Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc.

• Decision Date: 02 May 1985
• Docket Number: No. 56470,56470
• Citation: 10 Kan.App.2d 350,699 P.2d 566
• Parties: , 40 UCC Rep.Serv. 1876 DICK HATFIELD CHEVROLET, INC., Appellee, v. BOB WATSON MOTORS, INC., Defendant, and First National Bank of Kingman, Kansas, Appellant.
• Court: Kansas Court of Appeals

Page 566

699 P.2d 566

10 Kan.App.2d 350, 40 UCC Rep.Serv. 1876

DICK HATFIELD CHEVROLET, INC., Appellee, v. BOB WATSON MOTORS, INC., Defendant, and First National Bank of Kingman, Kansas, Appellant.

No. 56470.

Court of Appeals of Kansas.

May 2, 1985.

Review Granted June 28, 1985.

Syllabus by the Court

1. Absent certain exceptions, this court is duty-bound to follow Kansas Supreme Court decisions. One exception is when we are convinced for various reasons that the Supreme Court itself would not follow existing case law if it were faced with the set of facts before us. One reason is if the legislature has changed or has adopted statutory law that necessitates a different result.

2. One of the requirements under K.S.A. 84-9-203(1)(a) for a security interest to attach with respect to collateral is that the debtor sign a security agreement that contains a description of the collateral.

3. The standard applied in determining the sufficiency of the description is if it reasonably identifies what is described. K.S.A. 84-9-110.

4. Vehicle identification numbers are unnecessary for a sufficient description of collateral; thus, an error in a vehicle identification number does not render an otherwise valid security interest in that vehicle invalid.

5. K.S.A. 84-2-511(3) makes payment by check conditional, and payment is defeated if the check is dishonored. This statute affects the rights of the parties to the sales transaction and has no effect on the rights of third parties taking from the defaulting buyer.

6. A person with voidable title has power to transfer a good title to a good-faith purchaser for value. When goods have been delivered under a transaction of purchase, the purchaser has such power even though the delivery was in exchange for a check which is later dishonored.

7. A party who takes by gift, voluntary mortgage, pledge or lien qualifies as a purchaser under the Uniform Commercial Code. K.S.A. 84-1-201(32) and (33).

8. The Uniform Commercial Code defines good faith as "honesty in fact in the conduct or transaction concerned." K.S.A. 84-1-201(19).

9. In an action based on the Uniform Commercial Code, it is held that the trial court erred in holding that the Bank did not have a perfected security interest in the pickup truck and that the Bank did not act in good faith.

J. Stanley Hill and Robert E. Nugent, III, of Branine, Chalfant, Hill & Nugent, Hutchinson, for appellant.

No appearance for defendant, Bob Watson Motors, Inc.

David R. McClure, of Fettis and McClure, Wichita, for appellee.

Before ABBOTT, P.J., and PARKS and MEYER, JJ.

ABBOTT, Presiding Judge:

The First National Bank of Kingman, Kansas, (Bank) appeals from a judgment entered against it and in favor of Dick Hatfield Chevrolet, Inc., (Hatfield) in the amount of $8,005.90 plus interest and costs. The Bank contends it had perfected a security interest in a pickup truck which had been sold by Hatfield to the Bank's customer, Bob Watson Motors, Inc., (Watson Motors). The check given for the purchase price ($8,005.90) was dishonored by the Bank when it was presented for payment.

Two issues are presented on appeal. The trial court followed Trapani v. Universal Credit Co., 151 Kan. 715, 100 P.2d 735 (1940), wherein it was held that transposed digits in the motor number did not impart constructive notice, and held in the instant case that a typographical error by which an extra digit was added to a 17-character identification number rendered an otherwise valid security agreement invalid. Thus, the first issue is whether or not Trapani is applicable to this case in light of the enactment of the Kansas Uniform Commercial Code by the legislature in 1965.

The second issue is not viable unless the Bank was a secured party. If it was, then we reach the question whether, as such, the Bank had priority over an unpaid cash seller (Hatfield) to the unit the Bank held as security.

Some background is helpful in understanding the legal issues. For reasons not germane to this appeal, the Bank was required by federal authorities to monitor problem loans. Watson Motors' transactions with the Bank were subject to those requirements. For that reason, and because it deemed itself insecure, the Bank had been monitoring Watson Motors' account on a daily basis for several months.

The Bank had floor planned Watson Motors' inventory and held a security interest on two pickups which were a part of the inventory. On August 13, 1981, a "dealer trade" was consummated between Hatfield and Watson Motors. A dealer trade is actually the sale of a vehicle by each dealer to the other with a check being exchanged for the full purchase price of each vehicle. The pickup sold by Watson Motors to Hatfield was one of the two pickups on which the Bank held a specific security agreement. The Bank knew the details of the trade in advance, approved the trade and released its security interest in the pickup transferred to Hatfield. The pickup purchased from Hatfield was substituted on the security agreement, at which time a digit (8) was inadvertently added to the identification number so that it became 1GCDC14H2BJ1583863.

At that moment, Hatfield had a 1981 pickup and Watson Motors' check for $8,005.90; Watson Motors had a 1981 pickup and Hatfield's check for $7,849.55. A dealer trade is not unusual. It is a common occurrence in the automobile business, and at that point each party was in basically the same position it was in before the trade. What followed is not what usually follows a dealer trade.

Watson Motors deposited the check it received from Hatfield, and the Bank used the proceeds to pay off a note Watson Motors owed the Bank. The following day, the check Watson Motors had given to Hatfield for $8,005.90 arrived at the Bank for payment, but by then there were insufficient funds in Watson Motors' account to pay it and it was returned to Hatfield. Three or 4 days later, Watson Motors ceased doing business and turned its business assets over to the Bank. Hatfield sued Watson Motors and the Bank to recover actual and punitive damages. The day after suit was filed and service made on the Bank, the Bank sold the pickup Watson Motors had received from Hatfield and applied the proceeds in the amount of $8,185.27 to Watson Motors' indebtedness to it.

The trial court held that the Bank did not acquire a valid security interest in the pickup Watson Motors received from Hatfield because of the error made in recording the identification number, that the Bank was not a good-faith purchaser for value, and that defendants were liable for the amount of the insufficient fund check ($8,005.90) plus interest and costs. This appeal followed.

Counsel for Hatfield recognizes that the trial court is to be affirmed if Trapani v. Universal Credit Co., 151 Kan. 715, 100 P.2d 735, applies. Absent certain exceptions, this court is duty-bound to follow Kansas Supreme Court decisions. One exception is when we are convinced for various reasons that the Supreme Court itself would not follow existing case law if it were faced with the set of facts before us. One reason is if the legislature has changed or has adopted statutory law that necessitates a different result. Kansas has adopted a Uniform Commercial Code since Trapani that substantially changed existing statutory and case law.

Under the Uniform Commercial Code, one of the requirements for a security interest to attach with respect to collateral is that the debtor sign a security agreement that contains a description of the collateral. K.S.A. 84-9-203(1)(a). The standard applied in determining the sufficiency of the description is addressed in the UCC at K.S.A. 84-9-110, which provides in pertinent part:

"[F]or purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described." (Emphasis added.)

The Official UCC Comment to 84-9-110 indicates that the purpose for easing the description requirement is that: "Under this rule courts should refuse to follow the holdings, often found in the older chattel mortgage cases, that descriptions are insufficient unless they are of the most exact and detailed nature, the so-called 'serial number' test." Similarly, the Kansas Comment 1983 notes that pre-UCC Kansas case law was changed by 84-9-110 and specifically gives Trapani v. Universal Credit Co., 151 Kan. 715, 100 P.2d 735, as an example. Based upon these Comments, we conclude that the trial court's reliance on Trapani was unwarranted.

This result is supported by decisions from other jurisdictions. In the following cited cases, the various courts held that the vehicle identification numbers were unnecessary for a sufficient description, that a misdescription by an error in the number did not render the security interest invalid, or that such errors were not "seriously misleading." Associates Capital Corp. v. Bank of Huntsville, 49 Ala.App. 523, 274 So.2d 80 (1973); Thomas Ford etc., Inc. v. North Ga. etc. Assn., 153 Ga.App. 820, 266 S.E.2d 571 (1980); Still Associates, Inc. v. Murphy, 358 Mass. 760, 267 N.E.2d 217 (1971); City Bank and Trust Co. v. Warthen Serv. Co., 91 Nev. 293, 535 P.2d 162 (1975); WyHy Federal Credit Union v. Burchell, 643 P.2d 471 (Wyo.1982).

In addition, the test for determining adequacy of description also applies to the collateral description required in financing statements under K.S.A. 84-9-402. The 1978 amendments to 84-9-402 permit generic descriptions of collateral consistent with the types or classifications of collateral defined in 84-9-109. This also complies with the test of 84-9-110. Donald v. Madison Industries, Inc., 483 F.2d 837 (10th Cir.1973); In re Grey, 29 B.R. 286 (Bankr.D.Kan.1983). Moreover, K.S.A. 84-9-402(8) excuses minor errors in the financing statement requisites so long as such errors are not seriously misleading to a third party searching the files. The legislature intended to be...