Transport Equipment Co. v. Guaranty State Bank

• Decision Date: 26 June 1975
• Docket Number: No. 74-1747,74-1747
• Citation: 518 F.2d 377
• Parties: 17 UCC Rep.Serv. 1 TRANSPORT EQUIPMENT COMPANY, Plaintiff-Appellee, v. GUARANTY STATE BANK, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 377

518 F.2d 377

17 UCC Rep.Serv. 1

TRANSPORT EQUIPMENT COMPANY, Plaintiff-Appellee, v. GUARANTY STATE BANK, Defendant-Appellant.

No. 74-1747.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted May 23, 1975.

Decided June 26, 1975.

Ronald C. Newman, Kansas City, Kan. (Leonard O. Thomas, Kansas City, Kan., on the brief), for plaintiff-appellee.

Charles D. Kugler, Kansas City, Kan., for defendant-appellant.

Before MURRAH, BARRETT and DOYLE, Circuit Judges.

BARRETT, Circuit Judge.

Guaranty State Bank (Bank) appeals from the judgment of the Trial Court in favor of Transport Equipment Company (TECO) and its award of damages in sum of $11,300.00.

During the period from August to November, 1970, TECO sold, on open account, a number of truck body kits to Western Equipment Company (Western), a small corporation engaged in the business of constructing truck platforms and truck bodies and assembling prefab aluminum body kits. Of these kits sold to Western, a number had been resold by Western without payment to TECO, while certain others those eight kits presently in dispute remained on Western's premises in March of 1971. Having determined in early 1971 that Western's financial condition was deteriorating, TECO, on March 16, 1971, entered into a new arrangement with Western's president, Robert Fick. First, TECO accepted a promissory note from Western for those body kits which had been resold without payment to TECO. The remaining eight body kits still on Western's premises were sold back to TECO and consigned to Western under an agreement which gave TECO a security interest in the unsold kits. TECO filed a financing statement listing these eight truck body kits with the Secretary of State on March 22, 1971, at 1:57 p. m.

During 1970, Bank loaned money to Western in the sum of $3,000.00 evidenced by a promissory note which came due and was renewed on January 8, 1971. On January 18, 1971, Bank filed a financing statement which, in part, specifically listed several of the eight body kits described above. No separate written security agreement was entered into between Bank and Western.

On February 11, 1971, and March 8, 1971, Lien Notices were filed by the IRS evidencing assessments for delinquent taxes owing by Western.

Seizure of Western's physical assets occurred on March 23, 1971. Some time prior to the date of the seizure a check was made by IRS personnel for financing statements filed with the Secretary of State, having priority to the IRS claims. This check revealed the existence of Bank's financing statement and Bank, along with other creditors, was notified by IRS Agent Baum of the impending seizure and advised to remove all the assets in which it claimed an interest. TECO's financing statement had not then been filed and it was not notified.

Bank thereafter took action to remove the assets in which it claimed an interest including the eight body kits now in dispute on March 22, and 23, 1971.

Following seizure, the IRS sold Western's remaining assets by public auction on April 19, 1971. Purchaser at that sale was one H. L. Sandifer. On that same date, Sandifer purchased by private sale those assets of Western in the possession of Bank.

In its Memorandum Opinion filed March 18, 1974, the Trial Court concluded that Bank's security interest in the goods in question was subordinate to TECO's, and that in selling the goods without prior notice to TECO, Bank had not conducted a commercially reasonable sale pursuant to K.S.A. 84-9-504 and was liable for damages under K.S.A. 84-9-507 in the sum of $11,300.00, the fair market value of the goods.

On appeal Bank contends: (1) that the arrangement entered between TECO and Western on March 16, 1971, was in violation of the Kansas bulk sales statutes; (2) that the Trial Court erred in holding TECO's security interest to have priority; and (3) that the Trial Court erred in computing the damages awarded.

I.

Bank contends that the sale and consignment back transaction entered into between TECO and Western without notice to other creditors on March 16, 1971, amounted to a bulk transfer in violation of K.S.A. 84-6-101 et seq.

The Trial Court in its Memorandum Opinion filed March 18, 1974, held that this was an issue as to which no evidence had been introduced at trial and was not, therefore, properly before it. It further held that in any event this transfer was one "made to give security for the performance of an obligation" and was hence excepted from coverage under K.S.A. 84-6-103(1). We agree.

We reject Bank's unsupported contention that the exception under K.S.A. 84-6-103(1) "could only be meant to apply to those transfers wherein a security agreement denoted as such is drawn and signed." See, U.C.C. Official Comment 2 to § 6-103; Mann v. Clark Oil & Refining Corporation, 302 F.Supp. 1376 (E.D.Mo.1969), aff'd 425 F.2d 736 (8th Cir. 1970); 40 A.L.R. 3d 1078 p. 1103 et seq. The consignment agreement provided in part:

In consideration of the mutual promises hereinafter contained, the parties agree as follows:

1. Security Interest. Western grants to TECO to the extent it has capacity to do so a security interest in the consigned goods for the purpose of securing unto TECO the payment of any and all indebtedness, liabilities and obligations of Western to TECO whether now due or hereafter arising.

(TR. Vol. II, p. 334).

It is clear that the purpose of this consignment agreement was to secure payment for the body kits delivered to Western out of the proceeds of the sale of those kits. The consignment was made to give security and falls clearly within the exception of K.S.A. 84-6-103. See, Mann v. Clark Oil & Refining Corporation, supra.

II.

Bank alleges that the Trial Court erred in finding TECO's security interest to have priority, contending either: (1) that it was unnecessary for Bank to obtain a written security agreement from Western since its financing statement fulfilled the requirements of K.S.A. 84-9-203 ¹; or (2) that its interest was perfected, pursuant to K.S.A. 84-9-304, 305, by virtue of its taking possession of the collateral prior to the time TECO filed with the Secretary of State on March 22, 1971.

In Mitchell v. Shepherd Mall State Bank, 458 F.2d 700 (10th Cir. 1972), we rejected the contention that a financing statement such as the one here could substitute as a security agreement. In interpreting statutory language identical to K.S.A. 84-9-203, Judge Murrah, for the court, stated:

Cases and treatises construing these two sections have almost uniformly come to the conclusion that in order for a security agreement to be effective it must contain language which specifically creates or grants a security interest in the collateral described.

The function of a financing statement is to put third parties on notice that the secured party who has filed it may have a perfected security interest in the described collateral . . . . Absent language which would constitute the debtor's grant of a security interest, a financing statement cannot serve as a security agreement. (Emphasis supplied).

458 F.2d 700 at 703, 704.

See also, Shelton v. Erwin, 472 F.2d 1118 (8th Cir. 1972). Our review of the financing statements filed by the Bank in the instant case reveals no such "granting" language.

In regard to Bank's alternative theory that it perfected its security interest in the collateral by taking possession prior to the time TECO filed with the Secretary of State there exists a conflict in the record as to the time sequence of events occurring on March 22 and 23. Bank contends that its agents arrived at Western's business premises some time during the morning of March 22; that they had begun loading the collateral onto either a rented truck or one belonging to the debtor prior to the time that TECO filed at 1:57 that afternoon; and that even if the Court's finding that Bank had not begun loading equipment until the rented truck arrived after 3:24 p. m. is found to be supported by the evidence, the continuous presence of the Bank employees on the debtor's premises commencing in the morning of March 22, constituted "possession" sufficient to satisfy K.S.A. 84-9-305. ²

After a careful review of the entire record we are convinced that there is ample evidence supporting the Trial Court's determination that Bank had not begun loading the collateral until after the arrival of the rented truck, i. e., some time after 3:24 p. m., on March 22.

The remaining question, then, is whether Bank entered into "possession" of the collateral by virtue of the fact that its employees were present on the debtor's premises during the morning of March 22. Bank contends that "mere physical presence in the debtor's premises is sufficient to satisfy the requirement of actual possession." We disagree.

In In Re Automated Bookbinding Services, Inc., 471 F.2d 546 (4th Cir. 1972), the Court noted:

"Possession" is one of the few terms employed by the Code for which it provides no definition. The Code's general purpose is to create a precise guide for commercial transactions under which businessmen may predict with confidence the results of their dealings. In defining "possession" we must be guided by these considerations as well as by the underlying theories unique to Article 9. . . . "Possession" is used throughout Article 9 in establishing the filing scheme . . . and in providing perfection through means other than filing, such as through the secured party's taking possession. The ostensible ownership exercised through possession is demonstrated through simple physical control. One who controls the collateral possesses it, and leads others to believe it is his.

Pre-code security law defined possession as meaning physical control.

Perhaps the secured party must take possession from the debtor, who has possession, in order to demonstrate the ostensible ownership which indicates the perfected security interest to other potential creditors. (Emphasis Supplied).

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