Continental Credit Corp. v. Wolfe City Nat. Bank

• Decision Date: 18 December 1991
• Docket Number: No. 05-90-01465-CV,05-90-01465-CV
• Citation: 823 S.W.2d 687
• Parties: 17 UCC Rep.Serv.2d 984 CONTINENTAL CREDIT CORPORATION, Appellant, v. The WOLFE CITY NATIONAL BANK, Appellee.
• Court: Texas Court of Appeals

Page 687

823 S.W.2d 687

17 UCC Rep.Serv.2d 984

CONTINENTAL CREDIT CORPORATION, Appellant, v. The WOLFE CITY NATIONAL BANK, Appellee.

No. 05-90-01465-CV.

Court of Appeals of Texas,

Dallas.

Dec. 18, 1991.

Jack Myers, Dallas, for appellant.

Robert L. Scott, Greenville, for appellee.

Before BAKER, THOMAS and WHITTINGTON, JJ.

OPINION

WHITTINGTON, Justice.

Continental Credit Corporation appeals the trial court's judgment in favor of Wolfe City National Bank in Continental's suit for conversion. In eight points of error, Continental contends that the trial court erred in: (1) finding that Wolfe City had a perfected security interest in the inventory and accounts receivable of Pawn Partners, Inc.; (2) finding that Judy Summers had authority to subject the inventory and accounts receivable of Pawn Partners, Inc. to liens by Wolfe City; and (3) allowing hearsay testimony from two bank officials. We hold that Wolfe City did not have a valid security interest in the inventory and accounts receivable of Pawn Partners, Inc. We reverse the trial court's judgment. We render judgment in favor of Continental.

FACTS

Olin Summers was the sole shareholder of Pawn Partners, Inc. when it purchased Greenville Pawn Shop in January 1982. A few days later, Pawn Partners, Inc. filed an assumed name certificate in Hunt County to do business as Greenville Pawn Shop. Pawn Partners, Inc. operated the Greenville Pawn Shop from the date of purchase until it sold its assets to Continental in 1986.

In 1983, Olin Summers married Judy Owen. At that time, Judy had pre-existing loans and accounts with Wolfe City. The Summers began doing business with Wolfe City, using the name Summers coupled with the trade name of "Greenville Pawn Shop." During the marriage, Judy signed successive promissory notes payable to Wolfe City. She also signed three security agreements, pledging the inventory and accounts receivable of Greenville Pawn Shop as collateral for the notes. Wolfe City filed two financing statements, one with the Secretary of State in Austin and one in Hunt County.

In 1986, Continental purchased the assets of Pawn Partners, Inc. d/b/a Greenville Pawn Shop. Subsequently, Wolfe City, claiming a superior interest in the inventory and accounts receivable, made demand on Continental. Continental refused to return any of the assets it had purchased or the proceeds from the sale thereof. Wolfe City filed this conversion claim.

STANDARD OF REVIEW

Wolfe City alleged a superior interest or right to the inventory and accounts receivable of Greenville Pawn Shop based on asserted security interests in the property. For conversion to occur, a party must establish an unauthorized and wrongful exercise of dominion and control over another's personal property to the exclusion of or inconsistent with the rights of the owner. Waisath v. Lack's Stores, Inc., 474 S.W.2d 444, 447 (Tex.1971); Catania v. Garage De Le Paix, Inc., 542 S.W.2d 239, 241 (Tex.Civ.App.-Tyler 1976, writ ref'd n.r.e.). The party alleging conversion must also establish an interest in and superior right to possession of the converted property at the time of the conversion. Catania, 542 S.W.2d at 241.

CONTINENTAL'S CONTENTIONS

In four points of error, Continental contends that the trial court erred in determining that Wolfe City had a properly perfected security interest. Specifically, Continental contends that Wolfe City's financing statements did not put Continental on notice that Wolfe City claimed an interest in the inventory and accounts receivable of Pawn Partners, Inc. Continental further asserts that Wolfe City's unperfected security interest is subordinate to its rights as a bona fide purchaser from Pawn Partners, Inc. Continental stipulates that it did not perform a search of the Secretary of State's records to determine whether Wolfe City had a perfected security interest in the Pawn Shop's assets. Continental maintains that a search would have been futile because Wolfe City's financing statements did not reveal that Pawn Partners, Inc. was the owner of the property in which it claimed an interest.

WOLFE CITY'S FINANCING STATEMENTS

The three financing statements filed by Wolfe City contain the following pertinent information:

Financing Statement # 1--

Debtor: Judy and Olin Summers d/b/a Greenville Pawn Shop

Collateral: Inventory in Greenville Pawn Shop

Signature of Debtor: Judy Summers

Filed: October 7, 1984 (Secretary of State)

Financing Statement # 2--

Debtor: Judy Summers d/b/a Greenville Pawn Shop Collateral: Inventory and Accounts Receivable in Greenville Pawn Shop

Signature of Debtor: Judy Summers

Filed: December 18, 1985 (Secretary of State)

Financing Statement # 3--

Debtor: Judy and Olin Summers d/b/a Greenville Pawn Shop

Collateral: Inventory in Greenville Pawn Shop

Signature of Debtor: Judy and Olin Summers ¹

Filed October 24, 1984 (County Clerk-Hunt County)

REQUIREMENTS FOR PERFECTED SECURITY INTEREST

Section 9.402 of the Texas Business and Commerce Code, as applicable to this suit, sets out the requirements for perfecting a security interest as follows:

(a) General rule--A financing statement is sufficient if it gives the names of the debtor and the secured party, is signed by the debtor, gives an address of the secured party from which information concerning the security interest may be obtained, gives a mailing address of the debtor and contains a statement indicating the types, or describing the items, of collateral.

* * * * * *

(g) Sufficiency of name of the debtor--A financing statement sufficiently shows the name of the debtor if it gives the individual, partnership, or corporate name of the debtor, whether or not it adds other trade names or the names of partners....

(h) Effect of minor errors--A financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading.

Act of May 24, 1973, 63rd Leg., R.S., ch. 400, § 5, 1973 Tex.Gen.Laws 997, 1022, amended by Act of april 6, 1989, 71st Leg., R.S., ch. 18, § 1, 1989 Tex.Gen.Laws 295, 296 (current version at TEX.BUS. & COM.CODE ANN. § 9.402 (Tex.UCC) (Vernon 1991)). ² The critical inquiry in assessing whether the creditor has perfected a security interest is whether a reasonably prudent subsequent creditor would have discovered the prior security interest. The trial court must make this assessment based on the particular facts of each case. In re Lane, 41 B.R. 285, 288 (Bankr.N.D.Tex.1984).

In Matter of Hinson & Hinson, Inc., 62 B.R. 964 (Bankr.W.D.Pa.1986), "Hinson and Hinson, Inc.," a Pennsylvania corporation, filed a fictitious-name application to do business as "Western Sizzlin' Steak House of Bedford, Pa." A financing agreement was signed by Bernard Hinson showing the lessee as "Hinson and Hinson, Inc. d/b/a Western Sizzlin' Steak House." Thereafter, a financing statement was filed listing the debtor as "Mr. Bernard Hinson d/b/a Western Sizzlin' Steak House." The corporation's name did not appear anywhere on the financing statement. This filing was held ineffective to provide notice to creditors, because a creditor searching for "Hinson and Hinson, Inc." would be misled into believing that there was no security interest in property owned by the corporation. Id. at 968.

In Matter of Lintz West Side Lumber, Inc., 655 F.2d 786 (7th Cir.1981) (citing Hinson & Hinson, Inc.), the corporation, Lintz West Side Lumber, Inc., was indebted to a bank. A financing statement purporting to grant a security interest to the bank was executed. The financing statement listed the individuals, John and Mayella Lintz, as debtors. The court held that the failure to include the correct name of the debtor corporation in the financing statement was seriously misleading because subsequent creditors had to depend upon a government official to search state records for the financing statement. Id. at 791. The court stated that, as a duly constituted corporation, Lintz West Side Lumber, Inc. is a legal entity separate and distinct from John and Mayella Lintz, whose names appeared on the financing statement. Id. The court held that the names of the debtors were not sufficiently similar to provide a creditor or official searching the records with reasonable notice of the bank's security interest. Id.

Similarly, Pawn Partners, Inc. is a legal entity separate and distinct from Judy Summers, Olin Summers, and Greenville Pawn Shop, whose names appear on the financing statements. Following the reasoning in Lintz West Side Lumber, Inc., Wolfe City's failure to include the correct name of the debtor corporation in the financing statement was seriously misleading. Furthermore, we cannot say that the names of the debtors were sufficiently similar to provide a creditor or official searching the records on behalf of a creditor with reasonable notice of Wolfe City's security interest.

In re My Place or Yours, Inc., 34 B.R. 197 (Bankr.D.Vt.1983), presents a very similar circumstance and question: whether a filed financing statement, which listed the name of the debtor as an individual doing business under a trade name, is sufficient to put prospective creditors on notice that a purchase money security interest exists with respect to an asset of the corporate bankruptcy debtor. In the case of individuals, section 9.402 of the Texas Business and Commerce Code contemplates filing in the individual name, not in the tradename. In re My Place or Yours, Inc., 34 B.R. 197, 198 (Bankr.D.Vt.1983). In the case of corporate debtors, the section contemplates filing in the name of the corporation. Id. The court held that, where there is no resemblance between the properly indexed names of the debtor and the true name of the debtor, the financing statement falls short of the purpose of section 9.402. In addition, the court stated that minor errors, which are not seriously misleading, do not include designating the debtor under his or her individual name...