Can You Sell Property Subject to a Lender’s Security Interest?

No, selling property subject to a lender’s security interest is a crime.

Many small business loans from banks are secured by the business’s tangible personal property including office furniture, equipment, and inventory. The lender typically records a UCC 1 to give public notice of its lien and security interest in the debtor’s property.

I had a small business client who stated his business was in financial difficulty. He knew the business would have to shut down shortly. He asked whether he could sell the business’s inventory and equipment before he shut the doors. He knew someone in the same business who was willing to buy his property at a reasonable price. He asked whether his creditors could sue the buyer to recover the goods assuming he did not discuss with the buyer the loan agreement and security agreement.

Florida statutes make it a misdemeanor criminal offense to sell personal property subject to a security interest without the secured party’s consent. The offense is punishable regardless of whether the debtor had criminal intent, and the law applies to the buyer as well.

In this instance, the buyer would take may client’s property subject to the lender’s security interest whether or not the buyer had actual knowledge. The lender could sue the innocent buyer to recover the property.

So, if you buy equipment, inventory, etc., from a small business, you should search Florida’s UCC registry online to see if anyone has filed a UCC 1 that could encumber the property. If you find a UCC 1 that is unclear because it does not describe the secured property in detail you need to get more information to find out if you are getting encumbered goods.