Metropolitan Bank & Trust Co. v. Desert Valley Financial LLC

A mobile-home retailer and its financier both took loans from Pacific Business Capital Corporation (Pacific) (defendant). The retailer and the financier both granted Pacific a blanket security interest in all assets, including chattel paper generated from mobile-home sales, which Pacific perfected by filing. The retailer and the financier later sold the chattel paper that resulted from sales to Mountain Community Bank, which sold the chattel paper to First Commercial. First Commercial sold the chattel paper to Metropolitan Bank & Trust Company (Metropolitan) (plaintiff). In August 2000, the retailer’s and the financier’s businesses both collapsed. Pacific foreclosed on the companies’ assets and purchased the chattel paper at the foreclosure sale. Metropolitan then filed suit against Pacific for conversion and asserted that Metropolitan had a superior interest in the chattel paper. Pacific filed a counterclaim for conversion. A district court ruled that Pacific had the superior interest and that Metropolitan did not prove that it qualified for an exception under the pre-2001 version of Article 9 of the Uniform Commercial Code (UCC), which would grant Metropolitan priority if it had taken possession of the chattel paper without knowledge of Pacific’s prior interest. Metropolitan appealed. The appellate court ruled that the district court had not addressed Metropolitan’s knowledge correctly and remanded the case for a decision regarding whether Metropolitan had actual knowledge of Pacific’s interest when Metropolitan possessed the chattel paper. The district court ruled again that Metropolitan had not met its burden to establish the requisite lack of knowledge. Metropolitan admitted that there was an unspecified point in time when it gained knowledge of Pacific’s interest. Also, of two witnesses who conducted due diligence for Metropolitan, one could not recall if Pacific’s interest was noted in the files reviewed, and the other witness acknowledged knowing Pacific was a creditor. Also, there may have been pledge agreements on file listing particular loans covered. Metropolitan appealed again, arguing that the district court erred in determining that Metropolitan had not met its burden of proof.