## Facts

- Goodrich & Pennington Mortgage Fund, Inc. (G&P) originated mortgage loans.
- In 1997, G&P entered into an arrangement with Advanta Mortgage Corp., USA (Advanta) for Advanta to service G&P’s mortgages, including collecting payments and addressing borrower defaults.
- Under separate agreements related to the servicing relationship, G&P was entitled to receive payments from Advanta connected to the servicing of G&P’s mortgage loans.
- In 1999, HomeGold Financial, Inc. (HomeGold) made a series of loans to G&P totaling $1,000,000.
- As collateral for HomeGold’s loans, G&P granted HomeGold a security interest in G&P’s contractual right to receive the servicing-related payments from Advanta.
- G&P notified Advanta of HomeGold’s security interest.
- In 2001, Advanta appointed Chase Home Finance, LLC (Chase) as Advanta’s attorney-in-fact to perform servicing functions for the G&P mortgages.
- In December 2005, G&P defaulted on its obligations to HomeGold.
- Ralph C. McCullough, as plan trustee for the HomeGold-related bankruptcy estates (Trustee), sued in the U.S. District Court for the District of South Carolina, asserting:
  - breach-of-contract claims against G&P; and
  - a tort claim against Advanta and Chase for negligent/wrongful impairment of collateral, alleging negligent servicing reduced G&P’s revenue and contributed to G&P’s default, impairing HomeGold’s collateral (the payment rights).
- The district court dismissed the tort claim and certified to the Supreme Court of South Carolina the question whether state law recognizes such a claim by a secured creditor against a third party.

## Issues

1. Whether South Carolina recognizes a secured creditor’s tort claim against a third party for causing a reduction in the value of the creditor’s collateral (a claim framed as negligent impairment of collateral).
2. Whether the secured creditor can show a duty running from the third party to the secured creditor based on notice of the security interest, the secured party’s interest in the collateral, the parties’ commercial relationships, or the UCC.

## Decision

- The Supreme Court of South Carolina answered the certified question “no.”
- South Carolina does not recognize a stand-alone tort claim by a secured creditor against third parties for negligent impairment of collateral on these alleged facts.
- The court concluded the Trustee’s claim failed because Advanta and Chase owed no tort duty to HomeGold arising from the servicing arrangements or the fact that they were notified of HomeGold’s security interest.

## Legal Principles

- Negligence requires a legally recognized duty owed by the defendant to the plaintiff; whether a duty exists is a question of law.
- A third party’s knowledge that a creditor holds a security interest in a debtor’s contract rights does not, by itself, create a tort duty to protect the creditor from economic harm tied to the collateral’s value.
- In commercial settings where the alleged harm is a reduced revenue stream and related loss in collateral value, South Carolina will not create a new negligence duty absent a separate source of obligation running directly to the secured creditor.
- Article 9 of the UCC supplies tools and rights for secured creditors within secured-transactions law, but it does not, without more, create an implied tort cause of action against unrelated third parties for negligent impairment of collateral.
- Recognizing a broad negligence duty to secured creditors based solely on foreseeable economic effects of a third party’s performance under contracts with the debtor would expand tort liability beyond existing duty limits.

## Conclusion

McCullough holds that South Carolina does not recognize a secured creditor’s independent tort claim against third parties for negligent impairment of collateral when the creditor alleges only that the third parties’ servicing conduct reduced the debtor’s revenue stream and thereby diminished the value of the creditor’s security interest, and no separate duty ran from the third parties to the creditor.


McCullough v. Goodrich & Pennington Mortgage Fund, Inc., 644 S.E.2d 43 (2007)