                                                                           FILED
                           NOT FOR PUBLICATION                              NOV 18 2009

                                                                        MOLLY C. DWYER, CLERK
                    UNITED STATES COURT OF APPEALS                       U .S. C O U R T OF APPE ALS




                            FOR THE NINTH CIRCUIT



METROPOLITAN BANK & TRUST                        No. 08-16511
CO.,
                                                 D.C. No. 2:01-cv-00622-LDG-
             Plaintiff-counter-defendant,        LRL

  v.
                                                 MEMORANDUM *
DESERT VALLEY FINANCIAL LLC; et
al.,

             Defendants-Appellees,

PACIFIC BUSINESS CAPITAL CORP.,

              Defendant-cross-claimant -
Appellee     v.

HUNTINGTON NATIONAL BANK,

             Counter-defendant -
Appellant.



METROPOLITAN BANK & TRUST                        No. 08-16758
CO.,
                                                 D.C. No. 2:01-cv-00622-LDG-
             Plaintiff-counter-defendant,        LRL



        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
   v.

DESERT VALLEY FINANCIAL LLC; et
al.,

              Defendants-Appellees,

PACIFIC BUSINESS CAPITAL CORP.,

              Defendant-cross-claimant -
Appellee,

   v.

HUNTINGTON NATIONAL BANK,

              Counter-defendant -
Appellant.



                     Appeal from the United States District Court
                              for the District of Nevada
                      Lloyd D. George, District Judge, Presiding

                      Argued and Submitted November 5, 2009
                             San Francisco, California

Before: HUG, RYMER and McKEOWN, Circuit Judges.

        Metropolitan Bank & Trust Co. (Metropolitan) appeals from the district

court’s judgment for Pacific Business Capital Corp. (PBCC) after a bench trial on

PBCC’s conversion claim. We have jurisdiction under 28 U.S.C. § 1291. “We

review the district court’s findings of fact after a bench trial for clear error and its


                                            2
conclusions of law de novo.” Friends of Yosemite Valley v. Norton, 348 F.3d 789,

793 (9th Cir. 2003). We affirm in part and reverse in part.




                                          I

      To establish a defense under Uniform Commercial Code (U.C.C.)

§ 9-308(a),1 Metropolitan needed to prove that without its own actual knowledge

of PBCC’s security interest, it (1) gave new value for the mobile home loan

contracts (Home Loans) and (2) took possession of the Home Loans in the ordinary

course of its business. See U.C.C. § 9-308 cmt. 3; 9 Anderson on the Uniform

Commercial Code § 9-308:7 (1999); see also Cal. Comm. Code § 1201(25)(c)

(noting that “[a] person ‘knows’ or has ‘knowledge’ of a fact when he or she has

actual knowledge of it.”). The district court incorrectly attributed Mountain

Community Bank’s knowledge to Metropolitan. As the district court did not

determine whether Metropolitan acted without actual knowledge of PBCC’s




      1
        Metropolitan and PBCC agree that the pre-revision version of the U.C.C.
and the former provisions of the California Commercial Code control.

                                          3
security interest with respect to the initial 128 Home Loans or the substitute Home

Loans, we must reverse for it to make these findings.2




                                         II

      The district court properly rejected Metropolitan’s U.C.C. § 9-306(2)

defense. To establish this defense, Metropolitan needed to prove the transactional

documents between PBCC and Silver State Mobile Homes and Galaxy Financial

Services (collectively, Silver/Galaxy) authorized Silver/Galaxy to sell Home

Loans. The transactional documents authorized Silver/Galaxy to sell Home Loans

only with PBCC’s express written consent. The district court’s apparent reading of

section 2(f) of the Pledge Agreements as a prohibition against selling Home Loans

without consent is consistent with the scope of the Pledge Agreements. It also

matches the parties’ course of conduct. As PBCC did not expressly consent to

Silver/Galaxy’s initial sale of 128 Home Loans to Mountain Community Bank - or




      2
         If Metropolitan can establish on remand a U.C.C. § 9-308(a) defense as to
the initial 128 Home Loans, the district court may need to reconsider whether
Metropolitan gave new value for the substitute Home Loans by releasing security
interests in the Home Loans it returned. See Cal. Comm. Code § 9105(1)(o); Nw.
Acceptance Corp. v. Lynnwood Equip., Inc., 1 U.C.C. Rep. Serv. 2d 1710 (W.D.
Wash. 1986), aff’d, 841 F.2d 918 (9th Cir. 1988).

                                         4
Silver/Galaxy’s subsequent transfer of substitute Home Loans to Metropolitan -

Metropolitan’s U.C.C. § 9-306(2) defense fails.3




                                          III

      Finally, the district court’s damage award was not faulty or overstated.4

First, under California Commercial Code § 9503, PBCC had a right to take

possession of the Home Loans on April 3, 1998, the date Silver/Galaxy caused an

“Event of Default” under the transactional documents by selling Home Loans

without PBCC’s consent. Second, the district court reasonably refused to reduce

damages for returned Home Loans. To the extent these returned loans had any

value, the value was realized, for the most part, by Silver/Galaxy and not PBCC.

Third, the district court reasonably concluded the Home Loans’ actual value at the

time of conversion was at least equal to the amount Metropolitan originally paid

for those loans.

      Each party shall bear its own costs on appeal.


      3
         Even if the transactional documents authorized Silver/Galaxy to sell Home
Loans in the ordinary course of business without consent, the record supports the
district court’s factual finding that Silver/Galaxy did not sell - or subsequently
transfer - the Home Loans in the ordinary course of its business.
      4
        The district court will need to reconsider its damage award, of course, if it
finds on remand that Metropolitan can establish a U.C.C. § 9-308(a) defense.

                                           5
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.




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