rejecting the defendant’s affidavit in support of its motion for summary judgment because “[n]o answer having been filed by the defendant, the allegations of the complaint must be taken as true”
How later courts described this case
- rejecting the defendant’s affidavit in support of its motion for summary judgment because “[n]o answer having been filed by the defendant, the allegations of the complaint must be taken as true”
- “[A] simple phone call would have determined whether the bank had authorized [the] sale”
- holding that reliance on a “mere scintilla of evidence in support of the nonmoving party will not be sufficient”
Written by the judges who cited it.
The opinion
IN THE UNITED STATES BANKRUPTCY COURT FOR THE
EASTERN DISTRICT OF TENNESSEE
In re
Case No. 3:20-bk-31620-SHB
K&L TRAILER LEASING, INC. Chapter 11
Debtor
GREENEVILLE FEDERAL BANK, FSB
Plaintiff
v. Adv. Proc. No. 3:23-ap-03004-SHB
FIRST MIDWEST EQUIPMENT FINANCE CO.
Defendant
MEMORANDUM ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
APPEARANCES: LAUGHLIN, NUNNALLY, HOOD & CRUM, PC
Jerry W. Laughlin, Esq.
100 South Main Street
Greeneville, Tennessee 37743-4922
Attorneys for Plaintiff
FERRARO HANCOCK & ASSOCIATES, PLLC
Victoria A. Ferraro, Esq.
4219 Hillsboro Pike
Suite 302
Nashville, Tennessee 37215
Attorneys for Defendant
SUZANNE H. BAUKNIGHT
UNITED STATES BANKRUPTCY JUDGE
Plaintiff Greeneville Federal Bank, FSB (“GFB”) initiated this adversary proceeding by
the filing of its complaint (as amended) seeking determination by the Court that GFB’s properly
perfected inventory lien relating to K & L Trailer Sales And Leasing, Inc. (“Sales”) gives it
priority over $72,900.00 in proceeds from the sale by the Chapter 11 Trustee of five trailers1 that
Sales transferred to K&L Trailer Leasing, Inc. (“Leasing”) and for which Defendant First
Midwest Equipment Finance Co. (“FMEF”) held properly perfected liens.2 When the Chapter
11 Trustee sold the five trailers, he paid the proceeds to FMEF, and GFB now seeks to recover
those proceeds from FMEF. Pending before the Court and ripe for decision is GFB’s Motion for
Summary Judgment (“Motion”).
This dispute requires the Court to apply Tennessee’s version of Article 9 of the Uniform
Commercial Code (“UCC”). The Court applies the law here exactly as it applied it in
Greeneville Federal Bank, FSB v. Fellhoelter (In re K&L Trailer Leasing, Inc.), 630 B.R. 81
(Bankr. E.D. Tenn. 2021) (hereinafter “GFB I”), and Greeneville Federal Bank, FSB v. First
Farmers and Commercial Bank (In re K&L Trailer Leasing, Inc.), 665 B.R. 364 (Bankr. E.D.
Tenn. Nov. 4, 2024) (hereinafter “GFB II”).
Given the undisputed material facts from GFB’s Amended Complaint, the Court again
concludes that secured transactions principles preserved GFB’s properly perfected inventory lien
when Sales transferred GFB’s collateral to Leasing in transactions that were not in the ordinary
course of business such that GFB’s security interest in the Subject Trailers had priority over
1 The last four numbers of the VINs for the trailers at issue are: (1) 0661, (2) 2650, (3) 2651, (4) 2652, and (5) 6159
(“Subject Trailers”). [Doc. 19 at ¶ 5; Doc. 19-1 at p. 2.]
2 Sales sought bankruptcy protection under Chapter 11 on June 29, 2020, and the Chapter 11 Trustee was appointed
on July 8, 2020. [In re K & L Sales And Leasing, Inc., No. 3:20-bk-31619-SHB, Doc. 55.] Leasing also filed its
Chapter 11 petition on June 29, and the Chapter 11 Trustee was also appointed on July 8, 2020. [In re K&L Leasing,
Inc., No. 3:20-bk-31620-SHB, Doc. 47.]
FMEF’s security interest in the same trailers, and that GFB’s priority continues in the proceeds
from the Chapter 11 Trustee’s sale of the Subject Trailers.
I. PROCEDURAL POSTURE
GFB initiated this proceeding on January 9, 2023. [Doc. 1.] The next day, the summons
was issued by the clerk, and GFB served FMEF on January 19, 2023. [Doc. 5.]3 FMEF timely
filed its initial response to GFB’s Complaint in the form of Defendant’s Motion to Dismiss
Adversary Complaint. [Doc. 9.] Within the twenty-one days permitted by Federal Rule of Civil
Procedure 15(a)(1)(B),4 GFB amended its complaint on March 9, 2023. [Doc. 19.] On March
20, 2023, GFB timely responded on agreed extension to FMEF’s motion to dismiss. [Docs. 17,
21, 22.]
The Court denied FMEF’s motion to dismiss on August 15, 2023. [Doc. 25.] Under
Bankruptcy Rule 7012(a)(6)(A), FMEF’s deadline to file an answer to the amended complaint
expired on August 29, 2023. FMEF has never filed an answer to the amended complaint.
On November 9, 2023, GFB filed its Motion and supporting documents, including its
Statement of Undisputed Material Facts Filed on Behalf of Greeneville Federal Bank, FSB in
Support of its Motion for Summary Judgment (“Statement”). [Docs. 28, 29, 30.] Attached to
GFB’s Motion, and cited in support of its Statement, is the Affidavit of Lori Parks (“Parks
Affidavit”), the GFB employee responsible for administering the loan from GFB to Sales. [Doc.
3 Service on January 19, 2023, was late under Federal Rule of Bankruptcy Procedure 7004(e)(1); however, FMEF
waived any defect in service by failing to raise it in its motion to dismiss filed on February 17, 2023 [Doc. 9]. See Fed.
R. Civ. P. 12(h)(1).
4 Rule 15 is applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7015. References herein
to “Rule ” mean a Federal Rule of Civil Procedure and to “Bankruptcy Rule ” mean a Federal Rule of Bankruptcy
Procedure.
28-1.] In its Motion, GFB relies on the following documents attached as Exhibits 1 through 9 to
the Parks Affidavit:5
(1) Revolving Loan Agreement dated October 1, 2010, and Amendment to Revolving
Loan Agreement dated October 30, 2012;
(2) Security Agreement dated October 1, 2010 and Intercreditor Agreement dated April
30, 2015;
(3) UCC-1 Financing Statement dated October 4, 2010, and Financing Statement
Amendments dated October 1, 2015, and September 2, 2020;
(4) Promissory Note dated October 1, 2010; Modified Promissory Note dated October 1,
2012; Second Modified Promissory Note dated December 18, 2014; Third Modified
Promissory Note dated December 16, 2016; and Fourth Modified Promissory Note
dated August 15, 2019;
(5) five Closing Certificates and Certificates of Incumbency of K&L Trailer Sales &
Leasing, Inc. dated October 1, 2010; October 30, 2012; December 18, 2014;
December 16, 2016; and August 15, 2019;
(6) five Closing Certificates and Certificates of Incumbency of K&L Trailer Leasing, Inc.
dated October 1, 2010; October 30, 2012; December 18, 2014; December 16, 2016;
and August 15, 2019;
(7) Rule 2004 Examination by Duces Tecum of Michael Webster dated October 2, 2020
(“Webster Transcript”);
(8) a chart of the Subject Trailers and amounts paid to FMEF by the Chapter 11 Trustee;
and
(9) bills of sale and other documents relating to the Subject Trailers identified in Exhibit
8. [Docs. 28-1 through 28-10.]
[Docs. 28-2 through 28-10.]
FMEF sought additional time to respond to the Motion, and the Court granted an
extension to January 29, 2024. [Doc. 38.] On January 4, 2024, Attorney Victoria Ferraro filed a
notice of appearance as counsel for FMEF. [Doc. 40.] After expiration of the extended deadline
5 Except for the Webster Transcript and the “Closing Certificates and Certificates of Incumbency,” GFB’s Amended
Complaint included as attachments the same documents that were exhibits to the Parks Affidavit. [See Doc. 67 at p.
2.]
to respond to the Motion, FMEF moved for entry of an agreed order to further extend the
response time to February 28, 2024, which the Court granted. [Docs. 45, 46.] On February 28, at
FMEF’s request, the Court entered an agreed order to stay the adversary proceeding while
another of GFB’s adversary proceedings was progressing through an appeal and so that the
parties could engage in settlement negotiations. [Docs. 49, 50.]
After the appeal was concluded by agreement between those parties, the Court held a
status conference in this matter on September 26, 2024, and set a deadline for FMEF’s response
to the Motion. FMEF timely responded to the Motion [Doc. 63, 64, 65], and GFB filed its reply
brief and response to FMEF’s additional statements of undisputed material facts [Docs. 66, 67],
making the Motion ripe for adjudication.
II. FMEF’S OBJECTIONS TO GFB’S EVIDENCE
The heart of FMEF’s opposition to the Motion is based on a threshold evidentiary issue
stated in its hyper-technical6 objections to nearly all of GFB’s Statement as follows:
RESPONSE: Objection. This statement seeks to admit facts based solely upon
records submitted through the Affidavit of Lori Parks (“Ms. Parks”) when Ms.
Parks is not competent to offer testimony to satisfy the minimum requirements to
establish herself as a competent witness. Ms. Parks does not have the requisite
personal knowledge to testify as to the authenticity of the books and records of . . .
GFB[7] and her testimony is inadmissible hearsay that fails to satisfy the
requirements of Fed. R. Evid. 801(c), 803(6), and 902(1), (2), and/or (11).
Therefore, the fact asserted herein fails to comply with Fed. R. Bank. R. [sic] 7056-
6 Although FMEF may be correct that the Parks Affidavit fails to contain a statement that she is familiar with the
record-keeping practices of GFB and that the loan documents exhibited to her affidavit were made and kept in the
regular course of GFB’s business, this Court has accepted those same loan documents without objection by any other
party-in-interest across the two bankruptcy cases and seven related adversary proceedings to which GFB has been a
party. The defect in the Parks Affidavit is easily curable, and the documents clearly would be admissible at an
evidentiary hearing. The most the Court would be inclined to do would be to deny without prejudice the pending
Motion to allow GFB to restate it by including the missing evidentiary elements in a new affidavit. Such would be an
inefficient use of judicial resources, not to mention the added cost in legal fees for both GFB and FMEF. As discussed
below, because the Court finds that the allegations of the Amended Complaint have not been answered by FMEF, the
Court need not journey down such a wasteful path.
7 For paragraphs 23 and 24, the repeated objection substitutes the word “Sales” for “GFB.” [Doc. 64 at ¶¶ 23-24.]
1[8] and Fed. R. Civ. Pro. 56(c)(4) and should be excluded from consideration. See
Alpert v. United States, 481 F.3d 404, 409 (6th Cir. 2007). . . .
[Doc. 64 at ¶¶ 1-6, 8-17, 19-20, 22, 36-42.]
At times, the repetitious objection is modified slightly,9 with FMEF asserting:
RESPONSE: Objection. This statement seeks to admit facts based solely upon
records submitted through the Affidavit of Lori Parks (“Ms. Parks”) when Ms.
Parks is not competent to offer testimony to satisfy the minimum requirements to
establish herself as a competent witness. Ms. Parks does not have the requisite
personal knowledge to testify as[10] to the authenticity of the books and records of
the Tennessee Department of Revenue [or GFB11] and her testimony is inadmissible
hearsay that fails to satisfy the requirements of Fed. R. Evid. 801(c), 803(6), and
902(1), (2), and/or (11). FMEF would further object as the records identified herein
were not properly authenticated.[12] Therefore, the fact asserted herein fails to
comply with Fed. R. Bank. R. [sic] 7056-1 and Fed. R. Civ. Pro. 56(c)(4) and should
be excluded from consideration. See Alpert v. United States, 481 F.3d 404, 409 (6th
Cir. 2007). . . .
[Doc. 64 at ¶¶ 18, 21, 25-35.]13 By these objections, FMEF seeks to preclude the Court’s
consideration of the documents on which GFB relies.14
8 Presumably, FMEF counsel meant to reference E.D. Tenn. LBR 7056-1, which is a procedural requirement for
compliance with Bankruptcy Rule 7056, which incorporates Rule 56 in adversary proceedings.
9 The Court has italicized the quoted text that is modified.
10 In paragraphs 26, 28, 30, 32, and 34, the following words are added between the words “testify as” and “to the
authenticity”: “to the typing on the certificate of origin or.” [Doc. 64 at ¶¶ 26, 28, 30, 32, 34.]
11 The words “or GFB” are not included in paragraphs 21 and 25. [Doc. 64 at ¶¶ 21, 25.]
12 This clause appears in paragraphs 18, 21, and 25 through 39. [Doc. 64 at ¶¶ 18, 21, 25-39.]
13 FMEF raises the following additional objection in paragraphs 17, 41, and 42: “FMEF further objects to this
statement as it calls for a legal conclusion upon which Ms. Parks is not competent to testify as the proper foundation
for her legal acumen has not been laid to qualify her as an expert on legal matters.” [Doc. 64 at ¶¶ 17, 41-42.] Because
the Court relies on the admitted allegations of the Amended Complaint, the Court need not address this argument as
to the Parks Affidavit. Similarly, the Court need not address FMEF’s objections regarding GFB’s reliance on the
Webster Transcript. [Doc. 64 at ¶¶ 19, 23, 24.]
14 FMEF also embeds in its response to GFB’s Statement an “objection” under Rule 56(d), stating “FMEF would
submit that discovery has not been completed in this matter and additional time is warranted in accordance with Fed.
R. Civ. Pro. 56 (d) [sic] to further investigate this assertion.” [Doc. 64 at ¶¶ 7, 8, 37, 39, 40.] The Motion was filed in
early November 2023, and FMEF chose not to conduct discovery during the intervening nearly eleven months between
GFB’s filing of the Motion and the status conference held by the Court on September 26, 2024. Nor did FMEF raise
that it needed discovery at that status conference, the very purpose of which was to set a schedule for FMEF’s response
to the Motion. Instead, it merely asked for sixty days to respond to the Motion. Under the circumstances, because
FMEF failed to file a Rule 56(d) motion, the embedded “objection” is overruled.
The Court finds that FMEF’s failure to answer the Complaint or the Amended Complaint
means that the factual allegations therein are not subject to dispute. Although it is exceedingly
rare for a court to be asked to enter summary judgment against a defendant who never answered
a complaint (because the defendant ordinarily would be subject to entry of default and a motion
for default judgment under Rule 55), the Sixth Circuit has long followed the rule that “[o]n
motion for summary judgment, no answer having been filed, every allegation of the complaint is
to be taken as true.” Rogers v. Girard Tr. Co., 159 F.2d 239, 241 (6th Cir. 1947);15 see also Rolle
Mfg. Co. v. Marco Chems., Inc., 92 F. Supp. 218, 220 (D.N.J. 1950) (rejecting the defendant’s
affidavit in support of its motion for summary judgment because “[n]o answer having been filed
by the defendant, the allegations of the complaint must be taken as true”). In Rogers, the
defendant filed a motion to dismiss, and before the court ruled on that motion, the defendant also
filed a motion for summary judgment, later withdrawing the motion to dismiss. Rogers, 159 F.2d
at 241. The district court granted the summary judgment motion, but the appellate court reversed
because no answer had been filed so that the district court was required to take the allegations of
the complaint as true. Id. Because the allegations of the complaint, even if treated as true,
“clearly raised material issues of fact,” id. at 242, and the appellant had not sought summary
judgment (or default) on the unanswered complaint, the appellate court reversed the summary
judgment and remanded the case to the district court.
Rogers and cases like it present a different procedural posture than here. In those cases,
the non-answering defendant filed a motion for summary judgment. Here, by contrast, the non-
answering defendant is responding to a motion for summary judgment. Nonetheless, the rule
15 Rogers also has been cited for the “clear rule of the Sixth Circuit [that] . . . motions to dismiss and for summary
judgment are not ‘responsive pleadings’ within the meaning of Rule 15(a).” Union Planters Nat’l Bank v. Harwell (In
re Harwell), 80 B.R. 901, 903 (Bankr. W.D. Tenn. 1987).
still applies – because FMEF failed to answer the allegations of GFB’s Amended Complaint,
those allegations must be taken as true. As concerns the Parks Affidavit and the documents that
FMEF now seeks to exclude from consideration on GFB’s Motion, the Amended Complaint
alleged as follows:
5. [Leasing][16] was in the business of leasing big rig trailers at 7828 Rutledge Pike,
Knoxville, Tennessee, and after his appointment the [Chapter 11] Trustee sold the
five (5) trailers listed on Exhibit A.[17]
6. The [Chapter 11] Trustee then paid to First Midwest $72,900.00 of the net
proceeds from the sale of said trailers listed on Exhibit A.
. . . .
9. On October 1, 2010, [GFB] made a loan to [Sales] in the sum of $2,500,000.00,
secured by virtually all of the assets of [Leasing], including its inventory of new
and used trailers, and recorded with the Tennessee Secretary of State the UCC-1, a
copy of which is attached hereto as Exhibit B, which was continued by
continuations recorded with the Tennessee Secretary of State on October 1, 2015,
and September 2, 2020, copies of which is attached hereto as Exhibit C, and which
is subject to an Intercreditor Agreement, dated April 30, 2015, with First Peoples
Bank of Tennessee (“First Peoples”) attached hereto as Exhibit D.
10. At the time of said loan by [GFB], [Sales] signed a Security Agreement attached
hereto as Exhibit E, and it and others also signed a Revolving Loan Agreement
attached hereto as Exhibit F, and said Revolving Loan Agreement is subject to an
Amendment thereto attached hereto as Exhibit G.
11. Because [Sales] has, since October 1, 2010, continuously been engaged in the
sale of big rig trailers, and because such trailers constitute its inventory, the UCC-
1 attached hereto as Exhibit B, has at all times relevant to the allegations contained
herein, constituted a blanket inventory lien on all trailers owned by [Sales].
. . . .
13. Because [Sales] has, since October 1, 2010, continuously been engaged in the
sale of big rig trailers, and because such trailers constitute its inventory, the UCC-
1 attached hereto as Exhibit B, has at all times relevant to the allegations contained
16 The Court replaces the terms used in the Amended Complaint by the terms of art defined herein and shows the
changes with brackets without using ellipses to show missing words.
17 Because the allegations of the Amended Complaint have been admitted by FMEF’s failure to answer, the exhibits
are also admitted and proper for the Court’s consideration in connection with the Motion.
herein, constituted a blanket inventory lien on all trailers owned by [Sales] and has
survived the transfer of any trailer to any transferee of [Sales] who was not a “buyer
in the ordinary course of business” as defined in T.C.A. §47-1-201(9), and is
superior to any lien obtained by any lender from a transferee who was not a “buyer
in the ordinary cause of business” from [Sales] since only a “buyer in the ordinary
course of business” takes free of a blanket inventory lien in accordance with T.C.A.
§47-9-320.[18]
14. At all times relevant to the allegations contained herein, Kris Fellhoelter has
been the sole owner of [Sales], and its President, as well as simultaneously the fifty
percent (50%) owner of all of the outstanding stock and President of [Leasing].
15. At all times relevant to the allegations contained herein, Kris Fellhoelter’s
parents, Marvin Fellhoelter and Linda Fellhoelter, have been collectively the
owners of fifty percent (50%) of the outstanding stock of [Leasing], were officers
and members of the Board of Directors of [Leasing], and were also active
employees of [Sales] and [Leasing].
16. At all times material to the allegations contained herein, [Leasing] and [Sales]
shared other officers and employees, and [Sales] paid the full salaries of some of
those common officers and employees.
17. At all times material to the allegations contained herein, Kris Fellhoelter and
Marvin Fellhoelter and Linda Fellhoelter, and consequently [Leasing] were fully
aware of the terms of the security interest of [GFB] in all trailers of [Sales] and the
obligation of [Sales] to make payment to [GFB] in order to obtain a release of
[GFB’s] security interest in any trailer transferred by said [Sales].
18. To the extent that trailers were transferred from [Sales] to [Leasing] in a
transaction for which [GFB] did not release its security interest in the trailer, the
transferee thereof with such knowledge was not a “buyer in the ordinary cause of
business,” as defined in T.C.A. §47-1-201(9), and consequently the transferee
obtained the trailer subject to the unreleased blanket inventory lien and security
interest of [GFB], as did any lender claiming a security interest therein from that
transferee. (See T.C.A. §47-9-320).
19. The trailers identified on Exhibit A and transferred by [Sales] to [Leasing] were
transfers for which [GFB] did not release the security interest of its blanket recorded
inventory lien, and for which it did not receive payment from anyone for the release
of its security interest, all of which was within the knowledge of said transferee
([Leasing]).
20. The fact that transfers were made by [Sales] to [Leasing] without procuring a
release from [GFB] of its security interest in those trailers was known to Kris
18 The Court notes that this paragraph and paragraphs 18 and 21 contain, in part, conclusions of law so that even
though the allegations of the Amended Complaint are admitted by FMEF’s failure to answer them, the legal
conclusions will be addressed herein.
Fellhoelter, the President of [Leasing], and consequently was within the knowledge
of [Leasing], and for which reason [Leasing] was not a “buyer in the ordinary
course of business,” and by reason of which it took ownership thereof subject to
the existing security interest of [GFB] in those trailers in which it did not
specifically release its security interest.
21. That for each of the specific trailers referred to hereinafter that were transferred
by [Sales] to [Leasing] who then pledged those trailers to [FMEF], [FMEF] knew
or should have known that [Leasing] [as] transferee was not a “buyer in the ordinary
course of business,” and it then had a duty to see that the recorded security interest
of [GFB] in that particular trailer was released, and if it was not, then that [FMEF’s]
security interest in that trailer is junior and subordinate to the recorded blanket
inventory security interest of [GFB] in each such trailer.
22. The documents attached hereto as Exhibit H document that each of the trailers
listed on Exhibit A were transferred from [Sales] to [Leasing] subsequent to
October 1, 2010.
[Doc. 19 at pp. 2-7.]
III. FACTS19
On October 1, 2010, a Revolving Loan Agreement was executed between GFB and Sales,
through which GFB issued a floor-plan line of credit to Sales for its big rig trailers. [Doc. 19-6.]
The following insiders20 signed as guarantors: Leasing; Fellhoelter Enterprises, LLC; Kris and
Amy Fellhoelter; and Marvin and Linda Fellhoelter.21 [Id. at p. 19.] Additionally, under the
Security Agreement between GFB and Sales, also dated October 1, 2010 (which incorporated by
reference the Revolving Loan Agreement), GFB was granted a security interest in virtually all
19 The following facts cannot be disputed by FMEF because they were contained in the Amended Complaint or its
exhibits or for other reasons explained by the Court below.
20 Each person identified meets the definition of “insider” in 11 U.S.C. § 101(31).
21 At all times relevant to this adversary proceeding, Leasing was a Tennessee corporation in the business of leasing
big rig trailers. [Doc. 19 at ¶ 5.] Both Leasing and Sales maintained a place of business at 7828 Rutledge Pike in
Knoxville, Tennessee, and Kris Fellhoelter, who owned 100% of the outstanding stock in Sales and 50% of the
outstanding stock in Leasing, was President of both companies. [Doc. 19 at ¶¶ 5, 14, 20; Doc. 19-6 at p. 2.] Leasing,
through Kris Fellhoelter; Fellhoelter Enterprises, Inc.; and each of the Fellhoelters who executed the Revolving Loan
Agreement did so “for the purpose of acknowledging and consenting to the terms and provisions [thereof].” [Doc. 19-
6 at p. 17.]
assets of Sales, including but not limited to all current and after-acquired inventory. [Doc. 19-5.]
On October 4, 2010, GFB filed with the Tennessee Secretary of State a UCC-1 Financing
Statement reflecting the security interest that has been continuously retained22 in “[a]ny and all
personal property of [Sales], tangible and intangible, including without limitation, equipment,
inventory, accounts receivable, contract rights, general intangibles and all other personal
property of [Sales].” [Doc. 19-2 at p. 2.]
Concerning the collateral, the Security Agreement states, in material part:
Covenants as to the Collateral. So long as any of the Obligations shall
remain outstanding, unless Bank shall otherwise consent in writing:
. . . .
(f) Transfers and Other Liens. Without the prior written consent of
Bank, the Grantor will not (i) sell, assign (by operation of law or otherwise),
exchange, or otherwise dispose of any of the Collateral (except for sale or
other use of inventory in the ordinary course of business); or (ii) create or
suffer to exist any lien, security interest or other charge or encumbrance
upon or with respect to any of the Collateral except for the security interest
created by this Agreement and except for any security interest specifically
disclosed in Exhibit “A,” attached hereto.
[Doc. 19-5 at pp. 4, 6.]
With respect to amendments or modifications, the Revolving Loan Agreement expressly
states that “[t]he provisions of this Loan Agreement, the Note, or any other instrument or
document now or hereafter securing the Obligations may be amended or modified only by an
instrument in writing signed by the parties hereto.” [Doc. 19-6 at ¶ 7.1.] Correspondingly, the
Security Agreement provides the following with respect to amendments:
(a) No amendment of any provision of this Security Agreement shall be
effective unless it is in writing signed by the Grantor and the Bank, and no waiver
of any provision of this Agreement, and no consent to any departure by the Grantor
therefrom, shall be effective unless it is in writing and signed by the Bank, and then
such waiver or consent shall be effective only in the specific instance and for the
22 Continuation statements of the UCC-1 were recorded on October 1, 2015, and September 2, 2020. [Doc. 19-3.]
specific purpose for which given.
(b) No failure on the part of the Bank to exercise, and no delay in exercising,
any right hereunder or any other instrument or document shall operate as a waiver
thereof; nor shall any single or partial exercise of any such right preclude any other
or further exercise thereof or the exercise of any other right . . . .
[Doc. 19-5 at ¶¶ 13(a), (b).] The Security Agreement also specified that all terms used therein
“are defined in the Loan Agreement or in Article 9 of the [UCC] . . . of Tennessee, as now or
hereafter in effect, and which are not otherwise defined herein shall have the same meanings
herein as set forth therein.” [Id. at ¶ 1(a).]
The Subject Trailers were transferred by Sales to Leasing without GFB releasing its
inventory security interest and without payment to GFB. [Doc. 19 at ¶ 19.] Leasing, through its
president, Kris Fellhoelter, was aware that GFB did not receive payment for the Subject Trailers
when they were transferred from Sales. [Id. at ¶¶ 19-20.]
FMEF holds an Equipment Financing Agreement dated March 31, 2015 (“EFA-1”), on
which Leasing is obligated. [Doc. 65 at ¶ 1; Doc. 66 at ¶ 1.] The EFA-1 concerned the original
financed amount of $111,350.00 from FMEF’s assignor National Machine Tool Financial
Corporation to Leasing. [Id.] On October 15, 2015, Leasing became indebted to FMEF for an
additional $72,000.00 as shown by the Equipment Financing Agreement dated October 15, 2015
(“EFA-2”). [Id. at ¶ 4.] Kris Fellhoelter executed both the EFA-1 and the EFA-2 as President of
Leasing. [Doc. 64-2 at pp. 3, 6.] Notably, Sales (through Kris Fellhoelter)23 executed Guaranties
for Leasing’s debt under both the EFA-1 and the EFA-2. [FMEF Claim No. 39-1 Part 2 at pp. 5,
23 Kris Fellhoelter, individually, also signed as guarantor of Leasing’s debt to FMEF from the EFA-1 and the EFA-2.
[FMEF Claim No. 39-1 Part 2 at pp. 4, 32, In re K & L Trailer Sales and Leasing, Inc., No. 3:20-bk-31619-SHB (Sept.
21, 2020); FMEF Claim No. 17-1 Part 2 at pp. 5, 24, In re K & L Trailer Sales and Leasing, Inc., No. 3:20-bk-31620-
SHB (Aug. 20, 2020).] The Court takes judicial notice of FMEF’s proofs of claim filed in the Sales and the Leasing
bankruptcy cases. See Fed. R. Evid. 201.
14, In re K & L Trailer Sales and Leasing, Inc., No. 3:20-bk-31619-SHB (Sept. 21, 2020);
FMEF Claim No. 17-1 Part 2 at pp. 6, 26, In re K&L Trailer Leasing, Inc., No. 3:20-bk-31620-
SHB (Aug. 20, 2020).24]
FMEF “disputes” GFB’s assertions that FMEF’s lien as to Leasing on the Subject
Trailers “was typed on the certificate of origin for [each] trailer initially issued to Sales” and that
the certificates of origin reflect that the Subject Trailers were conveyed by Sales to Leasing.
[Doc. 64 at ¶¶ 26, 28, 30, 32, 34.] FMEF supplied copies of the certificates of title for each of
the Subject Trailers, all of which reflect its lien. [Doc. 64-2 at pp. 9-13.] Under Federal Rule of
Evidence 807, the Court overrules FMEF’s objection to Exhibit 9 to the Parks Affidavit, finding
sufficient guarantees of trustworthiness under the totality of the circumstances, including that
FMEF’s evidence corroborates Exhibit 9 to the Parks Affidavit as shown in this chart:
VIN last 4 Acquired Date on Title Issue Date Bill of Sale Date26 Certificate of
Title25 Origin27 Rec’d Date
0661 10/7/2015 11/6/2015 10/7/2015 11/6/2015
2650 3/30/2015 4/2/2015 3/30/2015 None
2651 3/30/2015 4/2/2015 3/30/2015 None
2652 3/30/2015 4/2/2015 3/30/2015 None
6159 10/7/2015 11/10/2015 10/7/2015 11/10/2015
This evidence (and FMEF’s claims filed in the Sales and Leasing bankruptcy cases)
establish that FMEF knew that Sales transferred the Subject Trailers to Leasing. Indeed,
FMEF’s claim in the Leasing bankruptcy cases and FMEF’s own exhibits attached to the
24 Notably, FMEF did not attach either of the Guaranties by Sales to the Affidavit of Regina Miller for its response to
the Motion.
25 The acquired date and title issuance date are reflected on the certificates of title supplied by FEMF. [See Doc. 64-
2 at pp. 9-13.]
26 The sale date is reflected on the trailer invoices included in Exhibit 9 to the Parks Affidavit [Doc. 28-10 at pp. 4, 8,
13, 18, 22], and two of the certificates of origin reflect a date-stamp “received” [id. at pp. 6, 20].
27 Each of the certificates of origin includes FMEF’s assignor as the lienholder. [Id. at pp. 6, 10, 15, 20, 24.]
Affidavit of Regina Miller include two UCC-1 Financing Statements naming Sales as the
“Debtor” (perhaps because Sales had guaranteed the debt of Leasing) and identifying as
“collateral” the three of the Subject Trailers28 even though Sales had transferred ownership of
those trailers to Leasing as shown on the certificates of origin. [FMEF Claim No. 17-1 Part 2 at
p. 8, In re K&L Trailer Leasing, Inc., No. 3:20-bk-31620-SHB (Aug. 20, 2020); Doc. 64-2 at p.
7; Doc. 28-10 at pp. 9-10, 14-15, 23-24.]
This evidence establishes indisputably that FMEF had knowledge that the Subject
Trailers were transferred from Sales to Leasing.
IV. SUMMARY JUDGMENT STANDARD
Under Federal Rule of Civil Procedure 56(a), “[t]he court shall grant summary judgment
if the movant shows that there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law[,]” utilizing the procedures for Rule 56(c) (applicable in
adversary proceedings through Bankruptcy Rule 7056). The Court does not weigh the evidence
to determine the truth of the matter asserted when deciding a motion for summary judgment but
simply determines whether a genuine issue for trial exists. See Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 249 (1986). “Only disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of summary judgment.” Id.
The movant bears the burden of proving that summary judgment is appropriate by
establishing that there is no genuine dispute concerning any material fact, such that any claim or
defense alleged is factually unsupported. See Celotex Corp. v. Catrett, 477 U.S. 317, 323-24
(1986). Once the initial burden is met, the nonmoving party must raise a genuine dispute of
material fact for trial and may not rely solely on allegations or denials contained in the pleadings.
28 The other two of the Subject Trailers were listed as collateral on the UCC-1 filed by FMEF’s assignor with Leasing
identified as “Debtor.” [FMEF Claim No. 17-1 Part 2 at p. 36, In re K&L Trailer Leasing, Inc., No. 3:20-bk-31620-
SHB (Aug. 20, 2020); Doc. 64-2 at p. 8.]
See Nye v. CSX Transp., Inc., 437 F.3d 556, 563 (6th Cir. 2006) (holding that reliance on a “mere
scintilla of evidence in support of the nonmoving party will not be sufficient”); see also
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
The facts and all resulting inferences are viewed in a light most favorable to the
nonmoving party, and the Court must decide whether “the evidence presents a sufficient
disagreement to require submission to a [fact-finder] or whether it is so one-sided that one party
must prevail as a matter of law.” Anderson, 477 U.S. at 243. “A genuine issue of material fact
exists when ‘there is sufficient evidence favoring the nonmoving party for a [fact-finder] to
return a verdict for that party.’” Laster v. City of Kalamazoo, 746 F.3d 714, 726 (6th Cir. 2014)
(quoting Anderson, 477 U.S. at 249). Nevertheless, when “the record taken as a whole could not
lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’”
Matsushita, 475 U.S. at 587 (citations omitted).
V. THE PARTIES’ POSITIONS
GFB relies on this Court’s decision in GFB I and GFB II. FMEF asserts that material
issues of fact exist to preclude summary judgment for GFB, arguing that the ordinary course of
business for Sales was to sell the new trailers by transferring the certificates of origin to a
purchaser with notation of the lien of the purchaser’s lender. [Doc. 63 at p. 7.] Thus, FMEF
contends:
[A] material question remains if FMEF actually had any duty to review the ‘source
of title’ as alleged in GSB’s [sic] Motion and also, given the normal course of
business for Sales, it begs the question of whether at the time of the transaction with
FMEF, if the transfer was done as a buyer in the ordinary course of business
pursuant to Tenn. Code Ann. §47-1-201(9). Sales was in the business of selling
trailers; there is a question of fact if the transfer was made in good faith, and was
made without knowledge of any violation of rights.
[Id. at pp. 7-8.]
FMEF also maintains that it held a properly perfected purchase-money-security-interest
(“PMSI”) in the Subject Trailers for the funds it loaned to Leasing to purchase the trailers. [Id. at
pp. 8-9.] It then claims that such a PMSI takes priority over GFB’s inventory lien “because the
trailers were no longer ‘inventory’ when FMEF filed and perfected its direct lien on” the Subject
Trailers. [Id. at p. 9.]
VI. ANALYSIS29
The starting point for the Court’s determination about the perfection and priority issues is
the UCC as adopted in Tennessee. As the Court explained in GFB I:
Under Tennessee law, GFB’s only method of perfecting its lien on the
inventory of Sales was by the filing of a financing statement. See Tenn. Code Ann.
§ 47-9-311(d) (providing that when collateral that is governed by a certificate-of-
title statute is inventory held for sale or lease by a person who is in the business of
selling goods of that kind, the requirements of the certificate-of-title statute do not
apply). Indeed, comment 4 to section 47-9-311 explains that “[c]ompliance with
the certificate-of-title statute is both unnecessary and ineffective to perfect a
security interest in inventory to which this subsection applies.” Tenn. Code Ann.
§ 47-9-311 cmt. 4. Thus, GFB’s security interest in the trailer-inventory of Sales
was continuously perfected from the date that GFB filed the UCC-1.
GFB I, 630 B.R. at 87.
The general rule concerning disposition of collateral contrary to a secured party’s security
interest is found at Tennessee Code Annotated section 47-9-315(a), which provides:
Except as otherwise provided in this chapter and in § 47-2-403(2):
(1) a security interest or agricultural lien continues in collateral
notwithstanding sale, lease, license, exchange, or other disposition thereof unless
the secured party authorized the disposition free of the security interest or
agricultural lien; and
(2) a security interest attaches to any identifiable proceeds of collateral.
29 Much of the remainder of this opinion is repeated from GFB II. Because FMEF was not a party to that adversary
proceeding, the Court reiterates its analysis here; however, the explanation of priority as between an inventory
lienholder and a PMSI lienholder over the same collateral of the same debtor is new.
Section 47-9-507(a) coordinates with section 47-9-315(a) to make clear that the secured party’s
perfection is uninterrupted by disposition of the collateral when section 47-9-315(a) applies to
continue the security interest: “A filed financing statement remains effective with respect to
collateral that is sold, exchanged, leased, licensed, or otherwise disposed of and in which a
security interest or agricultural lien continues, even if the secured party knows of or consents to
the disposition.” Tenn. Code Ann. § 47-9-507(a). As explained by comment 3, the secured party
retains its perfected lien after transfer even if the collateral is “owned by a person other than the
debtor against whom the financing statement was filed.” Tenn. Code Ann. § 47-9-507 cmt. 3.
To be sure, secured transactions principles provide exceptions to the general rule that a
perfected security interest remains attached to and perfected in collateral that is transferred by the
secured party’s debtor.
First, if chapter 9 of title 47 provides some exception to the general rule, then a
perfected security interest will not continue in collateral disposed of by a debtor.
Tenn. Code Ann. § 47-9-315(a). Second, if a secured party entrusts goods subject
to the creditor’s security interest to a merchant who deals in goods of that kind, the
merchant has the power to transfer all rights of the creditor “to a buyer in the
ordinary course of business.” Tenn. Code Ann. § 47-2-403(2), cited in Tenn. Code
Ann. § 47-9-315(a). Third, if a secured party authorizes the disposition of its
collateral free of the security interest, then that disposition terminates the security
interest in that collateral. Tenn. Code Ann. § 47-9-31[5](a)(1).
GFB I, 630 B.R. at 87-88.
Tennessee Code Annotated section 47-9-311(d) provides:
INAPPLICABILITY TO CERTAIN INVENTORY. During any period in which
collateral subject to a statute specified in subdivision (a)(2) is inventory held for
sale or lease by a person or leased by that person as lessor and that person is in the
business of selling goods of that kind, this section does not apply to a security
interest in that collateral created by that person.
Subsection (d) is an exception to the rule in subsection (a)(2)(A) that perfection of a security
interest in collateral that is subject to the state’s certificate-of-title laws requires compliance with
those laws (mandating perfection by notation on the collateral’s certificate of title). This is
because the UCC scheme provides that perfection of a security interest in inventory is
accomplished solely by filing a UCC-1 financing statement. See Tenn. Code Ann. § 47-9-312(a);
Tenn. Code Ann. § 47-9-311 cmt. 4 (“Compliance with [the] certificate-of-title statute is both
unnecessary and ineffective to perfect a security interest in inventory to which this subsection
applies.”).
FMEF argues that “the trailers were no longer ‘inventory’ when FMEF filed and
perfected its direct lien on the subject trailers.” [Doc. 63 at p. 9.] This is the same argument
raised by Leasing’s creditors in GFB I and GFB II that section 47-9-311(d) applied to strip GFB
of its security interest in the Subject Trailers because Leasing did not hold them for sale. Such
an argument jumps over and wholly misapplies the foundational protections of secured parties
under Article 9 when collateral is disposed of by a debtor and no exception applies to allow the
disposition to be free of the security interest created by the debtor.
The following hypothetical, which removes the relatedness of the transferor and
transferee present here, is instructive. Assume that an inventory seller of trailers (Transferor)
transfers trailer inventory to a trucking company (Transferee) that holds and uses the trailers as
equipment for its transportation business. The trailers, however, were subject to the inventory
lien given by Transferor to Bank A, properly perfected by the filing of a UCC-1 financing
statement. Next, assume that the facts show that the transfer of Bank A’s collateral to Transferee
was not in the ordinary course of business for whatever reason (say, for example, because the
owner of Transferee threatened the owner of Transferor and no consideration was exchanged
(except that Transferor’s owner escaped without bodily injury)). In such a circumstance,
Transferee would take the collateral subject to the security interest of Bank A. This is so because
section 47-9-315(a)(1) says it is so. If Transferee obtained funds from Bank Z by offering the
transferred trailers as collateral and if Bank Z noted its lien on the certificates of title for the
transferred trailers, those trailers nonetheless would remain subject to Bank A’s perfected
inventory lien. That is, the transfer (not in the ordinary course) of the trailers to Transferee that
is not in the business of selling trailers would not strip Bank A of its perfected inventory lien.
This is so even though Bank Z is perfected by notation of its lien on the certificates of title.
Bank Z has a properly perfected security interest in the trailers, but it is subject to the earlier
perfected security interest of Bank A.30
FMEF’s argument applied to our hypothetical facts would mean that an inventory lien
would not survive the transfer even if the sale was not to a buyer in the ordinary course. The
argument misunderstands the law and seems to conflate the two distinct questions of how to
perfect inventory that is subject to the state’s certificate-of-title law and what happens when
property is transferred in contravention of the rights of secured parties under the UCC.
Under the facts here, only two exceptions could exist to change the general rule that a
perfected security interest continues in collateral that is transferred: (1) sale of inventory to a
buyer in the ordinary course of business under section 47-2-403(2), as expressly referenced in
section 47-9-315(a), or (2) the secured party’s authorization of the disposition free of the security
interest under section 47-9-315(a)(1).
GFB argues that the first exception does not apply because the transfers of the Subject
Trailers by Sales to Leasing were not to a buyer in the ordinary course of business under section
47-2-403(2). Section 47-2-403(3) defines “entrusting” as an exception to the general rule found
in section 47-2-403(1) that a transfer of goods subject to an Article 9 lien transfers to the
30 Doubtlessly, if Transferee had purchased the trailers in the ordinary course of business, then Transferee would have
taken the trailers free of Bank A’s lien as provided in sections 47-2-403(2) and 47-9-315(a) – but under the principles
of Article 9 and not because Transferee is not in the business of selling trailers. In such a case, then Bank Z’s security
interest perfected by notation on the certificates of title would be first, and Bank A would have no interest in the
transferred trailers; instead, Bank A’s only security interest would be in identifiable proceeds of the collateral, as
provided in section 47-9-315(a)(2).
transferee only the rights of the transferor in the goods. Under section 47-2-403(2), when a
secured party entrusts its collateral consisting of goods to a merchant who deals in goods of that
kind, the merchant has the power to transfer all the rights of the entruster to a buyer in the
ordinary course of business. Similarly, section 47-9-320 provides that “a buyer in the ordinary
course . . . takes free of a security interest created by the buyer’s seller, even if the security
interest is perfected and the buyer knows of its existence.”
Importantly, “buyer in the ordinary course of business” is defined by the UCC:
“Buyer in the ordinary course of business” means a person that buys goods [1] in
good faith, [2] without knowledge that the sale violates the rights of another person
in the goods, and [3] in the ordinary course from a person . . . in the business of
selling goods of that kind. A person buys goods in the ordinary course if the sale to
the person comports with the usual or customary practices in the kind of business
in which the seller is engaged or with the seller's own usual or customary practices.
. . .
Tenn. Code Ann. § 47-1-201(9). GFB relies solely on the second element that requires a buyer
in the ordinary course to buy “without knowledge that the sale violates the rights of another
person in the goods.” Id.
Operation of these statutes is illustrated by numerous cases over the past sixty years. For
example, in Taylor Motor Rental, Inc. v. Associates Discount Corporation, 173 A.2d 688 (Pa.
Super. Ct. 1961), the plaintiff, a purchaser of a car from a car dealer, sued the dealer’s lender that
held a security interest in all of the dealer’s inventory. The owner of the car dealer was also an
officer and stockholder of the plaintiff-purchaser, and the owner also kept the dealership’s books
and records and signed the dealership’s checks, generally conducting the affairs of the
dealership. Id. at 689-90. The car at issue was kept in a building that was shared by the
dealership and the plaintiff-purchaser. Id. The court affirmed the trial court’s holding:
It is clear that plaintiff was not a buyer in the ordinary course of business as
defined by the Commercial Code. Both the relationship of plaintiff and [the
dealership], with their interlocking officers, shareholders and employees and the
fact that both plaintiff corporation and [the dealership] were managed by [the same
person] negates this.
Id. at 690.
In 1983, the bankruptcy court for the Western District of Texas held that a transfer of
inventory from one corporation to a related corporation was not a sale in the ordinary course of
business. First State Bank of Corpus Christi v. Del Tex Corp. (In re Del Tex Corp.), 32 B.R. 403
(Bankr. W.D. Tex. 1983). The secured lender had loaned funds to South Texas, an affiliated
entity31 of Del Tex, the debtor in the bankruptcy case, and the secured lender claimed that it was
a secured creditor of Del Tex. Id. at 404. The parent company caused transfers of inventory from
South Texas to Del Tex. Id. Stating the issue as “whether the Bank’s security interest over South
Texas’ inventory survived the purported sale to Del Tex and is enforceable against Del Tex,” id.
at 405, the court rejected Del Tex’s argument that the security agreement authorized South Texas
to sell the bank’s collateral. Id. at 406. The court applied the UCC provision that is now section
9-315(a) to determine that the court was required to enforce the security agreement between the
bank and South Texas, “particularly the usage and meaning of the term ‘inventory’, which the
Court finds to be the chief operative term in the grant of authority” to sell the bank’s collateral.
Id. The court reviewed the facts to find that the transfers from South Texas to Del Tex were not
sales in the ordinary course of South Texas’s business, primarily because the parent company
had failed to maintain the separateness of the two companies so that “the nature of the
management . . . reached the point that they cannot be considered to be dealing at arms length
with each other.” Id. at 407. The court concluded that “the transfers . . . cannot be treated as
sales in the ordinary course of business, but merely a shifting of assets between non-distinct
entities.” Id. The result was that the bank was a secured creditor of Del Tex to the extent of the
31 South Texas and Del Tex were owned by the same parent company. Id. at 404.
value of the bank’s collateral that was held by Del Tex after the transfer from South Texas. Id. at
408.
Two years later, the Supreme Court of Nevada held that a mobile home that a secured
lender’s debtor had sold to an individual was transferred subject to the lender’s security interest
in inventory. Homes Sav. Ass’n v. Gen. Elec. Credit Corp., 708 P.2d 280 (Nev. 1985). The
mobile home dealer gave an inventory lien to GECC, which properly perfected its lien. Id. at
282. When the dealer sold a mobile home to a consumer, the dealer would execute an
installment sales contract and a security agreement with the consumer and assign its rights to
Home Savings Association (“HSA”), which would pay the dealer the purchase price less the
consumer’s down payment. Id. HSA then obtained the title to the mobile home with its lien
noted. Id. One of the mobile homes at issue in the litigation had been sold to a customer, but the
customer had never made a down payment. Id. at 286. The evidence showed that the “deal fell
through” and the customer did not take possession of the mobile home. Id. At the time that
GECC repossessed the mobile home, it was on a residential site, not on the dealer’s sales lot. Id.
The court held that there had been no buyer and, thus, no buyer in the ordinary course. Id.
Notably, the court so held even though the mobile home was no longer being possessed and
offered for sale by the dealer. Id.
In a situation very similar to the facts here, in 1993, the bankruptcy court for the Southern
District of Ohio held for the floor-plan financier over the holder of a PMSI in a tractor that had
been purchased by the debtors and repossessed by the floor-plan lender. Bank One, Portsmouth,
N.A. v. Dettwiller (In re Dettwiller), 156 B.R. 540 (Bankr. S.D. Ohio 1993). The individual
chapter 11 debtors and their son owned a tractor dealership that sold Kubota tractors, with
Kubota retaining a properly perfected security interest in all equipment and inventory of the
dealership. Id. at 541-42. The tractor at issue was purchased from the dealership by one of the
debtors who “intended to lease the tractor to area farmers and had discussed this course of action
with Kubota’s representative.” Id. at 542. He paid a portion of the purchase price from his own
funds and financed the rest of the purchase from the plaintiff, Bank One, which perfected its
security interest. Id. “The tractor remained on the premises of the [d]ealership. The [d]ealership
did not inform Kubota of the sale.” Id. The court held that the sale was not in the ordinary
course of business because the debtor “did not act in good faith [and] . . . he knew that a sale
without remitting the proceeds to Kubota violated the [security] [a]greement.” Id. at 543.
The Dettwiller court acknowledged that “several courts have held that principals
purchasing goods from corporations they control are not buyers in the ordinary course of
business.” Id. at 544 (citing In re Palmer, 103 B.R. 348 (Bankr. M.D. Ga. 1989); Transam.
Comm. Fin. Corp. v. Union Bank & Tr. Co., 584 So. 2d 1299 (Ala. 1991); Merchants & Planters
Bank & Tr. Co. of Arkadelphia v. Phoenix Hous. Sys., Inc. 729 S.W.2d 433 (Ark. Ct. App.
1987); In re Del Tex Corp., 32 B.R. at 407). The competing creditor in Dettwiller argued that
Kubota authorized the sale of the tractor, treating the argument as a separate ground for stripping
Kubota of its inventory lien. Id. at 544-45. The court rejected the argument by reference to
Kubota’s and the dealership’s security agreement, which prohibited disposition of Kubota’s
collateral except in the ordinary course of business. Id. at 545.
Finally, the Dettwiller court found that Kubota should win on policy grounds.
In this contest between Kubota and plaintiff, it is appropriate that plaintiff should
bear the loss. . . . The policy of the buyer in the ordinary course exception to the
primacy of the inventory lender’s lien is rooted in commercial expediency.
Requiring good faith retail purchasers in the ordinary course to search for
encumbrances on purchased items is impractical and cumbersome. . . . The buyer
in the ordinary course of business doctrine “encourage[s] the marketability of goods
and support[s] the reliance interest of buyers in the ordinary course who assume
that they have clear title to the goods they purchase.”
Those principles ought not to avail this plaintiff, a lender to an insider buyer
which seeks to prime the lien of Kubota, a prior and properly perfected inventory
lender. Kubota did all it could have been expected to do to protect its security
interest. It properly and timely filed a UCC-1 financing statement and continuation
of same. . . . Moreover, Kubota[] . . . states that it did not learn of the sale of the
tractor until after debtors had filed their bankruptcy petition. This lack of notice is
consistent with the debtors’ failure to remove the tractor from the dealership
premises after the purchase,[32] thereby concealing from Kubota the fact that the
tractor had been purchased.
Id. (emphasis added) (citations omitted).
Also instructive is the more recent case of Automotive Finance Corporation v. DZ
Motors, LLC, 104 UCC Rep. Serv. 2d 740, No. 16-7955, 2021 WL 1380605 (D.N.J. Apr. 9,
2021). There, the floor-plan lender sued a credit union that had financed a sham sale to the then-
wife of the car dealership’s owner. Id. at *5. The court parsed through the evidence concerning
whether the sale of a Bentley to the dealer’s owner was legitimate and determined that if the
owner of the dealership or his wife had been buyers in the ordinary course, either could have
taken the car free of the inventory lienholder’s UCC lien. Id. at *12. Likewise, a lender that
financed such a purchase would be able to defeat the inventory lien. Id. Nonetheless, the court
held the following:33
On this record, there can be no serious contention that the Zholobovs were
in any sense buyers in the ordinary course. Accord with Martin Marietta Corp. v.
N.J. Nat’l Bank, 612 F.2d 745, 751 (3d Cir. 1979) (“[I]f the sale was a sham to
avoid the seller's obligation to his creditor, then it probably would not satisfy . . .
the buyer in the ordinary course requirement”); Taylor Motor Rental, 173 A.2d at
690 (rejecting an assertion that plaintiff was a buyer in the ordinary course where
the operator of the dealership acted for both the dealership and the purported buyer
“in applying for the certificate of title in the name of the plaintiff. The purported
sale by seller to the plaintiff [buyer] was merely a paper transaction for the benefit
32 Although GFB has not raised the point and it is not material to the Court’s analysis, the record establishes that Sales
and Leasing shared one address, which presumably means that the Subject Trailers remained on the Sales property
mixed with other trailers held for sale or leasing by Sales and for leasing by Leasing.
33 Though this Court acknowledges that much of the DZ Motors opinion concerns whether the vehicle remained for
sale by the dealership after the purported sale, that analysis does not support any argument here that GFB lost its
perfected inventory lien because Leasing was not in the business of selling trailers. It is immaterial that Leasing was
not in the business of selling trailers because under section 47-9-315(a), GFB’s inventory lien continued in the Subject
Trailers unless they were sold to Leasing as a statutorily defined buyer in the ordinary course of business.
of [seller], who now has possession of the automobile for which defendant has
never been paid.”).
Id.
Other of Leasing’s creditors who have disputed the priority of GFB’s inventory lien on
collateral transferred to Leasing have attempted to rely on section 47-9-32034 to assert that Kris
Fellhoelter’s knowledge of GFB’s security interest does not prevent Leasing from taking trailers
free of that interest. As previously explained, such an argument conflates two provisions of the
UCC. Certainly, knowledge of a perfected security interest does not prevent a buyer from being
a buyer in the ordinary course of business, but a buyer may not be a buyer in the ordinary course
of business unless the buyer is “without knowledge that the sale violates the rights of another
person in the goods.” Tenn. Code Ann. § 47-1-201(9).
Thus, the foundational question here is whether GFB has presented undisputed facts to
establish that Leasing was not a buyer in the ordinary course of business in light of the statutory
definition and the provisions of the Security Agreement and Revolving Loan Agreement between
Sales and GFB. FMEF asserts that there is an issue of fact as to whether “the transfer was made
in good faith, and was made without knowledge of any violation of rights.” [Doc. 63 at p. 8.]
To the contrary, the Court finds that the undisputed facts – namely, the Security Agreement and
Revolving Loan Agreement – are unambiguous concerning GFB’s rights and Sales’s obligations
and establish that Leasing was not a buyer of the Subject Trailers in the ordinary course of
business.
The Revolving Loan Agreement and Security Agreement between GFB and Sales were
signed by Kris Fellhoelter, who was the general manager of both Sales and Leasing. Kris
Fellhoelter also signed the certificates of origin to transfer ownership of three of the Subject
34 Section 47-9-320(a) provides, in material part, that a “buyer in the ordinary course of business . . . takes free of a
security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its
existence.”
Trailers from Sales to Leasing [Doc. 28-10 at pp. 10, 15, 24], and Linda Fellhoelter (also an
insider) signed a fourth [id. at 6]. The Revolving Loan Agreement and Security Agreement
contain numerous provisions to protect GFB’s lien in Sales’s inventory. GFB even procured the
signatures of Kris Fellhoelter, individually and as President of Leasing (along with other officers
of Sales and Leasing), to acknowledge his awareness of the terms of the Revolving Loan
Agreement and Security Agreement. The Security Agreement requires the express written
consent of GFB for Sales to dispose of any of GFB’s collateral other than by a sale of inventory
in the ordinary course of business. The Security Agreement also contains a provision against any
waiver of GFB’s rights by any failure of GFB to exercise or delay in exercising any right.
Presumably because of the relationship between Sales and Leasing and their owners, the
Revolving Loan Agreement (which was incorporated into the Security Agreement) defined
“Ordinary Course of Business” and expressly authorized an “occasional sale” of inventory to
another dealer, but only if the other dealer “is not a Related Person” [Doc. 19-2 at 23], which is
also defined to clearly include Leasing and Kris Fellhoelter.35 [See Doc. 19-2 at 24.]
35 Exhibit A to the Revolving Loan Agreement entitled “Definitions and Accounting Terms” includes the following
definitions:
“Ordinary Course of Business” as applied to sales of Inventory of the Borrower shall mean (a) a bona fide
retail sale to a purchaser, for his own use at the fair market value or fair cash price, as the case may be (such
purchaser or lessee not being a Related Person),, and (b) an occasional sale of such Inventory to another
dealer who is not a Related Person at a price not less than Borrower’s cost of the Inventory sold, provided
such sale is not a part of a plan or course of action to liquidate all or a portion of the Borrower’s business.
“Person” means an individual, partnership, corporation, trust, unincorporated organization, association, joint
venture or a government or agency or political subdivision thereof.
“Related Person” shall mean any person (a) which now or hereafter directly or indirectly through one or mor
intermediaries controls, or is controlled by, or is under common control with, the Borrower, or (b) which now
or hereafter beneficially owns or holds five percent (5%) or more of the, [sic] capital stock of the Borrower,
or (c) five present (5%) or more of the capital stock of which is beneficially owned or held by the Borrower.
For purposes hereof, “control” shall mean possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the ownership of voting stock, by
contract or otherwise.
[Doc. 19-6 at pp. 18, 23-24.] Clearly, at all times since October 1, 2010, Leasing and Sales are “related persons” as
defined by the Revolving Loan Agreement.
Consequently, the record indisputably establishes that Kris Fellhoelter and Leasing were
not “without knowledge that the sale violate[d] the rights of another person in the goods,” Tenn.
Code Ann. § 47-1-201(9), because GFB did not actively release its inventory lien on the Subject
Trailers. Thus, Leasing was not a buyer of the Subject Trailers in the ordinary course of
business.
To the extent that FMEF’s arguments could be interpreted to raise an argument that GFB
impliedly authorized the transfer of the Subject Trailers to Leasing by some pattern and practice
between GFB and Sales, the Revolving Loan Agreement and Security Agreement provide the
answer. First, the Revolving Loan Agreement and Security Agreement prohibit implied waiver
or modification by GFB, and the express terms of the agreements control under Tennessee law.
See Mem. & Order on Mot. for Discovery under Rule 7056 at 7-8, Greeneville Fed. Bank v. First
Farmers & Comm. Bank (In re K&L Trailer Leasing, Inc.), Adv. Proc. No. 3:23-ap-03010-SHB
(Bankr. E.D. Tenn. Oct. 9, 2024), ECF No. 51 (relying on Tenn. Code Ann. § 47-1-303(e)).
Further, absent knowledge and reliance by FMEF (which has not been alleged), it cannot be the
beneficiary of any such implied waiver or modification.
As this Court previously explained, the creditors of Leasing were not without the ability
to protect themselves. The Article 9 scheme apportions the risk to the party best able to prevent
the harm.
The continued perfection on disposition of collateral means that “any person
seeking to determine whether a debtor owns collateral free of security interests must
inquire as to the debtor’s source of title and, if circumstances seem to require it,
search in the name of the former owner.” [Tenn. Code Ann. § 47-9-507 cmt. 3.]
Here, the result is that any creditor of Leasing (or any other transferee) that wanted
to ensure a first-priority lien on the trailers offered by Leasing as collateral could
have inquired about Leasing’s source of title.
GFB I, 630 B.R. at 88.
The Ohio Court of Appeals in RFC Capital Corporation v. Earthlink, Inc., 55 UCC Rep.
Serv. 2d 617, 2004 WL 2980402, at *14 (Ohio Ct. App. Dec. 23, 2004), explained the steps
available to a purchaser (or, as in this case, to the lender of a purchaser):
By giving the secured party the power to authorize the release of the security
interest, the UCC places the secured party in a superior position over a third party
purchaser. Thus, the onus is on the third party purchaser to determine if a security
interest exists and ensure that the secured party fully authorizes the release of that
security interest. If the third party purchaser does not conduct a search of UCC
filings or does not obtain a release, it must bear the risk and/or burden of buying
potentially encumbered collateral.
This burden, however, is relatively light. When purchasing goods that are
subject to a security interest, the buyer must simply communicate with the secured
party disclosed in the UCC filing to determine what conditions, if any, the secured
party has placed upon its consent to a release. See Wabasso State Bank v. Caldwell
Packing Co., 251 N.W.2d 321, 324 (Minn. 1976) (“[A] simple phone call would
have determined whether the bank had authorized [the] sale”). If a secured party
discloses that it will only consent if the seller satisfies a condition (whether it be a
condition precedent or subsequent to the release), the buyer can then investigate the
likelihood of the condition occurring, value the collateral in the context of the
potentially ongoing security interest and generally assess the risk of going forward
with the transaction. If the buyer determines that the risk presented by the
conditional consent is too high, it can decide not to consummate the deal. While the
condition may only be in the seller’s power to satisfy, the decision to purchase the
collateral is totally within the buyer’s power.
Given the open and notorious relationship between Sales and Leasing, including their
shared location of operations and common owners, FMEF could and should have inquired about
the source of the Subject Trailers. Indeed, the certificates of origin reflecting Sales as the
transferor to Leasing were provided to FMEF (which then submitted them to the Tennessee
Department of Revenue for issuance of titles with FMEF’s lien noted), which could have
searched for any inventory liens and could have contacted GFB to learn whether the transfers of
the Subject Trailers had been approved by GFB or were sales in the ordinary course under
section 47-2-403(2).
Although sometimes the UCC must be applied in a way that seems inequitable, here, the
Court has no difficulty applying the UCC to find that GFB’s inventory lien remained perfected
and attached to the Subject Trailers after Sales transferred them to Leasing, with “financing”
provided by FMEF.
Finally, FMEF raises an argument that no other creditor has raised in the numerous cases
adjudicated in the past five years over the priority of GFB’s inventory lien. FMEF maintains that
it holds a PMSI and asserts that GFB has not challenged FMEF’s position as a PMSI lienholder
in the Subject Trailers. [Doc. 63 at p. 9.] GFB responds that the transfers from Sales to Leasing
were not in the ordinary course of business as a matter of law so that GFB’s perfected inventory
lien was unaffected by the transfers and that FMEF did not give notice to GFB as required by
Tennessee Code Annotated section 47-9-324 before Leasing took possession of the Subject
Trailers. [Doc. 67 at p. 10.] In fact, Ms. Parks makes clear that she did not receive any inquiry
or notice from FMEF’s assignor or from FMEF. [Doc. 28-1 at ¶¶ 12, 13.]
The Court construes FMEF’s argument as based in the provisions of section 47-9-324,
which provides an exception to the normal rule that priority is established by the first to perfect.
The exception applies to a PMSI in inventory collateral that is already subject to a prior perfected
security interest:
[A] perfected purchase-money security interest in inventory has priority over a
conflicting security interest in the same inventory ... if:
(1) the purchase-money security interest is perfected when the debtor receives
possession of the inventory;
(2) the purchase-money secured party sends an authenticated notification to the
holder of the conflicting security interest;
(3) the holder of the conflicting security interest receives the notification within
five (5) years before the debtor receives possession of the inventory; and
(4) the notification states that the person sending the notification has or expects to
acquire a purchase-money security interest in inventory of the debtor and describes
the inventory.
Tenn. Code Ann. § 47–9–324(b). This provision is explained in comment 4:
The arrangement between an inventory secured party and its debtor
typically requires the secured party to make periodic advances against incoming
inventory or periodic releases of old inventory as new inventory is received. A
fraudulent debtor may apply to the secured party for advances even though it[36]
has already given a purchase-money security interest in the inventory to another
secured party. For this reason, subsections (b)(2) through (4) and (c) impose a
second condition for the purchase-money security interest’s achieving priority: the
purchase-money secured party must give notification to the holder of a conflicting
security interest who filed against the same item or type of inventory before the
purchase-money secured party filed or its security interest became perfected
temporarily under Section 9-312(e) or (f). The notification requirement protects the
non-purchase-money inventory secured party in such a situation: if the inventory
secured party has received notification, it presumably will not make an advance; if
it has not received notification (or if the other security interest does not qualify as
purchase-money), any advance the inventory secured party may make ordinarily
will have priority under Section 9-322. . . .
Tenn. Code Ann. § 47-9-324, cmt. 4 (emphasis added). Even if this provision applied to FMEF
in these circumstances,37 the undisputed facts establish that FMEF did not give the required
notice for its PMSI to have priority over GFB’s inventory lien.
V. CONCLUSION
Because GFB has established by undisputed material facts that the transfers of the
Subject Trailers from Sales to Leasing were not sales to Leasing as a buyer in the ordinary
course of business (because Leasing is charged with knowledge that the transfer was in violation
of GFB’s inventory security interest), the Court finds that summary judgment in favor of GFB is
required under Tennessee law.
36 Notably, the word “it” refers to “debtor,” meaning the same debtor that obtains funds from its inventory financier
and from a PMSI lender. Again, here Sales obtained funds from GFB, but Leasing obtained funds from FMEF.
37 To reiterate, the PMSI provision does not apply to the priority battle here because FMEF’s debtor is Leasing, not
Sales.
A Judgment consistent with this Memorandum will be entered.
FILED: March 31, 2025
BY THE COURT
s/ Suzanne H. Bauknight
SUZANNE H. BAUKNIGHT
UNITED STATES BANKRUPTCY JUDGE