Opinion ID: 1700887
Heading Depth: 2
Heading Rank: 2

Heading: Did Bank Lose Its Security Interest by a Consent to Disposition?

Text: During the time Ceasar's had possession of the collateral, Bank made various loans to it and secured such loans with Ceasar's inventory, accounts receivable and general intangibles, the liquor licenses. This security interest was perfected on December 13, 1984. In April of 1985 Kurylas regained possession of the motel complex. Kurylas filed a financing statement executed by Lewis as its debtor on April 15, 1985, as a condition of the leaseback from Kurylas to Lewis and Ceasar's. Kurylas now contends that the Lewis and Ceasar's transfer of the collateral back to Kurylas constitutes an authorized disposition extinguishing Bank's security interest pursuant to SDCL 57A-9-306(2). The trial court found that since Bank did not consent to such a transfer, its security interest continued in the collateral. The security agreement between Bank and Ceasar's required Bank to give prior written consent to any disposition of collateral, except inventory, which could be sold to buyers in the ordinary course. It is undisputed that Bank did not execute a written consent authorizing such transfer to Kurylas. Kurylas argues that Bank's knowledge regarding the leaseback constitutes an authorization of the disposition under the or otherwise exception of SDCL 57A-9-306(2). We disagree. This court addressed the same issue in Aberdeen PCA, supra. In that case we refused to find the written consent in documents other than the security agreement. In the present case, unlike Aberdeen PCA, no documents exist that purport to evidence a written consent to transfers by Bank. Yet this court, upon a full review of all the facts in Aberdeen PCA, found that there was no otherwise authorization for the sale of the cattle, and thus, the security interest continued. The same result arises from the facts of this case. Kurylas has shown that Bank knew there was some change in the relationship between Kurylas and Ceasar's, but he failed to establish that Bank knew there had been an actual transfer of the collateral. Absent knowledge of a transfer, there certainly can be no consent to the disposition by Bank. Further, in Aberdeen PCA this court held that even if there is knowledge, it will not be elevated to the legal status of an authorization to extinguish a security interest. 379 N.W.2d at 832. To hold to the contrary would also be inconsistent with the terms of the security agreement which required written consent. Therefore, Bank's security interest survived the unauthorized transfer to Kurylas. Similarly, the November 6, 1985, transfer of the liquor licenses from Ceasar's to Kurylas following repossession of the motel by Kurylas had no effect on Bank's security interest as Bank had also not consented to this transfer.