638 B.R. 324
Bankr. M.D. Penn.2022Background
- Parties: Auto Trakk, LLC (purchaser/lessor), East Shore Auto, Inc. (dealer/debtor), Dealer Resources, LLC (floor‑plan financier with perfected UCC liens); Chapter 7 case filed by East Shore.
- Two relevant prepetition arrangements: (1) Dealer Resources provided floor‑plan financing and perfected liens on inventory; (2) East Shore sold vehicles plus lease contracts to Auto Trakk (Lycoming Auto Trust), with an understanding proceeds would be used to pay off any liens.
- Auto Trakk purchased five disputed vehicles prepetition; East Shore failed to pay Dealer Resources and did not transfer titles; Dealer Resources retained perfected liens and listed them on titles.
- Auto Trakk stipulated it had no knowledge that its purchases violated Dealer Resources’ rights; Dealer Resources argued Auto Trakk was not a buyer in the ordinary course and thus could not take free of its liens.
- Bench trial held; Court found Auto Trakk a buyer in the ordinary course, thereby taking the Vehicles free and clear of Dealer Resources’ liens; those liens instead attached to the sale proceeds (which are unaccounted for).
- Relief: Court entered judgment for Auto Trakk but did not order Dealer Resources to surrender titles; Auto Trakk must pursue separate proceedings to compel title transfer if Dealer Resources refuses.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Auto Trakk is a buyer in the ordinary course (BOC) who takes free of Dealer Resources’ perfected liens | Auto Trakk purchased in good faith, in ordinary course of East Shore’s business, without knowledge its purchase violated Dealer Resources’ rights | Dealer Resources: Auto Trakk failed due diligence, knew or should have known of liens, and sales were outside ordinary course | Auto Trakk was a BOC under 13 Pa.C.S. §1201 and took the Vehicles free of Dealer Resources’ liens |
| Whether Auto Trakk’s lack of title delivery, failure to inspect East Shore’s books, or other irregularities prove bad faith | Such breaches were East Shore’s, not evidence of Auto Trakk’s bad faith | Irregularities show Auto Trakk was not a good‑faith purchaser | Court: East Shore’s breaches do not establish Auto Trakk’s bad faith; stipulated lack of knowledge controls and statutory BOC rule applies |
| Whether Dealer Resources’ perfected lien survives against Auto Trakk via entrustment/floor‑plan reservation | Auto Trakk: Dealer Resources entrusted vehicles to East Shore; entrustment permits merchants to transfer entruster’s rights to BOC | Dealer Resources: perfection and contractual reservations prevent transfer; distinguishes precedent by perfection method | Court: entrustment doctrine applies (KDG/NMAC analogies); Dealer Resources’ interest ended as to Vehicles sold to BOC; its lien attached to sale proceeds |
| Whether Dealer Resources’ lien extends to lease payments/receipts collected by Auto Trakk | Auto Trakk: proceeds = money paid by buyer to seller; Dealer Resources’ lien limited to sale proceeds held by East Shore | Dealer Resources: seeks lien on ongoing lease payments received by Auto Trakk/assignee | Court: rejected extension; lien is on sale proceeds, not on subsequent lease receipts collected by purchaser/assignee |
Key Cases Cited
- KDG Auto Sales, Inc. v. Asta Funding, Inc., 781 A.2d 202 (Pa. Super. Ct. 2001) (entrustment to dealer permits dealer to transfer entruster’s rights to buyer in ordinary course)
- Nissan Motor Acceptance Corp. v. Sports Car Leasing LLC, 529 F. Supp. 3d 371 (E.D. Pa. 2021) (floor‑plan entrustment and consistent dealership practice support BOC transfers free of financier’s reserved security interest)
- Assocs. Disc. Corp. v. Old Freeport Bank, 421 Pa. 609, 220 A.2d 621 (Pa. 1966) (defines "proceeds of the sale" as the money paid by the buyer to the seller)