Farm Credit Services of the Midlands, PCA v. First State Bank of Newcastle, Wyoming

• Decision Date: 14 January 1998
• Docket Number: No. 20094,20094
• Citation: 1998 SD 13,575 N.W.2d 250,35 UCCRep.Serv.2d 324
• Parties: 35 UCC Rep.Serv.2d 324, 1998 SD 13 FARM CREDIT SERVICES OF THE MIDLANDS, PCA, Plaintiff and Appellant, v. FIRST STATE BANK OF NEWCASTLE, WYOMING, Defendant and Appellee, and Kathleen Reynolds; and Rasmussen Motors, Defendants. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 250

575 N.W.2d 250

35 UCC Rep.Serv.2d 324, 1998 SD 13

FARM CREDIT SERVICES OF THE MIDLANDS, PCA, Plaintiff and Appellant, v. FIRST STATE BANK OF NEWCASTLE, WYOMING, Defendant and Appellee and Kathleen Reynolds; and Rasmussen Motors, Defendants.

No. 20094.

Supreme Court of South Dakota.

Considered on Briefs Jan. 14, 1998.

Decided Feb. 18, 1998.

Rehearing Denied March 30, 1998.

Brent A. Wilbur of May, Adam, Gerdes & Thompson, Pierre, for plaintiff and appellant.

Todd D. Hauge of Bakewell, Hauge & Vander Heide, Custer, for defendant and appellee.

SABERS, Justice

¶1Trial court granted summary judgment to defendant bank, ruling that its unperfected purchase money security interest took priority over plaintiff creditor's unperfected security interest. We affirm.

FACTS

¶2During the 1990's, Chance and Neteri Reynolds (hereinafter "Debtor") obtained various loans from Farm Credit Services of the Midlands (Farm Credit) and First State Bank of Newcastle, Wyoming (Bank). On March 21, 1995, Debtor executed a security agreement in favor of Bank. The agreement specifically describes two 1995 Dodge pickup trucks by their vehicle identification numbers. In return, Bank loaned Debtor the money for the purchase of the two trucks.

¶3Approximately two years earlier, Debtor executed a security agreement in Farm Credit's favor, giving Farm Credit a security interest in various collateral, including accounts, livestock, equipment, and certain titled motor vehicles. Although the 1995 Dodge trucks were not described in the agreement, it stated that Farm Credit's security interest would attach to after-acquired property. Neither Bank nor Farm Credit perfected their security interests in the trucks by noting their liens on the certificates of title.

¶4In March of 1996, Debtor defaulted on its loans with both Bank and Farm Credit. Farm Credit brought a declaratory action to determine the rights of the parties to various items of collateral. The two trucks were eventually sold at public auction by a receiver appointed by the trial court. This dispute centers upon the proper distribution of the proceeds of that sale. The trial court granted summary judgment to Bank and Farm Credit appeals.

¶5.STANDARD OF REVIEW

¶6This appeal requires us to examine the statutes governing secured transactions. Questions of statutory interpretation require de novo review. Maynard v. Heeren, 1997 SD 60, p 5, 563 N.W.2d 830, 833. Since there are no factual issues in this case, summary judgment will be affirmed if the trial court correctly decided the legal issue presented. Weiss v. Van Norman, 1997 SD 40, p 9, 562 N.W.2d 113, 115 (citations omitted).

¶7.WHETHER FARM CREDIT'S SECURITY INTEREST ATTACHED TO THESE TRUCKS.

¶8The parties concede that neither perfected their security interests in the trucks by placing a lien on the titles in accordance with SDCL 32-3-38. A lien on a motor vehicle is not valid against subsequent lien holders or claimants in the absence of a notation of the lien on the certificate of title. SDCL 32-3-41; ¹ see also SDCL 57A-9-302(3)(b) & (4):

(3) The filing of a financing statement otherwise required by this chapter is not necessary or effective to perfect a security interest in property subject to:

...

(b) a certificate of title statute of this state under the law of which indication of a security interest on the certificate of title is required as a condition of perfection; but during any period in which collateral is inventory held for sale by a person who is in the business of selling goods of that kind, the filing provisions of this chapter (Part 4) apply to a security interest in that collateral created by him as debtor. ²

...

(4) Compliance with a statute or treaty described in subsection (3) is equivalent to the filing of a financing statement under this chapter, and a security interest in property subject to the statute or treaty can be perfected only by compliance therewith[.]

(Emphasis added); accord Pokela v. Dakotas United Methodist Fed. Credit Union (In re Huyck), 167 B.R. 908, 910 (Bankr.D.S.D.1994).

¶9Article 9 of the Uniform Commercial Code, codified at SDCL ch. 57A-9, governs secured transactions. See SDCL 57A-9-302(4) ("Duration and renewal of perfection of a security interest perfected by compliance with the statute or treaty are governed by the provisions of the statute or treaty; in other respects the security interest is subject to this chapter.") (emphasis added).

¶10Since both security interests are unperfected, "the first to attach has priority." SDCL 57A-9-312(5)(b). ³ Both parties claim that their security interests in the trucks "attached" simultaneously and argue equitable principles to enforce their respective interests. ⁴ We disagree, and affirm because we conclude that Farm Credit's security interest never attached to the trucks.

The requirements for attachment are provided in SDCL 57A-9-203:

(1) ... a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless:

(a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral ...; and

(b) Value has been given; and

(c) The debtor has rights in the collateral.

(2) A security interest attaches when it becomes enforceable against the debtor with respect to the collateral. Attachment occurs as soon as all of the events specified in subsection (1) have taken place unless explicit agreement postpones the time of attaching.

¶11Under subdivision (1)(a), the requirement that the collateral be "in the possession of the secured party pursuant to agreement" is strictly construed, i.e., "possession" must be actual. See, e.g., Warsco v. Schaller Trucking Corp. (In re R. & L. Cartage & Sons, Inc.), 118 B.R. 646, 649 (Bankr.N.D.Ind.1990) ("[U]nless the secured party is in possession of the collateral, in the absence of a written security agreement [describing the collateral] there is no security interest that is capable of being enforced against anyone."); Clarkson Co. Ltd. v. Shaheen, 533 F.Supp. 905, 917-18 (S.D.N.Y.1982) ("[P]ossession must be such as to prevent the debtor from having control of or access to the res of the pledge."). Here, since neither creditor had possession of the trucks, this portion of SDCL 57A-9-203(1)(a) does not apply.

¶12The alternative portion of subdivision (1)(a) requires "a security agreement which contains a description of the collateral" signed by the debtor. Bank's security agreement describes the trucks and includes their vehicle identification numbers, satisfying this section. The question is whether Farm Credit's after-acquired property clause describes the trucks.

¶13Farm Credit's security agreement describes certain titled vehicles other than the 1995 Dodge trucks. It provides that the security interest would include

... all increases, additions, accessions thereto and substitutions therefor now owned or hereafter acquired, or held on consignment, including all proceeds and products thereof[.]

We agree with the conclusion reached in Long Island Trust Co. v. Porta Aluminum Corp., 44 A.D.2d 118, 354 N.Y.S.2d 134, 142 (1974):

We do not interpret the general language in the after-acquired property clause of the security agreement to cover vehicles other than those therein specifically enumerated, unless they were given and accepted in replacement of specified vehicles.

The purchase orders for the two 1995 Dodge trucks indicate two trade-in vehicles--two 1995 Ford pickup trucks. The Fords are not listed in Farm Credit's security agreement; therefore, the Dodge trucks were not replacement vehicles for any of the vehicles in which Farm Credit had a security interest. Absent a writing specifically describing the collateral, Farm Credit's nonpossessory security interest never attached to the Dodge trucks under SDCL 57A-9-203(1)(a).

¶14Since Farm Credit cannot establish a sufficient writing under the statute it is unnecessary to analyze whether it met the provisions of subdivisions (b) and (c). ⁵ Bank's security interest meets all the conditions for attachment required under SDCL 57A-9-203(1): (a) Its security agreement, signed by Debtor, contains a description of the collateral; (b) Bank gave "value" by advancing the purchase price for the trucks; and (c) Debtor had rights in the collateral. Accordingly, Bank is entitled to the proceeds of the sale of the trucks. SDCL 57A-9-203(3).

¶15The order...