Amarillo Nat. Bank v. Komatsu Zenoah America, Inc., 92-1684

• Decision Date: 25 May 1993
• Docket Number: No. 92-1684,92-1684
• Citation: 991 F.2d 273
• Parties: , 20 UCC Rep.Serv.2d 1101 AMARILLO NATIONAL BANK, Plaintiff-Appellant, v. KOMATSU ZENOAH AMERICA, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 273

991 F.2d 273

61 USLW 2764, 20 UCC Rep.Serv.2d 1101

AMARILLO NATIONAL BANK, Plaintiff-Appellant, v. KOMATSU ZENOAH AMERICA, INC., Defendant-Appellee.

No. 92-1684.

United States Court of Appeals, Fifth Circuit.

May 25, 1993.

Rehearing Denied July 2, 1993.

Thomas R. Dixon, Jr., Gregory M. Bednarz, Underwood, Wilson, Berry, Stein & Johnson, Amarillo, TX, for plaintiff-appellant.

Robert W. Norcross, Jr., Gen. Counsel, Austin, TX, for amicus, Texas Bankers Ass'n.

Vance Edward Ivy, John T. Huffaker, Gibson, Ochsner & Adkins, Amarillo, TX, for defendant-appellee.

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

Before POLITZ, Chief Judge, GOLDBERG, and JONES, Circuit Judges.

GOLDBERG, Circuit Judge:

The Amarillo National Bank ("Bank") appeals the district court's denial of its conversion claim against Komatsu Zenoah America, Inc. ("KZA"). The Bank sued KZA for conversion, alleging that KZA wrongfully obtained possession of certain merchandise, in which the Bank has a perfected and superior security interest, from the Connally Implement & Supply Co., Inc. ("CISCO"). The district court, hearing this case under diversity jurisdiction and applying Texas law, held that the Bank consented to the transfer of the merchandise from CISCO to KZA and granted KZA's motion for summary judgment. Because we find that the Bank did not consent to the transfer of the merchandise from CISCO to KZA, we reverse.

FACTS

The facts leading up to the Bank's conversion claim against KZA are undisputed. Shortly after the Bank made a $700,000 loan to CISCO, CISCO filed for Chapter 11 bankruptcy. As part of CISCO's "Plan of Reorganization," which was approved by the bankruptcy court, CISCO executed two notes payable to the Bank. The two notes were secured by a written security agreement granting the Bank a security interest in "all inventory, accounts, notes, proceeds, [and] goods" owned by CISCO. The Bank perfected its security interest on February 23, 1987, by filing its financing statement in the office of the Secretary of State of Texas.

CISCO was a distributor of RedMax lawn care products, which it purchased from KZA. Sometime after the Bank perfected its security interest in CISCO's inventory, CISCO transferred to KZA its stock of RedMax products, which CISCO had previously purchased from KZA on credit. In return for the RedMax products, KZA issued credit memoranda to CISCO in partial satisfaction of CISCO's pre-existing debt to KZA.

The Bank's perfected security interest in CISCO's inventory included the RedMax products transferred from CISCO to KZA. The Bank's filing of its financing statement in the office of the Secretary of State of Texas put KZA on notice of the Bank's security interest in the transferred RedMax products. Although KZA, as the seller of the RedMax products, could have obtained a superior "purchase money security interest" in the goods at issue, KZA failed to perfect this interest because it did not file a financing statement in the office of the Secretary of State of Texas.

The Bank maintains that given its perfected security interest in the RedMax products, KZA's possession of the RedMax products constitutes conversion. KZA counters the Bank's charges by claiming that the Bank relinquished its security interest in the RedMax products by authorizing the transfer of the RedMax products from CISCO to KZA and thus cannot maintain an action for conversion.

ANALYSIS

Texas law defines conversion as "the wrongful exercise of dominion and control over another's property in denial of or inconsistent with his rights." Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 651 (5th Cir.1991) (quoting Waisath v. Lack's Stores, Inc., 474 S.W.2d 444, 446 (Tex.1971)). The Bank alleges that Assessing the merit of the Bank's conversion claim requires a determination of whether the Bank's security interest in the RedMax products survived the transfer of the collateral from CISCO to KZA. Under Texas law, "a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement." Tex.Bus. & Comm.Code § 9.306(b). See also Montgomery v. Fuquay-Mouser, Inc., 567 S.W.2d 268, 270 (Tex.Civ.App.1978) ("The security interest continues in collateral after it is sold unless the disposition was authorized by the secured party"). Absent such authorization, "the transferee takes subject to the security interest [and] the secured party may repossess the collateral from him or in an appropriate case maintain an action for conversion." § 9.306(b) Official Comment 3. See also Montgomery v. Fuquay-Mouser, Inc., 567 S.W.2d at 270 ("the transferee takes subject to the security interest and the secured party may maintain an action against him"); Chrysler Credit Corp. v. Malone, 502 S.W.2d 910, 914 (Tex.Civ.App.1973) ("In the event of an unauthorized sale, the Texas Business and Commerce Code authorizes the secured creditor to maintain an action for conversion against the transferee").

KZA is liable for conversion because it is wrongfully exercising dominion and control over the RedMax merchandise, which the Bank claims is inconsistent with the Bank's security interest in the RedMax products.

As the Bank's security interest in the RedMax products survived the transfer of the collateral from CISCO to KZA only if the Bank did not authorize the transfer, the district court correctly concluded that "the only real issue" to resolve is whether the transfer of the RedMax products occurred "without the Bank's consent." The district court also correctly noted that "this question is answered as a matter of law by proper interpretation of the Bank's security agreement" with CISCO.

Both parties agree that the security agreement is unambiguous. "Interpretation of an unambiguous contract is an issue of law which we review de novo." Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 650 (5th Cir.1991); see also Webb Carter Constr. Co. v. Louisiana Central Bank, 922 F.2d 1197, 1199 (5th Cir.1991) ("Our review of questions of law, including as here unambiguous contracts, is de novo").

In determining whether the Bank consented to the transfer of the RedMax products, the critical language of the security agreement is found in Paragraph E.2, which provides in relevant part:

Debtor will not (without Bank's consent ): remove the collateral from the location specified herein; allow the collateral to become an accession to other goods; sell, lease, otherwise transfer, manufacture, process, assemble, or furnish under contracts of service, the collateral, except goods identified herein as inventory. (emphasis added)

KZA's contention that the Bank consented to the transfer of the RedMax products from CISCO to KZA is premised on the security agreement's clause excepting from the general prohibition of unauthorized transfers "goods identified herein as inventory." KZA claims that the transferred RedMax products were "inventory," and thus, under the plain language of the security agreement, the Bank authorized the transfer at issue.

The court below agreed with KZA's interpretation of the security agreement. Referring to Black's Law Dictionary for guidance in determining the "ordinary meaning" of the term "inventory," the district court concluded that the transfer of the RedMax products from CISCO to KZA was a transfer of inventory within the meaning of the security agreement, and as such the transfer was authorized by the Bank.

In reviewing the district court's interpretation of the security agreement, we note as a threshold matter that the district court erred in interpreting the terms of the security agreement by reference to Black's Law Dictionary. Paragraph G of the security The term "inventory" is specifically defined in the U.C.C.:

                agreement provides that "definitions in the Uniform Commercial Code apply to words and phrases in this agreement."   Once a contract directs us to the white pages of the U.C.C., Black's definitions are exiled from our interpretive realm.   The terms of the security agreement must be interpreted by reference to the U.C.C.   Specifically, we must determine whether the transferred RedMax products constitute "inventory" under the U.C.C
                

Goods are (4) 'inventory' if they are held by a person who holds them for sale or lease or to be furnished under contracts of service or if has so furnished them, or if they are raw materials, work in the process or materials used or consumed in a business. § 9.109(4). ¹

Official Comment 3 to § 9.109 further explicates the meaning of inventory: "The principal test to determine whether goods are inventory is that they are held for immediate or ultimate sale. Implicit in the definition is the criterion that the prospective sale is in the ordinary course of business." (emphasis added)

In a case involving the identical issue of interpreting the meaning of "inventory" under the U.C.C., In re Del Tex Corp, 32 Bankr. 403 (Bankr.W.D.Tex.1983), the bankruptcy court held that transferred goods are inventory under the U.C.C. only if the goods are transferred in the ordinary course of business. In Del Tex, the bank had a security interest in South Texas Company's merchandise, and the...