Hampton Bank v. River City Yachts, Inc.

• Decision Date: 28 February 1995
• Docket Number: No. C5-94-1350,C5-94-1350
• Citation: 528 N.W.2d 880
• Parties: 26 UCC Rep.Serv.2d 243 HAMPTON BANK, Claimant and Third Party Plaintiff, Appellant, v. RIVER CITY YACHTS, INC., Respondent, Robert M. Dorschner, Lower Court Respondent, Mary C. DORSCHNER, Respondent, v. Nicholas HATTEN, et al., Third Party Defendants, Respondents, and Roger Pralle, et al., Third Party Defendants, Respondents.
• Court: Minnesota Court of Appeals

Page 880

528 N.W.2d 880

26 UCC Rep.Serv.2d 243

HAMPTON BANK, Claimant and Third Party Plaintiff, Appellant, v. RIVER CITY YACHTS, INC., Respondent, Robert M. Dorschner, Lower Court Respondent, Mary C. DORSCHNER, Respondent, v. Nicholas HATTEN, et al., Third Party Defendants, Respondents, and Roger Pralle, et al., Third Party Defendants, Respondents.

No. C5-94-1350.

Court of Appeals of Minnesota.

Feb. 28, 1995.

Review Denied April 27, 1995.

Syllabus by the Court

1. Minnesota's Watercraft Titling Act does not prevent the purchaser of a watercraft from taking free of a prior security interest as a buyer in ordinary course of business under Minn.Stat. § 336.9-307(1), even though the purchaser holds neither a certificate of title nor the manufacturer's statement of origin for the watercraft.

2. A party who survives pretrial dispositive motions is not subject to an award of bad faith attorney fees under Minn.Stat. § 549.21.

Douglas G. Peine, St. Paul, Loren M. Solfest, Larry S. Severson, Severson, Wilcox & Sheldon, P.A., Apple Valley, for appellant Hampton Bank.

T. Chris Stewart, Dunkley, Bennett & Christenson, Minneapolis, for respondent River City Yachts, Inc.

George L. May, Hastings, for respondents Nicholas Hatten, et al.

George E. Dow, Jr., Nelson, Casey, Tripp & Dow, P.A., Owatonna, for respondents Roger Pralle, et al.

Considered and decided by HARTEN, P.J., and PARKER and MANSUR, ^* JJ.

OPINION

HARTEN, Judge.

Bank appeals an adverse judgment in the bank's replevin action against respondent purchasers of a yacht, wherein the bank's security interest in the yacht was defeated and respondents were awarded damages on their counterclaims for conversion and breach of contract. The bank also appeals awards of attorney fees to respondents. One set of respondents, by notice of review, challenges the amount of damages and attorney fees awarded. We affirm as modified in part and reverse in part.

FACTS

River City Yachts, Inc. (RCY) was a boat dealership owned in equal shares by Robert Dorschner and Mary Dorschner, who also served as RCY's president and vice-president. In August 1991, RCY arranged for Hampton Bank (the Bank) to provide "floor-plan" financing for RCY. In return, RCY signed a security agreement granting the Bank a security interest in RCY's present and future assets, including inventory. The Bank perfected its security interest by filing a financing statement with the secretary of state. Under this arrangement, the Bank would loan RCY money to purchase an individual boat. When RCY sold the boat, the proceeds of the sale would be used to satisfy the loan. The Bank would then release the Manufacturer's Statement of Origin (MSO) for the boat.

In November 1992, the Bank loaned RCY $84,126.20 for the purchase of a 1993 model 47-foot Gibson Cabin Yacht (the yacht) and took possession of the yacht's MSO. On December 22, 1992, respondents Nicholas and Avis Hatten agreed to purchase the yacht for $147,700. The Hattens traded in a 36-foot Carver boat, forgave a prior indebtedness of Robert Dorschner in the amount of $10,000, and remitted a check to RCY for $28,000, plus $1,820 sales tax. The Hattens stored the yacht with RCY. Apparently unaware of this sale, the Bank continued to hold the yacht's MSO. In February 1993, the Hattens instructed RCY and Robert Dorschner to sell the yacht. The trial testimony of Dorschner and the Hattens differed as to whether the Bank or the Hattens were to receive the proceeds from this second sale.

In the spring of 1993, the Bank discovered that RCY had breached the security agreement; the Bank commenced a replevin action, claiming that RCY was indebted to it in the amount of $319,374.12. On April 23, 1993, the trial court issued a replevin order granting the Bank possession and control of RCY's inventory, equipment, and receivables, and control of the RCY premises. RCY was to continue to run the business, with Robert Dorschner acting as the Bank's representative in selling the inventory. A list of RCY's assets subsequently compiled by the Bank and RCY included the yacht. On June 3, 1993, the replevin order was extended. By March 1, 1994, RCY and the Dorschners owed the Bank $91,744.04 plus certain expenses; only $10,387 remained owing on the yacht.

On June 11, 1993, respondents Roger and Kay Pralle agreed with RCY to purchase the yacht for $108,000. For consideration, the Pralles traded in a boat and paid $68,000, plus $4,420 sales tax. A week later, the Pralles put the yacht in the water, and on July 17, 1993, they sailed it to Wisconsin. The Pralles have since remained in possession of the yacht. The Hattens did not receive the proceeds from the Pralle sale. The Bank continued to hold the yacht's MSO.

Also in June, the Bank apparently first learned of the yacht sale to the Hattens when Nicholas Hatten met with the Bank. Hatten demanded either the MSO or $130,000, but the Bank refused both requests. Later that month, the Bank discovered that RCY had entered into a purchase agreement with the Pralles.

On July 22, 1993, RCY filed for bankruptcy. The bankruptcy stay was eventually lifted to allow the Bank to proceed in district court to determine which party had a superior interest in the yacht. On August 24, 1993, the Bank amended its replevin complaint, joining the Hattens and the Pralles as third-party defendants.

The case was tried from March 28 to April 12, 1994. The Bank, which still held the MSO, claimed a superior interest in the yacht under Minnesota's Watercraft Titling Act. The Hattens and Pralles responded that under Minnesota's enactment of the Uniform Commercial Code (UCC), they had purchased the yacht as buyers in ordinary course of business and, thus, free from any outstanding security interest. The Hattens also asserted claims against the Bank, RCY, and the Dorschners for fraud, conversion, breach of contract, and breach of warranty.

On motion for directed verdict, the trial court ruled that the Hattens and Pralles were buyers in the ordinary course of business under the UCC, awarded ownership of the yacht to the Pralles, and ordered the Bank to release the MSO. A jury later found in favor of the Hattens on their conversion and breach of contract claims and awarded the Hattens damages in the amount of $115,020. The trial court denied the Bank's motion for a new trial, and ordered judgment against the Bank in the amended amount of $109,820. The trial court also awarded the Hattens $13,728.72 and the Pralles $18,551.25 in attorney fees. The Bank appeals from the judgment and the order denying its motion for a new trial, and challenges the attorney fee awards. The Hattens appeal the amount of damages and attorney fees awarded.

ISSUES

1. Do the Hattens and Pralles qualify as buyers in the ordinary course of business and take the yacht free of the Bank's security interest, even though they obtained neither a certificate of title nor the yacht's MSO?

2. Did the trial court abuse its discretion in awarding attorney fees?

3. Did the trial court abuse its discretion in limiting the Hattens' attorney fee award to 30 percent of their total fees?

4. Did the trial court err in failing to enter judgment for the Bank against RCY and the Dorschners in order to indemnify the Bank for the attorney fees awarded the Hattens and Pralles?

5. Did the trial court err in holding the Bank liable as a principal on the Hattens' breach of contract claim?

6. Was there sufficient evidence that the Bank was a controlling creditor of RCY?

7. Did the trial court err in refusing to include a jury instruction on termination of agency?

8. Did the trial court err in refusing to include on the special jury verdict form a separate interrogatory on waiver?

9. Did the trial court err in limiting the damages on the Hattens' conversion claim to the amount realized from the sale of the yacht, instead of the fair market value?

10. Did the trial court err in reducing the damages awarded the Hattens by the jury?

ANALYSIS

1. Interaction of U.C.C. and Watercraft Titling Act. The trial court ruled that the Hattens and Pralles were buyers in the ordinary course of business under U.C.C. § 9-307(1) and that therefore they took the yacht free of the Bank's security interest. The Bank claims that, under the Watercraft Titling Act, neither the Hattens nor the Pralles qualified as buyers in the ordinary course of business because neither acquired a certificate of title or the MSO for the yacht. The interaction of these two statutes presents a question of law upon which we need not defer to the trial court. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n, 358 N.W.2d 639, 642 (Minn.1984).

Minnesota's Watercraft Titling Act (WTA), Minn.Stat. §§ 86B.820-.920 (1992), and Minnesota's enactment of the UCC, Minn.Stat. §§ 336.1-101 to .11-108 (1992), both provide that a security interest in a watercraft ordinarily may be perfected only by notation on the boat's certificate of title. Id. §§ 86B.880, 336.9-302(3)(b). A security interest created by a dealer holding the watercraft for sale, however, is excepted from this requirement; rather, the dealer's secured party perfects a security interest by filing a financing statement with the secretary of state. Id. §§ 86B.875(3), 336.9-302(3)(b). The Bank properly perfected its security interest in the yacht.

The Hattens and Pralles rely on U.C.C. § 9-307(1):

A buyer in ordinary course of business (subsection (9) of section 336.1-201) takes free of a security interest created by the seller even though the security interest is perfected and even though the buyer knows of its existence.

Minn.Stat. § 336.9-307(1). Here, the security interest was created by the seller, RCY. A buyer in ordinary course is defined as follows:

"Buyer in ordinary course of business" means a person who in good faith and without knowledge that the sale to that person is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary...