Komas v. Future Systems, Inc.

• Decision Date: 19 July 1977
• Citation: 71 Cal.App.3d 809,22 U.C.C. Rep. Serv. 550,139 Cal.Rptr. 669
• Court: California Court of Appeals Court of Appeals
• Parties: , 22 UCC Rep.Serv. 550 John KOMAS, Plaintiff and Appellant, v. FUTURE SYSTEMS, INC., Defendant; SMALL BUSINESS ADMINISTRATION, Respondent. Civ. 40471.

Page 669

139 Cal.Rptr. 669

71 Cal.App.3d 809, 22 UCC Rep.Serv. 550

John KOMAS, Plaintiff and Appellant, v. FUTURE SYSTEMS, INC., Defendant;

SMALL BUSINESS ADMINISTRATION, Respondent.

Civ. 40471.

Court of Appeal, First District, Division 4, California.

July 19, 1977.

As Amended July 29, 1977.

James H. Burke, San Jose, for plaintiff and appellant.

James L. Browning, Jr., U. S. Atty., Michael C. D'Amelio, Asst. U. S. Atty., San Francisco, for defendant and respondent.

CHRISTIAN, Associate Justice.

John Komas appeals from a judgment which upheld a third party claim by respondent Small Business Administration ('SBA') and restrained an execution sale of assets of appellant's judgment debtor, Future Systems, Inc., a Delaware corporation.

After the sheriff had seized the debtor's assets, Paul J. Calleja, an employee of SBA, delivered to the sheriff a verified third-party claim, pursuant to section 689 of the Code of Civil Procedure, asserting a security interest in the debtor's machinery and equipment. Attached to the verified third-party claim were a 'Financing Statement' which had been filed with the Secretary of State by Future Systems, Inc. and a later 'Continuation Statement' filed by the United California Bank. The basis of the third-party claim was a $150,000 loan from the United California Bank to Future Systems, Inc. ('FSI') which had been guaranteed by the SBA: On April 28, 1972, FSI has executed a promissory note for $150,000 to United California Bank and allegedly granted a security interest in the property in question as security for that note. The note, with a balance due of $68,505.70, was subsequently assigned to the SBA.

Appellant contends that the documents supporting respondent's third-party claim were not properly before the court. Appellant contends that the SBA's failure to formally introduce evidence at the hearing on the third-party claim constituted a failure to meet its burden of proof under section 689 of the Code of Civil Procedure. This contention must be rejected. The complaint and supporting documents were treated as part of the record before the trial court by both court and counsel, and it is clear that the trial court considered the documents in its decision. The failure to formally and expressly offer the documents into evidence is not necessarily fatal, where the court and both parties treat the documents as if they were in evidence. (Estate of Connolly (1975) 48 Cal.App.3d 129, 132, fn. 4, 121 Cal.Rptr. 325; Walsh v. Walsh (1952) 108 Cal.App.2d 575, 579, 239 P.2d 472; Witkin, California Evidence (2d ed. 1966) Introduction of Evidence at Trial, § 1142, p. 1060; see also Waller v. Waller (1970) 3 Cal.App.3d 456, 465, 83 Cal.Rptr. 533.)

Appellant concedes that, If any security interest was created by the $150,000 loan transaction between United California Bank and Future Systems, Inc., that security interest was 'perfected' because a sufficient financing statement was filed with the Secretary of State. It is appellant's contention, however, that no security interest ever 'attached' to the collateral which was levied upon under the writ of execution. Appellant contends that none of the documents before the trial court constituted an adequate 'security agreement' creating or providing for a security interest in the collateral.

Under section 9105, subdivision [l], of the Commercial Code, a 'security agreement' is an agreement which 'creates and provides for' a security interest. Section 9203 specifies the requisites for the attachment and enforceability of a security interest. Section 9203, subdivison (1)(a)--(c), provides in relevant part: '. . . a security interest is not enforceable against the debtor or third parties with respect to the collateral and does not attach unless (a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral . . . and (b) Value has been given; and (c) The debtor has rights in the collateral.' In other words, there must be a binding security agreement in order to make the security interest enforceable. Where there is no security agreement, the filing of a financing statement is a nullity. (Needle v. Lasco Industries, Inc. (1970) 10 Cal.App.3d 1105, 1108, 89 Cal.Rptr. 593; 4 Anderson, Uniform Commercial Code (2d ed. 1971) § 9--204:4, p. 175.)

The order in which the three events occur, which are requisite to attachment of the security interest, is immaterial. But a security interest cannot attach until the parties have so agreed, value is given, and the debtor has rights in the collateral. (See Warren, California Commercial Law (Cont.Ed.Bar 1966) § 2.3, pp. 42--43.) Only the first requisite to attachment is disputed here--whether there was an agreement that a security interest attach.

Respondent conceded that the financing statement, standing alone, did not satisfy the requisites for a security agreement because that document does not recite that the parties intended to create a security interest in the collateral. (See Needle v. Lasco Industries, Inc., supra, 10 Cal.App.3d 1105, 1108; Warren, California Commercial Law: III (Cont.Ed.Bar 1966) § 2.17, pp. 56--57.) But an effective security agreement can be found when a financing statement is considered together with other documents. (See In re Numeric Corp. (1st Cir. 1973) 485 F.2d 1328, 1332; In re Carmichael Enterprises, Inc. (N.D.Ga.1971) 334 F.Supp. 94, aff'd per curiam, 460 F.2d 1405 (5th Cir. 1972); Evans v. Everett (1971) 279 N.C. 352, 183 S.E.2d 109; In re Auto Center Parts (C.D.Cal.1968) 6 U.C.C.Rep.Serv. 398.) In this regard, the court stated in In re Numeric Corp., supra, 485 F.2d at p. 1331:

we have little difficulty concluding that a separate formal document entitled 'security agreement' is not always necessary to satisfy the signed-writing requirement of § 9--203(1)(b). The draftsmen of the UCC ascribed two purposes to that requirement. One purpose was evidentiary, to prevent disputes as to precisely which items of property are covered by a secured interest. See Uniform Commercial Code § 9--203, Comment 3; J. K. Gill Co. v. Fireside Realty Inc., 262 Or. 486, 488, 499 P.2d 813 (1972). The second purpose of the signed-writing requirement is to serve as a Statute of Frauds, preventing the enforcement of claims based on wholly oral representations. See Uniform Commercial Code § 9--203, Comment 5.

Given these two limited purposes of § 9--203(1)(b), and the flexible definitions of 'security agreement' and 'agreement' found elsewhere in the Code, there seems to be no need to insist upon a separate document entitled 'security agreement' as a prerequisite for enforcement of an otherwise valid security interest. A writing or writings, regardless of label, which adquately describes the collateral, carries the signature of the debtor, and establishes that in fact a security interest was agreed upon, would satisfy both the formal requirements of the statute and the policies behind it. See Nunnemaker Transp. Co. v. United Cal. Bank, 456 F.2d 28, 31--32 (9th Cir. 1972); In re United Thrift Stores, Inc., 363 F.2d 11, 14 (3d Cir. 1966); In re Carmichael Enterprises, Inc., 334 F.Supp. 94, 105 (N.D.Ga.1971), aff'd per curiam, 460 F.2d 1405 (5th Cir. 1972); In re Fibre Glass Boat Corp., 324 F.Supp. 1054, 1055--56 (S.D.Fla.), aff'd per curiam, 448 F.2d 781 (5th Cir. 1971); Evans v. Everett, 279 N.C. 352, 359--360, 183 S.E.2d 109 (1971).

There is no language in the Commercial Code stating that the terms of the security agreement must be included in a single document. In fact, under its broad definition of 'agreement,' the code indicates otherwise: "Agreement' means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance . . .' (...