Citizens Nat. Bank of Evansville v. Wedel

• Decision Date: 10 March 1986
• Docket Number: No. 4-784A181,4-784A181
• Citation: 489 N.E.2d 1203
• Parties: 1 UCC Rep.Serv.2d 309 The CITIZENS NATIONAL BANK OF EVANSVILLE, Appellant/Cross Appellee (Plaintiff Below), v. Raymond WEDEL, Jr. Appellee/Cross Appellant (Defendant Below).
• Court: Indiana Appellate Court

Page 1203

489 N.E.2d 1203

1 UCC Rep.Serv.2d 309

The CITIZENS NATIONAL BANK OF EVANSVILLE, Appellant/Cross Appellee (Plaintiff Below), v. Raymond WEDEL, Jr. Appellee/Cross Appellant (Defendant Below).

No. 4-784A181.

Court of Appeals of Indiana Fourth District.

March 10, 1986.

George Montgomery, Terry G. Farmer, Bamberger, Foreman, Oswald & Hahn, Evansville, for appellant/cross appellee.

Donald R. Wright, W. Scott Shrode, Lynn, Wright, Evans & Daly, Evansville, for appellee/cross appellant.

MILLER, Judge.

In this replevin action, a dispute between plaintiff-appellant Citizens National Bank of Evansville and defendant-appellee Raymond Wedel, Jr. involved competing property interests in a boat and trailer owned by The Post, Inc. The bank claimed it had a perfected security interest in the boat, while Wedel asserted his contract rights to the boat were superior to the bank because its security interest was not perfected. Specifically, he claimed: 1) the financing statement filed by the bank incorrectly listed the debtor as Post, Inc. instead of its correct name, The Post, Inc.; and 2) the boat in question was listed as new when it was a used boat. After a jury trial, the trial court entered judgment for Wedel, and both parties have appealed. We reverse because the bank's security was perfected, and its claim to the collateral was superior to Wedel's contractual claim.

FACTS

Raymond Wedel, Jr. was a partner in Osborn Boats & Motors, an Indiana partnership. The partnership sold its assets on April 20, 1979 to The Post, Inc., a corporation in the business of selling motors, boats, and trailers. Under the terms of the agreement, Wedel was to receive $10,000 or a boat of equal value on August 1, 1979 in addition to monthly payments.

On May 31, 1979, The Post entered into a security agreement with the bank, granting it a security interest in certain inventory. The security agreement listed as collateral the inventory owned by The Post as described in the trust receipts. The trust receipts, in turn, listed a 1979 Ambassador 26-foot boat, serial number AQ290A594A, and a yellow 1979 Roadrunner trailer, serial number RR28191.

The bank filed a financing statement with the Indiana Secretary of State on June 12, 1979. The statement described the collateral as "new boats--all types of trailers, new jet boats--contract and lease rights for assigned security agreement dated May 31, 1979." Moreover, the debtor on the financing statement was listed as "Post, Inc. d/b/a/ Osborn Boats & Motors."

In February of 1980, The Post defaulted on its obligations to the bank, and it was several months behind in its monthly payments to Wedel. Moreover, Wedel had not received either the $10,000 payment or a boat from The Post. As a result of the default, the bank took over The Post's inventory.

Meanwhile, Wedel attempted to discover from the bank what security interest it might have in the inventory of The Post. On March 6, 1980, Wedel requested the Secretary of State to search for any financing statements on any property of The Post, Inc. The response by the Secretary on March 10, 1980 was that it could not find any statements on file.

On May 30, 1980, Wedel told the chief executive officer of The Post he intended to exercise his contract rights to purchase a boat. He then peacefully removed the 1979 yellow Ambassador 26-foot boat from The Post's place of business. On June 13, 1980, the bank filed a replevin action against Wedel after unsuccessfully demanding that Wedel return the boat, and the trial court granted a prejudgment order of possession to the bank.

Wedel responded to the bank's complaint by denying the validity of the claim and by asserting an affirmative defense of lack of good faith on the part of the bank, estopping it from any claim of right, title, or interest to the boat or the trailer in question. Wedel also entered a counterclaim alleging he was entitled to possession of the boat pursuant to his contract with The Post, and the bank had converted his property in the replevin action. The jury returned a verdict in favor of Wedel on his counterclaim, awarding him $10,000 in compensatory damages by reason of the conversion of the property by the bank, and the court entered judgment against the bank in that amount.

Both the bank and Wedel appeal the judgment, collectively raising the following issues for our consideration:

(1) Whether the bank had a perfected security interest in the boat;

(2) Whether the damages awarded were excessive;

(3) Whether the trial court should have instructed the jury on the issue of punitive damages;

(4) Whether the punitive damages instruction was a correct statement of the law.

We address only the first issue--whether the bank had a perfected security interest in the boat. ¹

We reverse.

DECISION

The creation of a perfected security interest in personal property is accomplished in a two step process: attachment and perfection. IND.CODE 26-1-9-303. ² Attachment occurs once "there is an agreement ... that it attach and value is given and the debtor has rights in the collateral." IND.CODE 26-1-9-204(1) (1982) (current version at IND.CODE 26-1-9-203(1) (Supp.1985)). Once the three requirements of attachment are met, the security interest is enforceable as between the secured party and the debtor. Hillman's Equipment, Inc. v. Central Realty, Inc. (1968), 144 Ind.App. 18, 242 N.E.2d 522, rev'd on other grounds, (1969) 253 Ind. 48, 246 N.E.2d 383.

The three elements of attachment--an agreement, value given, and debtor rights in the collateral--are not disputed by the parties. The May 31, 1979 security agreement and the trust receipt together satisfy the requirement that there be an agreement. Moreover, the trust receipt indicates value was given in exchange for the security interest in the form of a loan. The final requirement, that the debtor have rights in the collateral, is satisfied by Wedel's testimony that The Post owned the boat and trailer at the time it granted a security interest to the bank. Thus, the bank's security interest in the boat was enforceable as between it and The Post as debtor once attachment occurred.

While "attachment" relates to the creation of a security interest by virtue of execution of a security agreement, "perfection" is an additional step which makes the security interest effective against third parties. U.S. v. Gleaners & Farmers Cooperative Elevator Co. (7th Cir.1973), 481 F.2d 104. Perfection of a security interest is generally accomplished in one of two manners: by possession of the collateral or by filing a financing statement. ³ IND.CODE 26-1-9-304, -305 (1982). In order to perfect a security interest in Indiana by filing when the collateral is inventory, such as the boat in question, ⁴ the proper place to file the financing statement is with the office of the Secretary of State. IND.CODE 26-1-9-401(1)(c) (1982). The bank filed such a financing statement on June 12, 1979, and it claims perfection of its security interest in the boat under this filing.

Wedel challenges the validity of the perfected security interest on two grounds. He first asserts the financing statement is ineffective because the debtor's name was erroneously listed on the financing statement as "Post, Inc. d/b/a Osborn Boats & Motors" instead of "The Post, Inc." He argues the missing "The" invalidates the statement because the statute requires the correct name of the debtor to appear on the financing statement. IND. CODE 26-1-9-402(1), (3)(1982).

The standard for determining whether an error in the financing statement invalidates an otherwise perfected security interest is set forth in I.C. 26-1-9-402(5)(1982) which provides, "A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading." Wedel contends the omitted article "The" is seriously misleading because financing statements are indexed alphabetically under the name of the debtor ⁵ so that statement in question would not be filed in the correct place. Wedel supports his argument by the fact the office of Secretary of State did not find any financing statements on file when he requested a search under the name of "The Post, Inc." as the debtor.

We note at the outset the question of whether the error in the debtor's name is a minor one and is not seriously misleading is one of law for the court to decide and not a question of fact. ⁶ John Deer Co. v. William C. Pahl Construction Co. (1970), 34 App.Div.2d 85, 310 N.Y.S.2d 945. Moreover, the test of the sufficiency of a financing statement is whether, under all the facts, the filing would have given a file searcher notice to justify placing a duty upon him to make further inquiry concerning the possible security interest. In re Excel Stores, Inc. (2d Cir.1965), 341 F.2d 961; In re Reeco Electric Co., Inc. (S.D.Me.1976), 415 F.Supp. 238; In re Colorado Mercantile Co. (D.Colo.1969) 299 F.Supp. 55; Uniform Commercial Code Sec. 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 Sec. 23-16 at 952 (2d ed. 1980).

We hold the omission of an article such as "The" from the beginning of the debtor's name is a minor error which is not seriously misleading. We judicially note that initial articles--"A", "An", and "The"--are commonly omitted when titles are organized alphabetically. ⁷ We are aware of no system of alphabetizing--for reference, indexing, or filing--which would attempt to organize titles by an initial article, and cannot fathom a system which would attempt to do so. Thus, a filing that omits the initial article of a corporation name fulfills the test of a minor error which is not seriously misleading because such a filing should alert searches to the existence of...