Freeborn, In re

• Decision Date: 25 September 1980
• Docket Number: 46465,Nos. 46464,s. 46464
• Citation: 617 P.2d 424,94 Wn.2d 336
• Court: Washington Supreme Court
• Parties: , 29 UCC Rep.Serv. 1625 In re William Albert FREEBORN, Jr., wwi Clara Jean Freeborn, and Clara Jean Freeborn, Individually, dba Queen Bee Fashions, Bankrupts. Warren L. ERICKSON, as Trustee in Bankruptcy of William Albert Freeborn, Jr., and Clara Jean Freeborn, his wife, dba Queen Bee Fashions, Plaintiff, v. SEATTLE TRUST & SAVINGS BANK, a National Trust and Savings Company; Small Business Administration, an agency of the United States; and John H. Cronkhite and Beryl J. Cronkhite, his wife, Defendants. In re HYAK SKIING CORPORATION, a Washington Corporation, Debtor. Aldo PATRICELLI and David O. Hamlin, Plaintiffs, v. Bruce T. THURSTON (Substituted) Defendant, and Walter H. Page, Trustee (Substituted) Additional Defendant.

Page 336

94 Wn.2d 336

617 P.2d 424, 29 UCC Rep.Serv. 1625

In re William Albert FREEBORN, Jr., wwi Clara Jean Freeborn,

and Clara Jean

Freeborn, Individually, dba Queen Bee Fashions, Bankrupts.

Warren L. ERICKSON, as Trustee in Bankruptcy of William

Albert Freeborn, Jr., and Clara Jean Freeborn, his wife, dba

Queen Bee Fashions, Plaintiff, v. SEATTLE TRUST & SAVINGS BANK, a National Trust and Savings

Company; Small Business Administration, an agency

of the United States; and John H.

Cronkhite and Beryl J.

Cronkhite, his wife,

Defendants.

In re HYAK SKIING CORPORATION, a Washington Corporation, Debtor.

Aldo PATRICELLI and David O. Hamlin, Plaintiffs, v. Bruce T. THURSTON (Substituted) Defendant, and Walter H. Page, Trustee (Substituted) Additional Defendant.

Nos. 46464, 46465.

Supreme Court of Washington, En Banc.

Sept. 25, 1980.

Nicolai, Sorrel & Binns, Orly J. Sorrel, Thomas H. Murphy & Associates, Mark S. Elgot, Seattle, for petitioner.

Devin, Hamlin, Erickson & Fay, David O. Hamlin, Harry B. Fay, III, Seattle, for respondent.

WRIGHT, Justice.

This matter is before the court upon certification from the United States District Court for the Western District of Washington upon the authority of 2.60.010-.030 and Rule of Appellate Procedure (RAP) 16.16. Two cases involving substantially identical questions ¹ have been consolidated. The primary question is whether an assignee of a vendor's right to receive payments in an executory contract for the sale of real property has priority over subsequent lien creditors (including a trustee in bankruptcy) if the assignment is recorded under RCW 65.08.070 but not filed under the Uniform Commercial Code (UCC), RCW 62A.9-101 et seq. In In re Freeborn (No. 46464), the question was actually certified from the federal court, while in In re Hyak Skiing Corporation (No. 46465), the exact wording of the question came from the parties' stipulation.

Freeborn stems from a loan by Seattle Trust and Savings Bank (Seattle Trust) to William and Clara Freeborn which was secured by an assignment of their vendors' interest in a real estate contract. The document of assignment, entitled "Deed and Seller's Assignment of Real Estate Contract," expressly (a) assigns the contract and (b) conveys the real estate. The face of the document includes a statement that the transfer is "for security purposes only". Although the assignment was recorded with the King County Auditor Seattle Trust did not file a financing statement with the Secretary of State pursuant to UCC article 9. ²

The Freeborns subsequently filed a petition in bankruptcy. Plaintiff Warren L. Erickson was appointed trustee. The bankruptcy court, Kenneth S. Treadwell, judge, granted the trustee's motion for summary judgment. He held that in Washington a vendor under a real estate contract has a right to receive contract payments, which is personal property, and a right to hold legal title to the real property until fully paid. He further held that the transfer for security of the right to receive payments was a transfer of personal property which must be perfected under UCC article 9. In the bankruptcy court's view, because the assignment was not perfected under the UCC the trustee had the right to collect contract payments and Seattle Trust had only general creditor status. We affirm the bankruptcy court.

In re Hyak Skiing Corporation arose from a loan by Marie L. Hillman to Hyak Skiing Corporation (Corporation) secured by an assignment of a vendor's interests in real estate contracts. The document of assignment is entitled, "Seller's Assignment of Contracts and Deed". However, the deed portion of the document is not completed or executed. Hillman recorded the assignment but did not file a financing statement pursuant to UCC article 9. The corporation subsequently applied for bankruptcy relief.

Aldo Patricelli and David O. Hamlin, respectively chairman of the creditors' committee and an unsecured creditor of debtor corporation, brought an action against Marie L. Hillman, a secured creditor, to invalidate or set aside her security and relegate her to general creditor status. Plaintiffs argued the security interest-the right to receive real estate contract payments-had not been properly perfected by filing a financing statement under the U.C.C.

The bankruptcy court judge, Sidney C. Volinn, deferred action on motions for summary judgment pending the decision of the district court in the appeal in Freeborn. When that case was certified, defendant Bruce T. Thurston ³ moved for certification in Hyak. The district court granted that motion. As far as can be ascertained from the record, there was not a formal certification. Nonetheless, because the parties agreed upon the form of question we shall treat it as if it has been formally certified.

Seattle Trust argues in its brief that any decision in this matter should only apply prospectively. This issue is not part of the certified question and, accordingly, will not be considered.

I.

Initially we must decide if the right to receive real estate contract payments is personal property. We hold that it is personal property.

Washington case law supports the conclusion that the right to receive contract payments under a contract for the sale of real property is personal property. In Cascade Security Bank v. Butler, 88 Wash.2d 777, 567 P.2d 631 (1977), we said at 782, 567 P.2d at 634: "Specifically we here hold that a real estate contract vendee's interest is 'real estate' within the meaning of the judgment lien statute." In Cascade we cited numerous Washington cases supporting the characterization of a vendee's interest as real property and a vendor's interest as personal property.

Several cases hold that the vendor's interest is personal property. Three cases so hold in the context of probate proceedings. In re Plasterer's Estate, 49 Wash.2d 339, 301 P.2d 539 (1956); In re Eilermann's Estate, 179 Wash. 15, 35 P.2d 763 (1934); In re Field's Estate, 141 Wash. 526, 252 P. 534 (1927). A recent case to the same effect is Meltzer v Wendell-West, 7 Wash.App. 90, 497 P.2d 1348 (1972), which holds that a husband can convey a vendor's interest in a real estate contract without the wife joining in the conveyance because that interest is personal property.

II.

The next issue is: Does UCC article 9 apply to the assignment of a vendor's right to real estate contract payments?

Defendants Thurston and Seattle Trust argue that the respective assignments are excluded from the UCC by two provisions-RCW 62A.9.-102(1) and RCW 62A.9-104(j). RCW 62A.9-102(1) reads in part:

Except as otherwise provided . . . in RCW 62A.9-104 on excluded transactions, this Article applies so far as concerns any personal property and fixtures within the jurisdiction of this state

(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper, accounts or contract rights . . .

RCW 62A.9-104(j) provides:

This Article does not apply

(j) except to the extent that provision is made for fixtures in RCW 62A.9-313, to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder; . . .

(Italics ours.) The essence of the argument of Seattle Trust and defendant Thurston is that the contract right is an interest in reality and thus is excluded by RCW 62A.9-102(1)(a) and 62A.9-104(j). However, because we hold that a vendor's right to receive real estate contract payments is personal property it is evident U.C.C. article 9 applies.

A bankruptcy court considering the same contention made by Seattle Trust and Thurston held, as we do, that the transfer of rights in the contract is a transfer of personalty. Hughes v. Russo (In re Equitable Development Corp.), 20 U.C.C. Reporting Service 1349 (S.D.Fla.1976). The Russo court stated at 1354: A right to contract proceeds is surely not an interest in land. No interest in land passes to a third party who obtains a right to collections on the contract as security for a loan obligation. Nor is the pledge of contracts an interest in land . . .

Thus, Article Nine is not applicable to execution of the subject contracts for the sale of land .... However, when the vendor pledges his contract rights to defendants, Article Nine applies to the security interest created therein.

See also, H. and Val. J. Rothschild, Inc. v. Northwestern Nat'l Bank of St. Paul, 309 Minn. 35, 242 N.W.2d 844, 19 U.C.C. Reporting Service 673 (1976) (assignment for security of contractor's rights to receive payments under construction contracts creates security interest in contract rights covered by UCC article 9).

Defendants Thurston and Seattle Trust next focus on RCW 62A.9-102(3) and Official Comment 4 to U.C.C. § 9-102. RCW 62A.9-102(3) reads:

The application of this Article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Article does not apply.

Official Comment 4 to U.C.C. § 9-102 reads:

An illustration of subsection (3) is as follows:

The owner of Blackacre borrows $10,000 from his neighbor, and secures his note by a mortgage on Blackacre. This Article is not applicable to the creation of the real estate mortgage. Nor is it applicable to a sale of the note by the mortgagee, even though the mortgage continues to secure the note. However, when the mortgagee pledges the note to secure his own obligation to X, this Article applies to the security interest thus created, which is a security interest in an instrument even though the instrument is secured by a real estate mortgage . . .

(Italics ours.)

Defendant Thurston acknowledges the applicability of the UCC to the pledge of a note to secure the mortgagee's own obligation to a third party but nonetheless argues the UCC is only "tangentially" involved because the...