Central Cal. Equip. Co. v. Dolk Tractor Co.

Citation23 UCC Rep.Serv. 1051,78 Cal.App.3d 855,144 Cal.Rptr. 367
Parties, 23 UCC Rep.Serv. 1051 CENTRAL CALIFORNIA EQUIPMENT COMPANY, Plaintiff and Respondent, v. DOLK TRACTOR COMPANY et al., Defendants and Appellants. Civ. 3108.
Decision Date17 March 1978
CourtCalifornia Court of Appeals
Sylvia & Blegen and Jon A. Blegen, Rio Vista, for defendant and appellant Dolk Tractor
OPINION

HOPPER, Associate Justice.

This appeal involves a security interest created under article 9 of the California Uniform Commercial Code. 1

On August 23, 1971, Progressive Farms, Inc. (Progressive), as the buyer, and Central California Equipment Company (Central), as the seller, signed an installment sales contract and security agreement for the purchase of a self-mechanized corn harvester combine. After perfecting the security agreement by filing with the Secretary of State, Central assigned the note and the security interest to Bank of America on a with recourse basis. The security agreement expressly prohibited the disposition of the collateral without the written permission of the secured party.

Progressive used the harvester for a season and then abandoned corn as a crop. Having no use for the combine, it asked Central for assistance in its sale. Central, through its president Al Franklin, mentioned that the harvester was for sale to Stan Dolk of appellant Dolk Tractor Company (Dolk). Central was interested in finding another buyer to take over the payments on the machine because Progressive was in financial difficulty.

In October 1973, Progressive went out of business and Central repossessed all of the equipment subject to its existing security agreements. The harvester, however, was not repossessed. On June 4, 1974, Southern Tulare Farming, Inc., a separate corporation having the same interests as Progressive, assumed a new payment schedule.

Meanwhile, Progressive, Dolk, and appellant McCormack, a farmer, were brought together by Elmer Garzoli, one of Central's salesmen, to discuss the possible sale of the combine to McCormack. McCormack ultimately purchased the harvester from Progressive, but claimed at trial that he had no knowledge of the security interest on it. In late 1973, McCormack traded in the harvester for a tractor purchased from Dolk. Dolk also asserted that he had no knowledge of the security interest, but Garzoli testified that he had told Dolk that Bank of America owned the "contract" on the machine. While both Dolk and McCormack claimed that Central had authorized the sale of the harvester and had relinquished the security interest on it, Franklin, the president of Central, denied knowing when, if at all, the sale to McCormack from Progressive actually occurred, and further denied having actively sought any particular purchaser. He also indicated that his company had lost track of the exact location of the harvester and could not find it until after an extensive telephone search. At the time of trial Dolk was in possession of the harvester.

After the revision agreement was executed by Progressive, Southern Tulare Farming, Inc., and Central, under which Southern Tulare took over Progressive's obligation, Southern Tulare defaulted on its payments to Bank of America. The bank notified Central and Central filed suit to recover either the machine or its value from Southern Tulare. Sometime after the suit was filed, Central repurchased the security agreement and the note from Bank of America under the with recourse provision of the original assignment. The precise date was not adduced at trial but a letter from the bank dated January 14, 1976, refers to the repurchase of the contract.

The respondent, Central, filed a complaint for damages in the Kern County Superior Court on March 26, 1975. The complaint alleged that the appellants had disposed of certain farm equipment covered by a security agreement executed in respondent's favor and had failed to thereafter satisfy the underlying debt that the equipment secured.

Judgment was entered against Dolk and McCormack in favor of respondent for $8,769 damages, plus seven percent interest from October 1, 1974, $1,500 attorney fees and $491.45 costs. Appellants appeal contending errors in costs and in award of attorney fees and that the security interest did not deprive appellants of title to the harvester because Central had authorized its sale to appellants.

I. THE ISSUE OF AUTHORIZATION.

Under section 9201 a security agreement is effective according to its terms between the parties against purchasers of the collateral and against creditors, except as otherwise provided in the Act. One of the major exceptions to section 9201 is the sale to a buyer in the ordinary course of business (§ 9307). That section is inapplicable here because Progressive, the seller, was a farmer and was not in the business of selling farm machinery. Appellants also rely on section 9306, subdivision (2), however, and contend that there was an authorization to dispose of the collateral free and clear of the security.

Section 9306, subdivision (2), in California, as of the date of the transaction in this case, provided in part:

"Except where this division otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor." 2

This appears to be a case of first impression in California. However, there is a plethora of decisions in other jurisdictions. The first was Clovis National Bank v. Thomas (1967) 77 N.M. 554, 425 P.2d 726, which received considerable discussion mostly condemnatory, in the law reviews (see Comment (1968) 8 Nat.Res.J. 183; Comment (1967) 20 Baylor L.Rev. 136; Comment (1970) 12 Ariz.L.Rev. 391; Comment (1968) XVII De Paul L.Rev. 447, 453, 455; see also Sorelle, Farm Products Under the U.C.C. Is A Special Classification Desirable? (1969) 47 Tex.L.Rev. 309, 312-314) and resulted in immediate legislative change in New Mexico. In Clovis, the secured party had previously permitted the debtor to sell the collateral without written consent even though written consent was required under the terms of the security agreement. The court held that under those circumstances the secured party impliedly acquiesced in the disposition, thereby terminating the security interest under section 9306, subdivision (2). Clovis is a controversial decision. Subsequent decisions either followed, declined to follow, or distinguished Clovis and reached respective holdings on various grounds, such as the existence or nonexistence of a prohibition on disposition in the security agreement, prior course of dealings, express or implied authorization to sell, inventory, conditional consent, and waiver. (See, e.g., Lisbon Bank and Trust Co. v. Murray (1973) Iowa, 206 N.W.2d 96 (followed Clovis even though there was no clause prohibiting disposition); In re Cadwell, Martin Meat Company (1970 E.D.Cal.) 10 U.Com.Code Rep.Serv. 710 (knowledge of the sale of collateral without objection impliedly authorized the sale despite an express prohibition of sale without written consent); Central Washington Production Cr. Ass'n. v. Baker (1974) 11 Wash.App. 17, 521 P.2d 226 (authorization was a question of fact and summary judgment was held improper); Planters Production Credit Association v. Bowles (1974) 256 Ark. 1063, 511 S.W.2d 645 (typical of the Production Credit Association cases, this court found a waiver by the Production Credit Association's course of dealing that allowed member debtors to dispose of the collateral at will); Swift & Company v. Jamestown National Bank (8th Cir. 1970) 426 F.2d 1099 (security agreement expressly gave permission to sell the collateral); Garden City Production Credit Assn. v. Lannan (1971) 186 Neb. 668, 186 N.W.2d 99 (no clear showing of waiver or estoppel); Baker Production Cr. Ass'n. v. Long Creek Meat Co., Inc. (1973) 266 Or. 643, 513 P.2d 1129 (conditional consent for sale existed, but the condition was not met and the security interest continued); Hempstead Bank v. Andy's Car Rental System, Inc. (1970) 35 A.D.2d 35, 312 N.Y.S.2d 317 (because the buyers were not buyers in the ordinary course of business, there was an issue of fact on the question of implied authorization); United States v. Central Livestock Association (D.N.D.1972) 349 F.Supp. 1033 (authorized sale found from prior course of dealing); Borg-Warner Acceptance Corp. v. First National Bank (1976) 307 Minn. 20, 238 N.W.2d 612 (at p. 614 the court says, "To permit evidence of subsequent conduct to be introduced to vary the unambiguous terms of a security agreement is contrary to the basic premise of the U.C.C."); Wabasso State Bank v. Caldwell Packing Co. (1976) Minn., 251 N.W.2d 321 (petn. for rehg. den. March 17, 1977) (authorization was not shown by a failure to object to evidence of a prior course of dealing when an express prohibition against disposition was in the security agreement); Colorado Bank & Trust Co. v. Western Slope Investments, Inc. (1975) 36 Colo.App. 149, 539 P.2d 501 (trade custom and usage did not prevail over express terms of the agreement); In re Kittyhawk Television Corporation (S.D.Ohio 1974) 383 F.Supp. 691 (secured creditor knew of and consented to the sale); Long Island Trust Co. v. Porta Aluminum Corp. (1974) 44 A.D.2d 118, 354 N.Y.S.2d 134 (factual question whether by prior dealings the seller authorized sale by a debtor by asserting right to receive proceeds if chattels were sold. But note that Official Comment 3 to section 9306, subdivision (2), read differently then than it does now and that New York, as of 1974, had not adopted the 1972...

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