I received a call recently from an auctioneer’s wife. She called me in an effort to try and understand what she thought was conflicting advice she had received on the issue of security interests. Here is the story.

Sometime back, her husband had contracted to do an auction for a fellow who was in sort of a rush – actually a very big rush. He explained that he was moving out-of-state for a business opportunity and he needed an auction conducted fast with the net proceeds paid to him immediately. There was no time for him to wait extra days for a settlement to routinely occur, and his new address was uncertain, so he could not count on receiving a check by mail. He needed cash in hand before he literally left town right after the sale.

If you are an auctioneer, make a note now. If you are ever confronted with this type of situation (i.e., a seller in a super-big rush to get everything sold, get paid, and get out of town), you had better get out of the way. This is because something will be afoot that you do not want to be involved with, as was the case here.

Shortly before the date of the auction, the auctioneer got a telephone call from a creditor of the seller. The creditor had seen the advertising for the auction and called to state that the creditor had filed a lien against the property and it should not be sold by the auctioneer.

So much for the seller’s story to the auctioneer – and so much for the auction – both hit the wall simultaneously.

The auctioneer and his wife subsequently talked with a lawyer to learn how to find these liens in the future on property that prospective sellers bring to them.
The lawyer advised that when they run into a security interest recorded against a prospect’s property, it is a bad thing that they need to avoid.
Recently, the auctioneer’s wife was searching her state’s records for any security interests that might be recorded against a current seller’s property. She got to talking with a woman who works in the secretary of state’s office and this woman commented that a lot of people have security interests recorded against their property – and this is not necessarily a bad thing.
It was then that the auctioneer’s wife felt she had gotten conflicting advice from the lawyer on one hand, and this woman on the other (who works daily with security interests).

The wife then called me to ask which one was right – the lawyer or the state employee? Well, the auctioneer is right – and the woman is right, too. Let’s see why this is true.

A security interest is an interest in property that is created either by (a) the agreement of the property owner, or (b) some operation of law. The security interest exists to secure the performance of the owner on some obligation, such as the repayment of a debt owed by the owner to a creditor.

Example one: A person buys a refrigerator from a store and enters into a financing arrangement to pay for it over time. The store will obtain a written agreement from the buyer that gives the store a collateral interest in the refrigerator. This agreement is called a “UCC-1 financing statement” and the store will record it with the state to perfect its security interest in the appliance.

Example two: A person (i.e., the defendant) is sued by someone (i.e., the plaintiff) for money damages on some matter and a court enters a judgment against the defendant.

The plaintiff then moves to obtain a security interest against the defendant’s personal property by way of a judgment lien. This security interest is created by operation of law.

The reason the lawyer’s advice is correct is that when such a lien is found to exist against a prospective auction seller’s property, it tells the auctioneer two things.

First, if the auctioneer has done his job to this point, he initially asked the seller whether anything is owed on the assets to be auctioned.

If the seller answered in the negative, finding an unsatisfied security interest indicates that the seller has not been truthful with the auctioneer and that should be a huge red flag.

Second, an unsatisfied security interest also tells the auctioneer that a creditor has a claim against the assets that would have to be satisfied if the property were sold. This might mean that the seller has little or no equity in the property.

When a security interest is discovered, an auctioneer knows he is not going to sell that asset free and clear with no problem whatsoever. There is a problem and it is a big one.

The security interest is a priority, financial claim that exists for the benefit of a creditor and it must be satisfied or otherwise resolved before any sale occurs.
The reason the state employee’s advice is correct is that a security interest is not something that is bad per se, or that indicates a person who has property which is the subject of one is a bad person. That is not the case.

I have purchased items that were the subject of security interests (i.e., my first refrigerator) and you probably have, too. Nevertheless, this state employee likely does not understand the significant complication that a security interest poses for an auctioneer, while the lawyer did.

Next week we are going to continue our discussion of security interests when we look at how auctioneers can protect themselves against these liens and their implications for auction sales.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Steve Proffitt may write to him in care of this publication.