## Facts

- Allstate Financial Corporation financed Kane Delivery Limited’s business by purchasing Kane’s accounts receivable and taking a security interest in those receivables.
- Allstate perfected by filing UCC financing statements in Washington, D.C., where Kane was then located.
- Kane moved its principal place of business from Washington, D.C. to Maryland; Allstate did not file a Maryland financing statement until about four months after the move.
- Kane performed work as a subcontractor for Laidlaw Waste Systems, Inc., which paid Kane by check under the subcontract.
- Kane received two Laidlaw checks totaling about $96,888.33 and indorsed them to Financorp, Incorporated.
- Financorp loaned money to Kane on the basis of assignments of Kane’s Laidlaw receivables and searched Maryland UCC records before lending; the search revealed no financing statement covering Kane’s receivables.
- Financorp did not search Washington, D.C. UCC records and asserted it had no knowledge of Allstate’s claim when it took and deposited the checks.
- Financorp deposited the checks and applied the proceeds as a credit against Kane’s outstanding loan balance.
- Allstate claimed the checks were proceeds of receivables subject to Allstate’s prior perfected security interest and sued for unjust enrichment, conversion, and trespass to chattels.

## Issues

1. Whether Financorp qualified as a holder in due course of the two checks under UCC Article 3.
2. If Financorp was a holder in due course, whether that status gave it priority over Allstate’s Article 9 security interest in the receivables and their proceeds.
3. Whether Financorp had notice of Allstate’s claim (or acted in bad faith) such that holder-in-due-course status was defeated, including by reason of Financorp’s position as a junior secured lender.

## Decision

- The Fourth Circuit affirmed summary judgment for Financorp and the denial of Allstate’s summary judgment motion.
- Financorp took the checks for value, in good faith, and without notice of Allstate’s claim; it therefore qualified as a holder in due course.
- As holder in due course of the negotiable instruments, Financorp took the checks free of Allstate’s competing claim to the instruments as proceeds of collateral.
- Financorp’s separate status as Kane’s secured lender on receivables did not, by itself, bar holder-in-due-course status or establish notice.
- Because Financorp had superior rights to the checks, Allstate’s tort and restitution claims failed as a matter of law.

## Legal Principles

- A party is a holder in due course if it takes a negotiable instrument for value, in good faith, and without notice of claims or defenses at the time of taking.
- “Notice” requires actual knowledge, receipt of notification, or reason to know of a specific adverse claim; the mere possibility that prior liens may exist is insufficient.
- A holder in due course takes the instrument free of competing claims, and that priority can defeat an earlier-perfected Article 9 interest asserted in proceeds represented by the instrument.
- A creditor’s status as a secured lender (including a junior lienholder) is not inherently inconsistent with holder-in-due-course status; disqualification depends on proof of notice or lack of good faith.
- When no genuine dispute of material fact exists on notice, good faith, or value, summary judgment is proper.

## Conclusion

The court held that Financorp, having taken the checks for value, in good faith, and without notice of Allstate’s claim, was a holder in due course whose rights in the checks were superior to Allstate’s security interest in the underlying receivables and their proceeds, defeating Allstate’s conversion, trespass, and unjust enrichment theories.


Allstate Fin. Corp. v. Financorp, Inc., 934 F.2d 55 (4th Cir. 1991)