FILED
NOT FOR PUBLICATION DEC 07 2012
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
METROPOLITAN BANK & TRUST 11-15849
CO.,
D.C. No. 01-cv-622-LDG-LRL
Plaintiff-counter-defendant,
MEMORANDUM*
v.
DESERT VALLEY FINANCIAL LLC,
Defendant-Appellee,
PACIFIC BUSINESS CAPITAL CORP.
Defendant-cross-claimant-
Appellee,
v.
HUNTINGTON NATIONAL BANK,
Counter-defendant-Appellant,
Appeal from the United States District Court
for the District of Nevada
Lloyd D. George, District Judge, Presiding
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Argued and submitted August 7, 2012
San Francisco, California
Before: CALLAHAN and WATFORD, Circuit Judges, and KORMAN,
Senior District Judge.**
Silver State Mobile Home sold mobile homes that were financed by Galaxy
Financial Services. Pacific Business Capital Corporation (“PBCC”) extended loans
to Silver State and Galaxy in return for a blanket security interest in all their property,
including the chattel paper created from the mobile home sales. Subsequently, Silver
State and Galaxy sold the chattel paper from the mobile home loans to Mountain, who
in turn sold it to First Commercial, who in turn sold it to Metropolitan Bank & Trust
Company. Metropolitan conducted due diligence on Silver State and Galaxy prior to
purchasing the chattel paper. The sales contract provided that Silver State and Galaxy
continued to service the loans underlying the chattel paper and that if a mobile home
owner defaulted on a loan, Metropolitan could substitute the defaulted loan for a new
loan in good standing.
In August of 2000, Silver State and Galaxy collapsed and PBCC commenced
a foreclosure sale of their assets, at which it purchased the chattel paper. On May 15,
2001, Metropolitan sued PBCC for conversion, alleging that its interests in the chattel
**
The Honorable Edward R. Korman, Senior United States District
Judge for the Eastern District of New York, sitting by designation.
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paper were superior, and PBCC counterclaimed for conversion. After a bench trial,
the district judge held that PBCC’s security interest had priority and that Metropolitan
failed to prove it was entitled to the exception in U.C.C. § 9-308(a) (Cal. Comm. Code
§ 9308), as it read prior to the 2001 revision, which, to the extent here relevant, would
have given it priority if it took possession of the chattel paper without actual
knowledge of PBCC’s security interest. Because the district court did not correctly
resolve this issue, we remanded the case to the district court for the purpose of
determining whether Metropolitan proved that it took possession of the chattel paper
without its own actual knowledge of PBCC’s security interest, and if so, whether
Metropolitan gave new value for the substitute mobile home loans that it took. On
remand, the district judge held that Metropolitan failed to meet its burden of proving
that it purchased the chattel paper without actual knowledge of PBCC’s security
interest. Metropolitan again appeals.
Metropolitan argues first that it does not bear the burden of proving the
elements of § 9-308(a). This argument is contrary to our holding in the first appeal
that “Metropolitan needed to prove that [it took possession of the chattel paper]
without its own actual knowledge of PBCC’s security interest.” Metropolitan Bank
& Trust Co. v. Desert Valley Fin. LLC., 359 Fed. App’x 764, 765 (9th Cir. 2009)
(emphasis in original). Moreover, we agree that it is “incumbent” upon a party
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asserting a § 9-308(a) defense to prove that it had no knowledge of the prior security
interest. In re Comm. Mgmt. Serv., Inc., 127 B.R. 296, 306 (Bankr. D. Mass. 1991).
“This approach is consonant with ‘the ordinary rule [which], based on considerations
of fairness, does not place the burden upon a litigant of establishing facts peculiarly
within the knowledge of his adversary.’” Campbell v. United States, 365 U.S. 85, 96
(1957) (quoted in Nealey v. Transp. Maritima Mexicana, S.A., 662 F.2d 1275, 1280-
81 (9th Cir. 1980)); Nader v. Allegheny Airlines, Inc., 512 F.2d 527, 538 (D.C. Cir.
1975); Nemeth v. Pankost, 224 Cal. App. 2d 351, 356 (Cal. Dist. Ct. App. 1964). A
contrary approach would place PBCC in the difficult position of proving the extent
of Metropolitan’s knowledge.
Second, Metropolitian challenges the district judge’s finding that it did not
satisfy its burden of proving that it purchased the chattel paper without actual
knowledge of PBCC’s security interest. The district judge’s factual findings
following a bench trial are reviewed for clear error. Fed. R. Civ. P. 52(a)(6); Milicevic
v. Fletcher Jones Imports, Ltd., 402 F.3d 912, 915 (9 th Cir. 2005). The district judge
did not clearly err. The evidence in the record established that, in response to a notice
to admit that it had knowledge of PBCC’s security interest since at least April 15,
1998, Metropolitan admitted that it obtained actual knowledge “at some point in
time,” and that it was conducting an investigation to determine the specific date on
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which it did. While this response did not constitute an admission that Metropolitan
had actual knowledge, it allows for an inference that it may have had such knowledge
at the time it took possession of the chattel paper. Indeed, after providing this vague
response, Metropolitan did not subsequently update their admission in a way that
would have eliminated this inference.
Moreover, Metropolitan conducted extensive due diligence prior to purchasing
the chattel paper. The two critical witnesses to the due diligence conducted at
Mountain Bank were James Taylor, Metropolitan’s due diligence representative, and
James Tyler, First Commercial’s representative. Mr. Taylor did not affirmatively
deny awareness of PBCC’s security interest but only testified that he did not recall
whether or not PBCC was mentioned in the files he reviewed. ER 344. Mr. Tyler,
who was present with Mr. Taylor when they both reviewed the files, testified that Mr.
Taylor reviewed the “files of Mountain Community Bank regarding its purchase of
the loans from Galaxy Financial Services.” ER 252-53. Moreover, Mr. Taylor
admitted to having a conversation, albeit brief, with a Galaxy employee, about PBCC
as a creditor.
Judge Watford argues in his dissent that “the only information PBCC claims
Metropolitan had access to during the due diligence review was legally insufficient
to confer the required actual knowledge.” This assumes that the only documents in
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the files would have been U.C.C. filings in which PBCC asserted a blanket security
interest in all of Galaxy’s chattel paper. This is not necessarily the case. There is
evidence supporting the inference that the files could have contained pledge
agreements granting PBCC a security interest in “all of the Manufactured Home Retail
Installment and Security Agreements . . . now owned or hereafter acquired.” These
pledge agreements contained a list of specific mobile-home loans covered. See, e.g.,
SER 180. We know what the pledge agreements generally contained because some,
relating to different chattel paper, were produced by Galaxy as a part of discovery in
related litigation. Significantly, Metropolitan failed to produce its files from this due
diligence. This failure left unanswered evidence that the district judge was permitted
to rely on in finding that Metropolitan failed to meet its burden.
In sum, this is a close case, the outcome of which is dictated by the burden of
proof, the holes in Metropolitan’s defense, and the deference owed to the district
court’s finding that Metropolitan failed to meet its burden of proof that it took
possession of the chattel paper without actual knowledge of PBCC’s interest.
AFFIRMED.
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FILED
Metropolitan Bank & Trust Co. v. Desert Valley Financial LLC, No. 11-15849
DEC 07 2012
WATFORD, Circuit Judge, dissenting: MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
Metropolitan produced evidence that its employees who conducted the due
diligence on the loan contracts it purchased did not actually know of PBCC’s
security interest in those contracts. In response, the majority notes that
Metropolitan failed to produce its due diligence file, and that one employee
admitted having a brief conversation with a Galaxy employee about PBCC as a
creditor. But the only information PBCC claims Metropolitan had access to during
the due diligence review was legally insufficient to confer the required actual
knowledge. Even if Metropolitan employees had seen the UCC filings in which
PBCC asserted a blanket security interest in all of Galaxy’s chattel paper, that
would not have sufficed to impart actual knowledge as to any specific chattel
paper. See U.C.C. § 9-308, Official Comment 3 (“Mere knowledge of an Article 9
filing against chattel paper does not give knowledge of the existence of a security
interest in the chattel paper.”); see also 9 Ronald A. Anderson & Lary Lawrence,
Anderson on the Uniform Commercial Code § 9-308:7 (3d ed. 1999) (“Even
knowledge that another party has filed a financing statement covering chattel paper
is not sufficient to defeat the purchaser’s priority.”).
In my view, the PBCC Pledge Agreements Metropolitan received on
October 1, 1999 do not change the analysis because for the most part they also
describe only a general security interest in chattel paper. (The few loan contracts
that were specifically identified are not at issue in this case.) Nor do I think
Metropolitan’s failure to update its admission that it obtained actual knowledge “at
some point in time” is of any consequence, because PBCC never moved in the
district court to require a further response or to have the matter deemed admitted.
Thus, I would hold that Metropolitan satisfied its burden of proving that it lacked
the requisite actual knowledge.
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