Business Law (UCC; setoffs): KENTUCKY HIGHLANDS INVESTMENT CORP. V. BANK OF CORBIN [COA 9/15/2006]

KENTUCKY HIGHLANDS INVESTMENT CORP.  V. BANK OF CORBIN
BUSINESS AND CONTRACTS:  UCC Revised Article 9 (depository banks, claims, priorities, secured creditors) 

2005-CA-000686
PUBLISHED: AFFIRMING (COMBS)
DATE RENDERED:  9/15/2006

Kentucky Highlands Investment Corporation (“Kentucky Highlands”) appeals from a summary judgment granted by the Whitley Circuit Court in favor of the Bank of Corbin, Inc., (“the Bank”) regarding a priority dispute between Kentucky Highlands and the Bank of Corbin over funds on deposit. The Bank claimed a right of set-off against funds in a commercial deposit account, but Kentucky Highlands asserted a perfected security interest in the same funds.

Kentucky Highlands was the primary lender to Tri-County Manufacturing and Assembly Incorporated (“Tri-County Manufacturing”) and its affiliates, including Tritech Electronics, LLC (“Tritech”). Various loans extended to these debtors by Kentucky Highlands totaled more than five million dollars.

Kentucky Highlands contended that the loans were secured by a properly perfected security interest in all of the debtors’ personal property and an assignment of the debtors’ customer accounts receivable.  Tritech maintained a commercial deposit account with the Bank of Corbin. The Bank obtained a security interest in the deposits held at the Bank pursuant to a loan agreement between Tritech and the Bank, and it held a well-established right of set-off against the account.

Customer payments generally were not deposited into Tritech’s account. Instead, provisions of its loan agreements with Kentucky Highlands required Tritech to direct customers to remit their payments directly to Kentucky Highlands. The Tritech deposit account was funded primarily by transfers from an account held by Tri-County Manufacturing. Tri-County Manufacturing funded those advances on a line of credit provided by Kentucky Highlands. Kentucky Highlands was aware of Tritech’s account with the Bank of Corbin. Pursuant to the provisions of KRS 355.9-104(1), it could have taken steps to protect itself by taking control of the account. But it made no attempts to do so.

Kentucky Highlands having loaned money to Tritech had a security interest in Tritech’s accounts receivables and sued the Bank of Corbin bank where an affiliate of  Tritech (Tri-County) had maintained a commercial deposit account, alleging Tri-County was depositing customer payments in the account and that Bank of Corbin had colluded with with Tri-County to effect the conversion of Kentucky Highands’ lender collateral. Bank answered, claiming it had a superior right of set-off against the disputed funds. The Circuit Court granted bank’s motion for summary judgment finding its set-off right was superior.  The Court of Appeals affirmed holding the Kentucky Highlands which had loaned money to Tritech had failed to show it had priority over Bank of Corbin’s set-off rights to funds in deposit account, and the Bank of Corbin was not a “transferee” under statute which prohibited the transfer free of security interest in event of collusion.

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