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Actual notice denies bona fide purchaser defense

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The Indiana Court of Appeals today reversed an interlocutory order and remanded for the trial court to grant prejudgment possession of farm equipment to a company that had security interest in it even though it had been traded to another company.

In Deere & Co. v. Travis Hostetler and New Holland Rochester, No. 25A05-1006-CC-367, the appellate court was asked to determine whether the trial court properly interpreted and applied Indiana Code section 32-35-2-14 that determines essentially which party is entitled to prejudgment possession.

In 2008, Travis Hostetler entered into two contracts with Deere & Co. to buy farm equipment, with the terms granting Deere purchase money security interest in the equipment. A few months later, Hostetler sought to purchase more farm equipment from New Holland and traded two pieces of equipment on which Deere had priority perfected liens. New Holland asked Hostetler about the liens, and Hostetler said they’d been satisfied. New Holland also contacted Farmers State Bank, which said the debt to Deere had been satisfied.

However, the liens had not been satisfied and Hostetler had defaulted on his payments under the contracts with Deere. Because of that, Deere accelerated the payment obligation; Hostetler owed $268,584.04 on the first contract and $20,166.03 on the second.

Deere filed a complaint against Hostetler and New Holland for replevin, although the court noted it is actually an action to foreclose a security interest.

The trial court denied Deere’s request for prejudgment possession of the equipment in question and authorized New Holland to sell the equipment. It also required Deere to release its liens, which led to this appeal.

For a plaintiff to recover in an action for replevin, he must prove that he has title or right to possession, that the property is unlawfully detained, and that the defendant wrongfully holds possession.

“It is black letter law that, upon default, a secured creditor has the right to take possession of the collateral securing its claim and the rights set forth in the agreement with the defaulting party. I.C. §§ 26-1-9.1-601(a), -609(a)(1). Furthermore, a security agreement is effective against purchasers of the collateral. I.C. § 26-1-9.1-201(a),” wrote Chief Judge John Baker.

New Holland argued it was a bona fide purchaser because it believed the liens had been satisfied because of statements to that effect by Hostetler and Farmers State Bank.

The court noted that to be a bona fide purchaser, a party must establish it obtained property without actual or constructive notice of any adverse claims to the property. However, New Holland had actual notice of Deere’s perfected security interest, the court noted.

“As a general rule, we find that it is unreasonable to rely on the statements of third parties – or the debtor –about the current status of security interests. Specifically, Hostetler had every reason to be untruthful – and, indeed, New Holland acknowledges that it is aware that customers often misrepresent the status of liens on equipment offered in trade. Tr. p. 26-27. Although it was, perhaps, more reasonable to rely on statements made by bank employees, there is simply no excuse for New Holland’s failure to contact Deere directly. Its decision to rely on statements made by a third party removes any defense it may have had as a bona fide purchaser,” the judge wrote.

As an aside, the appellate court noted that New Holland had filed a third-party complaint against Farmers State Bank.


 

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  1. Hail to our Constitutional Law Expert in the Executive Office! “What you’re not paying attention to is the fact that I just took an action to change the law,” Obama said.

  2. What is this, the Ind Supreme Court thinking that there is a separation of powers and limited enumerated powers as delegated by a dusty old document? Such eighteen century thinking, so rare and unwanted by the elites in this modern age. Dictate to us, dictate over us, the massess are chanting! George Soros agrees. Time to change with times Ind Supreme Court, says all President Snows. Rule by executive decree is the new black.

  3. I made the same argument before a commission of the Indiana Supreme Court and then to the fedeal district and federal appellate courts. Fell flat. So very glad to read that some judges still beleive that evidentiary foundations matter.

  4. KUDOS to the Indiana Supreme Court for realizing that some bureacracies need to go to the stake. Recall what RWR said: "No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!" NOW ... what next to this rare and inspiring chopping block? Well, the Commission on Gender and Race (but not religion!?!) is way overdue. And some other Board's could be cut with a positive for State and the reputation of the Indiana judiciary.

  5. During a visit where an informant with police wears audio and video, does the video necessary have to show hand to hand transaction of money and narcotics?

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