Boyd, In re

• Decision Date: 25 January 1983
• Docket Number: No. 59061,59061
• Citation: 658 P.2d 470
• Parties: 35 UCC Rep.Serv. 669, 1983 OK 5 In re Larry Gene BOYD and Mera Beth Boyd, Debtors. John B. JARBOE, Trustee, Plaintiff, v. The FIRST NATIONAL BANK OF PRYOR, Defendant.
• Court: Oklahoma Supreme Court

Page 470

658 P.2d 470

35 UCC Rep.Serv. 669, 1983 OK 5

In re Larry Gene BOYD and Mera Beth Boyd, Debtors John B. JARBOE, Trustee, Plaintiff, v. The FIRST NATIONAL BANK OF PRYOR, Defendant.

No. 59061.

Supreme Court of Oklahoma.

Jan. 25, 1983.

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA BANKRUPTCY DEPARTMENT, BANKRUPTCY NO. 81-01000 ADVERSARY NO. 81-0534.

Pursuant to the provisions of 20 O.S.1981, § 1601 et seq., the United States District Court for the Northern District of Oklahoma, Bankruptcy Department, has certified two questions of law to the Supreme Court of the State of Oklahoma. The certified questions concern whether certain proceeds from a tort claim settlement obtained by debtor involving personal property which was subject to a security interest in favor of defendant bank constitutes "proceeds" within the meaning of Oklahoma's Uniform Commercial Code, 12A O.S.1971, § 9-306(1), and whether defendant bank had a properly perfected security interest in those proceeds on the date the debtor filed bankruptcy.

John B. Jarboe and Sidney K. Swinson, Tulsa, for plaintiff.

J. Michael Jacobs, Pryor, for defendant.

Laura Nan Pringle, Oklahoma City, for amicus curiae, Oklahoma Bankers Ass'n.

LAVENDER, Justice:

The Bankruptcy Division of the United States District Court for the Northern District of Oklahoma has certified the following two questions of law pursuant to the Uniform Certification of Questions of Law Act, 20 O.S.1981, § 1601, et seq.:

(1) Whether the One Thousand Two Hundred Fifty Dollar ($1,250.00) payment made by Allstate Insurance Company to the debtors is proceeds as defined in 12A O.S.1971, § 9-306 of the Oklahoma Uniform Commercial Code and subject to the defendant's security interest.

(2) In the event the One Thousand Two Hundred Fifty Dollar ($1,250.00) payment made by Allstate Insurance Company to the debtors is determined to be proceeds, whether the defendant had a properly perfected security interest in those proceeds on September 16, 1981, the date the debtors filed bankruptcy.

The certified questions are accompanied by a stipulation of facts between the parties which, insofar as pertinent to the first question, shows:

On April 13, 1981, debtors entered into and executed a promissory note in the principal sum of $1,718.05 together with a security agreement covering a 1971 Volkswagen in favor of defendant bank. Included in the security agreement was a provision which stated, "proceeds of collateral are also covered; however, such shall not be construed to mean that the secured party consents to any sale of such collateral." On April 14, 1981, defendant filed a lien entry form with the Oklahoma Tax Commission pursuant to 47 O.S.1981, § 23.2b, perfecting its secured interest in the vehicle.

On September 2, 1981, one or both debtors were involved in a collision with a third party who maintained liability insurance coverage with Allstate Insurance Company. Debtors and Allstate settled debtors' claim for automobile damage for the sum of $1,250.00. Before the settlement sum was paid by Allstate, debtors filed their petition for relief under Chapter 7 of the United States Bankruptcy Code on September 16, 1981. Allstate paid the settlement sum to the Trustee in Bankruptcy, who in turn released the money to defendant bank pending the outcome of these proceedings. Ownership of the fund turns on the answer to the two certified questions.

We first consider whether the settlement fund paid by a third party's automobile liability insurance carrier to debtors as a result of an automobile collision between third party and the Volkswagen which was the subject of a security interest in defendant bank and which was driven by one of the debtors constitutes "proceeds" within the meaning and coverage of 12A O.S.1971, § 9-306(1), thus establishing a prior right to the settlement fund in defendant.

Section 12A O.S.1971, § 9-306(1), in effect at the time of the automobile collision, insofar as pertinent, provides: " 'Proceeds' includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of."

Effective October 19, 1981, and after the collision, § 9-306(1) was amended by adding: "Insurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than a party to the security agreement."

Several courts have considered whether recovery under debtor's insurance coverage for loss of or damage to personal property subject to a security interest under § 9-306(1) as constituted prior to the October 19, 1981, amendment thereof may properly be "proceeds," where the security agreement does not require the debtor to insure the personal property. While these cases are distinguishable from the case before us in that the insurer made payment under debtor's policy where in the case at bar it is the third party's insurer who makes payment to debtor under third party's insurance policy, those cases are illuminating in their consideration of the issue before us.

Quigley v. Caron, 247 A.2d 94 (Me.1968) involved the right to proceeds of fire insurance arising from destruction of debtor's crop of potatoes, which crop was subject to a security interest agreement where debtor obtained the insurance, but was not required to do so by the security agreement. The Maine Supreme Court said (p. 96):

"We are satisfied that payments (or the right thereto) for fire losses often referred to as 'insurance proceeds,' are not 'proceeds' of the collateral security, that is of the potatoes, as that term is defined in Section 9-306(1) .... The insurance monies plainly do not come from a sale or exchange or collection of the security.

"Were the potatoes 'otherwise disposed of'? We answer in the negative. In our view, the Code covers voluntary disposal and not a change from destruction by fire. (Emphasis supplied.)

* * *

* * *

"The Rhode Island Court has reached a like result. In holding that insurance payments for losses are not 'proceeds' under Section 9-306(1), the Court said: 'Insurance moneys or proceeds flow from the insurance contract and not from the property insured.' Again, in passing upon the 'or otherwise disposed of' clause, the Court said of a tractor demolished in an accident, 'This involuntary conversion of the tractor is not a disposition within the meaning of [Section 9-306(1) ].' Universal C.I.T. Credit Corp. v. Prudential Invest. Corp. (R.I.) 222 A.2d 571 (1966). See also note on Secured Transactions 65 Mich.Law Review 1514."

In accord, see Peoples State Bank v. Marlette Coach Company (C.A. 10th 1964) 336 F.2d 3; Bank of New York v. Margiotta v. Sajoren, 99 Misc.2d 423, 416 N.Y.S.2d 493 (1979); Hoffman v. Snack, 37 D & C 2d 145 (Pa.1964).

In Welch v. Montgomery, 201 Okl. 289, 205 P.2d 288, 9 A.L.R.2d 294 (1949), we held that the holder of a judgment which is a lien upon real estate owned by the judgment debtor has no interest in the proceeds of a fire loss recovery by the judgment debtor under an insurance policy maintained on the property by judgment debtor where judgment debtor is not required to maintain fire insurance for the benefit of the holder of the judgment lien. Therein, we said:

"The rule so stated is universally recognized and applied. In Re San Joaquin Valley Packing Co., 9 Cir., 295 F. 311, at page 313, the following is given as the basis of the rule: '... The reason of the rule is that as between the insurer and the insured, a policy of fire insurance is purely a matter of personal contract. It does not attach to the insured property, nor does it run with the title thereto. It is in itself the measure of the rights of all persons under it, and its provisions must govern in determining who are the beneficiaries. Said the court in Columbia Ins. Co. v. Lawrence, 10 Pet. ( U.S.) 507, 9 L.Ed. 512:

'We know of no principle of law or of equity, by which a mortgagee has a right to claim the benefit of a policy underwritten for the mortgagor on the mortgaged property, in case of a loss by fire.... It is strictly a personal contract for the benefit of the mortgagor, to which the mortgagee has no more title than any other creditor.' "

Several courts have considered the issue presented in Quigley v. Caron, supra, wherein the debtor was required by the terms of the security agreement to keep the secured property insured.

In Brown v. First National Bank of Dewey (C.A. 10th 1980) 617 F.2d 581, the Court undertook to foretell the determination by the Oklahoma Supreme Court in construing the pre-amendment version of § 9-306 of Oklahoma's Commercial Code. The Court said (p. 584):

"The Act is to be liberally construed to effectuate its purposes, Okla.Stat.Ann. tit. 12A, § 1-102(1) (West 1963), and section 9-306 obviously was designed to protect a secured creditor's interest in collateral through permutations and substitutions. It seems to us antithetical to the purpose of the UCC to deny priority to a creditor who secured the agreement of the debtor to insure against involuntary loss of the collateral. Thus, we hold that proceeds from casualty insurance on collateral are proceeds of collateral, at least when the parties intended that the casualty insurance redound to the secured creditor's benefit. (Citations omitted.) (Emphasis supplied.)

"In making this determination, we are influenced also by the fact that in 1972 the Commissioners on Uniform State Laws amended section 9-306(1) to provide that '(i)nsurance payable by reason of loss or damage to the collateral is proceeds, except to the extent that it is payable to a person other than party to the security agreement.' Commentary accompanying the 1972 version states the purpose of the new sentence is to 'make[ ] clear that insurance proceeds from casualty loss of collateral are proceeds within the meaning of this section.' The Oklahoma legislature has not adopted the 1972 version, but we do not construe its...