Huff Equipment Co. v. Jones, 14070

• Citation: 725 S.W.2d 82
• Decision Date: 13 February 1987
• Docket Number: No. 14070,14070
• Parties: 3 UCC Rep.Serv.2d 1920 HUFF EQUIPMENT COMPANY, Plaintiff-Respondent, v. Joe D. JONES, Defendant, Empire Bank of Springfield, Intervenor-Appellant.
• Court: Court of Appeal of Missouri (US)

Page 82

725 S.W.2d 82

3 UCC Rep.Serv.2d 1920

HUFF EQUIPMENT COMPANY, Plaintiff-Respondent, v. Joe D. JONES, Defendant, Empire Bank of Springfield, Intervenor-Appellant.

No. 14070.

Missouri Court of Appeals,

Southern District,

Division Two.

Feb. 13, 1987.

James L. Bowles, Springfield, for intervenor-appellant.

Mark E. Fitzsimmons, Fitzsimmons & Schroeder, James A. Miller, Springfield, for plaintiff-respondent.

MAUS, Judge.

On June 30, 1986, this district filed an opinion affirming the judgment. Thereafter, on July 18, 1986, this district denied appellant's motion for rehearing or to transfer to the Supreme Court. Appellant then filed an application for transfer with the Supreme Court. It sustained the application on September 16, 1986. On January 21, 1987, the Supreme Court entered the following order: "Case retransferred to Missouri Court of Appeals, Southern District." With the addition of this paragraph, our original opinion is readopted. It is set out hereafter.

The subject matter of this action is the proceeds of the sale of a tractor-loader. Empire Bank of Springfield (Empire Bank) claimed those proceeds as the secured party under a security agreement. Huff Equipment Company (Huff), as a creditor of the debtors-owners of the tractor-loader, claimed by a garnishment of the auctioneer who held those proceeds following the sale. The trial court awarded the proceeds to Huff. Empire Bank appeals.

The following is a concise outline of the facts. On April 7, 1981, Joe Jones and Helen Jones, his wife, (debtors) executed a security agreement granting Empire Bank a security interest in described equipment which included the tractor-loader. Neither the security agreement nor the applicable financing statement covered proceeds or products.

Debtors scheduled an auction to sell various items of property on June 4, 1983. The property to be sold included the tractor-loader. Empire Bank consented to the sale upon the understanding the proceeds of the tractor-loader would be paid to the bank.

On June 2, 1983, Huff instituted this action against the debtors. The petition is not before the court. However, from the record it may be gleaned that the petition sought recovery on an unsecured note in the amount of $10,432.83. Upon Huff's affidavit that debtors were about to fraudulently convey or assign their property or effects so as to hinder or delay their creditors, a writ for the attachment of the property of debtors was issued. On June 2, 1983, a summons was served upon debtors. A copy of the writ of attachment was also left with debtors. However, the tractor-loader was not seized.

On June 3, 1983, the sheriff served a writ of garnishment in aid of attachment upon the auctioneer who was to conduct the sale in question. The net proceeds of that sale were $9,822.28. Of that amount, $5,100 was received for the tractor-loader. The auctioneer paid the proceeds into court. Empire Bank intervened. It filed a counterclaim against Huff by which it sought judgment for $5,100, punitive damages and attorneys fees. The trial court denied Empire Bank relief. The attached funds were awarded to Huff.

Empire Bank contends the trial court erred in awarding the proceeds to plaintiff-respondent, a creditor of defendant who attached the proceeds, rather than to intervenor-appellant, the holder of a perfected security interest in the farm equipment, for the right of intervenor-appellant to the proceeds was superior to that of plaintiff-respondent in that (A) the security interest of intervenor-appellant was perfected long before the sale, (B) the security interest of intervenor-appellant, under section 400.9-306(2), continued notwithstanding the sale, and (C) the security interest of intervenor-appellant was not lost by the agreement between defendant and intervenor-appellant that the farm equipment could be sold at auction.

To support this point, Empire Bank first argues that Huff attached the tractor-loader which was subject to its perfected security interest. Therefore, the bank concludes, that attachment was subject to the security interest which followed to the proceeds. Empire Bank also contends "there never were any proceeds from the sale of the tractor and loader which were received by the Debtor and in which Intervenor Empire Bank did not have a perfected security interest." That contention is premised upon the following proposition: "Empire Bank would have had to consent to the sale of the property in writing before the sale could take place free of the security interest of Empire Bank."

The first argument is factually unsound. Service of a copy of the writ upon debtors was not an attachment of the tractor-loader. See Rule 76.06. The second argument is based upon language from Central California Equipment Co. v. Dolk Tractor Co., 78 Cal.App.3d 855, 144 Cal.Rptr. 367 (1978). That case involved a security agreement which expressly prohibited a sale without written consent. The argument and case are not applicable. The security agreement in question provides the debtor will not sell the collateral. But, it does not contain any requirement of written consent. Cf. First Nat. Bank and Trust Co. of Oklahoma City v. Iowa Beef Processors, 626 F.2d 764 (10th Cir.1980); Lisbon Bank and Trust Company v. Murray, 206 N.W.2d 96 (Iowa 1973); Garden City Production Credit Assn. v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971). Further, Empire Bank did consent to the sale. Empire Bank's understanding that the debtor would remit the proceeds of the tractor-loader to the bank did not vitiate that consent. Lisbon Bank and Trust Company v. Murray, supra; Charterbank Butler v. Central Cooperatives, Inc., 667 S.W.2d 463 (Mo.App.1984). Cf. Moffett Bros. & Andrews Commission Co. v. Kent, 5 S.W.2d 395 (Mo.1928).

Moreover, both of these arguments are misdirected. This is not an action to recover the tractor-loader. Cf. First Nat. Bank and Trust Co. of Oklahoma City v. Iowa Beef Processors, supra. Nor is it an action based upon conversion of the tractor-loader. N. Cent. Kan. Prod. Cred. Ass'n v. Wash. Sales Co., 223 Kan. 689, 577 P.2d 35 (1978). The funds in question were received when the collateral tractor-loader was sold and constitute proceeds. § 400.9-306. Huff acquired a lien by "attachment, levy or the like" and was a lien creditor. § 400.9-301(3). This action is to determine the priority of a secured creditor and a lien creditor to those proceeds. Two provisions of the Uniform Commercial Code are basic to that determination. ¹

Section 400.9-301 in part provides: "(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...."

Section 400.9-306 in part provides:

(2) [A] security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also 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 ten days after receipt of the proceeds by the debtor unless

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

(b) the security interest in the proceeds is perfected before the expiration of the ten-day period.

During the ten days following the auction, Empire Bank could have perfected its security interest in the proceeds of the tractor-loader by filing an appropriate financing statement signed by the bank. § 400.9-402. On its failure to do so, its security interest in the proceeds became unperfected. It seems clear the interest of the bank in those proceeds was subject to the garnishment of lien creditor Huff.

However, Empire Bank cites and relies upon Blair Milling & Elevator Co., Inc. v. Wehrkamp, 217 Kan. 122, 535 P.2d 457 (1975), which holds to the contrary. In that case, under similar circumstances, a judgment creditor levied upon the proceeds of collateral subject to a security agreement. The levy was made during the ten-day period of temporary perfection. The court reviewed the pre-Code cases of Kansas holding that "a purchaser or mortgagee who becomes such before the expiration of the first filing does not gain priority by the mortgagee's failure to renew his affidavit in time, and he must take his interest or lien as it stood when he acquired it." Id. 535 P.2d at 460.

The Kansas court then noted that during the ten-day period, the lien creditor was charged with notice of the temporarily perfected security interest. It then observed, "in the absence of a specific statutory provision displacing the prior law of this state, 84-9-403(2) must be read to be consistent with the pre-Code law as applied to chattel mortgages, and the rights of creditors' conflicting interests in collateral are therefore fixed at the time of the levy." Id. 535 P.2d at 461.

The Kansas court concluded:

Viewing the present case in light of this rule, we hold that at the time Blair Milling levied upon the proceeds it had notice of the existing perfected security interest held by the Bank, and pursuant to the provisions of 84-9-306(3) this perfected security interest continued temporarily in all identifiable proceeds received by the debtor. This being true, the Bank had an interest in the proceeds superior to that of a judgment lien creditor, which would not be affected by the Bank's failure to prevent the perfected security interest from lapsing after the expiration of the ten-day period.

Id. 535 P.2d at 461. The court acknowledged that such a result was inconsistent with the Comments to the Uniform Commercial Code. It also observed that legislation had been...