## Facts

- Charles E. Johnson, Jr. and R. Geoff Layne held large positions in PurchasePro.com stock subject to resale restrictions and sought liquidity.
- Each entered a separate line of credit with Bank One secured by pledged PurchasePro shares (Johnson about $2.8 million; Layne about $3.25 million).
- The credit agreements set loan-to-value (LTV) default thresholds based on outstanding balance divided by market value of pledged stock (Layne 50%; Johnson 40%).
- If an LTV threshold was exceeded, the borrower had five days to notify Bank One and either add collateral or reduce the balance.
- PurchasePro’s stock price dropped sharply; Bank One treated the LTV thresholds as breached and sold the pledged stock on a national securities exchange to satisfy the debt.
- Johnson and Layne alleged Bank One mishandled the collateral and violated contractual and extra-contractual duties, causing losses tied to the decline in share value.

## Issues

1. Whether, under Kentucky’s UCC Article 9, a secured party in possession has a duty to protect stock collateral from market depreciation.
2. Whether Bank One’s disposition of the pledged stock on a national securities exchange was commercially reasonable.
3. Whether the parties’ lender-borrower relationship and transaction structure created a fiduciary relationship and, if so, whether it was breached.
4. Whether Bank One breached the loan or pledge agreements regarding notice, margin/LTV events, or liquidation rights.
5. Whether Bank One was entitled to summary judgment on its counterclaims to enforce the borrowers’ repayment obligations (including any deficiency).

## Decision

- The Sixth Circuit affirmed summary judgment for Bank One on all claims and counterclaims.
- Bank One was not liable for the collateral’s decline in market value because Article 9’s “reasonable care” duty concerns custody and preservation, not insulating the debtor from market risk.
- Selling the pledged shares on a national securities exchange was commercially reasonable as a matter of law on this record.
- The evidence did not establish a fiduciary relationship under Kentucky law; the relationship remained an arms-length lender-borrower arrangement.
- The contract claims failed because the agreements authorized Bank One’s actions upon LTV breach and plaintiffs did not show a genuine dispute of material fact.
- With no actionable wrongdoing by Bank One and enforceable default/liquidation rights established, Bank One was entitled to judgment on its counterclaims.

## Legal Principles

- Under Kentucky UCC Article 9, a secured party’s duty of reasonable care in custody and preservation of collateral does not make the secured party an insurer against market fluctuations in collateral value.
- A disposition of publicly traded stock collateral through a national securities exchange is generally a commercially reasonable method absent evidence of bad faith or improper conduct.
- Under Kentucky law, a fiduciary duty does not arise from a typical bank-customer or lender-borrower relationship without proof of special trust and confidence beyond ordinary commercial dealing.
- Where contract terms authorize default remedies triggered by specified LTV thresholds, and no contractual violation is shown, liquidation of collateral consistent with those terms does not support a breach-of-contract claim.

## Conclusion

The court held that a secured lender’s Article 9 duties require reasonable custodial care of pledged stock, not protection from market losses, and that an exchange sale of the stock was commercially reasonable; it further found no fiduciary relationship or contractual breach and affirmed judgment for the lender on both the borrowers’ claims and the lender’s counterclaims.


Layne v. Bank One, Ky., N.A., 395 F.3d 271 (6th Cir. 2005)