Farnum v. C. J. Merrill, Inc.

• Decision Date: 08 April 1970
• Citation: 264 A.2d 150
• Parties: 7 UCC Rep.Serv. 625 Francis H. FARNUM, Jr. v. C. J. MERRILL, INC.
• Court: Maine Supreme Court

Page 150

264 A.2d 150

7 UCC Rep.Serv. 625

Francis H. FARNUM, Jr. v. C. J. MERRILL, INC.

Supreme Judicial Court of Maine.

April 8, 1970.

John J. Flaherty and David M. Cohen, Portland, for receiver Harry A. marcus.

William B. Mahoney, David M. Fisher, Jr., and M. Roberts Hunt, Portland, for Maine Nat. Bank.

Merton G. Henry and George J. Mitchell, Portland, for defendant.

Before WILLIAMSON, C. J., and WEBBER, MARDEN, DUFRESNE, and WEATHERBEE, JJ.

MARDEN, Justice.

On appeal. This controversy arises out of the Receivership of C. J. Merrill, Inc. (Merrill), and conflicting claims under the provisions of our Maine Uniform Commercial Code (Code) 11 M.R.S.A. and specifically Section 9, Secured Transactions, by a financing Bank and the Receiver to certain assets of the company. The trial court ruled in favor of the Bank, and permitted Receiver to appeal. Reference to the Code will appear by Section number only except as to 9-306, and 9-301, which are quoted for convenience. Other pertinent provisions of Code also conform to the official text.

Pertinent facts are summarized as follows:

Keyes Fibre Company (Keyes) by purchase order dated February 10, 1966 authorized Merrill to custom-build at Portland, Maine, for delivery to Fairfield, Maine, a dryer with a contract price of $240,163.00, the payment for which was to be made eleven months after delivery.

Keyes was aware on or about February 21, 1966 that Merrill was to finance the construction of the dryer by loans from First National Bank of Portland (Bank), that Merrill proposed to assign the purchase order to Bank as collateral for advances and Keyes and Merrill agreed that the payment for the dryer would be made to Merrill and Bank as joint payees.

Over date of February 28, 1966 four instruments were executed between Merrill and Bank.

a) Assignment by Merrill to Bank of rights under the purchase order from Keyes.

It is stipulated that the contract right specified in the assignment was then a significant part of the outstanding accounts or contract rights of Merrill. (9-302(1)(d)(e)).

b) Security agreement covering the dryer with specificity, identifying it as the subject of the Keyes-Merrill purchase order.

This was upon a printed form purporting to comply with the Code in terms of 'Equipment and Consumer Goods' as collateral. The dryer does not fall within the Code definition of equipment (9-109(2)), or consumer goods (9-109(1)), but no point is made of this aberration. Inasmuch as the place of filing is the same for equipment and inventory (9-401(1)(d)), ¹ into which latter category the dryer falls (9-109(4)), no prejudice results. It also provided, inter alia, (additional provisions (3)) that the debtor (Merril) should 'not transfer any interest in the Collateral' and upon sale of any of the Collateral or appointment of a receiver (5) Bank might declare all obligations due and 'shall then have the remedies of a secured party under the Maine Uniform Commercial Code.'

c) Financing statement on approved form (U.C.C. 1) describing the dryer as in the security agreement.

This statement was filed (recorded) with the Secretary of State on March 2, 1966 (9-401(1)(d)), and by appropriate entry thereon indicated that 'proceeds of collateral are also covered.'

d) Demand note by Merril to Bank for $55,000.00 representing Bank's first advance to Merrill and listing as collateral security the dryer (as described in the Keyes purchase order, the security agreement and the financing statement), the purchase order Keyes to Merrill, and the assignment Merrill to Bank, which last two instruments were deposited with Bank.

A second note dated May 16, 1966 bore the same entry as to collateral and nine subsequent notes incorporated the recitation of collateral by reference.

The dryer was fabricated by Merrill and delivered to Keyes on November 30, 1966. Payment for it became due October 30, 1967.

It is conceded that Keyes was not a buyer in the ordinary course of business within the Code (1-201(9)).

Merrill was the subject of 'insolvency proceedings' (1-201(22)) and Receiver was appointed September 8, 1967.

It is stipulated that at least one of the creditors of Merrill had no knowledge of the alleged security interest of the Bank, by reason of which Receiver is a 'lien creditor' within the Code (9-301(3)).

Seasonably thereafter and before October 30, 1967 Bank and Receiver each made demand on Keyes that payment for the dryer be made to demandant. Keyes has paid neither one, and awaits adjudication of the dispute.

By reason of these conflicting interests an order was issued by the single Justice who had entertained the Receivership, requiring the Bank to establish the validity of its alleged security interest. The issue was submitted by stipulations and exhibits perpared by the Receiver and Bank jointly, upon which the Court ruled that the Bank was entitled to the proceeds from the dryer, and Receiver was permitted to appeal.

An issue as to the validity of this appeal was raised before the single Justice, but this issue is not briefed and is considered waived.

The ultimate issue is whether there was error in the ruling that the Bank as against the Receiver has a perfected security interest in the money representing the purchase price of the dryer.

Our consideration begins with the concession by Receiver in his brief that while the dryer was in the possession of Merrill, Bank had a perfected security interest in the machine and its proceeds. It is obvious that the dryer was manufactured for sale and delivery to Keyes, as to which all parties were aware. Keyes took the dryer free of Bank's security interest, not as a buyer in the ordinary course of business under 9-307(1) but by reason of the sale to it by Merrill being authorized by Bank under 9-306(2). This fact creates the competition for the unpaid purchase price.

The basic facts place Bank with a perfected (agreed) purchase money security interest (9-107(2)) in tangible collateral (9-105(1)(c)) (dryer) of the inventory category (9-109(4)) with a declaration in the financing statement that 'proceeds of collateral are also covered.' This leads us to 9-306 which provides:

'(1) 'Proceeds' include whatever is received when collateral or proceeds is sold, * * *. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are 'cash proceeds.' All other proceeds are 'noncash proceeds.'

'(2) Except where this Article otherwise provides, a security interest continues * * * in any identifiable proceeds including collections received by the debtor.

'(3) The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected 10 days after receipt of the proceeds by the debtor, unless

(a) A filed financing statement covering the original collateral also covers proceeds; * * *

'(4) In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest

(a) In identifiable noncash proceeds;

(b) In identifiable cash proceeds in the form of money which is not commingled with other money or deposited in a bank account prior to the insolvency proceedings;

(c) In identifiable cash proceeds in the form of checks and the like which are not deposited in a bank account prior to the insolvency proceedings; * * *.

Receiver enters the controversy subject to 9-301 which states:

'(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of

(b) A person who becomes a lien creditor without knowledge of the security interest and before it is perfected;

* * *.'

The stipulation recorded above, that not all of Merrill's creditors had knowledge of Bank's security interest, qualifies Receiver as a 'lien creditor,' by definition, under 9-301(3) with priority over an unperfected security interest.

This narrows the issue into whether the Bank's perfected security interest in the proceeds from the sale of the dryer, covers the unpaid purchase price.

Receiver urges first that the Bank has no claim to 'proceeds' for there were no 'proceeds' received by Merrill prior to the receivership, which he contends, is a prerequisite under 9-306(1).

The Receiver urges secondly that at the time of the appointment of the Receiver, Merrill had an account receivable against Keyes, but that this account receivable was not proceeds from the collateral (dryer) but proceeds from a contract right, in which Bank had not perfected any security interest. Receiver urges that for Bank to have acquired a security interest in the contract right against Keyes, it should have filed a financing statement with respect to it.

The stipulation recited earlier in this opinion that the assignment 'transferred a significant part of the outstanding accounts or contract rights of Merrill' did not exclude the contract right from that class of collateral as to which a filed financial statement was necessary if a creditor desired to perfect a security interest in it (9-302(1)(d)(e)), as such,-which, we add, is to be distinguished from derivative perfection of a security interest in the contract right as 'proceeds.'

These contentions point up one of the many problems under Section 9 which are stated but not solved definitively by treatise ² and only to a limited extent by judicial decision. See Annot. 30 A.L.R.2d 9.

Upon the premises established, the question becomes one of determining what the proceeds from the dryer are. The first sentence of 9-306 defines 'proceeds' as including 'whatever is received when collateral or proceeds is sold.' (Emphasis added.) Receiver does not question that an account receivable arose in favor of Merrill upon delivery of the dryer, but insists that this receivable was not proceeds from the dryer...