Magazine article The RMA Journal

Bank Assigning Security Interest That Had Been Terminated on the Public Record Not Guilty of Fraud

Magazine article The RMA Journal

Bank Assigning Security Interest That Had Been Terminated on the Public Record Not Guilty of Fraud

Article excerpt

Western Mortgage and Realty Co. v. Key Bank National Association (1) involved a bank that assigned a security interest to a third party after the security interest had been terminated on the public record. That fact notwithstanding, the bank successfully defended itself against claims by the assignee.

The factual background leading up to this case is extensive, but irrelevant to the question the court had to decide. So here is a simplification.

As part of a May 2007 loan purchase by Western from Key Bank, Western was to acquire Key Bank's security interest in the proceeds of a lawsuit. In a loan sale agreement, Key Bank warranted to Western that it had good title to the proceeds and had not previously assigned its interest in them. At the same time, Western warranted it was a sophisticated purchaser and had performed such due diligence as it deemed necessary or appropriate. Western was given a listing of all the UCC financing statements applicable to its purchase.

At closing, Western and Key Bank executed another document called an assignment of security agreement without recourse and without warranty. Western did not undertake to verify that the UCC financing statements were valid as of May 2007.

In June 2010, Western's attorney finally performed a UCC search and discovered that Key Bank had terminated its security interest in the litigation proceeds in 2006. Western sued Key Bank for breach of warranty, breach of the implied covenant of good faith and fair dealing, and fraud. The court began its discussion with this stinging comment:

"[This case] is lesson in the confusion that can result from inartful drafting of agreements by lawyers and non-lawyers, insufficient due diligence, the failure of sophisticated parties to adequately review documents prior to execution and trying to interpret contracts years after the contracts were signed and other events have unfolded. …

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