Deutsche Credit Corp. v. Case Power & Equipment Co.

CourtCourt of Appeals of Arizona
Citation179 Ariz. 155,876 P.2d 1190
Docket NumberCA-CV,No. 1,1
Parties, 24 UCC Rep.Serv.2d 652 DEUTSCHE CREDIT CORPORATION, a Delaware corporation, Plaintiff-Appellee, v. CASE POWER & EQUIPMENT COMPANY, an Arizona corporation, Defendant-Appellant. 91-0653.
Decision Date28 June 1994

VOSS, Judge.

Case Power and Equipment Company (Case) appeals from summary judgment awarding $8,964.90 to appellee Deutsche Credit Corporation (Deutsche) in its action for conversion of an excavator in which Deutsche had a perfected security interest. The appeal presents the question whether Case took the excavator free of Deutsche's security interest pursuant to Uniform Commercial Code (UCC) section 9-307, 1 when it bought the excavator in the ordinary course of business from a dealer in such equipment to whom Deutsche's debtor had transferred title. Also before the court is whether Deutsche should be awarded attorneys' fees on appeal pursuant to Ariz.Rev.Stat.Ann. (A.R.S.) section 12-341.01(A) or Rule 25, Arizona Rules of Civil Appellate Procedure (Rule).


RSS, Inc. (RSS), not a party below, has been in existence since at least June 11, 1977. As of August 9, 1990, Richard S. Steensland and Marsha Steensland were RSS's only directors and officers. RSS's address was 3570 N.W. Grand Ave. in Phoenix.

All Quip of Arizona, Inc. (All Quip), not a party to the appeal, has been in existence since at least January 7, 1986. As of September 10, 1990, Richard S. Steensland and Marsha Steensland were its only directors and officers. Like RSS, All Quip's address was 3570 N.W. Grand Ave. in Phoenix.

The record contains a letter from RSS to the Annual Reports Section of the Arizona Corporation Commission dated August 9, 1990. The letterhead of the stationery on which the letter was written named "RSS INC," and also contained a logo consisting of the stylized designation "ALL QUIP" represented as the chassis and wheels of a piece of earth-moving equipment.

On December 4, 1986, RSS bought a Tiger brand excavator from Takeuchi Manufacturing under a "Retail Installment Contract/Security Agreement" (security agreement) by which RSS granted Takeuchi a security interest in the excavator as collateral. Takeuchi assigned its interest in the security agreement to Deutsche and perfected the security interest by filing a financing statement. The financing statement identified Deutsche as Takeuchi's assignee.

Without Deutsche's knowledge, and in breach of the security agreement, RSS conveyed its ownership interest in the excavator to All Quip at some point on or before October 12, 1988. All Quip did not grant a security interest to Deutsche in connection with this transfer.

Case had bought numerous items of heavy equipment from All Quip before the events that generated this litigation. On October 12, 1988, Case bought the Tiger excavator from All Quip out of inventory on All Quip's lot. Case paid for it with a check for $35,000.00. Case received a paid invoice that contained All Quip's logo and full corporate name, but which made no reference to RSS. All Quip did not inform Case that Deutsche had a security interest in the excavator or that All Quip had obtained it from RSS. Deutsche did not know about or consent to All Quip's selling the excavator to Case.

RSS defaulted on its obligations under the security agreement. Deutsche brought this action against All Quip and Case for conversion, and against All Quip and the Steenslands seeking compensatory and punitive damages for conspiracy to commit a fraudulent conveyance. The Steenslands answered, denying personal involvement or liability and informing the court that All Quip had commenced Chapter 11 bankruptcy proceedings. Deutsche dismissed the action against All Quip without prejudice.

Case answered Deutsche's complaint on December 19, 1990, denying most of Deutsche's allegations for lack of sufficient information. On May 23, 1991, Deutsche moved for summary judgment on its conversion claim against Case. In response, Case argued that due to the close relationship between RSS and All Quip, Case had purchased the excavator free of Deutsche's perfected security interest pursuant to UCC section 9-307, 2 and asked the trial court for a continuance to conduct discovery "[i]n order to submit affidavits to further establish its defense under Adams...." (referring to Adams v. City Nat'l Bank and Trust Co., 565 P.2d 26 (Okla.1977)).

The trial court, without commenting on Case's request, granted Deutsche's motion for summary judgment. It entered a Rule 54(b) judgment in accordance with its ruling, denying Deutsche's request for an award of attorneys' fees. Case timely appealed. We have jurisdiction pursuant to A.R.S. section 12-2101(B) (Supp.1993).

A. Standard of Review

Summary judgment should be granted if the facts produced in support of a claim or defense have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion advanced by the proponent of the claim or defense. Orme School v. Reeves, 166 Ariz. 301, 802 P.2d 1000 (1990). On appeal from summary judgment, we view the facts in the light most favorable to the appellant. Chaparral Dev. v. RMED International, Inc., 170 Ariz. 309, 823 P.2d 1317 (App.1991). For questions of statutory interpretation, however, we are not bound by the trial court's interpretation and conduct our review de novo. Hampton v. Glendale Union High School Dist., 172 Ariz. 431, 433, 837 P.2d 1166, 1168 (App.1992).

B. Applicability of UCC section 9-307
1. Interpretation of section 9-307

When a debtor sells collateral subject to a security interest the general rule is that:

[the] security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition 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.

UCC § 9-306(2) (emphasis added). The only applicable exception to this rule is found in UCC section 9-307(1). 3 To come within its protection, the buyer must establish: (1) he bought the collateral from a person in the business of selling goods of that kind; (2) he bought in good faith and without knowledge that the sale would violate the ownership rights or a security interest of a third party; and (3) the security interest to which the collateral was subject was "created by his seller." See UCC sections 1-201(9) and 9-307; UCC Official Comment, Para. 2, 3A UNIFORM LAWS ANNOTATED at 257-58 (West 1992).

Here, in response to Deutsche's motion for summary judgment, Case offered evidence sufficient to establish that All Quip was in the business of selling heavy equipment of the kind that Case bought from it; that Case bought the Tiger excavator in good faith and paid substantial value for it; and that Case lacked any knowledge of the existence of Deutsche's security interest, much less that the sale was in violation of it. Accordingly, had Case also tendered sufficient evidence to raise a triable fact issue on whether Deutsche's security interest was "created by [Case's] seller," Case was potentially entitled to prevail under UCC section 9-307(1), and the trial court would have erred in granting summary judgment against it. Case, however, failed to show how the creation of the security interest could arguably be attributed to All Quip.

The leading decision on the "created by his seller" requirement of UCC section 9-307(1) is National Shawmut Bank v. Jones, 108 N.H. 386, 236 A.2d 484 (1967). In that case Wever bought a car from Wentworth Motor Co. and granted it a security interest which Wentworth thereafter perfected and assigned to National Shawmut Bank. Wever transferred the car to Hanson-Rock, Inc., an automobile dealer. Defendant Jones later bought the car from Hanson-Rock without knowledge of the bank's security interest. The Supreme Court of New Hampshire held that because the bank's security interest was not created by Hanson-Rock, but rather by Wever, UCC section 9-307(1) did not apply. Id. The court also stated that because subsections (1) and (2) of section 9-307 were the only provisions of UCC Article 9 under which a buyer of goods could claim to take free of a security interest where a sale was held without the secured party's consent, and section 9-306(2) provided that a security interest continues in collateral "except when this Article provides otherwise," there was no leeway to create any other exceptions in the absence of a custom, usage, or agreement to the contrary. Id.

National Shawmut Bank has been widely followed. See, e.g., Security Pacific Nat'l Bank v. Goodman, 24 Cal.App.3d 131, 100 Cal.Rptr. 763 (1972) (registered owner of boat in which bank had perfected security interest traded boat for "credit" to dealer who then sold boat to buyers; held, buyers did not qualify under section 9-307(1) because security interest not created by their seller); Martin Brothers Implement Co. v. Diepholz, 109 Ill.App.3d 283, 64 Ill.Dec. 768, 440 N.E.2d 320 (1982) (9-307(1) does not protect buyer in ordinary course from security interest created by former owner who was not buyer's seller); Vacura v. Haar's Equipment, Inc., 364 N.W.2d 387 (Minn.1985) ("security interest created by his seller" refers only to security interest given by seller as debtor and does not include any other security interest even though created in agreement to which seller was non-debtor party); Ocean County National Bank v. Palmer, 188 N.J.Super. 509, 457 A.2d 1225 (1983); Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 715 P.2d 381 (1986); First State Bank v. Barnes, 496 So.2d 53 (Ala.Civ.App.19...

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