An Auctioneer who Sells in Good Faith a Personal Property Subject to a Perfected Security Interest is Liable for Conversion if he sells the Property Without the Secured Party's Authorization

The Superior Court of New Jersey in Heritage Bank, N.A. v. Vilsmeier Auction Co., 218 N.J. Super. 440, 441 (Law Div. 1986) held that an auctioneer is liable for conversion if he sells personal property in which a third party has a perfected security interest without authorization from such secured party.  The auctioneer would be liable even if the auctioneer sold the property in good faith and was not aware of the secured party's interest at the time of the auction sale.

This case relates to an auction sale in which the defendant, Vilsmeier Auction Co. (“Defendant”) auctioned and sold two Refrigerator Trailers to the highest bidder, Evans Delivery Co.  The Defendant conducted the auction at the behest of J.K. Enterprises, Inc. (J.K.).  Prior to the auction, the president of J.K. had provided the Defendant certificates of unencumbered titles.  The Defendant sold the vehicles at auction and received commission for the auction sale. 

At the time of the auction the two trailers were actually subject to a perfected security agreement in favor of plaintiff Heritage Bank (“Bank.”)   However, the Defendant was not aware of this fact.  J.K. defaulted on the Bank loan and the Bank instituted this action against the Defendant to recover its loss on the loan. The Bank argued that the said auction was conducted without the secured party’s authorization.   The trial court granted summary judgment in the Bank’s favor and this appeal followed. 

Liability for conversion is imposed irrespective of the fact that the auctioneer acted in good faith and without actual or constructive knowledge of the security interest. Id. at 442.  (citing Commercial Credit Corp. v. Joplin Automobile Auction Co., 430 S.W.2d 440, 444 (Mo.App.1968).  The existence of a perfected security interest is constructive knowledge. Id. ( citing  Top Line Equipment Co. v. National Auction Service, 32 Wash.App. 685, 649 P.2d, 165, 167 (1982)).  When an auctioneer has constructive notice, as in a case where the property is subject to a valid perfected security interest, it is liable for conversion.  Id.

In discussing the doctrine of conversion in New Jersey, the Court referred to the McGlynn court’s words which are noted below: 

The general rule is that one who exercises unauthorized acts of dominion over the property of another, in exclusion or denial of his rights or inconsistent therewith, is guilty of conversion although he acted in good faith and in ignorance of the rights or title of the owner. The state of his knowledge with respect to the rights of such owner is of no importance, and cannot in any respect affect the case.

Id. at 442-43 [90 N.J. Super. 505, 526 (Ch.Div.1966) aff'd, 95 N.J. Super. 412 (App.Div.1967).]

The Court noted that the Bank had perfected its security interest per relevant New Jersey laws. Id.  The Defendant auctioneer could have requested for a title search from the DMV and known of the Bank's interest in the trailers. Id. at 443.  The Court found that the Defendant had an opportunity to discover Mr. Koenig's fraud if a search had been conducted. Id. 

In light of the above, the Court affirmed the trial court's decisions granting summary judgment in Plaintiff Bank's favor. Id.    The Court found that the existence of a perfected security interest was constructive knowledge.  Therefore, Defendant was liable in conversion for selling personal property in which Bank had a security interest without the Bank's authorization.