Kaichen's Metal Mart, Inc. v. Ferro Cast Co.

• Decision Date: 14 March 1995
• Docket Number: No. B083226,B083226
• Citation: 33 Cal.App.4th 8,39 Cal.Rptr.2d 233
• Court: California Court of Appeals
• Parties: , 26 UCC Rep.Serv.2d 35 KAICHEN'S METAL MART, INC., etc., Plaintiff and Appellant, v. FERRO CAST COMPANY, etc., Defendant and Respondent, Rohr Industries, Inc., Third Party Claimant and Respondent. Civ.

Page 233

39 Cal.Rptr.2d 233

33 Cal.App.4th 8, 26 UCC Rep.Serv.2d 35

KAICHEN'S METAL MART, INC., etc., Plaintiff and Appellant, v. FERRO CAST COMPANY, etc., Defendant and Respondent Rohr Industries, Inc., Third Party Claimant and Respondent.

Civ. No. B083226.

Court of Appeal, Second District, Division 6, California.

March 14, 1995.

Review Denied May 25, 1995.

Brown, Altshuler and Spiro and Bruce J. Altshuler, Beverly Hills, for plaintiff and appellant.

E.E. Clabaugh, Jr., Ventura, for defendant and respondent Ferro.

Page, Polin, Busch & Boatwright and Michael E. Busch, Rod S. Fiori, Christina B. Gamache and Dorothy A. Johnson, San Diego, for third party claimant and respondent Rohr.

STONE, Presiding Justice.

Appellant Kaichen's Metal Mart, Inc. challenges the trial court's order denying its motion to declare respondent Rohr Industries, Inc.'s senior secured lien invalid. We affirm.

This case presents a question of competing liens held by appellant (Kaichen's) and respondent (Rohr), creditors of respondent Ferro Cast Company (Ferro).

Rohr's senior lien is based on a $600,000 loan it made to Ferro in June 1986. In consideration for the loan, Ferro executed a promissory note in favor of Rohr stating that the amount loaned was due and payable on July 1, 1988. In order to secure Ferro's obligation under the note, the parties executed an agreement granting Rohr a security interest in Ferro's personal property, including a bank account. A financing statement pursuant to the California Uniform Commercial Code (hereinafter Commercial Code) was filed with the Secretary of State in June 1986. (Com.Code, § 9401 et seq.) Except for some interest payments made in 1987 and January 1988, Ferro made no payments on the principal and defaulted on the promissory note effective July 1, 1988.

Meanwhile, Kaichen's' lien was obtained pursuant to a judgment against Ferro in March 1987 for $102,039 plus interest, allegedly for unpaid goods. In March 1988, Kaichen's was prevented from levying on Ferro's bank account due to Rohr's superior lien.

Rohr filed a continuation statement in May 1991 pursuant to the Commercial Code to continue its security interest with Ferro. (Com.Code, § 9403.5.)

Kaichen's became a junior secured lienholder when it filed a notice of judgment lien with the California Secretary of State in December 1991. (Code Civ.Proc., § 697.510 et seq.)

In April 1992, Ferro executed an agreement with Rohr, wherein Ferro acknowledged its debt to Rohr, and agreed to pay the debt and waive the statute of limitations. Rohr in turn agreed it would forebear from instituting legal action against Ferro. Rohr states that Ferro's assets in April 1992 were of minimal value in comparison to the debt it owed Rohr, and, because Ferro was still in business, Rohr anticipated the value of Ferro's assets would increase in the future.

Subsequent to this last agreement between Rohr and Ferro and Kaichen's' second unsuccessful attempt to levy on Ferro's bank account, Kaichen's filed its motion to declare Rohr's secured lien invalid. Citing Code of Civil Procedure section 337, Kaichen's argued that the limitations period for Rohr's filing suit against Ferro expired on July 1, 1992, four years after the July 1, 1988 due date of Ferro's promissory note to Rohr. The trial court denied Kaichen's' motion on the primary ground that respondents had extended Ferro's debt and lien prior to the running of the statute of limitations, relying on Eilke v. Rice (1955) 45 Cal.2d 66, 286 P.2d 349.

The primary issue on appeal is whether Ferro's agreement to extend the statute of limitations is binding on Kaichen's. We conduct an independent review of this question of law. (Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1083, 258 Cal.Rptr. 721.)

Kaichen's contends it had standing to assert Ferro's defense of the statute of limitations. It is established that, while the plea of the statute of limitations is a personal privilege, the rule does not extend to third persons who have subsequently acquired interests in secured property. Such persons may invoke the aid of the statute even though the senior creditor and the debtor have agreed between themselves to waive the statute. (Brandenstein v. Johnson (1903) 140 Cal. 29, 73 P. 744 [judgment creditor]; Schriber v. Alameda County-East Bay Title Ins. Co. (1958) 156 Cal.App.2d 700, 320 P.2d 82 [lien creditor]; Flack v. Boland (1938) 11 Cal.2d 103, 77 P.2d 1090 [mortgagee]; Mitchell v. Auto. Owners Indemnity Underwriters (1941) 19 Cal.2d 1, 6, 118 P.2d 815 [trust deed holder].)

Here, however, Kaichen's' technical right to standing has no effect on Rohr's security interest. This is because, as the trial court determined, this case does not deal with a debt barred by the statute of limitations.

The parties dispute whether the four-year statute of limitations contained in Code of Civil Procedure section 337 concerning written contracts even applies to personal property security interests under the Commercial Code. Rohr argues that Code of Civil Procedure limitations statutes do not apply to security interests pursuant to the Commercial Code. We disagree.

Commercial Code section 1103 provides: "Unless displaced by the particular provisions of this code, the principles of law and equity, including ... [any] validating or invalidating cause shall supplement its provisions." (Emphasis added.) It has been held, pursuant to section 1103, that other code provisions pertaining to limitations of actions are applicable, "[a]s there is no special statute of limitations set forth in the Commercial Code...." (Bank of America v. Security Pacific Nat. Bank (1972) 23 Cal.App.3d 638, 642, fn. 3, 100 Cal.Rptr. 438.)

Civil Code section 2911 is the relevant statutory authority, providing that "[a] lien is extinguished by the lapse of time within which, under the provisions of the Code of Civil Procedure, ... [p] 1. An action can be brought upon the principal obligation...." In California, the underlying note is the "principal obligation" and the lien is incident thereto. (Flack v. Boland, supra, 11 Cal.2d at p. 106, 77 P.2d 1090.) The running of the statute of limitations bars an action to enforce the debt, and also deprives the creditor of filing an action for judicial foreclosure. ¹ (Ibid.; O'Neil v. General Security Corp. (1992) 4 Cal.App.4th 587, 601, 5 Cal.Rptr.2d 712.)

Rohr seeks to distinguish Flack v. Boland, supra, on the ground that the case involved a security interest in real property and therefore is inapplicable to commercial personal property security interests. Not so. Boland holds that Civil Code section 2911 applies to "any" lien. (11 Cal.2d at p. 106, 77 P.2d 1090.) In I.S. Chapman & Co. v. Ulery (1936) 15 Cal.App.2d 452, 457, 59 P.2d 602, the appellate court ruled that all rights of the mortgagee were barred by the statute of limitations "so far as they rest upon the promissory notes and the chattel mortgages securing them." (Emphasis added.) These cases are still good law.

Rohr bases its assertion, that pre-Commercial Code case authority is no longer relevant, on its view that the purpose of the code is to expand creditors' remedies. Rohr's argument is not persuasive; it is purely conclusionary and without adequate legal discussion.

Rohr does cite Civil Code section 2914 in support of its position that Code of Civil Procedure limitations statutes do not apply to security interests under the Commercial Code. That section states: "None of the provisions of this chapter [Title 14, "Liens"] apply to any transaction or security interest governed by the Uniform Commercial Code." However, in the absence of any Commercial Code provisions on statutes of limitations, section 2914 does not preclude application of Code of Civil Procedure section 337. The only Commercial Code sections cited by Rohr do not mention the applicability of limitations statutes to secured liens. (Com.Code, §§ 9302, 9303, 9401, 9403.)

Rohr cites a Colorado case, Cooper v. First Interstate Bank (Colo.Ct.App.1988) 756 P.2d 1017, for its proposition that statutes of limitations cannot defeat personal property security transactions. Cooper held that the running of the statute of limitations on a promissory note could cause the remedy on the note to be lost, but did not extinguish the remedy on the secured debt, since a secured creditor may collect the collateral as discharge of the debt at any "commercially reasonable time." (P. 1021.) We decline to follow Cooper. It is directly contrary to California law, providing that the statute of limitations runs on both the personal obligation and an action to enforce the creditor's rights against the secured debt. (Miller v. Provost (1994) 26 Cal.App.4th 1703, 1707, 33 Cal.Rptr.2d 288, citing Flack v. Boland, supra, 11 Cal.2d at pp. 106-107, 77 P.2d at 1091-1092.) This law has been in effect in this state over 134 years. (Lord v. Morris (1861) 18 Cal. 482, 490.)

Since the statute of limitations is applicable, does it, as Kaichen's contends, bar the extension agreement between Rohr and Ferro? Kaichen's states it has no quarrel with the general right of a debtor and a creditor to agree to extend the statute of limitations. However, it broadly argues this right is not applicable against the rights of a junior lienholder.

Eilke v. Rice, supra, 45 Cal.2d 66, 286 P.2d 349, dealt with the construction of former Code of Civil Procedure section 360. The current amended section 360, like section 337, is contained within title 2 governing the time of commencing civil actions. Section 360 provides that a written acknowledgment or promise indicating a new or continuing contract, or any payment made on a promissory note indicating acknowledgment of a continuing contract, is sufficient evidence to take a case out of the statute of limitations. ² Its companion statute, section 360.5, alternatively provides that a written waiver of the statute of limitations by the debtor will bar...