- Bank of the West v. Damon Pursell Construction Company (In re Damon Pursell Construction Co.), Case No. 13-6015
- The BAP affirmed the decision of the bankruptcy court granting summary judgment in favor of Bank of the West ("BOW") and rejecting National Bank of Kansas City's ("NBKC") request for equitable relief, and ruling that BOW had a first priority lien on a piece of hte debtor's equipment and was entitled to proceeds from the sale of that equipment.
- Procedural context:
- The appeal arose from a dispute regarding the existence, validity, and priority of liens of three lenders on a piece of equipment that was owned by the debtor, and the proceeds from the sale of that equipment. The bankruptcy court granted summary judgment to BOW, determining, as a matter of law, that NBKC was not entitled to relief on its equitable claims for imposition of an equitable lien and reformation based on mutual mistake.
- In 2005, the debtor granted BOW a security interest in the debtor's personal property. BOW properly perfected its security interest. In 2007, when the debtor purchased two 2006 Road Mobile Trommels (referred to as "Trommel 1007" and "Trommel 1008" based on their serial numbers), BOW's blanket security interest attached to both pieces of equipment. In 2007, the debtor executed a promissory note and security agreement in favor of NBKC, granting NBKC a security interest in the Trommel 1008. NBKC properly perfected that security interest. The bankruptcy court assumed that NBKC held a purchase money security interest, senior to BOW's blanket security interest, in the Trommel 1008. In March 2007, the debtor executed a promissory note and security agreement in favor of Kraus-Anderson, granting Kraus-Anderson a security interest in the Trommel 1007. Kraus-Anderson properly perfected its security interest in the Trommel 1007, thereby giving it a purchase money security interest senior to BOW's blanket interest in the Trommel 1007. Subsequently, and before filing its bankruptcy petition, the debtor sold the Trommel 1008 and, in error, paid the proceeds from the sale to Kraus-Anderson, rather than to NBKC. Consequently, the loan from Kraus-Anderson was paid off. In the bankruptcy, the bankruptcy court granted the debtor's motion to sell the Trommel 1007. The sale proceeds were greater than the amount the debtor owed to NBKC, but less than the amount the debtor owed to BOW. The sale order allowed the debtor to pay the sales commission and partially satisfy BOW's lien. The order further stated that the balance of the proceeds were to be held in the debtor's DIP account pending a resolution of the dispute over who holds the first priority lien and to pay the balance owed to BOW on its second priority lien. The BAP agreed with the bankruptcy court that upon the erroneous use of the sale proceeds from the sale of the Trommel 1008 to pay off the loan from Kraus-Anderson, BOW, who held a second priority security interest in the Trommel 1007, moved into the senior secured position. Kraus-Anderson's security interest had been extinguished when the corresponding loan was paid off. The BAP further agreed that, as a matter of law, NBKC did not have a claim against the Trommel 1007. As to NBKC's equitable claims for relief for imposition of an equitable lien and reformation based upon mistake, the BAP agreed with the bankruptcy court's determination that such claims must fail because NBKC had an adequate remedy at law. Specifically, the bankruptcy court had pointed to the provision of Missouri's Uniform Commercial Code which provides that a security interest continues in collateral after its sale to a third party. The court had also cited the provision in the Missouri Uniform Commercial Code which states that a security interest attaches to identifiable proceeds of the collateral. Finally, the court noted that NBKC could file an unsecured proof of claim in the debtor's case, a case in which the confirmed plan proposed 100% payment to unsecured creditors. Thus, the BAP concurred with the bankruptcy court's conclusion that, based upon the record, NBKC had adequate remedies at law. In addition, with respect to the merits of NBKC's request for an equitable lien, the bankruptcy court concluded from the record that "there was no factual basis to impose an equitable lien on the Trommel 1007 in NBKC's favor." Quoting from a cite provided by NBKC, the court noted the definition of an equitable lien: "An equitable lien is merely an encumbrance on property that is construed based upon the express agreement between the parties or with reference to the situation of the parties at the time of the contract and by the attendant circumstances." Broken down into its elements, en equitable lien requires the showing that (1) a duty or oblligation owing by one person to another; (2) a res to which that obligation fastens, which can be identified or described with reasonable certainty; and (3) an intent, expressed or implied, that the property serve as security for the payment of the debt or obligation. The BAP agreed with the bankruptcy court that the parties never agreed that NBKC's loan for the purchase of the Trommel 1008 would be secured by a totally separate piece of equipment, the Trommel 1007. Further, there was no reason on the record that BOW should be barred from enforcing its second position where the debtor mistakenly paid Kraus-Anderson from the proceeds of the Trommel 1008, rather than paying NBKC. Likewise, the BAP found the grant of summary judgmentn to BOW on NBKC's cause of action for reformation of the agreement for mutual mistake was proper. To reform a contract based upon mutual mistake, there must be clear, cogent, and convincing evidence of (1) a preexisting agreement between the parties; (2) a scrivener's mistake in drafting the agreement; and (3) that the mistake was mutual as between the parties. Agreeing with the bankruptcy court, the BAP found no basis for reforming NBKC's security agreement with the debtor to grant NBKC a first priority lien on the Trommel 1007. NBKC's loss of its interest arose from nothing other than the debtor's unilateral mistake when applying the proceeds from NBKC's collateral, the Trommel 1008.
- Kressel, Schermer, and Nail
Thelma McCoy v. USA
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