Delaware Business Litigation Report

Superior Court: A Secured Loan Transaction Only Conveys A Security Interest, Not Legal Title

Segovia v. Equities First Holdings, LLC, 2008 WL 2251218 (Del. Super. Ct. May 30, 2008).

This decision offers predictability to parties entering into straightforward secured loan transactions under Delaware law. It assures that a security interest will not be treated as a conveyance of legal title. And, it prescribes that if a party intends for a transaction to result in the conveyance of rights to the secured lender greater than a security interest, then that party must set forth crystal clear and unequivocal language in the parties’ contract. 

Here, a company received two loans from a lending company specializing in extending funds to individuals and companies with valuable stock holdings. As security for the loans, the company pledged stock that one of its owners held in a NYSE-listed company. 

After closing on the second loan transaction, the lender sold most all of the stock pledged, resulting in proceeds well above the combined total of the loans. The lender did not inform the company of the sales, did not apply the proceeds from the stock to the principal and interest owed, and continued to accept the company’s interest payments.   

The borrowing company and pledgor brought an action against the lender for breach of contract and conversion, among other claims. Both sides moved for summary judgment, with the lender arguing that the pledge agreement stated that the pledgor granted “all right title and interest”—in addition to a security interest. While acknowledging the existence of this language, the court found the lender’s argument unpersuasive, as neither the pledge agreement nor the loan agreement otherwise mentioned or contemplated a sale of the stock. Instead, the court found that the contract was unambiguous and only granted the lender a security interest in the collateral pledged. 

By selling the collateral, the lender breached the pledge agreement and violated the UCC’s requirement that the lender maintain “safe custody” of the collateral during the term of the loan. Further, by failing to apply the proceeds of the sale to the outstanding loan balances, and by accepting interest payments from the company, the lender also breached the loan agreement. 

The pledgor was entitled to elect between contract or conversion damages, with the conversion damages being the greater of the two.        

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