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May 13, 2015

Dude, Where’s My Car? Managing Personal Property Belonging To Third Parties Left On Acquired Real Estate.

by Starfield & Smith

Lenders who acquire real estate from their borrowers usually have procedures in place to assess the typical risks that may be present at the property, such as potential environmental liability. One risk that usually does not usually garner much attention, however, is the risk of potential liability to third parties who own personal property that is left on the premises. The Pennsylvania Superior Court recently issued an opinion on that subject that may encourage lenders to update their checklists and procedures when taking title to real estate collateral.

The Superior Court’s opinion involved a claim against a lender to an auto repair business. The plaintiff owned a 1989 Range Rover that was left on the property for repair. When the principal of the repair business died, the loan defaulted, causing the lender to foreclose on the real estate and purchase it at sheriff’s sale. When the lender’s agent went to the property to have the locks changed, he noticed that there were multiple vehicles on the property. The same agent returned to the property several months later. By that time, the decedent’s father had arranged for all of the vehicles to be towed away except for the plaintiff’s car. The plaintiff eventually came to the property to ask about the car and spoke with the lender’s agent. The agent asked that the plaintiff arrange for the vehicle to be picked up, and warned him that the car would be towed away if it was not. The agent never had the vehicle towed, however, and the plaintiff did not arrange for it to be towed either. Eventually, the car was stolen from the lender’s property.

The plaintiff filed a very simple lawsuit against the lender without the assistance of an attorney for the loss of the vehicle. (The case began in Pennsylvania’s small claims court and was later appealed to the Court of Common Pleas.) At trial, representatives of the lender admitted that the back gate to the property was open the entire time that the lender was rehabilitating the property, and that the plaintiff’s car was never secured. The court found the lender responsible for the value of the vehicle on a theory of conversion, and the lender appealed.

On appeal, the lender argued that the trial court erred because there was no proof that it ever exercised control over the vehicle. The Superior Court disagreed and upheld the trial court’s verdict for the car owner.  In doing so, the Court noted that a party can be held liable for the tort of conversion of property even though it does not have any specific intent to commit a wrong. It also concluded that the lender’s actions had deprived the plaintiff of his property without his consent.

The lesson to be learned from this case is that lenders should take particular care when dealing with personal property belonging to third parties, such as vehicles and leased equipment. That is particularly true where the third party contacts the lender about retrieving the property and/or where the lender makes representations to the third party about how and when it will dispose of the property. Lenders should work with their local legal counsel to confirm the best means of disposing of the third party’s property or securing it until it can be retrieved.

Lenders should always be sure to ask their legal counsel about any potential lender liability issues that might arise with regard to these situations, as well as any regulatory compliance issues that could potentially jeopardize their SBA guarantee, if applicable.  For more information, please contact Jeff at jfeldman@starfieldsmith.com or at 267-470-1231.
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Jeffrey S. Feldman is a Partner in the Fort Washington, Pennsylvania office of Starfield & Smith, P.C. He has extensive experience in business and commercial litigation, and is the manager of the firm’s Commercial Litigation and Creditors’ Rights department.