ITT Commercial Finance Corp. v. Bank of the West, 97-50500

Decision Date20 January 1999
Docket NumberNo. 97-50500,97-50500
Citation166 F.3d 295
Parties37 UCC Rep.Serv.2d 855 ITT COMMERCIAL FINANCE CORPORATION, Plaintiff-Appellee, v. BANK OF THE WEST, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Robert McRae O'Boyle, Haynes & Boone, Austin, TX, for Plaintiff-Appellee.

Corey William Haugland, Victor Michael Firth, James, Goldman & Haugland, El Paso, TX, for Defendant-Appellant.

Appeal from the United States District Court for the Western District of Texas.

Before KING, Chief Judge, and WISDOM and DAVIS, Circuit Judges.

KING, Chief Judge:

Defendant-appellant Bank of the West appeals the judgment of the district court granting plaintiff-appellee ITT Commercial Finance Corporation's motion for summary judgment. Bank of the West challenges the district court's determinations that the security interest of ITT Commercial Finance Corporation has priority over Bank of the West's security interest, and that Bank of the West is liable to ITT Commercial Finance Corporation for conversion. Although we agree with the district court's priority determination we disagree with its conclusion on conversion, and we therefore reverse the district court's judgment and remand for further proceedings.

I. BACKGROUND

Defendant-appellant Bank of the West (BOW) and plaintiff-appellee ITT Commercial Finance Corporation (ITT) are both commercial lenders. Over the course of several years, both BOW and ITT lent money to the same debtor, a fledgling microcomputer dealership that operated initially as a sole proprietorship run by Carlos Chacon and doing business under the trade name "Compucentro USA." Two predecessors-in-interest to BOW, Coronado Bank and Texas National Bank, made loans to the sole proprietorship in August 1988 and February 1990, respectively. They filed financing statements in the office of the Secretary of State of the State of Texas (the Secretary of State) to perfect their security interests in a broad class of current and after-acquired property under the names "Carlos Chacon d/b/a Compucentro USA" and "Carlos R. Chacon and Lorena Chacon d/b/a Compucentro USA." BOW subsequently purchased these loans from the FDIC and now holds the security interests.

On November 26, 1990, Carlos Chacon incorporated the sole proprietorship under the name "Compu-Centro, USA, Inc." On December 12, 1990, Chacon informed BOW of the incorporation using letterhead of the sole proprietorship bearing the name "Compucentro USA." The letter stated: "Enclosed please find copies of our newly incorporated license. As you finalize the paperwork on our loan you [m]ay want to reflect that we are incorporated."

On January 28, 1991, BOW filed a notice of assignment of the interest underlying Coronado Bank's 1988 filing with the Secretary of State, and, on March 11, 1991, BOW similarly filed a notice of assignment of the interest underlying Texas National Bank's 1990 filing. These assignment notices did not reflect the debtor's recent incorporation. Rather, they listed the debtor's name as "Chacon, Carlos d/b/a Compucentro, USA" and "Carlos R. Chacon and Lorena Chacon d/b/a Compucentro USA," respectively.

BOW also independently extended secured financing to the new corporation, filing a new financing statement on January 18, 1991 covering a broad class of current and after-acquired property and specifying the name of the debtor as "Compucentro, USA, Inc." Notably, the filing left out the hyphen in the corporation's legal name.

On October 1, 1991, ITT agreed to extend a line of credit for inventory purchases to Compu-Centro, USA, Inc. On October 14, 1991, ITT filed a financing statement covering a broad class of current and after-acquired property and specifying the name of the debtor as "Compu-Centro, USA, Inc." In the course of conducting a credit review of the corporation, ITT learned, through a loan application and a credit report, that Compu-Centro, USA, Inc. had existed before its November 1990 incorporation with a different name and business structure. ITT also possessed financial documents of the Chacons that listed a $68,000 liability to BOW for a loan. ITT did not investigate further, and, on October 18, 1991, ITT obtained an official search of the Secretary of State's records in the name "Compu-Centro, USA, Inc." ITT's filing was the sole filing reflected on the search report.

In the course of its business, Compu-Centro, USA, Inc. entered into a contract with the federal government to supply a medical center with computers. Neither ITT nor BOW provided Compu-Centro, USA, Inc. with funding to obtain these computers. Compu-Centro, USA, Inc. established an account at BOW in which it deposited the proceeds of the government contract. No other funds were deposited into this account. In 1993, Compu-Centro, USA, Inc. paid BOW $300,000 out of the $1.3 million received as proceeds of the government contract by a check drawn on the BOW account. The purpose of the payment was to satisfy, in part, the outstanding balance on the debt owed to BOW. BOW did not instruct Compu-Centro, USA, Inc. to make payment out of these proceeds and never offset or froze the account. At the time of the payment, Compu-Centro, USA, Inc. was in default on its obligation to ITT in the amount of $117,795.14. 1

On March 7, 1994, ITT filed this diversity action against BOW seeking a declaratory judgment regarding the priority of its security interest in the collateral of Compu-Centro, USA, Inc., and alleging that BOW had converted the proceeds of the government contract. On cross-motions for summary judgment, the district court granted summary judgment in favor of ITT on the declaratory judgment claim, finding that ITT's lien had priority because BOW's earlier-filed financing statements were seriously misleading. Thereafter, the case was transferred to a second district court judge, who granted ITT's motion for summary judgment on its conversion claim on the ground that BOW had not received the government contract proceeds from Compu-Centro, USA, Inc. in the ordinary course of business because the payment was in partial satisfaction of a money debt. The district court entered final judgment in favor of ITT in the amount of $86,959.98 plus pre- and post-judgment interest. BOW timely appealed.

II. STANDARD OF REVIEW

This court reviews the grant of summary judgment de novo, and applies the same standard used by the district court. See Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir.1994). Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). All factual questions are viewed in the light most favorable to the nonmoving party. See Quest Exploration & Dev. Co. v. Transco Energy Co., 24 F.3d 738, 741 (5th Cir.1994). In this diversity action, we must follow Texas law. See Cosden Oil & Chem. Co. v. Karl O. Helm Aktiengesellschaft, 736 F.2d 1064, 1069 (5th Cir.1984).

III. DISCUSSION
A. Who Has Priority?

If BOW's filings perfected its security interest in the collateral of the debtor corporation Compu-Centro, USA, Inc., BOW enjoys first priority and consequently cannot be liable to ITT for conversion of the proceeds of the government contract. Although BOW's filings precede ITT's filing, ITT argues, and the district court held, that ITT has first priority with respect to the debtor corporation's collateral.

1. The District Court Opinion

In a thorough and careful opinion, the district court first addressed whether the 1988 and 1990 financing statements pertaining to Coronado Bank's and Texas National Bank's loans to the sole proprietorship sufficiently perfected BOW's security interest in the collateral at issue in this case--collateral Compu-Centro, USA, Inc. indisputably acquired more than four months after its incorporation. According to the district court, because collateral acquired more than four months after Compu-Centro, USA, Inc.'s incorporation, by definition, had not been transferred from the sole proprietorship to the new corporation, 2 BOW could not rely upon the 1988 and 1990 financing statements to perfect its security interest in that collateral unless those filings were not seriously misleading with respect to the debtor's name after incorporation. 3 See TEX. BUS. & COM.CODE ANN. § 9.402(g) (West 1991).

A financing statement is not seriously misleading if "a reasonably prudent subsequent creditor would have discovered the prior security interest." Continental Credit Corp. v. Wolfe City Nat'l Bank, 823 S.W.2d 687, 689 (Tex.App.--Dallas 1991, no writ). The district court found that the pre-incorporation financing statements were seriously misleading as to the new name of the debtor, and therefore BOW was required to file a new financing statement after the debtor's incorporation to perfect its security interest in the collateral acquired more than four months after incorporation. The district court "recognize[d] the obvious futility of discovering a financing statement [that] lists the debtor as an individual under the name 'Carlos Chacon' ... in a search of a corporation under the name 'Compu-Centro, USA, Inc.' " (internal quotation marks omitted).

The court similarly found that BOW's filings of the notices of assignment of the pre-incorporation security interests were seriously misleading because they too were filed under the pre-incorporation name of the debtor. According to the court, the filings under "Carlos Chacon d/b/a Compucentro USA" and/or "Carlos R. Chacon and Lorena Chacon d/b/a Compucentro USA" were seriously misleading because no reasonably prudent creditor searching for filings pertaining to a corporation named "Compu-Centro, USA, Inc." could be expected to find them.

The remaining question for the district court, therefore, was whether BOW's post-incorporation...

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