Kimbell Foods, Inc. v. Republic Nat. Bank of Dallas

• Citation: 557 F.2d 491
• Decision Date: 12 August 1977
• Docket Number: No. 75-4105,75-4105
• Parties: 23 UCC Rep.Serv. 177 KIMBELL FOODS, INC., f/k/a Kimbell Milling Company, d/b/a Kimbell Grocery Company, Plaintiffs-Appellants, v. REPUBLIC NATIONAL BANK OF DALLAS and United States of America, Defendants- Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 491

557 F.2d 491

23 UCC Rep.Serv. 177

KIMBELL FOODS, INC., f/k/a Kimbell Milling Company, d/b/a

Kimbell Grocery Company, Plaintiffs-Appellants, v. REPUBLIC NATIONAL BANK OF DALLAS and United States of

America, Defendants- Appellees.

No. 75-4105.

United States Court of Appeals, Fifth Circuit.

Aug. 12, 1977.

Rehearing and Rehearing En Banc Denied Oct. 25, 1977.

A. L. Vickers, Vernon O. Teofan, Holt W. Guysi, Dallas, Tex., for plaintiffs-appellants.

Frank J. Betancourt, Dallas, Tex., for Republic Nat'l Bank.

Michael P. Carnes, U. S. Atty., Fort Worth, Tex., Charles D. Cabaniss, Asst. U. S. Atty., Dallas, Tex., for defendants-appellees.

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

Before THORNBERRY and GEE, Circuit Judges, and MARKEY, ^* Chief Judge.

GEE, Circuit Judge:

On this appeal we must decide which creditor of a mercantile chain enjoys priority to repayment from the proceeds of the sale of assets of three supermarkets, aggregating $86,672. One of these is the Small Business Administration (hereinafter SBA), an avatar of the United States, serving as the guarantor of a private loan to the debtor. SBA claims the special priority enjoyed by the sovereign in collecting taxes and the debts owed it by insolvents. We conclude that the SBA lacks priority under either state or federal law.

The other parties are the debtor, O. K. Supermarkets, Inc. (hereinafter O.K.), and a private lender, Kimbell Foods, Inc. (hereinafter Kimbell). O.K. is a Dallas supermarket chain. The bulk sale of fixtures, equipment and inventory of three of its stores forms the fund to which the parties seek priority. O.K. owed Kimbell because of weekly inventory sales to O.K. on open account. Much of the factual background from which the claims of the parties emerge is undisputed.

O.K. executed three security agreements and financing statements to Kimbell. The first was in August 1966, securing a $20,000 promissory note from Kimbell. The collateral listed included supermarket equipment and fixtures and "(a)ll goods, wares and merchandise and any and all additions or accessions thereto." In April and November of 1968, O.K. executed the remaining security agreements and financing statements to secure a $27,000 promissory note from Kimbell. The collateral for these two agreements was again specifically identified equipment normally used in a supermarket and "(a)ll goods, wares, merchandise and stock in trade and accessions." Each of the security agreements was duly filed, and no termination statement was filed on any of the agreements. It is of particular importance to this case that each of the security agreements included the provision that "said security interest also being given to secure the payment of all other indebtedness at any time hereafter owing by Debtor to Secured Party as well as the discharge of all obligations imposed upon Debtor hereunder."

On February 2, 1969, O.K. borrowed $300,000 from Republic National Bank of Dallas (hereinafter Republic). The SBA guaranteed 90% of this loan. On February 18, 1969, Republic filed with the Secretary of State of the State of Texas a security agreement and financing statement executed by O.K. to Republic granting it a security interest in all of the debtor's machinery, fixtures, equipment, inventory and all additions and accessions thereto. ¹ When O.K. defaulted on this note the SBA paid Republic 90% of the outstanding indebtedness, some $252,313.93, and on January 21, 1971, Republic assigned the SBA 90% of the note and financing statement.

Events subsequent to the 1969 loan of $300,000 form perhaps the most important part of this tableau. When Republic made its loan, O.K. owed Kimbell $24,893.10 on the 1968 note for $27,000. O.K. paid off this note from the Republic loan proceeds. Thus, both the 1966 note ² and the 1968 note between O.K. and Kimbell had been satisfied. O.K. still, however, owed Kimbell $18,390.93 on open account for inventory purchases. After February 12, 1969, O.K. paid Kimbell $18,390.93 against that debt payments Kimbell credited to O.K.'s oldest outstanding balances. O.K. kept on making inventory purchases from Kimbell on open account until January 15, 1971. By then the balance of O.K.'s account with Kimbell was $18,258.57. On January 15, 1971, Kimbell filed suit in Texas courts to recover that amount and, on January 31, 1972, obtained a judgment for $24,445.37 $18,258.57 principal, $1,186.80 interest and $5,000 attorneys' fees.

Both the SBA and Kimbell claimed priority in the $86,672 proceeds of the sale of three O.K. Supermarkets. After hearing the evidence and considering the stipulations of the parties the court ruled that the SBA had priority superior to all inchoate liens by virtue of its special status as a federal lien creditor. The district court ruled Kimbell's lien inchoate because Kimbell had not reduced its lien to judgment before the SBA guaranteed Republic's note or before the SBA made good on its guarantee. The court went on to rule that Kimbell did not have a good security interest in the goods sold at bulk sale, a fact that certainly rendered its lien inchoate. Kimbell appeals.

Kimbell's Lien

We must first determine whether the district court properly held that Kimbell's security agreements securing the 1966 and 1968 notes did not cover the advances Kimbell made to O.K. on open account. ³ The security agreements provide that the security interest also secures the payment of future indebtedness between the parties. Texas law countenances such so-called "dragnet clauses." See Tex.Bus. & Com.Code § 9.204(e) (Tex.U.C.C.). ⁴ Acknowledging this apparent approval of future advance clauses, the district court ruled that the future advance clause did not operate in this case. It relied on pre-Code Texas cases and U.C.C. cases from other jurisdictions to restrict the application of the future advance clause to future debts clearly contemplated by the parties. So reasoning, it ruled that in this case the parties meant the security agreements to cover only the notes for which they were executed, not later purchases on open account. We view the transactions differently. ⁵

Although the district court correctly stated the law of Texas, it arrived at the wrong conclusion in light of Texas' application of its law. Texas courts do not recognize the application of a future advance clause unless the future advance to be secured was "reasonably within the contemplation of the parties to the mortgage at the time it was made." Wood v. Parker Square State Bank, 400 S.W.2d 898, 901 (Tex.1966). See also Moss v. Hipp, 387 S.W.2d 656 (Tex.1965); Wallenstein & St. Claire, Annual Survey of Texas Law Property, 30 Southwestern L.J. 28, 53 n. 214 (1976). ⁶ Consistent with this view, in Texas a future advance clause in a mortgage does not secure a subsequent debt from the debtor to a third party acquired from the third party by the mortgagee. See Wood, supra. In circumstances similar to those at bar, however, Texas courts have hinted that future advance clauses will be effective. In Wood, for example, the Texas Supreme Court remarked that:

The more reasonable construction of this general language (a future advance clause) is that it referred to obligations directly arising between Lincoln Enterprises (the original debtor) and respondent bank (the original lender), i. e., where Lincoln became obligated to the bank as the maker of an obligation, or became liable in a secondary capacity in favor of the bank.

Supra at 902. See also Estes v. Republic National Bank, 462 S.W.2d 273 (Tex.1970); Wallenstein & St. Claire, supra at 53 n.214. In light of this evidence we conclude that in Texas a further extension of credit to the debtor by the lender is deemed future indebtedness reasonably contemplated by the parties when they execute a future advance clause.

The district court concluded that the parties did not intend the future advance clause to cover purchases on open account because the security agreements were intended to cover only the amounts loaned under a promissory note. In reaching this conclusion, however, the district court ignored two important factors: the parol evidence rule and Texas' treatment of future advance clauses in analogous situations. The district court admitted testimony by Harold Kindle, the president of O.K., about the subjective intention of the parties when they executed the 1966 and 1968 notes, security agreements and financing statements. Although his testimony was equivocal, ⁷ the district court understood him to say that the parties intended each transaction to be separate and distinct. Admission of such testimony was error. The language of the contract, unless ambiguous, represents the intention of the parties. The intent deduced from this objective matter, not the parties' subjective understandings, is controlling. See Western Oil Fields, Inc. v. Pennzoil United, Inc., 421 F.2d 387, 390 (5th Cir. 1970); City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518 (Tex.1968); Wall v. Lower Colorado River Authority, 536 S.W.2d 688, 691 (Tex.Civ.App. Austin 1976, writ ref'd n. r. e.). See also First National Bank v. Rozelle, 493 F.2d 1196, 1201 (10th Cir. 1974). Testimony as to O.K.'s subjective intent in receiving the future advance clause was a classic violation of the parol evidence rule and clearly inadmissible.

The district court compounded this error by failing to consider the truest test of the parties' intention, the words of the contract clearly providing that the security agreement should cover future indebtedness. In Estes v. Republic National Bank, 462 S.W.2d 273 (Tex.1970), the Texas Supreme Court upheld the applicability of a future advance clause despite the debtor's claim of an oral agreement that the deed of trust containing the future advance clause was intended as a separate transaction not to extend to other indebtedness between the parties. In the absence of some...