The New KYC: Know Your Collateral

As technology continues to creep into all aspects of life, banks and financial institutions have grown to appreciate the acronym “KYC”: Know Your Customer. 

And rightly so. Knowing your customer can help safeguard bank assets, foster customer relationships, and mitigate risks posed by bad actors and impostors. 

Today, we are reminded of another important “KYC” for banks and financial institutions: Know Your Collateral. Or at a minimum, be aware of the risks of failing to know your collateral. 

The Bonilla Case

On May 15, 2026, the Alabama Supreme Court affirmed a plaintiff’s successful summary judgment against a bank on a conversion claim in U.S. Bank Trust Nat’l Assn. v. Bonilla, SC-2025-0433, 2026 WL 1355750 (Ala. 2026). That alone is enough to shock the conscience of many in the financial industry.

The case stems from a residential foreclosure gone awry – but not with the borrower.

It all started out fairly routine. The Bank was assigned a residential mortgage loan from an original lender. At some point, the borrower falls behind on the mortgage payments. After the borrower failed to cure the default, the property was sold at a foreclosure auction to the Bank via credit bid. 

After taking ownership of the property, the Bank’s servicer engaged a local real estate agent to market it for sale. The real estate agent physically visited the property address one day to verify occupancy and discovered there was no mailbox or house matching the address provided. After some additional research, the agent made another trip to the property to assess whether it was occupied. On that visit, the agent encountered an individual at a house numbered close to the correct street number (67 instead of 77). The house this individual occupied appeared to match the description of the foreclosed house: a double-wide manufactured home that had been bricked over on all four sides. This individual responded that the address may have changed at some point over the years, and that it was possible that her property was foreclosed upon as she had fallen behind on her mortgage payments. This individual was in fact the original borrower referenced above. This conversation convinced the real estate agent that he had identified the correct property. The Bank then paid the individual $3,500.00 to vacate the property before listing it for sale. 

The Bank then entered into a contract for the sale of the property to an unrelated third-party for $95,000.00. The Bank recommended the purchaser obtain a survey, but the purchaser did not. Nor did the Bank. Everyone involved appeared to believe the property being sold was the property with the bricked-over double-wide. 

The third-party sale “closed,” and the Bank granted the property to the purchaser via special warranty deed. The special warranty deed’s legal description did not match the legal description contained in the foreclosure deed. Shortly thereafter, the purchaser contracted to sell the property for $114,000.00 and was informed by a title company that the legal description did not match the address of the property he believed he had purchased. 

The purchaser then sued the Bank for conversion, breach of contract, negligence, wantonness, and rescission of the special warranty deed. The trial court entered summary judgment in the purchaser’s favor on all claims, and the Bank appealed the decision on the conversion, breach of contract, negligence, and wantonness claims. The Bank did not appeal the judgment on the purchaser’s claim for rescission. 

Notably, the purchaser conceded that had he obtained a survey before the transaction closed, he would have known that he was purchasing a different property than he believed (which was worth approximately half the value of the property he thought he was purchasing). Based on this concession, the Bank argued that this constituted contributory negligence which should defeat the purchaser’s tort claims. The Bank previously argued that the “AS IS” language in the purchase-sale agreement defeated the purchaser’s claims but abandoned that argument on appeal.

The Alabama Supreme Court concluded that the record contained sufficient evidence to affirm the judgment on the purchaser’s conversion claim. First, the Court notes that a conversion claim is an intentional tort claim, and thus the Bank’s contributory negligence defense is not applicable. Next, it notes that the factual matters raised by the Bank were irrelevant to the basic elements required for the purchaser’s conversion claim: the purchaser paid $95,000.00 to the Bank to purchase a specific piece of real property, the Bank accepted that money but did not convey the specific piece of real property, and then the Bank refused to return the consideration received despite being unable to convey good title to the purported property. 

Next, the Alabama Supreme Court found that because it affirmed the conversion claim, and the compensatory damages award stemming from that claim, the Bank cannot be harmed by the court’s affirmance of the negligence or breach of contract claims because they awarded the same damages as the conversion claim. 

Finally, the Alabama Supreme Court reversed the trial court’s award of punitive damages on the purchaser’s wantonness claim, finding that the trial court had improperly made a factual determination regarding the Bank’s mental state, which should have been left to the province of the jury. 

The end result: a compensatory damages award in the amount of $114,000.00 affirmed, and a wantonness claim remanded for a jury trial. 

The Lesson: KYC

The takeaway is, while knowing your customer is important, the Bank here did know who their borrower was, and that knowledge actually contributed to the Bank’s agent identifying the wrong property as its collateral. The additional time and expense to confirm the identity of your collateral, to obtain a survey, or to purchase an owner’s title policy post-foreclosure is well worth it to prevent exposure like this. 

There are also real-world examples of how these simple steps can protect your institution. In a case out of Tyler, Texas in 2019 with similar facts, a title company argued the trial court erred in failing to apportion fault between the title company and the bank that initially foreclosed and “conveyed” the incorrect property. Tyler Title Company v. Cowley, No. 12-18-00043-CV, 2019 WL 1760105 (Tx. Ct. App. 2019). In the Tyler Title case, because a title company had insured the title in between the plaintiff and the bank’s faulty conveyance, the court found the bank’s role to be too attenuated to have caused the harm to the purchaser. In other words, the simple step of purchasing an owner’s policy can either remove the bank from the issue in the future or alert the bank to the issue before it purports to convey a misidentified parcel. 

However, knowing your collateral and doing the requisite due diligence to do so is always the best approach. In a similar case out of Georgia, the Court found that the title company was entitled to equitable subrogation to recover the money paid out on the title claim from the seller (i.e., the Bank in the Alabama case). Wilkinson Homes, Inc. v. Stewart Title Guaranty Company, 271 Ga. App. 577 (Ga. Ct. App. 2005). 

Conclusion

When dealing with the purchase and sale of real property through foreclosure, some jurisdictions will apply equitable principles, tort claims, or other arcane legal doctrines. It is important to know your collateral and spend that extra time and money to prevent a conversion or breach of warranty of title claim from popping up years later.

If these issues do arise, be sure to consult with legal counsel early. There are other legal and factual defenses that may be available, and certain jurisdictions even have safe harbors that may be available if pursued early.