Ellefson v. Centech Corp.

• Decision Date: 16 February 2000
• Docket Number: No. 98-528.,98-528.
• Parties: Dixie L. ELLEFSON, Appellant, v. CENTECH CORPORATION, A Minnesota Corporation d/b/a North Iowa Electronics, Defendant, and Winnebago Industries, Inc., Appellee.
• Court: Iowa Supreme Court

606 N.W.2d 324

Dixie L. ELLEFSON, Appellant, v. CENTECH CORPORATION, A Minnesota Corporation d/b/a North Iowa Electronics, Defendant, and Winnebago Industries, Inc., Appellee.

No. 98-528.

Supreme Court of Iowa.

February 16, 2000.

Randall E. Nielsen of Pappajohn, Shriver, Eide & Nicholas, P.C., Mason City, for appellant.

Scott D. Brown of Brown, Kinsey & Funkhouser, P.L.C., Mason City, for appellee.

Considered by LARSON, P.J., and LAVORATO, SNELL, TERNUS, and CADY, JJ.

LAVORATO, Justice.

The plaintiff, Dixie L. Ellefson, appeals from a district court ruling that authorized a bank-garnishee to release her garnishment of two bank account funds belonging to Centech Corporation. Winnebago, an intervenor in these proceedings, was an assignee of a security agreement that covered the collateral from which the funds were derived. Winnebago was also the assignee of what was purported to be a pledge that allegedly gave the assignor a lien on the funds in the bank accounts. By virtue of the security agreement and purported pledge, Winnebago claimed it had a right to the funds that was superior to Ellefson's garnishment claim. Ellefson contends the district court erred in rejecting her contention that any security interest in the funds was (1) waived or (2) at least limited by Iowa Code section 554.9306(4)(d)(ii) (1995). We disagree and affirm.

I. Background Facts and Proceedings.

Centech Corporation was a Minnesota corporation doing business in Iowa. Centech, a closely held corporation, engineered and manufactured a wide range of products from pregnancy detectors for pigs to computer equipment.

On February 25, 1994, Republic Acceptance Corporation extended credit to Centech according to the terms of an accounts receivable financing agreement. This indebtedness was secured by a security agreement dated February 25, 1994 (Security Agreement). The Security Agreement granted Republic a security interest in all of Centech's then-existing as well as future accounts, contract rights, other rights to payment, inventory, equipment, general intangibles, and "proceeds of any and all of the foregoing property." Republic perfected its security interest in the collateral by filing financing statements with the Iowa Secretary of State.

Centech purchased assets of North Iowa Electronics from Winnebago Industries, Inc. and thereafter began operating in Garner, Iowa, under the trade name North Iowa Electronics. Republic eventually financed this purchase, and Winnebago guaranteed Centech's debt to Republic.

In 1996, Centech was experiencing severe financial difficulties. These financial difficulties prompted a forbearance agreement in September 1996 (Forbearance Agreement) between Centech and Republic. In this agreement, Centech acknowledged (1) it owed Republic $4,674,628, (2) it was in default, and (3) Republic was entitled to foreclose on the collateral secured by the Security Agreement. Republic agreed to forebear from exercising its rights and remedies under certain conditions to allow Centech to continue its operations while seeking a buyer for its business. One of the conditions prohibited Centech from selling collateral without Republic's prior approval other than in the ordinary course of business.

The Forbearance Agreement was contingent on (1) Centech depositing all of its funds into an account at Clear Lake Bank & Trust in Garner and pledging that account to Republic, (2) Centech executing a repossession and occupancy agreement, and (3) Winnebago loaning Centech $125,000 for operating expenses.

Pursuant to the Forbearance Agreement, Centech deposited its funds into two bank accounts at the Clear Lake Bank. Centech thereafter executed an assignment of accounts agreement (Assignment of Accounts Agreement) on September 11, 1996. In the Assignment of Accounts Agreement, Centech stated that for value received it assigned, pledged and granted a security interest to Republic in Centech's right, title and interest in the two bank accounts. The Assignment of Accounts Agreement stated it was to secure Centech's debt to Republic under the Security Agreement.

The Assignment of Accounts Agreement prohibited Centech from transferring any monies from the two accounts without prior written consent from Republic. The Agreement expressly provided, however, that this restriction

shall not be construed . . . to restrict [Centech's] right to transfer funds in accordance with the Security Agreement. . . or to withdraw any funds from the Operating Account in the ordinary course of business prior to demand being made by [Republic] for payment.

The Agreement also provided that

[u]nder no circumstances shall the Depository be required to determine whether any conditions of payment or delivery to [Republic] or any restrictions on transfer or withdrawal of funds by [Centech] have been satisfied or whether the funds paid or property delivered in accordance with any ... direction have been properly applied by the Depository...

Additionally, the Assignment of Accounts Agreement provided that (1) the obligations under it were part of the obligations of the Security Agreement and (2) the two bank accounts were part of the collateral mentioned in the Security Agreement.

At the same time that the Assignment of Accounts Agreement was signed, Centech and Republic executed a repossession and occupancy agreement (R. & O. Agreement). Under this last agreement, Centech agreed to deliver to Republic possession of all of the collateral covered by the Security Agreement and the Assignment of Accounts Agreement on October 10, 1996 (Republic later extended this date to January 10, 1997) or upon Centech's earlier default of the Forbearance Agreement.

Republic thereafter notified the Clear Lake Bank & Trust of the assignment of the two bank accounts, and the bank acknowledged acceptance of the terms of the Assignment of Accounts Agreement. Later in September 1996, Winnebago made the $125,000 loan to Centech.

On January 27, 1997, Ellefson obtained a default judgment against Centech for $167,306.25 for claims brought under the federal Americans with Disabilities Act and similar Iowa employment discrimination statutes. Ellefson obtained the judgment in the United States District Court for the Northern District of Iowa. At Republic's direction, Centech made no defense of the action.

Because Centech did not pay its debt to Republic by the due date under the Forbearance Agreement, Republic sold the North Iowa Electronics assets to Midwestern Electronics pursuant to an agreement for the sale of collateral dated January 27, 1997. This sale was done in accordance with the R. & O. Agreement and apparently with Winnebago's consent.

On February 6 Republic assigned to Winnebago all its right, title, and interest in the Security Agreement, the Forbearance Agreement, and the Assignment of Accounts Agreement as well as various financing statements filed with the Iowa Secretary of State, which perfected Republic's security interest. Ellefson does not contend that this assignment to Winnebago was ineffective to transfer all of Republic's interests under these agreements to Winnebago. By the assignment, Republic sold to Winnebago the debt Centech owed to Republic. The assignment released Winnebago from its prior guarantee of Centech's indebtedness to Republic and entitled Winnebago to receive all payments on that indebtedness from Centech.

Meanwhile, on February 18, 1997, Ellefson's default judgment was transferred to the Iowa District Court for Cerro Gordo County, and an execution of judgment issued on March 20, 1997. On March 25 the Cerro Gordo County Sheriff served notice of garnishment on the Clear Lake Bank & Trust. The notice requested garnishment of any and all bank accounts owned by Centech.

In its answers to the garnishment interrogatories, the bank acknowledged it had a total of $123,615.36 in Centech's two accounts. The bank asserted that, before the service of the garnishment notice, Centech had assigned all its right, title, and interest in the two accounts to Republic and that thereafter Republic had assigned all of its right, title, and interest in these accounts to Winnebago. The bank further asserted that Republic and Winnebago "claim a first lien position on both accounts and that the security has been perfected by filings with the Iowa Secretary of State under the provisions of the Iowa Commercial Code."

On May 28 Winnebago filed a petition for intervention, asserting a superior lien to the two bank accounts. More specifically, Winnebago alleged that as assignee of the Security Agreement it acquired a security interest in all of Centech's accounts, inventory, equipment, and general intangibles and that the security interest had been perfected by proper filings with the secretary of state. Winnebago further alleged that, as assignee of the Assignment of Accounts Agreement, it acquired all of Centech's right, title, and interest in the two bank accounts, and for that reason, it had a prior claim to the funds held by the bank. Winnebago asked the district court to order release of the funds to Winnebago.

In its ruling, the district court stated that Ellefson claimed entitlement to either all, or a portion, of the two bank account funds under two separate theories. First, Winnebago's security interest in the funds was waived by provisions in the Assignment of Accounts Agreement and by expenditures Republic allowed Centech to make from the two bank accounts. Second, Winnebago's security interest in the two bank account funds was limited by Iowa Code section 554.9306(4)(d)(ii) (limiting scope of security interest once insolvency proceedings are instituted) because the sale of Centech's assets constituted "insolvency proceedings."

The district court ruled against Ellefson on both theories. The court concluded that Winnebago's security interest in the two bank accounts was superior to Ellefson's garnishment claim and authorized the bank to release...