First Nat. Bank of Steeleville, N.A. v. Erb Equipment Co., Inc.

• Decision Date: 05 March 1996
• Docket Number: No. 68042,68042
• Citation: First Nat. Bank of Steeleville, N.A. v. Erb Equipment Co., Inc., 921 S.W.2d 57, 32 U.C.C. Rep. Serv.2d 582 (Mo. App. 1996)
• Parties: 32 UCC Rep.Serv.2d 582 FIRST NATIONAL BANK OF STEELEVILLE, N.A., Plaintiff-Respondent/Cross-Appellant, v. ERB EQUIPMENT COMPANY, INC., Defendant-Appellant/Cross-Respondent.
• Court: Missouri Court of Appeals

Page 57

921 S.W.2d 57

32 UCC Rep.Serv.2d 582

FIRST NATIONAL BANK OF STEELEVILLE, N.A. Plaintiff-Respondent/Cross-Appellant, v. ERB EQUIPMENT COMPANY, INC., Defendant-Appellant/Cross-Respondent.

No. 68042.

Missouri Court of Appeals,

Eastern District,

Division Three.

March 5, 1996.

Motion for Rehearing and/or Transfer to

Supreme Court Denied April 24, 1996.

Application to Transfer Denied

May 28, 1996.

Paul M. Brown, Bruce D. Ryder, Neal C. Stout, Coburn & Croft, St. Louis, for appellant.

Craig A. Smith, Robert J. Selsor, Nicole M. Chaput, Suelthaus & Walsh, P.C., St. Louis, for respondent.

SMITH, Presiding Judge.

Plaintiff, First National Bank of Steeleville, brought this action to recover the proceeds of sales of John Deere machinery by defendant, Erb Equipment Company. Erb had repossessed the machinery from AmEarth Corporation, a debtor of both plaintiff and defendant. Defendant, by counterclaim, sought a declaration that it held purchase money lienor status as to the machinery seized and was entitled to equitable subrogation. The court entered a Summary Judgment in plaintiff's favor for $437,500, denied defendant's affirmative defenses and counterclaim, and granted defendant's motion for summary judgment on plaintiff's claim for prejudgment interest and punitive damages. Both parties appeal. We affirm in part and reverse in part.

The plaintiff bank has its principal place of business in Steeleville, Illinois. Defendant is a Missouri corporation with its principal place of business in Fenton, Missouri. It is engaged in the business of selling, leasing, and servicing John Deere industrial machinery. AmEarth Corporation is an Illinois corporation engaged in the business of mining and excavation. In the late 1970's and early 1980's the Bank loaned operating funds to Jones Excavating Company and its principal, Harry Jones. The Bank acquired blanket security interests in excavating machinery as security for those loans. In May 1985, the Bank loaned funds to Avery Wheatley, which were also secured by excavating machinery. On March 26, 1985, Jones and Wheatley incorporated AmEarth. The Bank loaned $71,000 to AmEarth which was personally guaranteed by Jones and Wheatley.

In 1987, AmEarth decided to purchase excavating machinery from Jones and Wheatley. In July, the Bank loaned AmEarth $450,000 on a promissory note secured by a blanket security agreement. The agreement gave the Bank an interest in all of AmEarth's equipment of every kind and description, "whether now or hereafter owned, existing, or acquired". The agreement stated that it was to be governed by the Illinois Uniform Commercial Code. The Bank had filed a financing statement with the Illinois Secretary of State on December 11, 1985, thereby perfecting its interest. After execution of the security agreement the Bank extended further loans to AmEarth, $157,259 on August 1, 1987, and $50,000 on April 5, 1988. By August 1987, the Bank had filed financing statements with both the Missouri Secretary of State and the Vernon County, Missouri, recorder of deeds. AmEarth was conducting mining operations in Vernon County.

On July 10, 1987, AmEarth purchased from defendant a used John Deere 644C Wheel Loader for $82,500, $22,500 of which was covered by a trade-in of other machinery. AmEarth also bought a John Deere 850B Dozer for $122,882, $32,000 of which was covered by trade-in. Although the machinery traded in was covered by the Bank's blanket security agreement, it did not assert its interest because it hoped the new equipment would help AmEarth succeed or at least increase the value of the mining operation if it had to be sold.

To cover the balance due to defendant, AmEarth executed a security agreement on July 10, 1987, giving Erb an interest in the two pieces of machinery. The agreement provided that Erb would assign the note and security to the Associates Commercial Corporation, with that corporation having a right of recourse against Erb. On August 17, 1987, AmEarth began leasing an 862 Prime Mover, an 844 Wheel Loader, and a 792 Excavator from Erb.

In 1988, AmEarth began experiencing financial problems. The company closed its Randolph County, Illinois office and relocated its principal place of business to Vernon County, Missouri. Because AmEarth had fallen in arrears in its payments to Associates that company exercised its right of recourse against Erb which paid the July 10, 1987 note's unpaid balance to Associates. Associates, without Erb's knowledge marked the agreement "paid" and forwarded it to AmEarth.

In December 1988, AmEarth and Erb began negotiations to convert AmEarth's leases of John Deere equipment into purchases and to refinance past-due non-purchase money charges that AmEarth owed Erb. The "global" financing plan was executed by Erb and AmEarth and dated December 27, 1988. Erb contends that the document was actually executed in mid-January 1989 and that it filed its financing statement on February 2, 1989. The date of execution is of no importance on this appeal.

The agreement refinanced the balance due to Erb for its payment to Associates on AmEarth's 1987 purchase of John Deere equipment. It also provided that AmEarth would purchase the Prime Mover, Wheel Loader, and Excavator for $218,645, $87,000, and $163,000 respectively. As a trade-in Erb received from AmEarth two pieces of machinery with a value of $215,000 and $15,000 rental credit on the Excavator.

The agreement consolidated (1) the purchase money debt for the three pieces of machinery which had been converted from lease to purchase, (2) the outstanding debt of $304,303.52 on the note which Associates assigned to Erb under its right of recourse (covering the Crawler Loader and Wheel Loader purchased from Erb in 1987) and (3) additional obligations which AmEarth owed to Erb in the amount of $77,947.25. The agreement provided that it was to be governed by Illinois law. The effect of the agreement was to bring together in one security document debt which was clearly purchase money debt (1), debt which was clearly not purchase money debt (3), and debt about which the parties are in disagreement as to its purchase money status (2).

AmEarth made one payment of $6230.27 on the Erb agreement and in 1989 ceased mining operations. On June 29, 1989 Erb repossessed AmEarth's machinery and the next day the Bank sent written demand that Erb return the machinery to AmEarth. Although the Bank's loans to AmEarth were in default and it claimed a security interest in the machinery senior and superior to Erb's interest it took no action to foreclose on AmEarth's machinery prior to Erb's sale of the collateral securing Erb's agreement with AmEarth. The Bank further made no demand on Erb to turn the machinery over to the Bank. Its only request was that the machinery be returned to AmEarth. Two days before the public sale by Erb of four pieces of the machinery the Bank wrote Erb that "all proceeds from the auction should be paid to First National Bank".

Erb conducted a private sale of the Wheel Loader which it bought for $57,500. The other four pieces of machinery were sold at a public auction to Erb on September 7, 1989. The total public sale proceeds from the machinery was $371,500, which along with the private sale proceeds, were applied against AmEarth's debt leaving an unpaid debt from AmEarth to Erb of $200,000.

In October 1989, the Bank brought suit against Erb to recover the proceeds of the two sales of John Deere machinery. Erb filed a counterclaim alleging tortious interference with Erb's rights of contract with AmEarth and raising a claim for equitable subrogation to the rights of Associates. The trial court entered its findings of fact and conclusions of law granting Bank's motion for summary judgment and denying Erb's motion for summary judgment on its counterclaim. The court found that by the December 27 agreement Erb had transformed and extinguished any purchase money security status in the five items of AmEarth machinery. It further found that Illinois law applied as to the Bank's rights to the sales proceeds and found Erb to have become a purchaser rather than a secured creditor when it purchased the machinery for itself at the foreclosure sales. Therefore, because Erb took the machinery subject to the bank's prior security interest the court found Erb to be liable for conversion due to its retaining the machinery after the sales. The court granted Erb's motion for summary judgment on Bank's claim for prejudgment interest and punitive damages. Both parties appeal.

The key issue which must be resolved is which party had the superior lien as to the five items of machinery. That issue is determined in turn by whether Erb had a purchase-money lien on all or some of the items of machinery and that status is determined by the legal effect of the December 27 agreement between Erb and AmEarth.

The Uniform Commercial Code (UCC), which has been adopted in this state, provides the rules to be applied in determining the priority of conflicting security interests. The primary rule is that "Conflicting security interests rank according to priority in time of filing or perfection." § 400.9-312(5)(a). ¹ The Bank's blanket security instrument was prior in time of filing and perfection to Erb's December 27 agreement and if the first in time rule applies the Bank's lien is superior. There is an exception created for purchase money security interests. That exception is set out in § 400.9-312(1) through (4) depending on the nature of the item involved. The machinery involved here was operating equipment, not inventory. Therefore it is covered by § 400.9-312(4). § 400.9-107 contains the definition of purchase money security interest:

Definition--"purchase money security interest".-- A security interest is a "purchase money security interest" to the extent that it is

(a) taken or retained by the seller of the collateral to secure all or part of its price; or

(b) taken by a person...