Duncan Box & Lumber Co. v. Applied Energies, Inc.

• Citation: 165 W.Va. 473,270 S.E.2d 140
• Decision Date: 16 September 1980
• Docket Number: No. 14097,14097
• Parties: , 29 UCC Rep.Serv. 1731 DUNCAN BOX & LUMBER COMPANY v. APPLIED ENERGIES, INC., Defendant Below The First Huntington National Bank, Suggestee Below.
• Court: Supreme Court of West Virginia

Page 140

270 S.E.2d 140

165 W.Va. 473, 29 UCC Rep.Serv. 1731

DUNCAN BOX & LUMBER COMPANY v. APPLIED ENERGIES, INC., Defendant Below The First Huntington National Bank, Suggestee Below.

No. 14097.

Supreme Court of Appeals of West Virginia.

Sept. 16, 1980.

Greene, Ketchum & Mills, George A. Mills, III, and Menis E. Ketchum, Huntington, for appellant.

Huddleston, Bolen, Beatty, Porter & Copen, A. Michael Perry and Thomas H. Gilpin, Huntington, for defendant.

MILLER, Justice:

The question presented by this appeal is whether, under our Uniform Commercial Code (UCC), ¹ a bank can obtain a security interest in a depositor's reserve bank account which would prevail over a suggestee execution issued by a judgment creditor of the depositor.

The First Huntington National Bank (hereinafter Bank) agreed to finance, through a deed of trust, the purchase by Applied Energies, Inc. (hereinafter Debtor) of a tract of land known as Meadow Links Estates. With the purpose of subdividing the tract into lots for mobile home dwellers, Debtor sought further financing from the Bank for resale of the lots to individual purchasers. The proposal was that Debtor would assign the purchasers' promissory notes, secured by deeds of trust, to the Bank.

The Bank agreed to this arrangement, but insisted on security in the form of a "reserve account" to be controlled by the Bank which would, in effect, guarantee the Bank the right to a reserve of 25% of the unpaid balance of the outstanding notes. Payments into the reserve account would be accomplished by the Bank retaining 25% of the amount due Debtor on notes assigned by Debtor to the Bank from the sale of individual lots. The rules governing the reserve account were established by written agreement between the Bank and Debtor. ²

Sometime after this arrangement between Bank and Debtor became effective, Debtor terminated its business. Subsequently, two creditors of Debtor, Ronald L. Eastham & Associates, Inc., and Duncan Box & Lumber Company (hereinafter Duncan), instituted separate proceedings against Debtor, obtaining judgments and proceeding by suggestee execution to attach the reserve account of Debtor in the Bank. The Bank contended the sum in the reserve account, approximately $41,000, did not exceed 25% of the unpaid balance owed by Debtor to Bank, which was roughly $400,000. The Bank thus asserted that Debtor had no "interest or property in the reserve account," and that the Bank was not "in possession of any property belonging to (Debtor)." The Circuit Court of Cabell County upheld the Bank's contentions and dismissed the proceedings. This appeal followed. ³

Duncan argues that the Bank has no lien because it failed to file a financing statement under the general requirement of our Uniform Commercial Code, W.Va.Code, 46-9-302(1), which states, with enumerated exceptions: "A financing statement must be filed to perfect all security interests . . . ." The Bank asserts that a financing statement was not required because the reserve account falls within exception (a) of that Code section, which states "a security interest in collateral in possession of the secured party under section 9-305 ( § 46-9-305)."

At the time the reserve account was created in 1973, W.Va.Code, 46-9-305, provided generally that if a creditor took "(a) security interest in letters of credit and advices of credit . . ., goods, instruments, negotiable documents or chattel paper" and retained possession of the collateral, then he had perfected his security interest without the necessity of filing a financing statement. ⁴

Duncan asserts the reserve account does not fall within this Code section because the account constitutes money, and that money was not within the statutorily enumerated items as this statute existed in 1973 when the agreement was executed. To buttress this point, Duncan calls our attention to the 1974 amendment to W.Va.Code, 46-9-305, which added the term "money" to the list of interests perfectible by possession.

These arguments, however, miss the critical point of the case. The agreement creating the reserve account was essentially a common law pledge. It is true that W. Va.Code, 46-9-102(2), provides generally that Article 9, governing secured transactions, applies "to security interests created by contract including pledge, . . . ." ⁵ But it is equally clear under W.Va.Code, 46-9-104(k) (1963), that certain transactions which may constitute a pledge are excluded from Article 9:

"(Article 9 does not apply) to a transfer in whole or in part of any of the following: Any claim arising out of tort; any deposit, savings, passbook or like account maintained with a bank, savings and loan association, credit union or like organization." ⁶

The official comment to this section states in paragraph 7:

"Rights under life insurance and other policies, and deposit accounts, are often put up as collateral. Such transactions are often quite special, do not fit easily under a general commercial statute and are adequately covered by existing law. Paragraphs (g) and (k) make appropriate exclusions."

The upshot is that the UCC does not apply to a pledge or transfer of a bank account, and thus the validity of such an arrangement is tested not by the UCC, but under the common law. This is the conclusion reached by courts which have passed on the question.

Walton v. Piqua State Bank, 204 Kan. 741, 754, 466 P.2d 316, 327 (1970), involved a purported pledge of funds in a passbook savings account. The court, after stating the statutory exceptions, acknowledged the inapplicability of the UCC:

"Hence, no provisions of the Uniform Commercial Code are applicable to the question presented, and we refer to our decisions and to the Restatement of the Law, Security, as they apply the common law."

The court in Wightman v. American National Bank of Riverton, 591 P.2d 903, 906 (Wyo.1979), discussed this question in more detail:

"A pledge is recognized by the Uniform Commercial Code (U.C.C.). However, the U.C.C. does not deal with the rights and obligations arising out of pledges. Common law principles are used to fill this gap. 68 Am.Jur.2d Secured Transactions § 49, pp. 875-876. While the U.C.C. recognizes pledges, it does not specifically deal with the rights and obligations arising out of them. Moreover, § 34-21-904(a)(xi) (the Wyoming version of UCC 9-104(k)) specifically excludes the pledge of a savings deposit. Thus we are obliged to peruse the law of pledges, in determining the matter before us. . . ." ⁷

See Miller v. Wells Fargo Bank International Corp., 540 F.2d 548, 557 n. 2, 561-63 (2d Cir. 1976); United States v. Sterling National Bank & Trust Co. of New York, 360 F.Supp. 917, 924 (S.D.N.Y.1973), modified on other grounds, 494 F.2d 919 (2d Cir. 1974); 1 P. Coogan, W. Hogan & D. Vagts, Secured Transactions under the Uniform Commercial Code § 5A.14 (Bender 1980).

In light of the foregoing authority, we exclude a consideration of the UCC from our inquiry and proceed to consider the common law of pledges.

In First National Bank of Parkersburg v. Harkness, 42 W.Va. 156, 24 S.E. 548 (1896), we defined a pledge in Syllabus Point 1:

"A pledge is a bailment of goods by a debtor to his creditor, to be kept by him until his debt is discharged."

We also discussed the distinction between a pledge and a mortgage:

"Jones, Pledges, § 1, says: 'Every contract by which the possession of personal property is transferred as security only is to be deemed a pledge. . . .' * * * The distinction between a pledge and a mortgage is stated in Jones, Chat.Mort. § 4, as follows: 'The chief distinction between a mortgage and a pledge is that by a mortgage the general title is transferred to the mortgagee, subject to be revested by the performance of the condition; while by a pledge the pledgor retains the general title himself, and parts with the possession for a special purpose.' And the same author in his work on Pledges (section 7) says: 'A pledge differs from a mortgage of personal property in being a lien upon property, and not a legal title to it. The legal title to the property pledged remains in the pledgor, while a mortgage passes the legal title of the property itself to the mortgagee, subject to be revested in the mortgagor upon the performance by him of an express condition subsequent.' . . ." (42 W.Va. at 165-66, 24 S.E. at 552).

In Bank of Mill Creek v. Elk Horn Coal Corp., 136 W.Va. 36, 40-41, 65 S.E.2d 892, 895 (1951), we reaffirmed the foregoing statements from Harkness in the context of a pledge of corporate stock, an intangible at common law.

Courts initially were troubled with the concept that a pledge of intangible property interests or choses in action could be obtained. The underlying concept of a pledge required physical possession by the creditor of the object pledged, ⁸ and hence the early reluctance by some courts to find physical possession of something "intangible." As recognized in Annot., 53 A.L.R.2d 1396 (1957), the problem has been resolved through the concept of the "indispensable instrument":

"Problems involved in the free transfer of intangible property interests have been substantially solved, as to a large class of such rights, by the introduction of the concept of negotiability, by virtue of which a document representing the right is vested with many of the characteristics of an actual chattel, and it seems to be settled that such a right may be pledged by delivery of the negotiable instrument which represents it. However, there remains a large class of intangibles which may in some sense be said to be represented by a commercial document which is not, however, negotiable, and the question is frequently presented whether such a right may be pledged by delivery of the document in question. This question may be answered simply, although not too helpfully, by saying that the courts generally recognize that if the document delivered does represent the right to the extent that it...