## Facts

- A mobile-home retailer and its financier borrowed from Pacific Business Capital Corporation (Pacific) and granted Pacific a blanket security interest in all assets, including chattel paper generated by mobile-home sales.
- Pacific perfected its security interest by filing.
- The retailer and financier later sold the chattel paper to Mountain Community Bank, which sold it to First Commercial.
- First Commercial sold the chattel paper to Metropolitan Bank & Trust Company (Metropolitan).
- In August 2000, the retailer and financier collapsed.
- Pacific foreclosed on the companies’ assets and purchased the chattel paper at the foreclosure sale; Desert Valley Financial LLC later held the rights tied to Pacific’s position in the litigation.
- Metropolitan sued for conversion, claiming it had a superior interest in the chattel paper; Pacific asserted a counterclaim for conversion.
- Under the pre-2001 version of U.C.C. Article 9, a purchaser of chattel paper could obtain priority over a prior perfected secured party if it met the statutory requirements, including taking possession without actual knowledge of the prior interest.
- In the first round of proceedings, the district court ruled for Pacific, concluding Metropolitan did not prove it qualified for the chattel-paper purchaser priority rule.
- On Metropolitan’s first appeal, the Ninth Circuit remanded for the district court to decide whether Metropolitan had actual knowledge of Pacific’s interest when Metropolitan possessed the chattel paper.
- On remand, the district court again ruled against Metropolitan, finding Metropolitan did not meet its burden to show it lacked actual knowledge.
- The evidence on remand included Metropolitan’s admission that at some unspecified time it learned of Pacific’s interest; testimony from two Metropolitan due-diligence witnesses (one unable to recall whether Pacific’s interest appeared in reviewed files and another acknowledging awareness that Pacific was a creditor); and indications that pledge agreements or similar documents might have identified loans subject to Pacific’s claim.
- Metropolitan appealed again, challenging the district court’s post-remand finding on actual knowledge and burden of proof.

## Issues

1. Whether Metropolitan, seeking priority as a purchaser of chattel paper under former U.C.C. § 9-308, bore the burden to prove it took possession of the chattel paper without actual knowledge of Pacific’s prior perfected security interest.
2. Whether the district court clearly erred in finding that Metropolitan failed to prove the absence of actual knowledge during the period it possessed the chattel paper.

## Decision

- The Ninth Circuit affirmed the judgment for Desert Valley and against Metropolitan.
- Metropolitan bore the burden to prove the elements of the former U.C.C. § 9-308 chattel-paper purchaser priority rule, including the “without actual knowledge” requirement.
- The district court did not clearly err in finding Metropolitan failed to carry that burden based on the record and reasonable inferences drawn from the evidence.
- Because Metropolitan did not establish the statutory lack-of-knowledge condition, it was not entitled to priority over Pacific/Desert Valley, and Metropolitan’s conversion theory failed.  
- Judge Watford dissented, arguing the evidence did not support a finding that Metropolitan had actual knowledge at the relevant time and that the district court’s inference of actual knowledge was mistaken.

## Legal Principles

- Under the pre-2001 U.C.C. Article 9 priority rule for purchasers of chattel paper (former U.C.C. § 9-308), a purchaser can obtain priority over an earlier perfected secured party only if it satisfies the statute’s conditions, including taking possession without actual knowledge of the prior security interest.
- The party invoking the statutory priority exception bears the burden of proof on its requirements, including lack of actual knowledge.
- A district court’s finding about a party’s actual knowledge is a factual determination reviewed on appeal for clear error; the judgment stands if the finding is plausible on the full record, even if other inferences are possible.

## Conclusion

The Ninth Circuit affirmed the post-remand judgment that Metropolitan failed to prove it possessed the chattel paper without actual knowledge of Pacific’s prior perfected security interest, so Metropolitan could not claim priority under former U.C.C. § 9-308 and could not prevail on its conversion claim against Desert Valley.


Metropolitan Bank & Trust Co. v. Desert Valley Financial LLC, 500 F. App’x 611, 2012 U.S. App. LEXIS 25098 (2012)