American City Bank of Tullahoma v. Western Auto Supply Co.

• Decision Date: 18 September 1981
• Docket Number: No. 80-311-II,80-311-II
• Citation: 32 UCCRep.Serv. 1251,631 S.W.2d 410
• Parties: 32 UCC Rep.Serv. 1251 AMERICAN CITY BANK OF TULLAHOMA, Plaintiff-Appellee, v. WESTERN AUTO SUPPLY COMPANY, Defendant-Appellant.
• Court: Tennessee Court of Appeals

Page 410

631 S.W.2d 410

32 UCC Rep.Serv. 1251

AMERICAN CITY BANK OF TULLAHOMA, Plaintiff-Appellee, v. WESTERN AUTO SUPPLY COMPANY, Defendant-Appellant.

No. 80-311-II

Court of Appeals of Tennessee, Middle Section.

Sept. 18, 1981.

J. Stanley Rogers, Rogers and Parsons, Manchester, Tenn., for plaintiff-appellee.

Kenneth Ray Jones, Jr. and Gerard Thomas Nebel, Bass, Berry & Sims, Nashville, Tenn., for defendant-appellant.

Charles H. Warfield and Thomas P. Kanaday, Jr., Farris, Warfield & Kanaday, Nashville, Tenn., for Jackson County Bank.

Joe C. Peel, Asst. Atty. Gen., Nashville, Tenn., for Martha B. Olsen, Commissioner of Revenue, State of Tenn.

OPINION

CONNER, Judge.

This case involves a dispute concerning the priority between two secured creditors claiming title to the same collateral under the Uniform Commercial Code. It raises issues concerning: (a) the sufficiency of filing a financing statement in a partnership name; (b) the effect of a misspelling in the name of the partnership debtor; (c) the necessity of amendment of the financing statement upon the initial creditor's ascertaining that there has been a change in the identity of the debtor in order to maintain priority over a subsequent creditor; (d) the reasonableness of the sale or other disposition of the involved collateral by the original creditor; and (e) the actual extent of the first filer's security interest based upon the effect of that creditor's failure to pay the applicable State of Tennessee privilege tax on the entire amount claimed by it as a priority.

THE FACTUAL AND PROCEDURAL BACKGROUND OF THE DISPUTE

The defendant-appellant, Western Auto Supply Company, ¹ entered into a purchase and security agreement with the partnership of Williamson, Knoer and York on June 9, 1977, authorizing the partnership to conduct business as a Western Auto dealer. Western Auto supplied financing for the partnership to purchase merchandise for the store and was granted a security interest in the store's inventory, accounts receivable, contract rights, chattel paper, fixtures and equipment.

The financing statement was filed with the secretary of state and the Coffee County Register of Deeds on June 17, 1977. The statement listed the debtor as:

Williamson, Kneer & York

Western Auto Associate Store

121 W. Lincoln

Tullahoma, Tn. 37388

The financing statement was signed by all of the debtor partners, W. A. York, Donald A. Williamson and George W. Knoer, but it was only indexed under "Williamson" in the secretary of state's office. On the financing statement filed with the secretary of state, the amount of indebtedness listed was $50,000.00, and the tax was paid on that amount only.

Subsequently, on September 1, 1977, York purchased the interest of his two partners and became the sole owner of the Tullahoma Western Auto store. Western Auto was made aware of the transaction at or about the time of its occurrence. York obtained a loan from the plaintiff, American City Bank, to finance this purchase. York gave to American City Bank a security interest in the store's inventory, accounts receivable, chattel paper, contract rights and general intangibles. He did not tell the bank of the previous partnership security interest granted to Western Auto. The plaintiff ran a verbal search with the secretary of state to see if there had been a prior security interest granted in York's collateral. This search did not pick up York as a debtor, since the previous filing had only been indexed in the partnership name. Thereafter, the bank perfected its security interest by filing a financing statement with the secretary of state on September 21, 1977, listing the debtor as:

W. A. York dba Western Auto

Associate Store # 16741

West Lincoln, Tullahoma, Tn. 37388

On November 1, 1977, the defendant amended its original financing statement that was filed with the secretary of state's office listing the debtor as:

York, W. A.

Western Auto Associate Store

121 West Lincoln

Tullahoma, Tn.

A like financing statement was filed with the Coffee County Register of Deeds on November 6, 1977.

In the meantime, York defaulted on his obligations to Western Auto and voluntarily surrendered the collateral to defendant on October 26, 1978. He had previously sold his accounts receivable totaling $30,700.00 to Thrift Loan Company (hereafter Thrift) on October 17, 1978, at a discount. There is little question but that this was the commencement date of York's liquidation despite Western Auto's protestations to the contrary. Although Western Auto did not directly participate in the sale of these accounts to Thrift, Western Auto consented to the sale and York did pay directly to Western Auto the $25,886.55 in proceeds from the Thrift sale in partial satisfaction of his indebtedness to it. After giving York credit for this amount, Western Auto was still owed $47,503.74.

On repossession, the defendant conducted an audit showing the book value of the inventory to be $53,779.40 and the value of the fixtures to be $12,000.00.

Western Auto quickly sold all of the toys and other seasonal goods in the inventory to the Western Auto Associate Store in Shelbyville on November 27, 1978, in anticipation of the Christmas season. Just over $7,000.00 in toys and other like goods brought $4,228.34, a discount of 39% from their book value.

Subsequently, by letter of March 9, 1979, Sam Sawyer, the then attorney for American City Bank, by letter to H. W. Sawyer, Western Auto's Wholesale Credit Manager, claimed that the bank had a prior right to the collateral and demanded payment of its secured indebtedness, $52,000.00. Four days later H. W. Sawyer returned a letter denying the bank's priority.

Later, on April 3, 1979, Gerard Thomas Nebel, attorney for the defendant, informed the plaintiff that Western Auto proposed to retain the balance of the collateral in satisfaction of York's remaining obligation to the defendant. It then totaled $46,914.43.

Thereafter, Western Auto sold the inventory and fixtures in one bulk package in November, 1979. The sale was for $44,235.74, equal to 74% of the book value of the collateral. The bank then sued Western Auto, demanding payment of its claim and an accounting, alleging that Western Auto's previously filed U.C.C. financing statement was fatally defective, that the bank had the only valid security interest in York's assets, and even if Western Auto had priority, in no event should the defendant's security interest exceed $50,000.00, the amount on which the privilege tax required by T.C.A. § 67-4102, Item S(b) ² was paid.

The trial judge, without intervention of a jury, held that the defendant's financing statement did not comply with the requirements of T.C.A. § 47-9-402. ³ He said:

... (S)aid filing does not constitute a sufficient filing of said financing statement inasmuch as it contains serious omissions and errors which are seriously misleading, all because of the fault of the defendant, Western Auto Supply Company.

Having decided that the initial filing of the financing statement by defendant to have been insufficient, the trial court found that it was unnecessary to address the various other questions raised by the pleadings and the proof. Thus, he awarded the plaintiff judgment for $52,056.00, the amount of its purported secured indebtedness plus its filing fee. The defendant appealed.

With leave of court amicus curiae briefs were filed by the Jackson County Bank and Martha B. Olsen, Tennessee Commissioner of Revenue, on the question of the effect that T.C.A. § 67-4102, Item S(b), supra, might have on the validity of Western Auto's security interest as to any amounts beyond which the tax imposed by that statute was paid if this court were to otherwise determine the original filing to have been proper. Both amici curiae have vigorously asserted that Western Auto has no valid security interest for any amount beyond the $50,000.00 figure for which the tax was paid.

In the event we are unable to sustain the action of the trial court we have been urged by both plaintiff and defendant to decide all issues raised at trial necessary to finally dispose of the litigation.

We can review all of the issues presented by this appeal. T.R.A.P. 13(b). ⁴ Further, this court may give any judgment provided that it is not "in contravention of the province of the trier of fact." T.R.A.P. 36(a). ⁵ The facts of this appeal are not in material dispute. We are here dealing with questions of law and may render judgment on these issues without interfering with the factual province of the trial judge.

THE VALIDITY OF DEFENDANT'S INITIAL FILING

The threshold issue raised is whether a financing statement filed in the name of a partnership complies with T.C.A. § 47-9-402, supra. In this regard we must respectfully disagree with the conclusions of the trial court.

Tennessee has adopted the system of notice filing:

... What is required to be filed is not, as under chattel mortgage and conditional sales acts, the security agreement itself, but only a simple notice which may be filed before the security interest attaches or thereafter. The notice itself indicates merely that the secured party who has filed may have a security interest in the collateral described. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs....

T.C.A. § 47-9-402, Comment 2. Essentially, all that is required of the creditor is to file something publicly that will alert credit searchers to the existence of a security agreement. J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code § 23-16 at 952 (2d Ed. 1980) (hereafter White & Summers).

To comply with T.C.A. § 47-9-402(3), supra, the name of the debtor must be supplied. "Debtor" is defined as the person who owes the payment of a secured obligation. T.C.A. § 47-9-105(1)(d). ⁶ The code defines person as including an individual or an organization. T.C.A. § 47-1-201(30). ⁷ Organization is...