IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

April 12, 1999 Session

CONISTER TRUST LTD. v. BOATING CORPORATION

OF AMERICA and VILLAS-AFLOAT, LTD.

Appeal from the Chancery Court for Sumner County

No. 94C-412 Tom E. Gray, Chancellor

No. M1998-00949-COA-R3-CV - Filed March 14, 2002

The buyer of three boats that were to be built pursuant to specific instructions defaulted on payment

for the second and third boats by failing to pay the entire purchase price of the boats. The seller

resold the two boats and recovered its damages caused by the buyer’s breach. A creditor of the

buyer, who furnished funds for the purchase of the first two boats, sought the excess proceeds from

the sale of the second boat asserting that it had an unperfected security interest. Because the buyer

did not attain rights in the collateral sufficient to meet the requirements for attachment of a security

interest, the creditor is not entitled to distribution of the proceeds under Article 9 of the Uniform

Commercial Code. Instead, the rights of the buyer and seller are governed by Article 2. The creditor

was entitled to assert the buyer’s right to restitution of partial payments, and the seller was entitled

to recover its damages from the resale of the two boats. The seller also had a right of setoff which

it exercised to recover losses on the third boat from moneys realized in the sale of the second boat.

Accordingly, we affirm the trial court. 

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

Affirmed and Remanded

PATRICIA J.COTTRELL,J., delivered the opinion of the court, in which BEN H.CANTRELL, P.J.,M.S.,

and WILLIAM C. KOCH, JR., J., joined.

Todd E. Panther, Nashville, Tennessee, for the appellant, Conister Trust Ltd.

Steven C. Douse, Nashville, Tennessee, for the appellees, Boating Corporation of America and

Villas-Afloat, Ltd.

OPINION

The issue presented to the court is whether Boating Corporation of America (“BCA”) or

Conister Trust, Ltd. (“Conister”) is entitled to proceeds realized from the sale of a boat. Conister,
1

BCA sold its assets and went out of business in September 1997.

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a British financing institution, sued Villas-Afloat, Ltd. (“Villas-Afloat”) and BCA seeking surplus

proceeds that BCA withheld from the sale of a boat built by BCA for Villas-Afloat. Conister had

provided financing to Villas-Afloat for two boats to be built by BCA, and BCA sold the second after

Villas-Afloat failed to pay. After the sale, BCA applied proceeds from the sale to moneys owing on

a third boat it had built for Villas-Afloat. The trial court found that no surplus proceeds existed from

the sale of the second boat, and Conister appealed. 

In 1989, Robin Bamford, director of the newly formed Villas-Afloat, approached Conister

about financing the purchase of several boats. Like Conister, Villas-Afloat was a business located

on the Isle of Man in Great Britain. Villas-Afloat intended to purchase the boats and offer them to

vacationers in the Mediterranean on a time share basis.

BCA was a Tennessee corporation which built houseboats, boats and cruisers.1

 These boats

were marketed through a network of some 23 dealers in the U.S. and Canada which ordered and

bought the boats and sold them to consumers. The boats were typically built to order and delivered

only after full payment by the dealer.

In 1989, Mr. Bamford approached BCA about becoming BCA’s exclusive distributor in

Europe. In June, after a telephone conversation between the parties, BCA confirmed its agreement

with a letter indicating that Mr. Bamford’s company would be the exclusive European dealer of BCA

boats with a minimum annual order of six boats. In August 1989, acting under this agreement, Mr.

Bamford requested that BCA send him invoices for two boats. His correspondence stated: 

Although we will have sufficient funds for the first two boats, we are taking

advantage of an initial loan offered to us to leave capital free for operation costs.

In late November 1989, Villas-Afloat paid a $25,157.68 deposit to BCA on the first boat

(“Boat I”). The deposit was accompanied by a confirmation facsimile advising BCA that the balance

would be from a “finance house.” On December 1, 1989, BCA sent Villas-Afloat Invoice Number

1766 in the amount of $196,934.75 for Boat I. This invoice provided detailed information on the

equipment and components to be used on the boat and their cost. On December 6, BCA sent invoice

number 1771, which was equally detailed and for the same amount, to cover the second boat (“Boat

II”).

InDecember 1989, Conister and Villas-Afloat entered into two conditional sales agreements.

The documents purport to represent a sale by Conister, called “seller” in the documents, to VillasAfloat, called “buyer” therein. They included a section to be signed by a “dealer,” offering to sell

the goods to Conister. Although BCA’s name had been filled in as the dealer, no signature was

included for BCA. Conister never forwarded the documents to BCA for signature. Conister was to
2

At the exchange rate then prevailing, this sum amounted to $160,400 per boat.

3

BCA applied the $25,157.68 deposit from Villas-Afloat and $171,777.07 of the proceeds wired from Conister

to the invoice price of $196,934.75.

4

That amount was $149,002.93.

5

On December 22, 1989, Mr. Bamford faxed BCA a copy of a letter of intent from the Barcelona Olympic

Organizing Committee confirming that Villas-Afloat’s product had been selected as the official motor yacht of the 1992

Olympic games. The Committee required six additional vessels, each with a professional skipper.

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advance up to £100,000 per boat2

 and under the agreements, Villas-Afloat was to be liable for the

balance. Villas-Afloat sent the invoices it had received from BCA to Conister.

 On December 13, 1989, pursuant to the conditional sales agreements between Conister and

Villas-Afloat, Conister wired £200,000 (approximately$320,800)toBCA.The confirming facsimile

to BCA for this wire transfer stated in part:

Subject: Invoice 1771 and 1766

Comments: Confirmation of funds of £200,000.00 sterling have been sent to your account

by SWIFT to your Banker.

Conister preceded this fax with a telephone call to BCA’s president, Clyde C. Head. The

Conister representative who made the call, Michael James Lees, recalled that he “phoned Boating

Corporation of America in the afternoon to obtain and confirm the banking details of Boating

Corporation of America.” These were the first communications between Conister and BCA. At no

time did these two entities enter into any kind of a written contractual arrangement regarding the

boats.

On December 15, 1989, BCA released Boat I to Villas-Afloat, having received full payment

for that boat.3 This left BCA holding the remaining funds originating from Conister and VillasAfloat.4

On January 19, 1990, Villas-Afloat ordered six additional boats from BCA for the Olympic

Games Committee.5

 Mr. Bamford’s correspondence requested: 

From the funds we have already advanced to you, please allocate $25,000 to the

deposit on the first of these six boats which are required by the 1992 Olympic

Committee. We are at present attending to the final contract details as all six boats

are being financed through a lending institution for the Olympic Committee.
6

That amount was $124,002.93

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As requested by Villas-Afloat, BCA used $25,000 of the amount remaining from payment

for Boat I as a deposit on a third boat (“Boat III”). BCA applied the remaining balance to Boat II.6

Due to changes and additions requested by Villas-Afloat, $14,191.88 was added to the price of Boat

II. Thus, as of January 30, 1990, BCA’s records showed that $87,123.70 remained owing on Boat

II, which was completed on February 13, 1990.

In January of 1990, Villas-Afloat failed to make its first payment to Conister under the

Conditional Sales Agreement. Villas-Afloat also failed to make any payments to BCA on Boat II.

On February 21, 1990, E. J. Thorn, Conister’s chief executive, corresponded with BCA’s

president, Clyde Head. The letter stated:

We have today determined an agreement with Villas-Afloat Limited in respect of a

Mediterranean Motor Yacht, believed to be recently completed and in your

possession. This letter serves as your authority, from this company as owners, to

retain possession of this vessel and await our further instructions.

Mr. Head responded on March 12, 1990, with a letter to Conister’s counsel stating:

We received a letter from E. J. Thorn . . . concerning the ownership and possession

of the second Harbor Master Motoryacht which we constructed for Villas-Afloat.

This motoryacht is owned by and is in the possession of Boating Corporation of

America. This boat had been sold to Villas-Afloat with partial funding provided by

Conister. . . . It is my understanding that Conister has funded the purchase of these

Harbor Master Motoryachts for Villas-Afloat. Could you please supply me with

documentation to demonstrate Conister’s ownership position in this vessel? The

motoryacht under discussion was finished on February 13, 1990 and we anticipated

immediate shipment. We are awaiting shipping instructions and stand ready to ship

the boat upon payment of the outstanding balance.

Conister’s counsel responded the following day, March 13, 1990, by sending BCA copies

of the conditional sales agreements and explaining that Villas-Afloat was in default. No mention

was made of what BCA should do with Boat II.

After Mr. Head received the agreements, he noticed that BCA’s name had been filled in

under a provision of the documents which stated:

To Conister Limited . . .

 I/We offer to sell you the Goods described in the Schedule hereto and request you

to supply them on Conditional Sale to the proposed Buyer named in the schedule
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hereto. The Goods referred to are my/our sole property unencumbered and have not

been the subject of any previous transaction with the proposed Buyer. I/We warrant

that the initial Payment shown in the Schedule above has not been increased in any

way beyond the actual amount that will be paid in cash by the proposed Buyer or the

fair market value of goods traded in to me/us.

 NO INVOICE OR OTHER DOCUMENTATION INFERRING A SALE OR AN

AGREEMENT TO SELL HAS BEEN ISSUED BY ME/US AND WE CERTIFY

THAT THIS TRANSACTION HAD NEITHER BEEN OFFERED TO NOR

REFUSED BY ANY OTHER COMPANY, PERSON OR FIRM. I/WE FURTHER

CERTIFY THAT THE MEANING AND EFFECT OF CLAUSE 5 OVERLEAF

HAVE BEEN FULLY EXPLAINED TO THE PROPOSED BUYER BY ME/US

AND I/WE DECLARE AND CERTIFY THAT THE GOODS ARE FIT FOR

THEIR INTENDED USE. 

The date, November 12, 1989, was filled in, but a space for the signature of the dealer was blank.

When Mr. Head saw BCA’s name written in under this provision, he was concerned and sought legal

counsel.

BCA continued work on Boat III because Mr. Bamford indicated that he was continuing to

seek additional financing. On April 4, 1990, BCA sent Villas-Afloat an invoice in the amount of

$209,964 for Boat III. Mr. Bamford failed to obtain new financing and made no more payments to

BCA. On July 4, 1990, Conister informed BCA:

We have been extremely patient in allowing the search for alternative funding over

this period, but we are now looking at an increased probability that the boat which

you still have in your possession will have to be realized.

Conister offered two options: (1) to pay BCA the amount outstanding, take possession of the boat

and arrange for its sale after its conversion to U.S. specifications or (2) “agree to a sum with you at

which we would be prepared to relinquish our interest in the boat.” Conister expressed a preference

for the second option.

OnOctober 17, 1990, BCA’s counsel notified Mr. Bamford, Conister, and Conister’s counsel

that a balance of $87,100.73 plus interest and storage charges remained unpaid on Boat II and if

BCA did not receive payment, it would sell the boat at auction. The letter also stated:

In the event that the boat is sold at an auction, the proceeds from the sale will first be

applied to cover the storage fees, interest expense and the outstanding principal

balance. The remaining amount of the proceeds of the sale will be paid to either

Conister Ltd. or to Villas as those two parties shall jointly instruct me in writing. If

I do not receive joint instructions from said parties, I will file an interpleader action

in the appropriate court in Nashville, Tennessee. (emphasis in original).
7

BCA arrived at this number by crediting Villas-Afloat with $6,500 for items deleted from the original invoice

and adding $4,660.46 in interest charges and $397.50 for a generator hush cover.

8

This figure includes a $57,566.25 shortfall in the resale from Boat III, $4,400 in storage and handling costs,

$4,406.96 in fees and expenses for resale, $24,000 in costs incurred in modifying Boat III for the American market, and

$4,000 in pro-rata development expenses. BCA sold Boat III for $152,407.75.

9

BCA calculated its credits as $48,889.85 in surplus from the sale of Boat II, $25,000 deposit on Boat III,

(continued...)

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Villas-Afloat did not respond to this letter. Conister’s counsel inquired about how the sale

would be conducted. The letter closed with the statement, “I would advise that title to the yacht rests

with my client.” BCA’s counsel responded with information about the sale and asked for

clarification of the above quoted statement, stating:

If your comments refer to whether the sale proceeds that may result from the sale or

auction of the boat belong to Conister or Villas-Afloat, then I understand your

comment. However, as I expressed in my letter of October 17, 1990, the boat in

question had never been fully paid for and therefore title to it remains with my client.

. . . Also, please understand that I am not in a position to verify, one way or the other,

whether your client or Villas-Afloat has title to the boat. To date, the only “proof”

that I have to verify Conister’s interest in the boat is a copy of a conditional sales

agreement between Conister and Villas-Afloat which your client forwarded to my

client under previous cover. However, not being a solicitor or a barrister in England,

I cannot confirm or deny your client’s legal interest in the boat. But, understand that

the only contractual arrangement my client has concerning the boat is with VillasAfloat.

On November 26, 1990, BCA sold Boat II for $134,551.51, leaving a surplus, according to

BCA, of $48,899.85 above the amount owed it for Boat II.7

BCA’s counsel informed Conister of the sale and surplus in a December 7, 1990, letter which

stated:

[Our client] has instructed us to pay the remaining proceeds from the sale to the

rightful owner of said proceeds. However, in light of our confusion concerning who

has the legal right to these proceeds, we respectfully request that your client,

Conister, and the appropriate representative of Villas-Afloat, send us joint payment

instructions informing us who to pay, etc.

BCA completed Boat III in late December 1990 and shortly thereafter sold Boat III. After

Boat III was sold, BCA calculated its losses arising from its dealings with Villas-Afloat at

$94,373.21.8 BCA then applied the $48,889.85 credit from the sale of Boat II to cover its losses on

Boat III. BCA calculated that even with the addition of that amount it faced a shortfall.9
9

(...continued)

$3,000 in unincurred transportation costs, and $14,000 in gasoline engine substitution savings. Credits were totaled at

$90,889.85, while they calculated their losses at $94,363.21. Faced with these figures, BCA concluded “that the person

or the company that these funds [the $48,889.85 surplus] were due was not [a] question mark. . . . They were due to

Boating Corporation of America because Villas-Afloat had caused the incursion of these expenses.”

10This letter indicated that Villas-Afloat was “being wound up in the High Court of England.”

11Conister has not pursued the $11,377.07 claim in this appeal.

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Conister demanded the $48,889.8510 surplus from the sale of Boat II, but the money was not

forthcoming. In August, 1994, Conister commenced this action, seeking a declaration “that as to all

persons in the world Conister possesses a superior claim to the surplus proceeds from the sale of the

second boat and a judgment for $48,889.85.” Conister also sought damages of $25,000, which it

alleged that BCA wrongfully applied toward Boat III, and $11,377.07, which BCA allegedly

wrongfully applied to satisfy the balance on Boat I.11 

After a trial, the court found:

that there has not been any unjust enrichment and that there are no surplus proceeds

[but] [i]f there were any surplus proceeds the court would find that they are in fact

that of Conister and that they should be paid over to Conister.

I. Uniform Commercial Code Article 2 and Article 9 Claims

Conister does not dispute the commercial reasonableness of the sale of Boat II or the

accuracy of BCA’s claims for expenses and losses on that boat and does not argue that its interest

in Boats I and II was superior to that of BCA. Conister simply maintains that once BCA recouped

its losses on Boat II, Conister was entitled to the surplus proceeds from the sale of Boat II because:

(1) By advancing $320,800 to BCA pursuant to the conditional sales agreement

with Villas-Afloat, Conister acquired a security interest in Boat II pursuant

to Tenn. Code Ann. § 47-9-107 and that such interest gave Conister rights to

proceeds upon the sale of the collateral securing the loan. Conister does not

assert that it perfected its security interest.

(2) Conister’s security interest in Boat II does not conflict with BCA’s interest

in that boat. Conister does not dispute that BCA was entitled to sell Boat II

and to satisfy its lien on that boat from the proceeds of the sale. However,

BCA had no right to apply the surplus proceeds from the sale to a loss

resulting from a separate contract. Conister contends the building of Boat III

was pursuant to a contract with Villas-Afloat which was separate from the

contract for Boats I and II.
12Because this case was tried and briefed prior to the 2001 changes in Article 9, all references to statutes in

Chapter 9 of Article 47 of the Tennessee Code are to those statutes as numbered prior to July 1, 2001.

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(3) Conister’s communications with BCA limited the use of the $320,800

transferred to BCA to Boat I and Boat II, and BCA’s later conduct and

communications confirmed its understanding of that restriction.

On the other hand, BCA contends that its building of the three boats was pursuant to a single

contractual relationship with Villas-Afloat, arguing that its relationship with Villas-Afloat was an

installment contract under the Uniform Commercial Code, Tenn. Code Ann. § 47-2-612(1).

Consequently, BCA argues it was entitled to set off its losses on Boat III with the surplus funds from

the sale of Boat II.

BCA also argues that even if there were separate contracts for Boats II and III, BCA was

entitled to offset any claim by Villas-Afloat to the surplus from the sale of Boat II by any claim it

had against Villas-Afloat, whether the claims arose from the same contract or not. Conister’s interest

in Boat II derives from Villas-Afloat and is subject to the same limitations and defenses, according

to BCA. In addition, BCA asserts that Conister did not possess a security interest in Boat II and that

Conister did not limit use of the £200,000 it wired to BCA to Boats I and II.

The parties’ positions involve two articles of the Uniform Commercial Code, as adopted in

Tennessee: Article 2 (Chapter 2 of Title 47 of Tennessee Code Annotated), dealing with sales, and

Article 9 (Chapter 9 of Title 47 of Tennessee Code Annotated), dealing with secured transactions.

BCA is an Article 2 seller with rights created therein, and Conister claims an Article 9 security

interest. The boats in question were undisputedly goods under Article 2, and Conister argues Boat

II was also collateral under Article 9. To analyze these competing interests, and the proper method

to prioritize them, we must first identify each party’s interest and the accompanying rights. We

begin with the parties’ positions.

Conister claims it is entitled to the remaining “proceeds” of the sale of Boat II under Tenn.

Code Ann. § 47-9-504(1),12 which provides that proceeds from the disposition of collateral subject

to a security interest are to be distributed in the following order:

(a) the reasonable expenses of retaking, holding, preparing for sale, or lease selling,

leasing and the like and, to the extent provided for in the agreement and not

prohibited by law, the reasonable attorneys’ fees and legal expenses incurred by the

secured party; 

(b) the satisfaction of indebtedness secured by the security interest under which the

disposition is made; 

(c) the satisfaction of indebtedness secured by any subordinate security interest in the

collateral if written notification of demand therefor is received before distribution of

the proceeds is completed. If requested by the secured party, the holder of a
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subordinate security interest must seasonably furnish reasonable proof of his interest,

and unless he does so, the secured party need not comply with his demand. 

Conister’s claim rests upon (c) above and, consequently, on its claim that it had a security

interest in Boat II. “Unless otherwise agreed, a security agreement gives the secured party the right

to proceeds provided by § 47-9-306.” Tenn. Code Ann. § 47-9-203(3). Tenn. Code Ann. § 47-9-

306(1) defines proceeds as “whatever is received upon the sale, exchange, collection or other

disposition of the collateral or proceeds.” BCA asserts that Conister did not have a security interest

which had attached to Boat II. 

BCA’s position, however, is primarily based upon the rights and remedies given to a seller

under Article 2. It argues that because it was entitled to offset its losses or damages caused by

Villas-Afloat’s default of its obligation to pay for Boats II and III against moneys it owed to VillasAfloat, there were no excess proceeds from its arrangement with Villas-Afloat. Consequently,

Villas-Afloat had no interest in the proceeds from the sale of Boat II which it could have transferred

to Conister.

The UCC addresses, to some extent, the interaction between Article 2 and Article 9. In

particular, certain formalities otherwise requisite to the enforceability of a security interest are

waived for those interests arising under the article on sales, Article 2. Tenn. Code Ann. § 47-9-203.

In addition: 

A security interest arising solely under the chapter on sales (chapter 2 of this title)

. . . is subject to the provisions of this chapter except that to the extent that and so

long as the debtor does not have or does not lawfully obtain possession of the goods:

(a) no security agreement is necessary to make the security interest

enforceable; and

(b) no filing is required to perfect the security interest; and

(c) the rights of the secured party on default by the debtor are

governed by the chapter on sales (chapter 2 of this title) in the case of

a security interest arising solely under such chapter . . . .

Tenn. Code Ann. § 47-9-113.

The interests which arise solely under Article 2 include those clearly denominated security

interests by Article 2 as well as other interests not so clearly labeled. “Whenever Article 2 refers to

a nonconsensual security interest arising by operation of law or purely as a result of the sales

transaction (i.e., without any intent to create a secured credit transaction), section 9-113 will

probably apply.” WILLIAM D. HAWKLAND, HAWKLAND UNIFORM COMMERCIAL CODE SERIES § 9-

113:2 (2001) [hereinafter HAWKLAND UCC SERIES]. 
13As an example of those issues where little light has been cast, White & Summers pose the following inquiry,

“seller stops or withholds, and lien-creditor of the buyer seeks to levy on the goods in seller’s hands. Do sections 9-201

and 9-301 control, or is the solution to be found in Article 2, or in still other law?” White and Summers also direct the

reader to the Jackson and Peters article as “cast[ing] considerable light.”

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The drafters call certain interests that arise under the Article on sales “security

interests” even though they generally arise by operation of law. An example is the

interest of a buyer exercising a right of rejection under section 2-711(3). Also, there

is a series of rights that are not labeled security interests under Article 2 but are

similar to security interests. Examples of these are the seller’s rights under sections

2-702 [seller’s remedies on buyer’s insolvency] and 2-705 [stoppage of goods in

transit].

Section 9-113 plainly addresses the extent to which Article 9 governs those Article

2 interests, there called “security interests.” Comment 2 to section 9-113 suggests

that this section may also address seller’s rights which are like security interests but

which are not labeled as such by Article 2.

JAMES J.WHITE &ROBERT S.SUMMERS,UNIFORM COMMERCIAL CODE § 30-11, at 75 (4th ed. 1995).

The result of disputes between Article 2 interests and Article 9 interests is not subject to

uniform rules or interpretations. See WHITE &SUMMERS, supra, §30-11, at 76-77 (“few Code cases

cast little light on such issues”);13 Thomas H. Jackson & Ellen A. Peters, Quest for Uncertainty: A

Proposal for Flexible Resolution of Inherent Conflicts between Article 2 and 9 of the Uniform

Commercial Code, 87 YALE L.J. 907 (1978). Nonetheless, where a buyer defaults, it would appear

that a seller’s rights would be governed by Article 2’s provisions establishing the seller’s remedies

rather than Article 9’s default provisions. 8 HAWKLAND UCCSERIES § 9-113:2; In Re Ault, 6 B.R.

58 (Bankr. E.D. Tenn. 1980). 

Before we reach any question of priority of competing interests created under the different

articles, an analysis of the rights or interests claimed by each party is necessary to determine if such

competing interests actually exist.

II. Rights and Remedies Under Article 2 

Under Article 2 of the UCC, when a buyer wrongfully fails to make a payment due on or

before delivery, the aggrieved seller has several options to protect itself from loss and may, as BCA

did here, withhold delivery of the goods and resell and recover damages. Tenn. Code Ann. § 47-2-

703. If the seller resells the goods in good faith and in a reasonable manner, neither of which is

challenged herein, the seller may recover the difference between the resale price and the contract

price together with allowable incidental damages, less expenses saved by buyer’s breach. Tenn.
14The seller is not required to account to the defaulting buyer for any profit on the resale. Tenn. Code Ann.

§ 47-2-706(6); see also cmt. 11. Since the eventual sales of Boat II and Boat III resulted in a lower price than the

contract with Villas-Afloat, the profit provision is not involved.

15BCA’s agreement with Villas-Afloat for Boat II set the price at $196,934.75, but changes in specifications

increased the price by $14,191.88, making the total $211,126.63. BCA sold the boat for $134,551.51. Under the statute,

BCA was entitled to recover the difference in the two prices as well as its costs of sale and storage. After deducting those

damages from the amounts BCA had been paid toward Boat II by Villas A-float, BCA recovered $48,889.85 in excess

of its damages. As to Boat III, the contract price with BCA was $209,964, and the boat sold for $152,407.75, and BCA

sustained additional expenses for storage and handling, modification of the boat for the American market, and other

expenses. BCA gave credit for unincurred transportation costs and other savings. Thus, BCA was entitled to recover

from Villas-Afloat the difference in the contract price and the resale price ($57,556.25), and incidental damages

($36,806.96), less savings ($17,000). That amount was $77,363.21. Against that amount due to BCA from VillasAfloat, BCA applied the $48,899.85 from the sale of Boat II and the $25,000 deposit on Boat II, leaving a deficit.

16BCA released Boat I to Villas-Afloat because it received full payment. Conister later repossessed Boat I and

resold it.

17“A lien, in its broadest sense, is a legal claim or charge on real or personal property used as security for the

payment of some debt or obligation.” Keep Fresh Filters, Inc. v. Reguli, 888 S.W.2d 437, 443 (Tenn. Ct. App. 1994).

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Code Ann. § 47-2-706(1).14 According to the evidence, BCA calculated its damages for each boat

in accordance with the statute, and Conister does not dispute these calculations.15

BCA never relinquished possession of Boat II or Boat III to Villas-Afloat; it retained

possession of them pending full payment.16 This action was consistent with the UCC. Unless

otherwise agreed, tender of payment by the buyer is a condition precedent to seller’s duty to tender

and complete delivery. Tenn. Code Ann. § 47-2-511(1). A seller “is not required to give up

possession of the goods until he has received payment” absent an agreement for credit. Tenn. Code

Ann. § 47-2-310, cmt. 2. The fact that BCA retained possession strengthens its position and

broadens its range of remedies under Article 2. A seller in possession of the goods when the buyer

breaches the contract can rely on the goods for its recovery. In re Ault, 6 B.R. at 67.

The rights or remedies given to a non-breaching seller under Article 2 are akin to the

common law seller’s lien.17 See Jackson & Peters, supra, 87 YALE L.J. at 914-15. We are of the

opinion that a seller who never delivers goods because the buyer fails to tender the required payment

simply remains the owner of the goods. See WHITE &SUMMERS,supra, § 7-6, at 375. Nonetheless,

we are aware that a non-breaching seller’s interests may also constitute “a security interest arising

solely under the chapter on sales,” Tenn. Code Ann. § 47-9-113, or rights similar to security

interests, as discussed above. Whichever title is given to the seller’s rights, they clearly arise from

Article 2.

Tenn. Code Ann. § 47-2-706’s listing of the types of damages available to the seller indicates

the seller would not be entitled to retain partial payments which exceed its damages after resale.

Otherwise, the seller could be unjustly enriched. The damages allowed are designed to “put the

seller in as good a position as performance would have done.” Tenn. Code Ann. § 47-2-708(2). 
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Accordingly, Article 2 also addresses the rights of a breaching buyer who made partial

payments to a refund of some or all of such partial payments. Tenn. Code Ann. § 47-2-718(2). That

provision entitles the breaching buyer to restitution of its down payment according to the formula

set out therein. R.E. Davis Chem. Corp. v. Diasonics, Inc., 826 F.2d 678, 681 (7th Cir. 1987).

Where the seller justifiably withholds a delivery of goods because of the buyer’s

breach, the buyer is entitled to restitution of any amount by which the sum of his

payments exceeds . . . (b) . . . twenty percent (20%) of the value of the total

performance for which the buyer is obligated under the contract or five hundred

dollars ($500), whichever is smaller. 

Tenn. Code Ann. § 47-2-718(2). However, the amount of restitution is limited by the seller’s

damages. Subsection (3) provides that “the buyer’s right to restitution under subsection (2) is subject

to offset to the extent that the seller establishes (a) a right to recover damages under the provisions

of this chapter . . .” Id. Thus, a breaching buyer may receive as restitution its deposit, down

payment, or partial payment to the extent any of it remains after the seller exercises its rights or

remedies under Article 2, including resale and deduction of authorized damages, except the seller

retains at least $500. Madsen v. Murrey & Sons Co., Inc., 743 P.2d 1212, 1215-16 (Utah 1987);

Wendling v. Puls, 610 P.2d 580, 585-86 (Kan. 1980); Anheuser v. Oswald Refractories, Inc., 541

S.W.2d 706, 711-12 (Mo. Ct. App. 1976). This restitution to a breaching buyer is consistent with

the now general rule:

That a person who breaks his contract may still be entitled to the restitution of the

benefits that he conferred on the other party before the breach, once the victim of the

breach has been fully compensated by an award of damages. An award not reduced

by the benefit received by the plaintiff would be too large to be compensatory, and

so it would be punitive, and punitive damages are rarely . . . awarded in contract

cases; and so a victim of a breach of contract who wants to keep the contract

breaker’s money above and beyond the amount necessary to compensate for the

breach may be said to be “unjustly enriched”, entitling the contract breaker to

restitution.

Micro Data Base Sys., Inc. v. Dharma Sys., Inc., 148 F.3d 649, 656 (7th Cir. 1998) (citations

omitted).

Article 2 also addresses partial payments by buyers in one other instance. A buyer who has

paid a part of the price of goods in which the buyer has a “special property” may make tender of any

unpaid portion of the price and recover the goods from the seller, if the seller becomes insolvent

within ten days of receipt of the partial payment. Tenn. Code Ann. § 47-2-502. Villas-Afloat did

not tender the full purchase price, and BCA did not become insolvent in the relevant time period.

Thus, this provision has no direct applicability to the case before us. However, its mention of

“special property” refers to another potential source of interest for a buyer, and the comments to this

section provide clarification of that interest.
18Conister asserts it had a purchase money security interest in Boat II because the money it advanced was used

by the debtor to purchase the collateral. See Tenn. Code Ann. § 47-9-107(b); John Deere Co. v. Production Credit Ass’n

of Murfreesboro, 686 S.W.2d 904 (Tenn. Ct. App. 1984). A purchase money security interest must also meet the

requirements of a security interest. Id. at 907; Mays v. Brighton Bank, 832 S.W.2d 347, 349 (Tenn. Ct. App. 1992).

19Attachment is different from perfection, and Conister does not assert that it perfected its interest by filing.

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Under Tenn. Code Ann. § 47-2-501 a buyer obtains “a special property” and an insurable

interest in goods by identification of the goods to the contract. Other than triggering the right to

recover identified goods from an insolvent seller, as set out in Tenn. Code Ann. § 47-2-502, and

other potential remedies not relevant, the extent and effect of this “special property” is not explained.

See Jackson & Peters, supra, 87 YALE L.J. at 937 n.100. What is clear, however, is that whatever

a “special property” is, it is not a security interest. The UCC’s definition of security interest states,

“The special property interest of a buyer of goods on the identification of those goods to a contract

for sale under § 47-2-401 is not a ‘security interest,’ but a buyer may also acquire a ‘security interest’

by complying with chapter 9 of this title.” Tenn. Code Ann. § 47-1-201. Official Comment 2 to

Tenn. Code Ann § 47-2-502 reaffirms this principle, even where a buyer has made partial payment

and the seller becomes insolvent, stating “The question of whether the buyer also acquires a security

interest in identified goods and has rights to the goods when insolvency takes place after the ten-day

period provided in this section depends upon compliance with the Article [Chapter] on Secured

Transactions (Article [Chapter] 9).” Villas-Afloat did not attempt to comply with the requirements

of Article 9. 

III. Rights and Remedies Under Article 9

Conister’s position rests fundamentally on its claim that it had a security interest pursuant

to the Uniform Commercial Code. Under the UCC, the term security interest is defined as “an

interest in personal property or fixtures which secures payment or performance of an obligation.”

Tenn. Code Ann. § 47-1-201(37).18 A security interest can only be enforced against the debtor or

third parties if it has “attached.”19

(1) Subject to the provisions of § 47-4-208 on the security interest of a collecting

bank, § 47-8-321 on security interests in securities and § 47-9-113 on a security

interest arising under the chapter on sales, a security interest is not enforceable

against the debtor or third parties with respect to the collateral and does not attach

unless:

(a) the collateral is in the possession of the secured party pursuant to

agreement, or the debtor has signed a security agreement which

contains a description of the collateral . . . ; and

(b) the value has been given; and 
20“Value” is defined in § 47-1-201, which states: 

. . . a person gives “value” for rights if he acquires them: (a) in return for a binding commitment to

extend credit or for the extension of immediately available credit whether or not drawn upon and

whether or not a charge-back is provided for in the event of difficulties in collection . . . or (d)

generally, in return for any consideration sufficient to support a simple contract.

Tenn. Code Ann. § 47-1-201. Conister extended credit to Villas-Afloat, then, Conister “gave value” within the meaning

of the Code.

21Conister asserts that the conditional sales agreement signed by Villas-Afloat sufficiently described the

collateral, here the boats, to meet the requirements of the Code. Although the conditional sales agreement between

Conister and Villas-Afloat is not a formal security agreement, the UCC does not require such formality. Other less

formal documents, standing alone or in various combinations, have been held to satisfy the requirements of § 47-9-203.

See Wray v. Estate of James Franklin Wray, No. 01A01-9509-PB-00392, 1996 Tenn. App. Lexis 300, at *3 (Tenn. Ct.

App. May 22, 1996) (no Tenn. R. App. P. 11 application filed); WHITE & SUMMERS, supra, at § 23-3. In Wray the court

held that a hand written note that stated, “Wayne Wray first lienholder $4500 payable on demand, no interest” in

addition to a notation on the certificate of title that Wayne Wray was the first lienholder both of which were signed by

the debtor and included a description of the collateral, a car, were, in combination, sufficient to satisfy the security

agreement requirement. Wray,1996 Tenn. App. Lexis 300, at *1-*2. The sales agreement at issue herein is signed by

the debtor in that it is signed by Mr. Bamford, the director of Villas-Afloat, on its behalf. Further, the sales agreement

contains a section entitled “Particulars of Goods Including Model and Serial numbers” after which Boats I and II are

described and serial numbers given on the two respective documents. However, under the document, Conister agrees

to sell the boat to Villas-Afloat, even though Conister had no contractual agreement with BCA for the manufacture or

sale of the boat.

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(c) the debtor has rights in the collateral.

(2) A security interest attaches when it becomes enforceable against the debtor with

respect to the collateral. Attachment occurs as soon as all of the events specified in

subsection (1) have taken place unless explicit agreement postpones the time of

attaching.

Tenn. Code Ann. § 47-9-203.

There is no question that Conister gave value.20 Because Boat II was never in Conister’s

possession, it must demonstrate that Villas-Afloat signed a security agreement that meets the

requirements of § 47-9-203(1)(a). A “security agreement” is defined in Tenn. Code Ann. §

47-9-105(1)(l) as “an agreement which creates or provides for a security interest.” Further, for

purposes of this statute, “any description of personal property . . . is sufficient whether or not it is

specific if it reasonably identifies what is described.” Tenn. Code Ann. § 47-9-110. If the

conditional sales agreement signed by Villas-Afloat is sufficient to meet the requirement of

subsection (1)(a),21 which we do not decide, then the remaining hurdle for Conister is to show that

Villas-Afloat had “rights in the collateral” as required in subsection (c). Mays, 832 S.W.2d at 349.
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The phrase “rights in the collateral” is not defined in the Code. Kunkel v. Sprague Nat’l

Bank, 128 F.3d 636, 642-43 (8th Cir. 1997); First Tenn. Bank, Nat’l Assn v. Graphic Arts Centre,

Inc., 859 S.W.2d 858, 864 (Mo. Ct. App. 1993); Peterson v. First Tenn. Bank, 1985 Tenn. App.

Lexis 3059, at *14 (Tenn. Ct. App. July 30, 1985) (no Tenn. R. App. P. 11 application filed).

Generally, issues such as ownership, possession, and their indices such as title, physical control, and

risk of loss enter into consideration of whether a debtor has sufficient rights in the collateral so as

to allow attachment of a security interest. See Kunkel, 128 F.3d at 641 (courts consider factors such

as the extent of the debtor’s control over the property and whether the debtor bears the risk of

ownership); Kinetics Tech. Int’l Corp. v. Fourth Nat’l Bank, 705 F.2d 396, 399 (10th Cir. 1983)

(debtor’s control); Chambersburg Trust Co. v. Eichelberger, 588 A.2d 549, 552-53 (Pa. 1991)

(debtor had risk of ownership); Hong Kong & Shanghai Banking Corp. v. HFH USA Corp., 805 F.

Supp. 133, 141-42 (W.D.N.Y. 1992) (court looked to whether title passed because title is indicative

of rights buyer has to dispose of goods); Peterson, 1985 Tenn. App. Lexis 3059, at *14 (where true

ownership lies with another party, mere acquisition by debtor of possession is not enough, but

owner was estopped to deny creation of security interest where owner gave debtor permission to use

goods as collateral). 

The importance of possession has been noted in many cases. See Douglas G. Baird &

Thomas H. Jackson, Possession and Ownership: An Examination of the Scope of Article 9, 35 STAN.

L.REV. 175, 202-06 (1983). Both Article 2 and Article 9 place significance on the physical location

of contract goods as an indicator of statutory rights. Jackson & Peters, supra, 87 YALE L.J. at 912.

Courts in Tennessee have also found possession to be a determinative factor. “Possession is also

significant as a means of giving notice of rights in the goods, since notice is the basis of perfection

of security interests. And possession must be measured in part by its ability to give notice.” In Re

Ault, 6 B.R. at 65; see also AHCI, Inc. v. Short, 878 S.W.2d 112, 114 (Tenn. Ct. App. 1993) (seller

divested itself of title to property at the time of the execution of the sales agreement where delivery

had already taken place and the buyer was in possession of the property); Weaver v. Ford Motor

Credit Co., 112 B.R. 906, 912 (Bankr. E.D. Tenn. 1990) (once goods have been delivered into the

possession of the buyer under a sales contract, the most the seller can retain is a security interest).

The importance of possession is acknowledged in Tenn. Code Ann. § 47-9-113, quoted

earlier, which states that interests arising solely under Article 2 are governed by Article 2 “so long

as the debtor does not have or does not lawfully obtain possession of the goods.” In other words,

“once a debtor-buyer obtains possession of the goods, lawful as against the seller, the transaction

loses its overriding sales characteristics and resembles more closely a credit transaction.” 8

HAWKLAND UCC SERIES § 9-113:3. The converse must be presumed to be as accurate: as long as

the seller retains possession, the more the transaction retains its character as a sale subject to Article

2.

In the case before us, Villas-Afloat never obtained possession of Boat II or Boat III because

it did not pay for them, a requirement of delivery. However, Conister does not base its position on

any argument that Villas-Afloat had ownership, title or possession to Boat II. Instead, it alleges,

“Villas-Afloat acquired rights when it placed the order, thereby entering into contracts for the
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purchase of the boat, and when it paid money to BCA pursuant to this contract,” without specifying

the nature or legal source of those rights. Because the allegation is that the rights arose by virtue of

the sales transaction, we interpret the statement as referring to contractual rights or rights and

remedies available under Article 2.

Where the claimed security interest relates to a sale of goods, the questions of whether the

debtor has rights in the collateral, and the extent of those rights, should be determined by reference

to Article 2 and with reference to the policies underlying it. Trust Co. Bank v. The Gloucester Corp.,

643 N.E.2d 16, 18 n.6 (Mass. 1994) (citing 8 ANDERSON,UNIFORM COMMERCIAL CODE § 9-203:44,

at 688 (3d ed. 1985) and Johnson v. Conrail-Amtrak Federal Credit Union, 37 U.C.C. Rep. Serv.

933, 942 (D.C. Super. 1983)); Manger v. Davis, 619 P.2d 687, 690 (Utah 1980); Heidelberg Eastern,

Inc. v. Weber Lithography, Inc., 19 UCC Rep. Serv. 2d 767, 769 (N.Y. Sup. 1992). “In general, the

debtor’s ‘rights in the collateral’ are determined not by Article 9, but by Articles 2, 2A, by the

common law, and by other rules.” WHITE & SUMMERS, supra, at § 31-6, at 127.

We have previously identified the only applicable buyer’s interests in Article 2: the right to

restitution of partial payments and a special property in the goods. The question is whether these

identified remedies are sufficient to grant Conister an attached security interest. The partial payment

made by Villas-Afloat gave it a right to restitution of that portion of its payments that remained after

the seller’s resale and recoupment of damages, under Tenn. Code Ann. §§ 47-2-718(2) and (3), as

discussed above. We do not, however, equate a right to restitution of payments to rights in the

collateral. First, a breaching buyer’s rights in moneys remaining after resale of goods arises only

after the goods (or collateral under Article 9) have been disposed of by the seller. Thus, the remedy

was not intended to have any application to the goods themselves. Second, a number of courts have

ruled that a seller’s right to reclaim goods when payment is dishonored after delivery to buyer does

not include the right to recovery of proceeds from the resale of those goods. See, e.g. In re Coast

Trading Co., 744 F.2d 686, 691 (9th Cir. 1984) (citing prior precedent on issue); Morken v. Kunkel,

182 B.R. 1007 (Bankr. D. Minn. 1995). We think the reasoning of those courts is applicable here.

Where the UCC speaks only of goods, proceeds are not included. Logically, then, where the UCC

grants an interest in money generated from the sale of goods, that interest does not extend to the

goods themselves. Therefore, Villas-Afloat’s interest in restitution of its partial payments is not a

“right in the collateral” sufficient to create an enforceable security interest in Conister.

The remaining question, therefore, is whether the “special property” in Boat II acquired by

Villas-Afloat pursuant to Tenn. Code Ann. § 47-2-501, discussed above, constitutes “rights in the

collateral” sufficient to give Conister a security interest. We believe any consideration of that issue

must begin with the UCC’s discussion of the nature of the “special property.” As explained earlier,

the UCC clearly states that a special property is not a security interest. Thus, it could not have

bestowed on Villas-Afloat a security interest in Boat II that Villas-Afloat could convey to Conister.

Comment 3 to Tenn. Code Ann. § 47-2-401 states that the incidents of a special property of the

buyer “are defined in the provisions of this Article [Chapter] such as those on the rights of the

seller’s creditors, on good faith purchase, on the buyer’s right to goods on the seller’s insolvency,

and on the buyer’s right to specific performance or replevin.” 
22Graphic Arts Centre, 859 S.W.2d at 865; Crocker Nat’l Bank v. Ideco Division of Dresser Indus., Inc., 839

F.2d 1104, 1108 (5th Cir. 1988); 3 R. ANDERSON , UN IF ORM COMM ERCIAL CODE, § 2-501:16, at 612 (“by virtue of the

special property of the buyer in the identified goods he may, even though title has not passed to him, recover the goods

in the event of the seller’s insolvency, or upon the seller’s default or repudiation, and he has a limited right to recover

goods by replevin”).

23Conister also did not tender full payment after notice from BCA.

24In support of such statements, those courts have generally relied on treatises, such as 1 Gilmore, Security

Interests in Personal Property, § 11.5, at 353 (1965).

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Thus, the incidents of a special property are specifically limited to those given explicitly by

a provision in Article 2. The only rights given directly to a buyer with a special property are very

limited.22 For example, such a buyer who has made partial payments may recover the goods from

an insolvent seller within ten days of the payment. Tenn. Code Ann. § 47-2-502. That right to

recover the goods, however, is contingent upon tender of the full purchase price. Villas-Afloat made

no such tender here and consequently was ineligible to exercise the sole remedy given by the UCC

to a buyer holding a special property.23 We fail to see how a limited remedy afforded to nonbreaching buyers, unexercised in this case prior to the resale of Boat II, can constitute “rights in the

collateral” sufficient to create a security interest. See Graphic Arts Centre, Inc., 859 S.W.2d at 865,

discussed below. 

In a few cases, courts have found that a special property, when coupled with possession, was

sufficient to constitute rights in the collateral. As explained by the Massachusetts Supreme Court

in Trust Co. Bank v. The Gloucester Corp., 643 N.E.2d 16 (Mass. 1994), this reasoning begins with

the proposition that possession alone is generally not sufficient.

While a debtor’s mere possession of goods usually is not enough to satisfy the “rights

in the collateral” requirement of § 9-203(1)(c), “the cases generally hold . . . that

where a debtor gains possession of collateral pursuant to an agreement endowing him

with any interest other than naked possession, the debtor has acquired such rights as

would allow [a] security interest to attach. . . .” Consistent with this standard, it has

been held that, a debtor’s possession of goods with contingent rights of ownership,

gives the debtor “rights in the collateral.”

Id. at 17-18 (citations omitted). The court found that delivery to the debtor buyer of the goods gave

the debtor rights in the collateral because there had been identification of the goods to the contract,

giving the buyer a special property, the delivery had been made pursuant to the sales agreement, and

the buyer acquired a degree of control and authority over the goods. Id. at 18.

Although some courts have used language indicating that the special property given to the

buyer upon identification is sufficient to create rights in goods so that a security interest may attach,24

in each of those cases, the debtor had actual possession. See, e.g., In Re McLaughlin, 183 B.R. 171,
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173 (Bankr. W.D. Wis. 1995); In Re McFarland, 112 B.R. 906, 908 (Bankr. E.D. Tenn. 1990)

(considering whether security interests held by creditor were preferential transfers under the

Bankruptcy Code).

However, in cases where the seller retained possession, the conclusion has been different.

For example, in Central Prod. Credit Ass’n v. Hopkins, 810 S.W.2d 108, 113 (Mo. Ct. App. 1991),

the court held that for a security interest to attach, a debtor must have some degree of control or

authority over the goods placed in the debtor’s possession. While supposing that it could be argued

that the buyer acquired a special property, arising upon identification of the goods to the contract,

the court concluded that such an interest is not sufficient, without possession, to permit attachment

of the creditor’s security interest. Id. at 113-14. Because the debtor never acquired possession, it

never acquired any rights or interest in the goods, therein cattle. “A holding that [debtor] could

transfer a security interest to the plaintiff would contravene the general principle that one cannot

encumber another person’s property.” Id. at 114.

In Graphic Arts Centre, Inc., the Missouri Court of Appeals found that the debtor never had

actual or constructive possession. The court also considered the effect of identification of the goods

to the contract, the event which gives rise to the “special property,” beginning with the principle that

identification serves a limited function. The special property and insurable interest given to the

buyer upon identification allows the buyer a limited right to recover the goods. 859 S.W.2d at 865.

The court found:

However, these remedial rights derived from identification are available only upon

misconduct by the seller. Here, buyer, rather than seller, failed to fully perform under

the contract. Thus, these remedial provisions are unavailable to [debtor-buyer] and

[its creditor] and therefore fail to provide them the requisite “rights in the collateral.”

. . . Identification by itself does not confer “rights in the collateral” . . . .

Id. (citations omitted).

We have found no instance wherein a court has found that a buyer’s special property is, in

and of itself, without possession, sufficient to create “rights in the collateral.” The Fifth Circuit dealt

with the issue in the context of a seller who retained possession in Crocker Nat’l Bank, wherein a

buyer contracted to purchase forty oil rigs from the seller who was to manufacture them. The buyer

later canceled the order, and the rigs were never delivered, although seller maintained that buyer was

obligated to pay for them because the manufacturing process was too far along when buyer attempted

to cancel. 839 F.2d at 1106. The buyer and seller eventually settled their differences, but upon

buyer’s insolvency, buyer’s creditor who had a perfected security interest in buyer’s inventory

asserted it was entitled to recover the rigs. The court first determined that the seller, who retained
25The same conclusion could be made in the case before us, that BCA held a perfected purchase money

security interest in the boats. See In Re Ault, 6 B.R. at 67 (stating that under UCC § 2-505(1)(b) seller with possession

had a perfected security interest). However, Conister does not dispute BCA’s priority to proceeds from Boat II to the

extent of its damages. The dispute is over disposition of the amount in excess of those damages. While Conister’s claim

to that money is based upon Article 9’s provision regarding proceeds from collateral and, therefore, its claim to an

Article 9 security interest, BCA’s claim is not based on any Article 9 interest.

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title and possession to goods, held a perfected purchase money security interest in the goods,

pursuant to UCC §§ 2-401, 9-107, and 9-305.25

In addressing the creditor’s assertion that its debtor, the buyer, had acquired rights in the

collateral sufficient for the creditor’s security interest to attach because upon identification of the

goods to the contract the buyer was given a special property in the rigs, the court explained the

relationship of possession to special property. That explanation, being particularly relevant to the

situation before us, bears quotation at some length:

The Uniform Commercial Code does not define the term special property interest.

However, comment 3 to § 2.401 indicates that the special property interest is not a

security interest but essentially relates to a purchaser’s remedial rights. “[I]ts

incidents are defined in provisions of the Article such as those on the rights of the

seller’s creditors, on good faith purchase, on the buyer’s right to goods on the seller’s

insolvency, and on the buyer’s right to specific performance or replevin.”

The Buyer and the Bank argue that because § 9.203 does not specify any minimum

quantum of rights in the collateral that must be held by a debtor before a security

interest can attach, the special property interest is sufficient for a security interest to

attach. The parties rely on L.B. Smith, Inc. v. Foley, 341 F.Supp. 810 (W.D.N.Y.

1972) and In re County Green Ltd. Partnership, 438 F.Supp. 693 (W.D.Va. 1977),

but miss the important distinction in both of those cases that the buyer had physical

possession of the goods to support the attachment of a security interest.

The court in In re County Green held that “the mere delivery of the appliances to the

construction site for use on the construction project gave the debtor rights in the

collateral for purposes of § [9.203].” 438 F.Supp. at 696. In County Green, the

buyer actually possessed the goods and thus the case is distinguishable from the

present facts.

L.B. Smith, Inc. v. Foley arises in a different factual framework. There the Internal

Revenue Service asserted a tax lien on two trailers delivered by the seller to the buyer

pursuant to a conditional sales agreement. The buyer never made any payment to the

seller for the trailers. The district court was called upon to determine the relative

priorities of the IRS’s tax lien and the unperfected interest of the unpaid seller. In

determining whether or not the IRS’s lien was perfected, the court examined the issue
26 The text of the footnote in the opinion is:

L.B. Smith, Inc. v. Foley is the basis for the statement that “a debtor has rights in the collateral if he

*** is a buyer with special property rights in goods by virtue of U.C.C. § 2-501, even though he has

not yet acquired title under U.C.C. § 2-401 * * *.” 8 ANDERSON, UN IF ORM COMM ERCIAL CODE § 9-

203.45. The other case relied upon by Anderson for this proposition, Holstein v. Greenwich Yacht

Sales, Inc., 122 R.I. 211, 404 A.2d 842 (1979), is also distinguishable from this case . There the

Rhode Island court held that the special property interest acquired by the buyer of an undelivered

sailboat was superior to the security interest of the seller’s floor-plan financer. Holstein, however,

is distinguished because it did not determine the rights of the buyer as against the seller/holder of a

purchase money security interest in the goods. Retention of possession was not an issue in Holstein,

while it is central to the rights of the parties here.

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“whether and to what extent the taxpayer-conditional vendee had property and rights

to property in the two Coastal Trailers to which the federal tax lien could attach.”

341 F.Supp. at 813. The court concluded that “whatever the full nature of this

‘special property’ interest in the buyer, it is of a nature sufficient to permit attachment

of a lien by the buyer’s creditor.” Id. Although the court did not discuss the buyer’s

possession of the trailers, that change of possession to the buyer did occur and the

opinion must be read and construed in light of the buyer’s possession.26

In In the Matter of Samuels & Co., 526 F.2d 1238 (5th Cir.) (en banc), cert. denied,

429 U.S. 834, 97 S.Ct. 98, 50 L.Ed.2d 99 (1976), this court focused on the

importance of possession in determining the relative rights of parties claiming a

security interest in property. The opinion addressed the following question: is the

interest of an unpaid cash seller in goods already delivered to a buyer superior or

subordinate to the interest of a bank, the holder of a perfected security interest in

those same goods? Id. at 1241. This court held that the buyer had the right to

encumber the goods upon their delivery having obtained that right upon acquiring

possession of the goods. The decision rested upon possession. Indeed, as the

opinion made clear, the bank’s security interest attached only as a direct result of the

seller’s voluntary act of delivery of the cattle to the buyer without reserving any

written security interest. Id. at 1247. See Interfirst Bank of Abilene, N.A. v. Lull

Mfg., 778 F.2d 228, 233 (5th Cir.1985).

This case is different from Samuels. The Seller never delivered the rigs to the Buyer.

Nevertheless, the analysis in Samuels is important here because it demonstrates the

important role of possession in determining rights in collateral. See Kinetics

Technology Int’l Corp. v. The Fourth Nat’l Bank of Tulsa, 705 F.2d 396 (10th Cir.

1983), where the court held that for a security interest to attach, a debtor must have

some degree of control or authority over collateral placed in the debtor’s possession.

The Seller in this case retained possession of the rigs at all times, thus preserving a

purchase money security interest in them. The Buyer never paid for the rigs and
27Because the only right Villas-Afloat could convey was an interest based on its position as a buyer making

partial payments under Article 2, its interest is one “arising solely under the chapter on sales (chapter 2 of this title)”

and consequently, “the rights of the secured party on default by the debtor are governed by the chapter on sales (chapter

2 of this title).” Tenn. Code Ann. § 47-9-113(c).

-21-

never acquired any control over them. A holding that the Buyer could transfer a

security interest to the Bank would contravene the general principle that one cannot

encumber another person’s property. See Kinetics Technology Int’l Corp., 705 F.2d

at 398. As the district court noted, “[i]t would astonish the sellers of the world to

discover that a seller who has not parted with goods nor received payment for them

has an interest in the goods inferior to the creditor of a holder of an executory

contract to buy them.” Such a holding would offend the commercial expectations of

all sellers who retain possession of goods to protect themselves against a defaulting

buyer. 

We thus hold that where the seller has never relinquished possession of the goods the

special property right of § 2.401 in and of itself does not constitute a sufficient right

in the collateral to enable a buyer who has not paid for those goods to transfer a

security interest in them to a third party.

Crocker Nat’l Bank, 839 F.2d at 1108-09;see also Heidelberg Eastern, Inc., 19 UCC Rep. Serv. 2d

at 770 (citing Crocker Nat’l Bank with approval for principle that “the requirement of UCC 9-

203(1)(c) that a debtor have rights in the collateral is a reflection of the general principle that one

cannot encumber another’s property. . .” and holding the UCC “embodies a policy of protecting the

priority of a seller’s . . . interest . . . .”). 

For the reasons stated above, and in particular reliance on Crocker Nat’l Bank, whose

reasoning and result we adopt, we find that Villas-Afloat never acquired rights in the collateral

sufficient to meet the requirement for attachment of any security interest in Conister. Therefore,

Conister cannot rely on any Article 9 interest to enforce its claimed right to proceeds, and Tenn.

Code Ann. § 47-9-504(1) does not apply to the dispute.27
28The example given by these authors is illustrative:

For example, assume that Boeing leases aircraft to Pan Am on twenty-year leases at $100,000 per

month. Does Pan Am enjoy “rights in the collateral” sufficient to pass on to a third party a security

interest in the aircraft? If we assume that Boeing’s consent to an assignment of the leases is not

required, the answer seems to be yes. See, e.g., In re Holiday Airlines Corp., 647 F.2d 977 (9th Cir.

(continued...)

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IV. Rights Which Were Conveyed

Although Villas-Afloat did not have sufficient rights in the collateral to create an attached

security interest to Conister under Tenn. Code Ann. § 47-9-203(1)(c), it was nevertheless able to

convey to Conister what rights it had under the agreement with BCA or under Article 2.

Sometimes courts use the “rights in the collateral” requirement as a way of limiting

the scope of the security interest, vis à vis prior claimants. Thus, an expansive

security interest in goods granted by the lessee of such goods nevertheless rises no

higher than the lessee’s rights and thus is not superior to the lessor’s rights. . . .

Viewed in that way, “rights in the collateral” language merely states a truism,

namely, that the debtor normally can only convey something once it has something,

and that something may be less than the full bundle of rights that one may hold in

such property. The “rights in the collateral” language is a gateway through which

one looks to other law to determine the extent of the debtor’s rights, and thus the

interest the debtor can grant to a third party by way of a security interest.

WHITE & SUMMERS, supra, § 31-6, at 126-27.

The question really is what rights a breaching buyer may pass on to a creditor. We agree

with the following analysis:

A secured party (or other property claimant) may hold rights that are derived from

the debtor and yet may nonetheless find that he enjoys no greater rights against the

“owner” of the goods than does the debtor himself. As long as the rights of the

secured party (or other property claimant) to the collateral remain only derivative of

the debtor’s, the “rights in the collateral” issue seems largely uncontroversial.

Regardless of whether the rights in the collateral are asserted by the debtor are those

of the holder of a “special property interest” in the goods or of “title” to the goods,

the debtor has some rights in the collateral. However limited those rights may be,

there is no reason that a secured party (or other property claimant) should not be able

to succeed to them.

Baird & Jackson, supra, 35 STAN. L. REV. at 203.28
28(...continued)

1981). But to say that a third party can obtain a security interest in the aircraft is not to say that its

security interest entitles it to prevail against Boeing. Rather, “attachment” of the third party’s interest

means nothing more than that upon Pan Am’s default against the third party, the latter can assert

whatever rights Pan Am enjoys in the aircraft against Boeing. The secured party may take possession

of the aircraft by stepping into the shoes of Pan Am and assuming both its rights and obligations

under the lease. The secured party will acquire not the aircraft but rather Pan Am’s right to use them.

Assuming that the secured party’s rights to the aircraft are but derivative of Pan Am’s, when Pan Am

loses its right to possess the aircraft as against Boeing, so too will the secured party lose its rights to

possess the aircraft as against Boeing. Because Pan Am has the right to use the airplanes only if it

pays Boeing $100,000 a month, the secured party will be able to use the airplanes only if it pays

Boeing the same amount. Thus, the right the third party acquires to secure its debt (the right to rent

airplanes from Boeing at $100,000 a month) will prove valuable only if the $100,000 rental price is

below the prevailing market rate for airplanes of that type at the time of Pan Am’s default.

Id. at n.85.

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Thus, we conclude that Villas-Afloat could only convey to Conister those interests or rights

it had. Because the dispute herein is over the proceeds from the sale of Boat II, the relevant right

so conveyed was Villas-Afloat’s right to restitution of that portion of its partial payments which

exceeded BCA’s costs and damages.

V. Resolution of Competing Claims to Excess Proceeds from Boat II

The outcome of the conflicting claims to the $48,889.85 depends upon an analysis of the

rights and interest of the two parties under Article 2 and other applicable state law. Tenn. Code Ann.

§ 47-1-103: Haverlah v. Memphis Aviation, Inc., 674 S.W.2d 297, 306-07 (Tenn. Ct. App. 1984).

Villas-Afloat had, and conveyed to Conister, a right to restitution under Tenn. Code Ann. § 47-2-

718(2), which translates to claim for the $48,889.85 minus $500. On the other hand, BCA has a

claim against Villas-Afloat arising from its rights as a seller under Article 2 and claims a right to

setoff its losses on Boat III against the same money. Article 2 provides no guidance on resolving

the dispute, but is the source of the debts claimed by each. We resort, therefore, to the law of setoff.

Haverlah, 674 S.W.2d at 306-07.

The fundamental philosophy of all setoffs and recoupments is that a party being sued for

money may claim entitlement to money from the party bringing the suit, permitting the adjudication

of countervailing claims in one suit. 

A set-off is a counterdemand which a defendant holds against a plaintiff, arising out

of a transaction extrinsic of plaintiff’s cause of action. It is the right which exists

between two parties, each of whom under an independent contract owes an

ascertained amount to the other, to set-off their respective debts by way of mutual

deduction, so that in any action brought for the larger debt the residue only, after

deduction, may be recovered. The right of set-off is a common-law right, which
29BCA argues that the boats were built pursuant to an installment contract between BCA and Villas-Afloat;

Conister argues there were separate contracts, at least with regard to Boat II and Boat III. The trial court found “Boating

Corporation of America contracted with Villas-Afloat to build a series of boats, that three boats were built.”

-24-

belongs to every creditor, to apply unappropriated monies of his debtor, in his hands,

in extinguishment of debts due to him. It allows parties that owe mutual debts to

each other to assert amounts owed, subtract one from the other, and pay only the

balance.

80 C.J.S. Set-off and Counterclaim § 3 (2000) (footnotes omitted).

“[A]ny claim or demand the defendant may have against the plaintiff may be used as a set

off, while it is not a subject of recoupment unless it grows out of the very same transaction which

furnishes the plaintiff’s cause of action.” Howard v. Abernathy, 751 S.W.2d 432, 434 (Tenn. Ct.

App. 1988). Thus, whether BCA’s arrangement with Villas-Afloat is treated as one contract or as

three, BCA is entitled to claim a right of setoff.29 See also Tenn. R. Civ. P. 13.02 (allowing as

permissive counterclaims “any claim against an opposing party, whether or not arising out of the

transaction or occurrence that is the subject matter of the opposing party’s claim.”).

In In Re Paul Pack Steel Erection Co., Inc., 126 B.R. 310 (Bankr. E.D. Tenn. 1991), the court

was called upon to determine whether a creditor contractor could setoff against retainages it was

holding the total amount due to the contractor from a now bankrupt subcontractor under three

separate subcontracts. The bankruptcy trustee objected to using the entire retainage from the third

contract to setoff the claims resulting from the first two contracts. The court determined that

retainage on a subcontract was simply a debt owed by the contractor to the subcontractor and, as

such, was subject to the common law rules of setoff. Consequently, the contractor creditor was

entitled to setoff the retainage from one contract against debts owed it by the subcontractor arising

from all three subcontracts. Id. at 312.

A setoff must be a valid claim for which the defendant might have sued the plaintiff and

recovered. Howard, 751 S.W.2d at 434. In other words, a setoff claim must be sufficient to support

an independent action by the defendant against the plaintiff. Combustion Eng’g Co. v. McFarland,

209 Tenn. 75, 349 S.W.2d 138 (1961). An essential requirement to a right of setoff is that the

demands, or claims, are mutual, that is subsisting between the same parties. Auton’s Fine Jewelry

& Bridal Center, Inc. v. Beckner’s, Inc., 707 S.W.2d 539, 540 (Tenn. Ct. App. 1986) (citing

Edington v. Pickle, 33 Tenn. 122 (1853)). Additionally, the reciprocal claims “must be of the same

grade and nature or be due in the same capacity or right.” Id. The right to setoff is available to assert

claims only to liquidated damages or those capable of being ascertained by calculation. Howard, 751

S.W.2d at 434.

A remedy provided by Article 2 can be the basis of a setoff claim. First Tenn. Bank Nat’l

Ass’n v. Hurd Lock & Mfg. Co., 816 S.W.2d 38, 41 (Tenn. Ct. App. 1991). In Hurd Lock, a buyer

was allowed to set off its Tenn. Code Ann. §§ 47-2-714 and -715 damages against amounts it owed
-25-

under the sales contract. Because the damages incurred by the buyer were greater than the amounts

due under the contract, the seller’s secured creditor was not entitled to any amount from the buyer.

The claim by BCA for its damages arose from its rights and remedies under Article 2 of the

UCC because of the breach by Villas-Afloat in failing to pay for the boats it contracted to buy.

Conister’s claim rests on the rights transferred to it by Villas-Afloat, and Villas-Afloat had a claim

for restitution of partial payments for Boat II also found in Article 2. Thus, we find there is

mutuality of parties and the claims are of the same nature. Because the UCC creates the formula for

calculation of both claims, they were both capable of being ascertained by calculation and were, in

fact, so calculated before the lawsuit was brought by Conister. Therefore, BCA has met the

requirements for asserting a valid claim of setoff against Villas-Afloat. 

This court has also allowed a party to assert a claim of setoff where “complete justice and

equity cannot be meted out to the parties” otherwise. Haverlah, 674 S.W.2d at 307; Moore v.

Howard Pontiac-Am., Inc., 492 S.W.2d 227, 230 (Tenn. Ct. App. 1972). In other words, there is no

reason to subject the parties to two lawsuits when they have claims against each other. See also

ECHO, Inc. v. Whitson Co., Inc., 52 F.3d 702, 704 (7th Cir. 1995) (In allowing buyer to assert

counterclaims against the seller who brought suit to collect money owed from the sale of goods,

which counterclaims where based on a separate distribution agreement, the court stated “The real

point is that only the resolution of the counterclaim will ultimately determine how much money each

party owes each other.”). 

It does not change the outcome of the case that for some period of time after the sale of Boat

II BCA indicated that the $48,889.85 belonged to Villas-Afloat. After Boat III was sold, BCA

realized a net loss in its dealings with Villas-Afloat. It subsequently determined that it would apply

the proceeds from the $48,889.85 to the money Villas-Afloat owed it on Boat III. Although the right

of setoff is an exercisable prerogative, not a natural right conclusively established because the parties

have claims against one another, In re Holder, 182 B.R. 770, 776 (Bankr. M.D. Tenn. 1995), BCA

exercised that right, asserted its claim to setoff in a timely manner, and did not waive it. The court

had authority to allow the claimed setoff. Tenn. Code Ann. § 25-1-105; McReynolds v. Cherokee

Ins. Co., 815 S.W.2d 201, 206 (Tenn. Ct. App. 1990). 

The party asserting a claim to setoff has the burden of establishing its right to setoff. Polk

v. Torrence, 218 Tenn. 680, 683, 405 S.W.2d 575, 576 (1966). BCA has proved its losses and the

claims it had against Villas-Afloat. In fact, Conister does not dispute the amounts or that VillasAfloat was liable to BCA for its damages. Further, setoff is an equitable doctrine, and generally rests

in the inherent authority of the court to do justice to the parties before it and, therefore, will not be

allowed where to do so would work injustice. Auton’s Fine Jewelry & Bridal Center, Inc., 707

S.W.2d at 540. We find nothing about the situation before us which indicates that allowance of

BCA’s right of setoff would be inequitable. BCA performed all its obligations under its agreement

with Villas-Afloat and took reasonable steps to recover its losses. Conister, a lending institution,

made a loan to Villas-Afloat which later proved to have been improvident, but failed to take the steps

necessary to insure its loan would be secure before delivering the proceeds of the loan.
-26-

Therefore, we conclude that BCA was entitled to setoff the amount owed it by Villas-Afloat

against the money left after the resale of Boat II. There is sufficient evidence in the record to prove

that the amount of BCA’s setoff exceeds the $48,889.85. In essence, our conclusion is the same as

the trial court’s: there were no excess proceeds.

VI. Conister’s Non-Derivative Claims

In addition to its claim to the proceeds from the sale of Boat II based upon its assertion of

an attached security interest, and in addition to those rights derived from Villas-Afloat, Conister

makes other claims which we interpret as not deriving from Villas-Afloat. These claims begin with

the assertion that communications from Conister to BCA made contemporaneously with its wire of

the proceeds of its loan to Villas-Afloat restricted application of those funds to Boats I and II. The

only communication contemporaneous with delivery of the funds was the fax which simply

referenced, in the subject line, two invoices by number. There was a telephone conversation to

confirm the details of the process for wiring the money, but there was no testimony that anything

else of substance took place in that conversation. The trial court held:

The evidence is insufficient for the Court to find that Conister Trust gave any written

instructions or verbal instructions to Boating Corporation of America on the use of

the funds or on any limitation of the funds. One cannot read the fax which confirms

the wiring of the 200,000 pounds with reference to the invoice numbers on the first

two boats as a limitation on the application of those funds.

Conister asserts the trial court’s holding was in error. We cannot agree. The evidence does

not preponderate against the trial court’s factual finding.

In addition, Conister recounts numerous statements from BCA officials acknowledging the

entitlement of Villas-Afloat and/or Conister to the $48,889.85 remaining after the resale of Boat II.

We do not interpret these statements as supporting any argument that Conister actually or effectively

limited use of the funds it loaned Villas-Afloat to Boats I and II. As set out earlier, after the sale of

Boat II on November 26, 1990, BCA considered the $48,889.85 as surplus from the sale and made

no claim to that money. In fact, BCA offered to forward the money to the proper party upon receipt

of joint payment instructions. BCA sold Boat III in late December of 1990. Conister claims that

BCA made similar statements disclaiming interest in the proceeds from Boat II and carried that

amount as a credit balance on its books for some time after the sale of Boat III. BCA asserts that it

did not realize the full extent of its losses in its dealings with Villas-Afloat until “the dust settled”

and that the issues resolved in determining the entitlements to the money were complex. We note

that Conister did not initiate this litigation until August of 1994, and the record would indicate there

had been silence between the parties from early 1991.

These factual allegations concerning the contemporaneous communications and subsequent

statements appear to be the basis, in part, for the equitable arguments made by Conister. Conister

argues that, even if it does not have a superior interest to the proceeds of the sale of Boat II via a
-27-

security interest, it is still entitled to the money under the doctrines of constructive trust and equitable

lien. As foundation for this argument, Conister states that BCA knew that Conister only funded

Boats I and II and was not involved with Boat III, but BCA still applied $25,000, of Conister funds

towards Boat III and offset its loss on Boat III with the surplus from Boat II. Therefore, Conister

argues, it is entitled to both the $25,000 deposit on Boat III and the $48,889.85 surplus on Boat II.

To clarify, we point out that the $25,000 that is the subject of Conister’s claim is the amount

BCA applied, at the direction of Villas-Afloat, as a deposit on Boat III. Conister’s claim that BCA

was not entitled to so apply that amount rests upon its claim that BCA was restricted in its use of the

funds wired by Conister. This argument, however, overlooks the fact that Villas-Afloat had supplied

an initial $25,158 as a deposit. Conister’s argument in this regard lacks an evidentiary basis that the

money used as a deposit on Boat III was part of the money wired by Conister. 

Additionally, and more significantly, Conister’s argument that BCA could not apply either

the $25,000 or the $48,889.85 in proceeds from the sale of Boat II contains two defects. First, the

money wired to BCA was money loaned to Villas-Afloat and was no longer Conister’s money. The

fact that Conister made the transfer instead of giving the money to Villas-Afloat to make the

payment does not alter the fact that the money was Villas-Afloat’s and was sent to BCA at the

direction of Villas-Afloat. While Conister could put conditions on the use of the money by VillasAfloat, it had no relationship with BCA through which it could impose such conditions on BCA.

Second, as we have determined earlier, BCA was entitled to the remedies afforded under the UCC

and to offset its total damages against amounts paid to it by Villas-Afloat. These problems doom

Conister’s final two claims. 

A. Constructive Trust

Conister argues that this court should apply the principle that “when one acquires property

with notice that another is entitled to its benefits, equity constructs a trust out of the transaction and

makes a trustee of the person thus acquiring title” citing Browder v. Hite, 602 S.W.2d 489 (Tenn.

Ct. App. 1980). As such, BCA was the trustee as to both the $25,000, deposit and the $48,000,

surplus. Implicit in Conister’s argument is that this case satisfies the criteria for the imposition of

a constructive trust. We disagree.

Constructive trusts arise through equity to satisfy the demands of justice. Rowlett v. Guthrie,

867 S.W.2d 732, 734 (Tenn. Ct. App. 1993); Akers v. Gillentine, 191 Tenn. 35, 39, 231 S.W.2d 369,

371 (1948). A constructive trust arises against one who: 

 . . . by fraud, actual or constructive, by duress or abuse of confidence, by

commission of wrong, or by any form of unconscionable conduct, artifice,

concealment, or questionable means, or who in any way against equity and good

conscience, either has obtained or holds the legal title to property which he ought not,

in equity and good conscience hold and enjoy. 
-28-

Livesay v. Keaton, 611 S.W.2d 581, 584 (Tenn. Ct. App. 1980) (citation omitted). Tennessee courts

have found constructive trusts in several situations, and included among them is “where a person

acquires property with notice that another is entitled to its benefits.” Myers v. Myers, 891 S.W.2d

216, 219 (Tenn. Ct. App. 1994). This ground includes a requirement that the party seeking to impose

a constructive trust must own the property in question or have a beneficial interest in it. Browder,

602 S.W.2d at 493. A constructive trust is a device used by courts applying equitable principles “to

compel one who unfairly holds a property interest to convey that interest to another to whom it justly

belongs.” Akers, 191 Tenn. at 39, 231 S.W.2d at 371 (citation omitted). Finally, to establish a

constructive trust the proof must be “‘clear, cogent, convincing, and irrefragable.’” Browder, 602

S.W.2d at 493 (citing Cook v. Cook, 521 S.W.2d 808 (Tenn. 1975); Seaton v. Dye, 37 Tenn. App.

323, 263 S.W.2d 544 (1953)); see also Linder v. Little, 490 S.W.2d 717 (Tenn. Ct. App. 1972). 

In the case herein, we find that a number of the prerequisites for a constructive trust do not

exist. BCA has not engaged in the type of conduct required; Conister was not entitled to the

“property” at issue; and Conister received the benefits its was entitled to, in that it could assert its

debtor’s rights to restitution. We find no basis for the application of the equitable principles

underlying the theory of constructive trust in this business arrangement wherein both Conister and

BCA had available remedies to protect their interests. 

B. Equitable Lien

Similarly, we find that the doctrine of equitable lien does not apply to the circumstances

herein. An equitable lien is a right of a special nature over property which constitutes a charge or

encumbrance so that the property itself may be proceeded against in an equitable action, and either

sold or sequestered, and its proceeds or profits supplied on the debt of the person in whose favor the

lien exists. Shipley v. Metropolitan Life Ins. Co., 25 Tenn. App. 452, 158 S.W.2d 739 (1941). This

court has discussed the doctrine as follows:

An equitable lien is a right, not existing at law, to have specific property applied in

whole or in part to payment of a particular debt or class of debts. It is not an estate

or property in the thing itself, nor is it a right to recover the thing; that is, it is not a

right which may be made the basis of a possessory action, but is merely a charge

upon it. Greer v. American Security Insurance Co., 223 Tenn. 390, 445 S.W.2d 904,

907 (Tenn.1969); See Allen v. Cunningham, 143 Tenn. 11, 223 S.W. 450

(Tenn.1919). An equitable lien arises either from a written contract which shows an

intention to charge some particular property with a debt or obligation or is implied

and declared by a court of equity out of general considerations of right and justice as

applied to relations of the parties and circumstances of their dealings. In the absence

of an express contract, a lien is based upon the fundamental maxims of equity and

may be implied and declared by a court of chancery out of general considerations of

right and justice as applied to the relations of the parties and the circumstances of

their dealings. Greer, 445 S.W.2d at 907. There must be an intent to make the

particular property, real or personal, a security for the obligation. Id. An equitable

lien cannot be founded merely upon moral obligations alone, but must find a basis
-29-

in established equitable principles. Id.; See also Stansell v. Roach, 147 Tenn. 183,

246 S.W. 520 (Tenn.1922).

Muller v. Lannom, No. 02A01-9702-CH-00043, 1997 Tenn. App. Lexis 904, at *14-*15 (Tenn. Ct.

App. Dec. 17, 1997) (citations omitted) (no Tenn. R. App. P. 11 application filed). Importantly, this

court has stated, “there must be an established obligation before a lien may be declared to secure it.”

Shipley, 25 Tenn. App. at 455, 158 S.W.2d at 741. 

It is undisputed that there was no express contract between BCA and Conister. BCA did not

have an obligation to Conister regarding the money sent it at the direction of its buyer Villas-Afloat.

Further, we find that no “fundamental maxims of equity” were triggered. Thus, we find there was

no equitable lien upon the funds. 

VII.

Accordingly, the decision of the trial court is affirmed and the case is remanded for such

proceedings as are necessary. Costs of this appeal are taxed to Appellant, Conister Trust Ltd., for

which execution may issue if necessary.

___________________________________________

PATRICIA J. COTTRELL, JUDGE