(Please try to make it to the end. I had to explain the law before I could grind my axe.)
Today we spent about three and half hours in a lecture about secured transactions, probably the most boring and complicated material I have dealt with other the tax law. I took secured transactions this past semester and I guess I didn't learn much. Secured transactions deal with those relationships between debtors and creditors, and also those among various types of creditors.
I want to complain about a situation in which a creditor can collect property from a third-party purchaser who bought security-interest-encumbered property without knowing of the encumbrance, but in order to do so, in case someone who reads this is not currently deep in the law, I guess I should explain something about secured transactions.
"A secured transaction is a transaction intended to create a security interest in personal property or fixtures. it generally involve a sale on credit or a loan in which the seller or the lender obtains a lien on some or all of the debtor's property as security payment," reads the Moll outline from Barbri's Missouri Lecture Handouts.
All "all caps" definitions in this post are also from this lecture handout.
DEBTOR: The person who owes a payment or performance of the obligation secured.
SECURED PARTY: A lender, seller or other person in whose favor there is a security interest.
SECURITY AGREEMENT: the agreement between the debtor and the secured party that creates a security interest.
SECURITY INTEREST: An interest in personal property or fixtures which secures payment or performance of an obligation. It is a contingent property interest in the debtor's collateral that the debt grants to the creditor. When the contingency, which is default, occurs, the property interest springs to life and the creditor has rights in the debtor's collateral.
There are several types of secured creditors who have achieved security through various methods and at various times, but these specifics are not necessary fort the hypothetical from which my complaint stems.
The Bogarts purchased a sailboat with money borrowed from State Bank, which took a security interest in the sailboat and promptly perfected. (My note: Perfection is a system of methods used to protect the secured party against third parties, including purchasers like Nudnik, and other secured creditors.) Three months later, the Bogarts sold the sailboat to Mabel's Marina, which sells new and used boats. A month later, the sailboat was sold to Nudnik. State Bank has tracked down the sailboat, and seeks to enforce its security interest in the sailboat which is in Nudnik's hands. Can it enforce its security interest in the sailboat?
Answer: State Bank can repossess the boat from Nudnik even though he did not owe them a cent and even though did he did not have any knowledge that the boat was encumbered by State Bank's security interest. Nudnik's only recourse is to sue Mabel's Marina for the loss. (Am I the only person who thinks this result is a bit unfair for a good-faith purchaser. Am I the only one who thinks this pushes the scale a little too heavily for the creditor?)
The rationalization comes from a general rule for UNAUTHORIZED SALES as stated in the lecture handout: A buyer in the ordinary course of business (other than a person buying farm products from a person engaged in farming operations) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.
For a third-party purchaser, like Nudnik, to purchase the property unencumbered by the security interest,
BUYER IN THE ORDINARY COURSE: A person who buys goods in good faith, without knowledge that the sale violates the rights of another person (usually a secured party) in the goods, and in the ordinary course from a person in the business of selling goods of that kind.
So, the basic elements for a third-party purchaser to obtain security-interest-encumbered property free of the security interest are: 1. that the property was purchased in the ordinary course of business, 2. in good faith, 3. the security interest was created by the seller.
Here, Mabel's Marina was in the business of selling new and used boats to consumers. Nudnik, a consumer, purchased the sailboat out of Mabel's inventory so the first element is satisfied.
Nudnik did not know anything about the security interest that encumbered the property when he purchased it so the second element is satisfied. (Why would he voluntarily purchase property with another person's security interest attached?)
However, Nudnik fails the test because the security interest was not created by the seller, Mabel's Marina. Here, Nudnik loses his boat, and the money he spent on it, because a party, two degrees away, signed the boat off as collateral. Nudnik, with no opportunity to learn about the security interest, was completely in the dark as to the encumbrance, but still his property is taken away.
Even if he can get the money back from Mabel's, Nudnik has to get an attorney, pay the attorney and possibly deal with a lengthy, expensive and tedious legal process. Besides that, Nudnik misses out on the all the fun he could have had on his boat until he obtains a judgement sufficient to purchase a new one, and we all know, as the Beatles sang in "She's Leaving Home," "Fun is the one thing that money can't buy."
I'm going to go a little further. Let's say Nudnik had asked this girl out, one he's been in love with for years and, having saved up enough money to buy this boat, he finally mustered up the courage to ask her out for a picnic out on the water. Well, now, no boat, no date. She thinks he's a liar and she'll never go out with him again. He's lost a chance at love, and I think everyone knows you cannot sue for actual performance or replevin in such a case.
Yes, I'm adding facts to the equation, but nothing that would effect the legal relevance. The point I'm trying to make is that the law assigns a negative result on someone who could not possibly expect, or know of, the risk he took. Nudnik bought from a boat dealer and, no facts suggest that he should have or could have been aware of State Bank's security interest.
This risk should be on the creditor, who deals in this sort of business and who has a right not to loan to any questionable characters. State Bank had a choice who it dealt with so if it loans to someone like Bogarts who sold the collateral without permission, it should bear the risk, not a party who had never met either the debtor or the creditor.
Also, the creditor, almost as a rule, has deeper pockets than a general consumer. So, not only is the risk put on a party with less knowledge and less experience, but on the party with less ability or stability to shoulder the load.
I'll leave you with a quote from the lecturer this morning, Professor Douglas K. Moll and, assuming you made it this far, I'd like you to ponder it. "Moral implications have nothing to do with the law."
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