Manger v. Davis

Decision Date15 October 1980
Docket NumberNo. 16744,16744
Citation30 U.C.C.Rep. 515,619 P.2d 687
Parties30 UCC Rep.Serv. 515 Winifred MANGER, Plaintiff and Appellant, v. Steven DAVIS; James B. Medlin; Word Making Productions, Ltd.; CD&M Company and Michael Allred, Defendants and Respondents.
CourtUtah Supreme Court

John W. Lowe of Lowe & Hurley, Salt Lake City, for plaintiff and appellant.

Earl Jay Peck of Nielsen, Henriod Gottfredson & Peck, Salt Lake City, for Word Making Prod.

Melvin E. Leslie of Dart & Stegall, Salt Lake City, for CD&M Co.

Steven R. McMurray of McMurray, McIntosh, Butler & Nielsen, Salt Lake City, for Davis.

MAUGHAN, Justice:

Plaintiff, alleging her ownership of a valuable diamond ring, initiated this action to recover possession from Word Making Productions, Ltd., hereinafter "W.M.P." Plaintiff's consignee, Steven Davis, authorized Jack Anderson and Michael Allred to pledge the ring to W.M.P. The trial court ruled plaintiff's ownership was subject to the perfected security interest of W.M.P. in the ring, securing sums advanced by the pledgee. The judgment of the trial court is reversed, and the cause is remanded to the trial court for disposition in accordance with this opinion. All statutory references are to Utah Code Annotated, 1953, as amended, unless otherwise indicated.

Plaintiff is an octogenerian and widow of an academy award recipient, movie star, Warner Baxter. In the 1930's he gave her a diamond ring containing an emerald cut diamond of approximately 9.72 carats with six baguettes totalling .967 of a carat. Plaintiff met Davis at a dinner party given by her niece, whose husband was a successful Hollywood producer and friend of Davis. Plaintiff was in need of funds and Davis, a recent graduate of a school of gemology, informed her he could find a buyer for the ring. She gave him possession and a writing, which stated:

"Dear Mr. Davis-It would please me so much-if you would sell my emerald cut diamond ring for me-at whatever percent you consider OK. It was nice meeting you and your charming wife.



Winifred Manger"

There was an explicit understanding between plaintiff and Davis that any offer to purchase was to be submitted to plaintiff for approval. Davis made a brief attempt to sell the ring in San Francisco, but the offer to purchase was unsatisfactory. Davis took the ring to Salt Lake City, where he assured plaintiff, through telephonic communication, that it was secured in a vault in a bank. From time to time he informed plaintiff of prospective sales, but the transaction always failed.

Without plaintiff's knowledge or consent Davis embarked on a peculiar course of action. He testified that he did not apprise her of his actions because she was too old to understand. Davis had met two promoters named Jack Anderson and Michael Allred, who owned stock in a local company, CD&M. The promoters explained that if they effected certain mergers of CD&M with companies in Colorado and Texas, they would be able to borrow money to purchase the ring. Davis gave possession of the ring to Anderson, who without the knowledge or authority of Davis, took the ring to Zions Bank, represented it was his property and pledged it to secure a personal loan for $10,000. The promoters gave Davis some stock certificates they represented to be worth $200,000.00. He determined the stock was worthless and returned it on October 12, 1976.

Thereafter, Allred approached James B. Medlin, President of W.M.P., which is a close corporation, to seek further loans, offering a valuable ring as security. Allred was indebted to Medlin, who knew Allred had few assets, and Medlin was suspicious about the proffered security. Allred explained that Davis was the owner of the ring and had consented to the pledge. Subsequently, Anderson, Allred, and Davis met with Medlin to arrange the loan and pledge. At this time Medlin required Davis to execute an affidavit, which provided:

"Steve Davis, being first duly sworn on oath, deposes and says: As full payment for services rendered to the Estate of Winifred Manger, on or about August, 1975, I received the following described ring:

"The ring has been appraised with a retail replacement value of approximately $140,000.00.

"I am a certified diamond appraiser and have been duly certified by the Gemological Institute of America. My appraised value was $165,000.00.

"I have entered into an agreement with Michael Allred and Jack Anderson to allow them to use my ring as collateral to raise money for their private ventures in exchange for securities which they have allowed me to use as collateral for my own private ventures.

"I understand that Jack Anderson and Michael Allred may be using the above-described ring as collateral to borrow money from Word Making Productions and/or James B. Medlin, and agree that said ring may be used as collateral for said loan in any manner in which Jack Anderson and Michael Allred see fit to use it.

"Dated this 18th day of October, 1976.

Steve Davis."

Medlin, who is also an attorney, did not inquire what type of services were rendered by Davis, who was a young man, to receive this substantial compensation. Neither was Medlin curious about verification of the existence of such an estate, which he was informed was in Los Angeles, nor the unorthodox manner of compensation for services. He testified he relied on the statements of Allred and Anderson that the father of Davis was a prominent business man to verify the ownership of the ring. Medlin was similarly disinterested as to the motive of Davis to exchange a valuable asset with the promoters, one of whom was a debtor of Medlin and without assets, to further his own business interests. Medlin further arranged an agreement to notify the bank holding the ring as security for Anderson's loan of his subsequent security interest and appointing the bank as escrow agent to hold possession as a means of perfecting Medlin's security interest.

Plaintiff's ring was thus pledged to W.M.P. by the promoters to secure a loan of $20,000. Allred paid $5,000 of this loan to Medlin to discharge his prior indebtedness. Subsequently, Allred, alone, received an additional advance of $10,000, which was also secured by the pledge.

The promoters defaulted on all the loans and Anderson died. W.M.P. paid the bank $10,625 to discharge the prior indebtedness and took possession of the ring. The trial court ruled W.M.P. had a perfected security interest, securing payment of the following amounts: $10,625, plus interest; $20,450, plus interest; and $10,000, plus interest and court costs.

Since the other defendants do not claim any interest in the ring, only plaintiff and W.M.P. are involved in this appeal.

The trial court found the ring was delivered to Davis on a consignment to sell in April, 1976, and plaintiff did not file a financing statement or take any other action designed to perfect a security interest in the collateral. There was a finding that plaintiff had no knowledge of any of the transactions except for the delivery to Davis for purpose of sale. Davis was found not to be a merchant dealing in diamond rings or goods of that kind, and there was no valid or effective sale of the ring ever made to CD&M Co.

In its conclusions of law, the trial court ruled that W.M.P., as a lender and pledgee, was a purchaser of the ring as defined in 70A-1-201(32). The court further ruled that pursuant to the following provisions of the Uniform Commercial Code in Title 70A: 2-104(1), 2-403(2), 1-201(19), 2-401, 2-403(1), 2-403(3), 2-403(4), 9-102, 9-105, 9-112, 9-113, 9-302, 9-501, W.M.P. had a perfected security interest in the ring by possession, which was prior to plaintiff's ownership interest. The lien of W.M.P. was obtained prior to any attempt by plaintiff to withdraw or rescind the authority of her agent, Davis. As a purchaser, W.M.P.'s lien rights applied to and secured payment of the loans. W.M.P. made the loans and took its lien in good faith without any knowledge of any claim of plaintiff. Davis was not a merchant dealing in diamond rings or goods of that kind as defined by the U.C.C. The trial court finally concluded that no valid or effective sale of the ring was ever made to CD&M and CD&M Company acquired no interest therein.

The essence of the dispute between the parties involves whether Davis, the consignee, had a voidable title. Respondent persuaded the trial court that Davis had such a title and a provision in Section 70A-2-403(1) was controlling, namely, "... A person with voidable title has power to transfer a good title to a good faith purchaser for value...." Since "purchase" includes taking by pledge, Section 70A-1-201(32), the trial court found the loan transaction, secured by a pledge of the ring to W.M.P., to be a good faith purchase for value.

In an analysis of this rather complex case, the appropriate point to begin is Section 70A-9-204(1), which provides that a security interest cannot attach until the debtor has rights in the collateral. Unless Davis had rights in the ring, so he could authorize the pledge by Allred and Anderson, the security interest of W.M.P. could not attach.

The Code does not clearly establish the meaning of "rights in the collateral." Although a debtor has possession of the collateral, that fact does not give him rights. If a security transaction relates to a sale, Article 2 may determine whether the debtor has rights. 1 If there be no authority to subject property to a security interest, the creditor has no security interest therein. 2

Concededly, under Section 70A-9-305, a security interest in goods may be perfected by the secured party's taking possession of the collateral. Further, if the collateral, as herein, is held by a bailee, the secured party is deemed to have possession from the time the bailee (Zions Bank) received notification of the secured party's (W.M.P.) interest. However, Article 9 does not govern the creation of property rights, which may have arisen as a result of a sale of...

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