## Facts

- A bank made loans to mining companies and took a perfected security interest in mining equipment, including 85 heavy metal roof-support “Shields.”
- The debtor companies experienced financial trouble and sold secured equipment without the bank’s permission, including the Shields, which were sold as scrap in late 2005.
- The Shields were transferred through a scrap hauler/dealer (S & S Salvage, LLC) and purchased by a scrap metal buyer (River Metals Recycling, LLC), which lacked actual knowledge of the security interest.
- The secured interest was later assigned to Madison Capital Company, LLC, which stepped into the bank’s position as secured party.
- After default and inspection, the secured party discovered in 2006 that the Shields were missing and learned they had been sold as scrap.
- Madison sued S & S and River Metals in 2008, asserting conversion, negligence, replevin, constructive trust, trespass to chattels, and wrongful withholding based on interference with secured collateral that had been scrapped.
- On summary judgment, the court initially dismissed several claims but left trespass and wrongful withholding for further proceedings; later, it denied Madison’s post-judgment motion and entered summary judgment for defendants on the remaining claims, ending the case.

## Issues

1. Whether River Metals qualified as a buyer in the ordinary course of business under UCC Article 9 and therefore took free of the security interest.
2. Whether Kentucky’s two-year statute of limitations barred the secured party’s conversion claim based on when the secured party knew or should have known of the disposition.
3. Whether a scrap dealer or scrap purchaser owed a tort duty to investigate UCC filings or secured interests before purchasing scrap metal.
4. Whether replevin was available when the defendants did not possess the disputed goods when suit was filed because the goods had been processed as scrap.
5. Whether a constructive trust could be imposed absent proof of fraud, breach of duty, or comparable wrongful conduct by the defendants.
6. Whether the evidentiary record supported trespass to chattels and wrongful withholding after the court’s reconsideration at the post-judgment stage.

## Decision

- The court held River Metals was not a buyer in the ordinary course because the seller was not in the business of selling mining equipment of that kind.
- The court granted summary judgment to defendants on conversion as time-barred under Kentucky’s two-year limitations period, accruing no later than 2006 when the secured party learned the Shields were missing and had been sold.
- The court granted summary judgment to defendants on negligence because neither defendant owed a duty to run UCC searches or otherwise investigate security interests before buying scrap.
- The court granted summary judgment to defendants on replevin because neither defendant possessed the Shields when suit was filed.
- The court granted summary judgment to defendants on constructive trust for lack of evidence of fraud or similar inequitable conduct by defendants.
- After initially allowing trespass and wrongful withholding to proceed, the court later denied Madison’s Rule 59(e) motion and sua sponte granted summary judgment to defendants on the remaining claims, vacating trial and disposing of the action.

## Legal Principles

- UCC buyer-in-ordinary-course protection applies only when goods are purchased from a seller in the business of selling goods of that kind; a user of capital equipment selling it is not such a seller.
- In Kentucky, conversion claims are subject to a two-year limitations period that begins when the plaintiff knew or should have known of the conversion.
- Absent a special relationship or specific legal basis, scrap dealers and scrap purchasers generally have no tort duty to search UCC records before purchasing scrap metal.
- Replevin requires that the defendant possess or control the disputed chattel at the time suit is filed; it is unavailable when the property has been destroyed or processed and is not in defendants’ possession.
- Constructive trust is an equitable remedy requiring proof of wrongful acquisition or retention (such as fraud or abuse of confidence); it does not lie on these facts without such proof.
- A court may enter summary judgment on remaining claims when the developed record shows no genuine dispute of material fact and the movant is entitled to judgment as a matter of law.

## Conclusion

The court entered judgment for the scrap dealer and scrap purchaser on all claims, ruling that buyer-in-ordinary-course status was unavailable, the conversion claim was time-barred, Kentucky law imposed no duty on scrap-market participants to conduct UCC searches, replevin failed for lack of possession, and equitable relief required wrongdoing not shown; the remaining trespass and wrongful withholding claims were later resolved against the secured party at summary judgment.


Madison Cap. Co., LLC v. S & S Salvage, LLC, 765 F. Supp. 2d 923 (W.D. Ky. 2011)