Secured Creditor May Recover Funds Paid to Unsecured Creditor
Description District court upheld the bankruptcy court determination that funds paid to a supplier of raw materials were received in bad faith, not in the ordinary course, thus enabling a secured creditor to recover the funds from the supplier due to priority of its liens.
Topic Negotiable Instruments/Commercial Paper
Key Words Priority; Bad Faith; Ordinary Course
C A S E   S U M M A R Y
Facts Win-Vent made aluminum windows. Tifton was its primary aluminum supplier. Win-Vent was obligated to Commerce Bank under secured and perfected promissory notes for a total of $1.4 million. The security included virtually all of Win-Vent's assets and accounts receivable. In violation of the notes, Win-Vent paid Tifton out of its accounts receivable. After Win-Vent defaulted on the notes, Commerce took possession of Win-Vent, which filed bankruptcy. Commerce sued Tifton for conversion to recover the value of the accounts receivable funds Win-Vent had passed to Tifton prior to bankruptcy. Tifton countered that it was unjust enrichment for Commerce to receive funds that were for the aluminum it supplied to Win-Vent. The bankruptcy court held for Commerce, ordering Tifton to pay $813,000 for the conversion. Tifton appealed.
Decision Affirmed. An unsecured creditor cannot circumvent Article 9 provisions with action in unjust enrichment against secured creditors, absent a showing that the secured creditor engaged in fraud. Tifton knew that the bank had a security interest in the proceeds, so the payments were not received "in the ordinary course" as defined by Article 9-306. Tifton converted funds that were due to Commerce.
Citation Commerce Bank, N.A. v. Tifton Aluminum Co., Inc., 217 B.R. 798 (W.D. Missouri, 1997)

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