Centennial State Bank v. S. E. K. Const. Co., Inc.

• Court: Missouri Court of Appeals
• Writing for the Court: Before DIXON; TURNAGE
• Citation: Centennial State Bank v. S. E. K. Const. Co., Inc., 518 S.W.2d 143 (Mo. App. 1974)
• Decision Date: 30 December 1974
• Docket Number: Nos. 26538,26544,s. 26538
• Parties: 16 UCC Rep.Serv. 561 CENTENNIAL STATE BANK, Appellant, v. S. E. K. CONSTRUCTION CO., INC., and John L. and Ruth E. Polston, Respondents, and Fireman's Fund Insurance Company, Appellant.

Page 143

518 S.W.2d 143

16 UCC Rep.Serv. 561

CENTENNIAL STATE BANK, Appellant, v. S. E. K. CONSTRUCTION CO., INC., and John L. and Ruth E Polston, Respondents and Fireman's Fund Insurance Company, Appellant.

Nos. 26538, 26544.

Missouri Court of Appeals, Kansas City District.

Dec. 30, 1974.

Jerome T. Wolf, Spencer, Fane, Britt & Browne, F. Philip Kirwan, Robert A. Babcock, Margolin & Kirwan, Kansas City, for appellants.

Richard W. Miller, George T. O'Laughlin, William E. Simmons and Miller & O'Laughlin, P.C., Kansas City, for respondents.

Before DIXON, C.J., and SHANGLER, WASSERSTROM and TURNAGE, JJ.

TURNAGE, Judge.

This action was commenced by Centennial State Bank (Centennial) against S.E.K. Construction Company, Inc. (S.E.K.) and John L. Polston and Ruth E. Polston (Polstons). Fireman's Fund Insurance Company (Fireman's) intervened in such suit, and thereafter the Polstons filed a crossclaim against Fireman's.

The original litigation was brought by Centennial after Centennial had taken an assignment of a promissory note and security agreement executed by S.E.K. to Commercial Credit Industrial Corporation (CCIC). S. E. K. originally executed a promissory note to CCIC in the amount of $124,999.08. The Polstons were stockholders in S.E.K., and at the request of CCIC delivered to CCIC their personal guarantee of the promissory note given by S. E. K. Prior to the Polstons giving their personal guarantee to CCIC, the Polstons had caused to be given a guarantee by Modern Methods, Inc., a corporation in which the Polstons were the sole stockholders.

The promissory note given to CCIC was secured by a security agreement on certain road building equipment.

S.E.K. also made and delivered its promissory note to Centennial and gave a security agreement to secure the same, which covered the same road building equipment as the security agreement given to CCIC. By a subordination agreement, the Centennial note and security agreement were made subordinate to the CCIC note and security agreement with the result that CCIC had a first lien on the S.E.K. equipment and Centennial held the second lien.

Subsequent to the giving of these notes and security agreements, S.E.K. was involved in a road building project in the State of Oklahoma. Fireman's was the surety on a performance bond given by S.E.K. in connection with such road building project.

After becoming engaged in the Oklahoma road building endeavor, S.E.K. defaulted on the payments due on the CCIC note and apparently also on the Centennial note. The Industrial State Bank of Kansas City, Kansas (Industrial) also held a promissory note executed by S.E.K. and secured by a security agreement given on other road building equipment which was not covered by the CCIC and Centennial security agreements.

Apparently at the time of falling into default on the Centennial and CCIC notes, S. E. K. also defaulted on the Industrial note. In an attempt to protect their security and to begin efforts toward collecting their notes, Centennial and Industrial sent representatives to Oklahoma to begin repossession of the road building equipment covered by their security agreements. Since the Centennial security agreement covered the same equipment as the CCIC security agreement, Centennial, through its attorney, Arthur Doyle, maintained close contact with CCIC in Baltimore, Maryland. Mr. Doyle kept CCIC fully informed of the efforts which Centennial and Industrial were making in the repossession of the equipment, and although CCIC made no objection to these repossession efforts, there does not appear to be any evidence to show that CCIC in any way instigated those repossession efforts, or did more than simply receive reports concerning this activity. Mr. Doyle testified the repossession was made on behalf of CCIC, Centennial and Industrial, as their interests appeared.

Before Centennial and Industrial could repossess the equipment, Fireman's instituted an injunction suit in the federal court in Oklahoma seeking to prevent this repossession. Centennial and Industrial, through the efforts of Mr. Doyle, was able to have this injunction suit dismissed.

In connection with the conclusion of the Oklahoma litigation, Fireman's entered into an agreement with the Polstons by which Fireman's agreed to protect, defend and indemnify John L. Polston and Ruth E. Polston as respects their guarantee given to CCIC for the balance due CCIC on the equipment covered by its security agreement.

Thereafter, the equipment was segregated with reference to that which was covered by the Centennial and CCIC security agreements and that covered by the Industrial security agreement. The equipment was thus brought to Kansas City.

Centennial had made the decision to purchase the CCIC note, and about the time the equipment was moved to Kansas City, Mr. Doyle obtained the payoff figure from CCIC. CCIC gave this figure as being $55,408.70, which, as stated in the assignment to Centennial, represented the remaining amount presently owed CCIC under the promissory note and chattel mortgages, discounting unearned interest and past due charges. Centennial paid the $55,408.70 to CCIC and took an assignment from CCIC. The assignment given by CCIC to Centennial covered the original promissory note given to it by S.E.K., various chattel mortgages (sic) given to secure the payment of said note, and the guarantees given by Modern Methods and the Polstons to CCIC for the payment of the S.E.K. note.

At about the time Centennial was obtaining the assignment of the note and other documents from CCIC, Centennial gave notice to the Polstons, Modern Methods and Fireman's of the impending foreclosure sale of the equipment covered by the first lien given to CCIC. After obtaining the assignment, Centennial proceeded with the sale of the equipment under the first lien which it had acquired and obtained the sum of $55,408.70 at such sale, being the same amount Centennial had paid CCIC.

After such sale, Centennial calculated the expenses which were incurred in repossessing the equipment in Oklahoma and returning it to Kansas City, and in connection with the sale, as being $7,961.86. Centennial further calculated the attorney fees which it had incurred for the same purposes, as being $8,311.30. Thereafter, Centennial instituted this suit against S.E.K. and the Polstons for the sum of $16,273.16, which was the total of the attorney fees and expenses incurred in the repossession, moving of the equipment and its sale. This suit was based on the allegation these expenses were properly deducted from the proceeds of the sale before applying such proceeds to the balance due. The petition then alleged a deficiency existed in the amount of such expenses.

Additional facts bearing on the controversy between the Polstons and Fireman's will be developed in the disposition of the appeal by Fireman's.

After a hearing by the court without a jury, the Court entered findings of fact and conclusions of law, resulting in a judgment for S.E.K. and the Polstons on the claim by Centennial, and in favor of the Polstons against Fireman's for attorney fees incurred by the Polstons in defending the suit brought by Centennial. Centennial appealed from the judgment denying its claim, and Fireman's appealed from the judgment against it in favor of the Polstons.

These appeals have been consolidated and in an attempt to bring some clarity out of this rather confusing situation, these appeals will be discussed separately.

CENTENNIAL APPEAL ¹

The theory of the Centennial claim against S.E.K. and the Polstons was that Centennial had the right to deduct from the proceeds of the sale of the equipment following its repossession, the expenses and attorney fees incurred in connection with the repossession and sale of such equipment. In making such claim, Centennial relies on § 400.9--504 RSMo 1969, V.A.M.S. which is a part of the Uniform Commercial Code. This Section provides in part as follows:

(1) A secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing. Any sale of goods is subject to the article on sales (article 2). The proceeds of disposition shall be applied in the order following to

(a) the reasonable expenses of retaking, holding, preparing for sale, selling and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorney fees and legal expenses incurred by the secured party;

(b) the satisfaction of indebtedness secured by the security interest under which the disposition is made;

(c) the satisfaction of indebtedness secured by any subordinate security interest in the collateral if written notification of demand therefor is received before distribution of the proceeds is completed. If requested by the secured party, the holder of a subordinate security interest must seasonably furnish reasonable proof of his interest, and unless he does so, the secured party need not comply with his demand.

Centennial argues under this Section it is entitled to deduct the expenses and attorney fees, even though these were incurred prior to the time Centennial became the owner of the CCIC note and security agreement under which the sale was actually made. Centennial urges it is absolutely entitled to deduct such amounts under the plain terms of this Section regardless of any other fact or circumstance. No cases applicable to the facts here under this Section has been cited, and independent research reveals none. In making this argument, Centennial overlooks the fact that under this Section of the Uniform Commercial Code, the party entitled to deduct the amounts referred to is the secured party. In this litigation, CCIC was the secured party under the note and security agreement given it, which was later assigned to Centennial, and under which security agreement Centennial made the sale. By...