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Blanken v. Kentucky Highlands Investment Corporation

United States District Court, E.D. Kentucky, Southern Division, London

February 27, 2014



DAVID L. BUNNING, District Judge.


This matter is before the Court on Defendants' Motion to Dismiss, (Doc. #9). Plaintiff's claims depend on his allegedly superior interest in a piece of property. In their various filings, Defendants have argued, sometimes persuasively so, that Plaintiff possessed, at most, a claim inferior to that possessed by Defendants. If that is true, Plaintiff's have no valid claims to the property in dispute.

For the reasons stated below, the Court accepts some, but not all, of the arguments advanced in Defendants' filings. Accordingly, Defendants' Motion (Doc. # 9) will be granted in part and denied in part.


This case revolves around a "roll forming machine"-characterized in Plaintiff's filings as the "Blanken equipment" and in Defendants' as a "Roll Former." (Doc. #14-1, at 2; Doc. #16, at 1). A roll forming machine is a large piece of manufacturing equipment which bends long pieces of metal into various shapes and sizes depending on the commercial need. The equipment is expensive. In the present matter, the roll forming machine in question has a value of approximately $750, 000. (Doc. #14-1, at 9).

In 1999, LEEP, Inc. purchased a roll former with financing provided by Wells Fargo. (Doc. #18-1). Though the financing agreement is structured as a traditional lease, with Wells Fargo owning the equipment and LEEP renting it, the lease agreement contained a provision that allowed LEEP to purchase the roll former at the end of the lease term for only $1. (Doc. #18-1, at 4). In their Motion to Dismiss, Defendants correctly argue that this kind of a sham lease is considered a traditional secured agreement under the Uniform Commercial Code. (Doc. #9, at 4). Plaintiff admitted as much in his response. ( See Doc. #14-1 at 7) ("Wells Fargo possessed a perfected security interest in the Blanken Equipment."). Thus, LEEP purchased a roll former, Wells Fargo financed the purchase, and Wells Fargo filed a financing statement on September 21, 1999. (Doc. #18-3, at 45). LEEP had possession of the roll former for many years and used it in the course of business.

On July 29, 2004, LEEP entered into a financing agreement with Fortress Credit Corp. (Doc. # 1-7). That agreement gave Fortress a security interest in LEEP's assets, including its equipment. (Doc. #1-7). Notably, the agreement defined property excluded from the agreement as "any contract, lease, license, or other agreement" that contained provisions restricting assignability. (Doc. #1-7, at 7).

As early as August 2004, LEEP began to fall behind on its payments to Wells Fargo. Shortly thereafter, Wells Fargo filed another financing statement in Oregon to maintain its perfected security interest. (Doc. #1-8). The record indicates that some efforts were made to adjust or delay the lease payments over the next few years. Yet in an April 21, 2008 letter, Wells Fargo notified LEEP that it had defaulted on its roll former payments. (Doc. #18-5, at 24). A few weeks later, on May 8, Wells Fargo sued LEEP in the Middle District of Pennsylvania for breach of contract. (Doc. #18-4). Wells Fargo settled with LEEP on August 8, 2008 on the condition that LEEP pay Wells Fargo $125, 000 within ninety days of settling; the agreement ("the agreement") also provided that if LEEP did not pay Wells Fargo, the district court would enter a consent judgment against LEEP. (Doc. #18-5, at 32-35).

On November 6, ninety days after the parties entered the settlement agreement, multiple transactions transpired. According to Plaintiff, these were all part of the same agreement between Wells Fargo, LEEP, and Blanken. (Doc. #32, at 5). As part of this transaction (the "November 6 transaction")[1] Wells Fargo assigned its security interest to Roger L. Blanken, the Plaintiff in this case, for $125, 000. (Doc. #1-9). This extinguished Wells Fargo's interests in the roll former. Blanken and LEEP also amended the security agreement to reduce LEEP's monthly payments. (Doc. #1-10). This Second Amendment to Lease eliminated LEEP's purchase rights and made Blanken the owner of the roll former. (Doc. #1-10, at 2).

What's relatively obvious is that the parties to the November 6 transaction didn't appreciate its legal consequences. Until this litigation, they apparently never understood that Wells Fargo was never the true owner of the roll former but rather the possessor of a security interest in property that LEEP owned. Those parties assumed that Wells Fargo owned the roll former, and then negotiated in ways that transferred Wells Fargo's "ownership" to Blanken. Because of this dissonance, Plaintiff' arguments don't easily fit within the UCC: they're trying to fit a square peg (the language used during the November 6 transaction) into a round hole (the UCC).


A. Standard of Review

In reviewing a Rule 12(b)(6) motion to dismiss, this Court must "accept all the... factual allegations as true and construe the complaint in the light most favorable to the [p]laintiff." Hunter v. Sec'y of U.S. Army, 565 F.3d 986, 992 (6th Cir. 2009) (quoting Gunasekera v. Irwin, 551 F.3d 461, 466 (6th Cir. 2009)). "When an allegation is capable of more than one inference, it must be construed in the plaintiff's favor." Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998).

B. The Fortress-LEEP security agreement did not exclude the roll former

1. The plain meaning of the exclusionary clause relates to commercial agreements, not manufacturing equipment.

Plaintiff devotes a lot of space to this issue, arguing that the exclusionary provision of the Fortress-LEEP security agreement applies to the roll former. The contested provision reads, in its entirety, as follows:

Excluded property shall mean any contract, lease, license, or other agreement that contains a provision prohibiting the assignment or grant of a security interest therein without the consent of another Person to the extent (but only to the extent) that such consent has not been obtained and the prohibition either exists on the date of this Agreement and has been disclosed to the Administrative Agent in writing or, after the date of this Agreement, is included in such contract, lease, licence, or other agreement with the prior written consent of the Administrative Agent (other than any of the ...

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