A perfected security interest in collateral continues to exist in that collateral despite a secured creditor’s failure to comply with a separate state statute requiring it to file a claim of “exemption” from a levying creditor. In Keybank Nat’l Ass’n v. PAL I, LLC, 155 Idaho 287 (2013), the Idaho Supreme Court held that a secured creditor, who failed to follow a certain statutory “exemption” procedure when a judgment creditor ordered a levy against the debtor’s property, did not forfeit its perfected security interest in the collateral or its proceeds.
KeyBank, the secured creditor, made two separate loans to the debtor, Tri-Steel, and secured those loans with security interests in Tri-Steel’s inventory, equipment, accounts, attachments, accessories, tools, parts and supplies. KeyBank filed a UCC financing statement and perfected its security interest in Tri-Steel’s collateral. Tri-Steel then defaulted on its obligations under its promissory notes and security agreements with KeyBank, and KeyBank filed suit against it.
PAL I, LLC (“PAL”), an unsecured creditor, also filed suit against Tri-Steel and was awarded a monetary judgment against it, thereby making PAL a judgment creditor of Tri-Steel. PAL then obtained a writ of execution against Tri-Steel’s property and directed the sheriff to levy and sell the property to collect against PAL’s judgment. At that time, the sheriff mailed KeyBank a claim of exemption under Idaho Code §11-203 (“I.C. 11-203”). While KeyBank did not respond to the claim of exemption, as required by I.C. 11-203, it did send letters to both PAL and the sheriff asserting the bank’s perfected security interest in Tri-Steel’s property, and requesting that the sheriff’s sale be postponed. Despite KeyBank’s communications, the sheriff’s sale went ahead on behalf of PAL, and no proceeds from the sale were provided to KeyBank.
The Idaho Supreme Court affirmed the district court in its judgment for KeyBank and held that KeyBank’s non-compliance with I.C. 11-203 did not forfeit its perfected security interest in Tri-Steel’s collateral. The court also held that KeyBank’s perfected security interest in the debtor’s collateral passed to the proceeds of that collateral upon its sale. PAL asserted that I.C. 11-203 obligated KeyBank to return the claim of exemption form in order to maintain its perfected security interest. The court found, however, that the statute was trumped by Idaho’s Article 9 of the Uniform Commercial Code (“UCC”) — specifically, Idaho’s UCC 9-315, which states that a perfected security interest continues in the collateral regardless of its sale. The security interest only terminates when the party holding the security interest authorizes disposition of the collateral free of the security interest. Because KeyBank clearly notified PAL of its perfected security interest and did not authorize disposition of the collateral, its security interest remained in the proceeds of the collateral following its sale.
Moreover, I.C. 11-203 was not rendered meaningless by this decision, as PAL argued, because its purpose was procedural, not substantive. The court continued its reasoning to state that I.C. 11-203 had no bearing on the creation or extinguishing of perfected security interests, and that the statute merely provided the sheriff with procedures to carry out sales of levied property. It also allowed secured creditors a chance to assert their security interests in the debtor’s property by filing the statutory claim of exemption, but noncompliance with such filing did not affect their rights or interests as secured creditors. The court held, therefore, that KeyBank’s failure to file a claim of exception under the statute by no means resulted in a forfeiture of its perfected security interest.
The court then rejected PAL’s argument that the doctrine of quasi-estoppel prevented KeyBank from recovering from the proceeds of collateral. The court held that quasi-estoppel only applied when the offending party asserted a position inconsistent with its original position. The court found here that KeyBank never changed its original position. It contacted PAL and the sheriff to notify them of its perfected security interest in the debtor’s collateral and consistently maintained that position. Thus, KeyBank’s failure to respond to the claim of exemption was not inconsistent with its assertion of a perfected security interest.
Finally, the Idaho Supreme Court held that the district court’s ruling upholding KeyBank’s perfected security interest did not violate the Equal Protection Clause of the Fourteenth Amendment. While the parties were treated differently, KeyBank, PAL and Tri-Steel were not similarly situated because secured creditors, judgment creditors and judgment debtors are all different classes of people. This distinction among different classes of people precluded the disparate treatment among KeyBank, PAL and Tri-Steel from triggering the Equal Protection Clause.
Thus, the Supreme Court of Idaho affirmed the district court and held that a perfected security interest survived a sheriff’s sale of assets and maintained priority over judgment liens, despite the secured creditor’s failure to comply with the levy exemption statue under I.C. 11-203.