## Facts

- RFC Capital Corporation (RFC) extended Internet Commerce & Communications, Inc. (ICC) up to $12 million under a revolving loan and security agreement.
- As collateral, ICC granted RFC a perfected security interest in ICC’s “customer base” and related intangibles, and ICC could not transfer the collateral without RFC’s express written consent.
- RFC perfected its security interest by filing a UCC-1 financing statement.
- ICC later contracted to sell its dial-up customer base to EarthLink, Inc. (EarthLink), with EarthLink agreeing to pay a per-customer “bounty” (reported as $190 per transferred customer who met specified service/payment conditions).
- ICC represented to EarthLink that RFC had already agreed to release its lien on the customer base, even though RFC had not provided an unconditional release at that point.
- In 2001, RFC and ICC executed a “Second Amendment” to their security agreement addressing the EarthLink transaction; RFC consented to the sale and agreed to release its security interest in the purchased customer base only upon ICC’s complete performance of its obligations under the loan documents.
- ICC promised EarthLink that at least 40,000 customers would transfer, but only 25,144 customers transferred; EarthLink suspended payments to ICC.
- ICC did not fully perform its obligations to RFC, and RFC did not provide an unconditional termination or release of its perfected security interest.
- RFC sued EarthLink in tort (including conversion, tortious interference, and unjust enrichment), claiming EarthLink impaired RFC’s security interest by taking and using the customer base.
- A jury returned a verdict for RFC, and the trial court entered judgment for approximately $6 million; EarthLink appealed.

## Issues

1. Did RFC’s execution of the Second Amendment constitute an immediate, unconditional release of RFC’s security interest in the customer base sold to EarthLink?
2. Where EarthLink acquired the customer base through a contract with ICC, did RFC prove conversion without evidence that RFC demanded return of the collateral (or its equivalent) and EarthLink refused?
3. Did the evidence support RFC’s tortious interference and unjust enrichment claims against EarthLink under these facts?
4. Did the trial court err by giving the jury an adverse-inference instruction based on alleged spoliation by EarthLink?

## Decision

- The Court of Appeals of Ohio, Tenth Appellate District, reversed the judgment for RFC and remanded.
- The court held that RFC’s consent and any release in the Second Amendment were conditional and did not become effective merely upon execution; the condition—ICC’s complete performance—was not satisfied.
- The court held that EarthLink’s initial acquisition of the customer base was lawful, so conversion required proof of a demand and refusal; RFC failed to prove that element, requiring judgment for EarthLink on conversion.
- The court found RFC’s remaining tort theories, including tortious interference and unjust enrichment, were not supported on the record and did not justify the verdict.
- The court held the trial court abused its discretion by giving an adverse-inference spoliation instruction without an adequate foundation that EarthLink wrongfully destroyed or withheld evidence that could not be obtained from other sources.

## Legal Principles

- A secured party may give consent to a disposition of collateral while conditioning any lien release on the debtor’s full performance; absent satisfaction of the stated condition, the security interest is not released.
- A perfected security interest, reflected by UCC filings, provides notice to third parties; a buyer cannot treat a debtor’s assurances of release as a substitute for an actual release by the secured party.
- Under Ohio law, when a defendant’s initial possession of property is lawful, conversion generally requires proof that the plaintiff demanded return (or equivalent control) and the defendant refused.
- An adverse-inference instruction for spoliation requires a sufficient showing of wrongful destruction or withholding of relevant evidence and resulting prejudice, especially where the missing information is not reasonably available through other means.
- Trial courts must ensure jury instructions match the evidentiary record; an unsupported spoliation instruction can warrant reversal when it may have affected the verdict.

## Conclusion

The appellate court reversed a $6 million judgment for a secured lender after concluding that the lender’s consent to the sale of the borrower’s customer base to EarthLink did not operate as an unconditional release because the release was expressly contingent on the borrower’s complete performance, that conversion failed because EarthLink lawfully obtained the customer base and the lender did not prove demand and refusal, and that the trial court’s spoliation adverse-inference instruction lacked an adequate evidentiary basis, requiring remand for further proceedings.


RFC Capital Corp. v. EarthLink, Inc., 2004 Ohio 7046, 55 UCC Rep. Serv. 2d 617 (2004)