happening on November 6, 2008.
After becoming aware of the UCC’s applicability and requirements, Plaintiff argued
that he and LEEP effected a “strict foreclosure” under Section 9-620, which permits a
secured party to accept collateral in full or partial satisfaction of the debtor’s obligation if the
following three requirements are met: (1) consent of the debtor, (2) the creditor’s
acceptance of the collateral in satisfaction of the debt, and (3) a record authenticated after
default in which the terms are agreed upon. Plaintiff insists that these requirements were
satisfied, making him the owner of the roll former and discharging all other security
interests, including the interest assigned to Kentucky Highlands. The Court rejected this
argument in its prior Memorandum Opinion and Order, finding that neither the Assignment
of Loan Documents nor the Second Amendment to Lease evidenced LEEP’s consent to
Plaintiff’s acceptance of the roll former in satisfaction of its debt. (Doc. # 44).
Despite this finding, Plaintiff continues to claim that the November 6th transactions
constituted a strict foreclosure under Section 9-620 and discharged Kentucky Highlands’s
security interest. In response, Defendants argue that the transactions did not satisfy the
requirements under Section 9-620, and thus, Plaintiff did not acquire ownership of the roll
former and their security interest was not discharged.
8

The Court continues to be

unpersuaded by Plaintiff’s arguments and rejects the second version of this story - what
Plaintiff wishes would have happened on November 6, 2008.
District courts have “authority both under common law and Rule 54(b) to reconsider
interlocutory orders and to reopen any part of a case before entry of final judgment;”
however, they will do so only when there is “(1) an intervening change of controlling law,
(2) new evidence available, or (3) a need to correct a clear error or prevent manifest
injustice.” Rodriguez v. Tenn. Laborers Health & Welfare Fund, 89 Fed. App’x 949, 959 (6th
Cir. 2004) citing Mallory v. Eyrich, 922 F.2d 1273, 1282 (6th Cir. 1991). Plaintiff appears
to rely on the second ground, arguing that his deposition testimony and declaration (Doc.
# 96-4 and 96-9), as well as the deposition testimony of LEEP C.E.O., John Nordstrom
(reproduced below), prove that LEEP consented to Plaintiff acquiring ownership of the roll
former, while LEEP’s debt to its other secured creditor (Kentucky Highlands) was
eliminated under Section 9-620:
Q:

So the exhibits we’ve seen so far show that Wells Fargo assigned the
documents to Roger Blanken on November 6, 2008; Roger Blanken
wired $125,000 to Wells Fargo on November 6, 2008; and you and
Roger Blanken executed the second amendment to the lease that you
understood had as its owner of the roll forming equipment Roger
Blanken, also on November 6, 2008, correct?

A:

Yes.

Q:

I take it, then, that with the settlement agreement between Leep and
Wells Fargo you thought that Wells Fargo owned the roll former,
correct?

A:

Yes.

Q:

And then with the assignment from Wells Fargo to Roger Blanken you
understood that Roger Blanken owned the roll former, correct?

A:

Correct.
9

Q:

And you knew in the summer and fall of 2008 that if Wells Fargo didn’t
get $125,000 it was going to repossess the roll former, correct?

A:

Correct.

Q:

And because Leep couldn’t pay Wells Fargo $125,000, you asked
Roger Blanken if he would pay it and take ownership, correct?

A:

That’s correct.

Q:

Now, when you on behalf of Leep executed the settlement agreement
agreeing to pay the $125,000, Leep was in default on its obligations
to Wells Fargo, correct?

A:

Yes.

Q:

And so you executed that settlement agreement after default, correct?

A:

Yes.

Q:

And when Roger Blanken paid the $125,000 on Leep’s behalf, you
then executed the second amendment to the lease also after the
default to Wells Fargo, correct?

A:

Yes.

Q:

And at that point you understood that the roll former was owned by
Roger Blanken, who was collecting or had a right to collect the lease
payments from Leep, correct?

A:
...

That’s correct.

Q:

Was it your understanding that ownership of the roll former had
passed to Blanken?

A:

Yes, absolutely.

(Doc. # 96-7; Depo. John Nordstrom (Feb. 6, 2015), 94:16 - 97:3.)
Although this testimony establishes that LEEP and Plaintiff both intended for Plaintiff
to be the owner of the roll former, such testimony is insufficient to satisfy the requirements
of Section 9-620. Therefore, Plaintiff has failed to establish new evidence sufficient to
10

persuade this Court to reconsider its prior decision dismissing Plaintiff’s Section 9-620
theory.5
Plaintiff and LEEP intended for Plaintiff to be the owner of the roll former because
they believed that Wells Fargo had transferred title to Plaintiff in the Assignment of Loan
Documents and that LEEP was simply leasing the roll former. In fact, the Second
Amendment to Lease, which Plaintiff now claims is the “record authenticated after default”
required by Section 9-620, explicitly states: “Whereas, Owner obtained from Wells Fargo
Equipment Finance, Inc. (“WFEF”) of Minneapolis, MN an assignment of documents
including title to and a lease of One (1) Bradbury Roll Forming Machine...” (Doc. # 1-10).
Thus, the testimony cited proves only that Plaintiff and LEEP thought Wells Fargo was the
owner of the roll former by virtue of the Assignment of Loan Documents from Wells Fargo
to Plaintiff; not that LEEP agreed to transfer ownership of the roll former to Plaintiff in
satisfaction of the debt via the Second Amendment to Lease.
Moreover, the Second Amendment to Lease does not qualify as a “record
authenticated after default” evidencing LEEP’s consent to transfer the roll former to Plaintiff
in satisfaction of his debt, as required by Section 9-620. LEEP did not contemplate, much
less consent to, a strict foreclosure. Plaintiff fails to realize that the Court must look to the
5

In its prior Memorandum Opinion and Order, this Court held:
”... Plaintiff fails to point to a shred of evidence that LEEP somehow consented to or even
contemplated strict foreclosure. Indeed, as Defendants note, LEEP insisted until recently that
they merely leased - and not owned - the roll former. It is impossible for LEEP to consent to
transferring ownership to someone else when it doesn’t believe it has any ownership in the first
place. (Doc. # 16, 13-14).
The Court is simply unwilling to take the logical leap required by Plaintiff’s arguments on this
issue. Ensuring adherence to rigid formalities is not the purpose of the UCC. But Section 620 is
only triggered when the debtor offers express consent, and the Court could find no evidence of
LEEP’s consent in this case. For this reason, there is little doubt that the Second Amended Lease
did not constitute an acceptance in full satisfaction of the debt under Section 620...” (Doc. # 44, 1415).
11

time of the transaction to determine whether LEEP consented to strict foreclosure. Post
hoc consent is insufficient.
Black’s Law Dictionary defines “consent” as “a voluntary yielding to what another
proposes or desires; agreement, approval, or permission regarding some act or purpose...”
(Black’s Law Dictionary, 10th ed. 2014). With that definition in mind, there is little doubt
that LEEP did not consent to a strict foreclosure by Plaintiff. Instead, LEEP consented to
Wells Fargo transferring title to Plaintiff. Plaintiff cannot recharacterize LEEP’s consent to
what it mistakenly believed was happening, into consent for what Plaintiff wishes would
have happened, now that they are aware of the UCC’s applicability and requirements. In
other words, LEEP’s belief that title of the roll former had transferred to Plaintiff via the
Assignment of Loan Documents cannot be converted into retroactive consent to transfer
title to Plaintiff via the Second Amendment to Lease. As this Court held in its Prior
Memorandum Opinion and Order - “It is impossible for LEEP to consent to transferring
ownership to someone else when it doesn’t believe it has any ownership in the first place.”
(Doc. # 44, 14). Therefore, the Second Amendment to Lease is not a record authenticated
after default evidencing an acceptance in full satisfaction of the debt under Section 9-620,
and accordingly, ownership of the roll former did not transfer to Plaintiff.
In its prior Memorandum Opinion and Order, the Court left open the possibility that
the roll former may have been transferred to Plaintiff pursuant to Section 9-610, which
provides that “after default, a secured party may sell, lease, license or otherwise dispose
of any or all of the collateral.” Ky. Rev. Stat. Ann. § 355.9-610. If the secured party sells
or otherwise disposes of the collateral, good faith purchasers for value take all of the
debtor’s rights in the collateral and take free of the secured party’s security interest and all

12

other subordinate liens and security interests. Ky. Rev. Stat. Ann. § 355.9-617. However,
Plaintiff concedes that the November 6th transactions “did not effect a sale, lease or other
disposition” under Section 9-610. (Doc. # 97, 6).6
The Court having reaffirmed its previous finding that the November 6th transactions
did not constitute a strict foreclosure under Section 9-620, and Plaintiff having conceded
that Section 9-610 is inapplicable, the Court is left with only one acceptable version of this
story - what actually happened. In short, Plaintiff obtained a secured interest in the roll
former, which he failed to perfect. Meanwhile, Fortress had a perfected security interest
in the roll former, which it assigned to Kentucky Highlands. Therefore, this case boils down
to a rather simple dispute between an unperfected secured creditor (Plaintiff) and a
perfected secured creditor (Kentucky Highlands), whose priority is governed by Article 9
of the UCC.
A perfected security interest ... has priority over a conflicting unperfected
security interest...
Ky. Rev. Stat. Ann. § 355.9-322(1)(b).

6

Even if Plaintiff had not conceded his Section 9-610 argument, he would have failed
for two reasons. First, the Assignment of Loan Documents from Wells Fargo to Plaintiff do not
constitute a disposition of collateral that discharges all other secured interests; rather it was
simply an assignment of the secured interest. See Doc. # 1-9, Complaint, Ex. E ; see also Doc.
# 95-2 (Depo. of Douglas Hein). Second, Plaintiff’s 9-610 argument would face a large hurdle in
overcoming Section 9-617's good faith requirement. If a disposition of collateral under 9-610
occurred, Plaintiff would take free and clear of all subordinate interests only if Plaintiff acted in
“good faith.” See Ky. Rev. Stat. Ann. § 355.9-617. Based on the record, the Court believes that
the Plaintiff’s awareness of the existence of the Fortress Financing Agreement, as well as the
fact that Plaintiff is an insider (as a LEEP shareholder), cast doubt on Plaintiff’s status as a
“good faith” transferee under Section 9-617. See Docs. # 95-20 (Ex. 19) and 95-21 (Ex. 20).
Furthermore, there are strong policy considerations that arise under this argument. If
shareholders can discharge their corporation’s subordinate security interests by purchasing the
corporation’s assets (collateral) which secure the debt, and then lease the asset back to the
corporation (as Plaintiff alleged herein), corporations and their shareholders would easily be
able to “pull a fast one” on all of their creditors. Article 9 does not provide an avenue for such
deceptive business tactics.
13

Accordingly, Defendants have a perfected security interest in the roll former and take
priority over Plaintiff, who failed to perfect and has only an unperfected secured interest.
D.

Plaintiff’s Tort Claims

Now that the Court has determined the nature of the parties’ interests in the roll
former, Article 9's priority rules can be applied to resolve the parties’ dispute. Accordingly,
Plaintiff’s tort claims will be analyzed as claims brought by an unperfected secured creditor
against a perfected secured creditor with priority.
Plaintiff seeks damages for conversion and tortious interference, as well as
declaratory relief, against Defendants for actions taken after LEEP’s default: (1) taking
possession of and (2) disposing of the roll former. However, Article 9 authorizes such
action. Specifically, Ky. Rev. Stat. Ann. § 355.9-609(1) permits a secured party to “take
possession of the collateral” after debtor’s default. Further, a secured party may exercise
their rights after default “pursuant to judicial process” or “without judicial process, if it
proceeds without breach of the peace.” Ky. Rev. Stat. Ann. § 355.9-609(2). If the creditor
takes possession of the collateral, he “has two alternatives in dealing with the collateral.
He must either sell the property in a ‘commercially reasonable’ manner with notice provided
to the debtor of the sale, Ky. Rev. Stat. Ann. 355.9-504(1), (2), (3), or he may elect to retain
the collateral in satisfaction of the debt.” Herring Min. Co. v. Roberts Bros. Coal Co., Inc.,
747 S.W.2d 616, 619 (Ky. Ct. App. 1988); See also Ky. Rev. Stat. Ann. § 355.9-610(1) (“A
secured party may sell, lease, license or otherwise dispose of any or all of the collateral in
its present condition or following any commercially reasonable preparation or processing.”).
If commercially reasonable, “a secured party may dispose of collateral by public or private
proceedings, by one (1) or more contracts, as a unit or in parcels, and at any time and

14

place and on any terms.” Ky. Rev. Stat. Ann. § 355.9-610(2).
Plaintiff claims that Defendants’ actions in taking possession, and disposing of, the
collateral are tortious, despite Article 9's provisions, which authorize those very actions.
The Court refuses to impose tort liability when a party acts in accordance with Article 9.
To do so would allow a creditor with a subordinate interest to circumvent the UCC's clear
rules regarding perfection, priority, default, and enforcement, and more importantly, render
Article 9 meaningless. Therefore, to the extent that Article 9 permits Defendants’ conduct,
Defendants are immune from tort liability for exercising the right to repossess and dispose
of collateral as a perfected secured creditor with priority. Accordingly, the Court’s inquiry
will be limited to whether Defendants acted in accordance with Article 9.
1.

Conversion

Conversion is the “wrongful exercise of dominion and control over property of
another.” State Auto. Mut. Ins. Co. v. Chrysler Creditor Corp., 792 S.W.2d 626, 627 (Ky.
Ct. App. 1990). More specifically, the Kentucky Supreme Court has held that a plaintiff
must prove the following seven elements to establish a claim for conversion under
Kentucky law:
(1) the plaintiff had legal title to the converted property; (2) the plaintiff had
possession of the property or the right to possess it at the time of the
conversion; (3) the defendant exercised dominion over the property in a
manner which denied the plaintiff's rights to use and enjoy the property and
which was to the defendant's own use and beneficial enjoyment; (4) the
defendant intended to interfere with the plaintiff's possession; (5) the plaintiff
made some demand for the property's return which the defendant refused;
(6) the defendant's act was the legal cause of the plaintiff's loss of the
property; and (7) the plaintiff suffered damage by the loss of the property.
Ky. Ass’n of Counties All Lines Fund Trust v. McClendon, 157 S.W.3d 626, 632 n.12 (Ky.
2005); see also Meade v. Richardson Fuel, Inc., 166 S.W.3d 55, 58 (Ky. Ct. App. 2005).

15

As an unperfected secured party with a subordinate interest in the roll former,
Plaintiff cannot satisfy the second element, and thus his conversion claim cannot survive.
In order to state a claim for conversion, Plaintiff must be able to prove that he had
“possession of the property or the right to possess it at the time of the conversion.”
McClendon, 157 S.W.3d 626, 632 n.12 (Ky. 2005). Although a secured party’s interest is
sufficient under Kentucky law to bring a conversion claim, Article 9's priority rules come into
play in determining whether the plaintiff has the right to possess the property at the time
of the conversion. See e.g. Ranier v. Gilford, 688 S.W.2d 753 (Ky. Ct. App. 1985) (holding
that the UCC recognizes a secured creditor’s right of action for wrongful conversion of
collateral against transferee of original debtor); Gen. Motors Acceptance Corp. v. Lincoln
Nat’l Bank., 18 S.W.3d 337 (Ky. 2000) (holding that creditor’s security interest in proceeds
of its collateral took priority over bank’s right to apply proceeds as setoff under Kentucky’s
UCC, and thus bank was liable to creditor for conversion); Meade v. Richardson Fuel, Inc.,
166 S.W.3d 55 (Ky. Ct. App. 2005) (holding that plaintiff’s failure to comply with the
requirements of Article 9 in protecting her interest, precluded plaintiff from prevailing on
conversion claim).
The Western District of Kentucky recently considered the interplay between
conversion claims and Article 9 priority rules in CNH Capital Am., LLC v. Hunt Tractor, Inc.,
3:10-CV-00350, 2015 WL 5554020 (W.D. Ky. Sep. 21, 2015). In CNH Capital, there were
several competing interests at stake - Commonwealth Bank, with a security interest in the
funds deposited in a checking account, and CNH Capital America, LLC, with a purchasemoney security interest in the collateral and the proceeds. Pursuant to Kentucky’s UCC,
a bank has “superior-priority” in the rights of a deposit account. See Ky. Rev. Stat. Ann. §

16

355.9-327. Examining the competing interests, the Court found that the success of
plaintiff’s conversion claim was dependent upon Article 9's priority rules, but determined
that Commonwealth Bank’s “super-priority” did not prevent CNH from bringing a conversion
claim because “priority disputes only arise upon default.” CNH Capital, 2015 WL 5554020,
at *4. Although Commonwealth Bank would have “prevailed over CNH in a priority dispute
over the funds,” the debtor had not defaulted on his obligations to Commonwealth Bank,
and thus, CNH, a creditor with a subordinate interest, was permitted to bring a conversion
claim. Id.
In the present case, Plaintiff, an unperfected secured creditor with a subordinate
interest, did not have the right to possess the roll former at the time of the conversion.
Instead, because of LEEP’s default and Defendants’ superior interest, Defendants had the
right to possess the roll former. Unlike CNH Capital, LEEP defaulted on its obligation to
Kentucky Highlands. Thus, Article 9's priority rules determine which party has “the right to
possess” the collateral, and which party has the requisite interest to bring a conversion
claim. Because Defendants’ superior interest prevails over Plaintiff’s subordinate interest
in the roll former, Plaintiff did not have “the right to possess” the roll former and his showing
on this necessary element is precluded by Article 9's priority rules.
Defendants complied with the UCC, perfected its security interest, and obtained
priority; therefore, its interests are superior to Plaintiff’s interest. Allowing Plaintiff, the
holder of a subordinate interest, to bring a conversion claim against Defendants, a
perfected secured creditor with a superior interest, would allow Plaintiff to proceed in tort
in direct contradiction with Article 9's comprehensive statutory scheme - a result this Court
will not permit. Therefore, there is no genuine dispute of material fact as to whether a

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conversion occurred and Defendants are entitled to summary judgment.7
2.

Tortious Interference

Under Kentucky law, “tort liability exists for the interference with a known contractual
relationship, if interference is malicious or without justification, or is accomplished by some
unlawful means such as fraud, deceit, or coercion.” Steelvest, Inc. v. Scansteel Serv. Ctr.,
Inc., 807 S.W.2d 476, 487 (Ky. 1991); see also Brett v. Media Gen. Operations, Inc., 326
S.W.3d 452 (Ky. Ct. App, 2010). Plaintiff bears the burden of establishing that Defendants
acted without justification. See Bourbon Cnty. Joint Planning Comm’n v. Simpson, 799
S.W.2d 42 (Ky. Ct. App. 1990). Thus, “a party may not recover ... in the absence of proof
that the opposing party ‘improperly’ interfered with his prospective contractual relation.”
Nat’l Collegiate Athletic Ass’n v. Hornung, 754 S.W.2d 855, 858 (Ky. 1988). It is not
improper interference if the “alleged interferer has acted in good faith to protect a legitimate
interest of his own.” Simpson, 799 S.W.2d at 45 citing Hornung, 754 S.W.2d at 858. Article
9 authorizes a secured party to take possession of and dispose of collateral to protect its
secured interest. See Ky. Rev. Stat. Ann. §§ 355.9-609 & 9-610.
Defendants argue that Plaintiff cannot prevail on his tortious interference claim
because Defendants acted with justification, provided by Article 9, in taking possession of
and disposing of the roll former. (Doc. # 98, 21-22). On the other hand, Plaintiff asserts
that there is no genuine dispute as to the justification element, because “the defendants’
actions were neither privileged nor justified.” (Doc. # 96-1, 23).

7

Plaintiff explains:

To the extent Plaintiff claims Defendant is liable in tort for their non-compliance
with the UCC’s notice requirements, the Court finds the Plaintiff’s argument is without merit.
First, Ky. Rev. Stat. Ann. § 355.9-611 does not require an unperfected secured creditor to be
notified before disposition of collateral. Moreover, Plaintiff became aware of Defendant’s
intention to repossess and dispose of the collateral before the private sale, as evidence by
Plaintiff’s Exhibit G, attached to the Complaint. (Doc. #1-12).
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“[b]ecause Blanken’s strict foreclosure of the roll former terminated Fortress’s security
interest, the defendants had no justification to repossess the roll former from LEEP.” Id.
Defendant further claims that Defendants were not justified because they “acted in bad
faith” by going “behind LEEP’s back to buy up its debt in a scheme to obtain its assets” and
then disposing of the roll former by private sale to OVC, “an arrangement commercially
unreasonable at best, and underhanded at worst.” Id. at 23-24. In support of this assertion,
Plaintiff directs the Court’s attention to deposition testimony and notes of Thomas Atkins,
the attorney who represented LEEP in joint venture negotiations with OVC, prior to
Kentucky Highlands obtaining Fortress’s secured interest. (Doc. # 96-1, 23; Doc. # 96-17).
The Court is unpersuaded by Plaintiff’s first argument - that Defendants took
possession of the roll former without legal justification. To the extent Plaintiff relies on his
claim to ownership of the roll former under Section 9-620, the Court has repeatedly rejected
that argument. Plaintiff’s bad faith argument is equally unavailing because the evidence
Plaintiff has presented fails to produce a genuine issue of material fact. At most, Mr.
Atkins’s notes and deposition testimony establish that his “mental impression” was that
“OVC had no intention of doing this deal” and “wanted to structure a deal that would force
LEEP to default “ so “they would have control” of LEEP’s equipment. Id.
This evidence is insufficient to create a genuine issue of material fact. Although this
Court has a “duty to view the facts in the light most favorable to the nonmovant,” this Court
is not required or permitted “to accept mere allegations.” Chappel v. City of Cleveland, 585
F.3d 901, 906 (6th Cir. 2009). Because Plaintiff has not presented any specific facts which
would negate Defendants’ justification in repossessing the roll former, Defendants are
entitled to summary judgment on Plaintiff’s claim that Defendant’s repossession of the roll

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former constitutes tortious interference.
Moreover, this result is demanded by Article 9. Section 9-609 clearly grants a
secured party the right to take possession of collateral after a debtor’s default. Allowing
perfected secured creditors with priority to be tortiously liable for acting in accordance with
the UCC would be wholly irrational. Other courts have reached the same conclusion,
including the Eighth Circuit8 and the Federal District Court for the Eastern District of
Pennsylvania.9 In Pennsylvania, coincidentally where Defendants repossessed LEEP’s roll
former, the District Court declared that “Article 9 renders” a secured party with priority
“immune from tortious interference liability absent any allegations of illegality or fraud.” U.S.
Claims. Inc. v. Flomenhaft, 519 F. Supp. 2d 532, 539 (E.D. Pa. 2007). Further discussing
the purpose of Article 9 and its interaction with tort law, the Flomenhaft Court thoughtfully
opined as follows:
Article 9's carefully crafted statutory scheme was intended to institute a
bright-line rule in favor of the most diligent creditor without turning every
priority dispute into a fact intensive case-by case subjective inquiry into what
one creditor may or may not have known about another’s interest. See UCC
§ 9-322, cmt. 3 (“[t]he [priority] rules may be regarded as adaptations of the
idea, deeply rooted at common law, of a race of diligence among creditors”).
The statutes are clear that a creditor’s subjective knowledge is entirely
irrelevant to determining the relative priority of the competing interests. UCC
§ 9-322, cmt. 4, ex. 2. Even if the later creditor makes his advance on the
same collateral with knowledge of another’s prior unperfected competing
interest, he will still be awarded priority under Article 9 so long as he is the
first to perfect. UCC § 9-324, cmt. 4, ex.3. Article 9's drafters explained that
such a rule “is premised on the belief that [the unsecured creditor’s] failure

8

Noble Sys. Corp. v. Alorica Central, LLC, 543 F.3d 978 (8th Cir. 2008) (holding that
senior creditor had no duty to observe and abide by debtor’s contract with junior creditor, and
thus senior creditor did not tortiously interfere with junior creditor’s business relationship with
debtor by foreclosing on its assets and selling them to third party, even if senior creditor knew
that junior creditors would not have their claims satisfied at foreclosure sale, where debtor
derived no benefit from foreclosure).
9

U.S. Claims, Inc. v. Flomenhaft, 519 F. Supp.2d 532 (E.D. Pa. 2007).
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to file could have misled the subsequent creditor. Id. However, the drafters
made clear that whether one was actually misled is immaterial.”
Flomenhaft, 519 F. Supp. 2d at 536-537.
In conclusion, the Flomenhaft court held that under the facts alleged by the junior
creditor, the senior creditor with priority had committed no torts because the senior creditor
“was the more diligent creditor and its interests are superior to those of Plaintiffs.” Id. at
538. Furthermore, “[p]ermitting Plaintiffs, unperfected creditors, to assert” tort claims
against “a perfected creditor with a superior interest, would allow an end run around the
UCC’s clear priority rules; it would give Plaintiffs a remedy in common law based on a claim
for which the UCC statutes have expressly precluded relief,” and therefore, plaintiffs’ claims
failed as a matter of law. Id.10 This Court agrees with the results reached by the Eastern
District of Pennsylvania, as well as the Eighth Circuit. Kentucky Highlands was the “more
diligent creditor” and ensured that its secured interest took priority by perfecting in
accordance with Article 9 - such conduct cannot be characterized as tortious.
However, the Court’s inquiry does not stop there. To avoid tort liability, Kentucky
Highlands must have also disposed of the roll former in accordance with Article 9.
Defendants insist that there was compliance with Section 9-610, which provides: “If
commercially reasonable, a secured party may dispose of collateral by public or private
proceedings, by one or more contracts, as a unit or in parcels, and at any time and place
and on any terms.” Ky. Rev. Stat. Ann. § 355.9-610. But, Defendants overlook a key
requirement of Section 9-610: “if commercially reasonable.” Kentucky’s UCC provides

10

It is worth noting that the Court in Flomenhaft concluded that Article 9 precluded
Plaintiffs, as unperfected secured creditors, from bringing both conversion and tortious
interference claims against, Defendant, a perfected secured creditor with priority - the very
same conclusion this Court reached.
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additional guidance for the determination of whether the secured party’s disposition was
“commercially reasonable.” See Ky. Rev. Stat. Ann. § 355.9-627(2). Specifically, “a
commercially reasonable disposition is one that is made (a) in the usual manner on any
recognized market; (b) at the price current in any recognized market at the time of
disposition; or (c) otherwise in conformity with reasonable commercial practices among
dealers in the type of property which was the subject of the disposition.” Id.
Under Kentucky law, the secured party has the burden to show that it acted with
commercial reasonableness. Owens v. First Commonwealth Bank of Prestonsburg, Ky.,
706 S.W.2d 414 (Ky. Ct. App. 1985). Although the fact that a greater amount could have
been obtained “is not of itself sufficient to establish that the sale was not made in a
commercially reasonable manner,” it is relevant to a determination of commercial
reasonableness. School Supply Co. v. First Nat’l Bank of Louisville, 685 S.W.2d 200, 204
(Ky. Ct. App. 1984), abrogated on other grounds by McCoy v. Am. Fidelity Bank & Trust
Co., 715 S.W.2d 228 (Ky. 1986). But, a “great disproportionate difference between the
value of the property and what was realized by sale” will give rise to a “presumption of
‘commercial unreasonableness,’” which the creditor will have to overcome. Id.
In this case, genuine issues of material fact remain as to Plaintiff’s argument that
Defendants disposed of the roll former without legal justification. While Section 9-610
authorizes a secured party to dispose of the collateral after default, that disposition must
be “commercially reasonable,” and it is far from clear that Defendants’ disposition complied
with this requirement of Article 9. The most the Court can locate in the record regarding
the disposition of the roll former is a letter from Kentucky Highlands to LEEP providing
notice of its intent to repossess and dispose of the roll former; it does not provide any

22

description or further details of the proposed disposition. (Doc. # 1-11). At this juncture, the
Court does not know if the roll former was sold in the usual manner, in a recognized
market, or in conformity with reasonable commercial practices, because the record is
completely devoid of details of the disposition, including the price, timing, and terms of the
disposition.

Therefore, Defendants have failed to meet their burden of proving the

disposition of the roll former was “commercially reasonable” and summary judgment is
inappropriate on this narrow issue.
E.

Request for Declaratory Relief

In his Amended Complaint, Plaintiff seeks a declaration that the Defendants did not
possess any right, claim, or interest in the roll former. Plaintiff’s requested declaration must
be rejected based on this Court’s findings, detailed above, as well as those contained in
its prior Memorandum Opinion and Order. Defendants possessed a superior interest in the
roll former and acquired priority under Article 9. Therefore, Defendants are entitled to
judgment as a matter of law on Plaintiff’s claim for declaratory relief.
IV.

CONCLUSION
Accordingly, for the reasons stated herein,
IT IS ORDERED that Defendant’s Motion for Summary Judgment (Doc. # 95) is

granted with respect to Plaintiff’s declaratory judgment and conversion claims and denied
with respect to Plaintiff’s tortious interference claim, because there is a genuine issue of
material fact as to whether Defendants’ disposition of the roll former was commercially
reasonable.
IT IS FURTHER ORDERED that Plaintiff’s Motion for Summary Judgment (Doc. #
96) is denied in full.

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This 25th day of January, 2016.

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