Mattson v. Commercial Credit Business Loans, Inc.

• Decision Date: 05 August 1986
• Citation: 301 Or. 407,723 P.2d 996
• Parties: , 2 UCC Rep.Serv.2d 135 Quinton F. MATTSON, Petitioner on Review, Cascade Logging Corp., Plaintiff, v. COMMERCIAL CREDIT BUSINESS LOANS, INC., Respondent on Review, The Oregon Bank, Defendant. TC A8303-01531; CA A32139; SC S31706. *
• Court: Oregon Supreme Court

Page 996

723 P.2d 996

301 Or. 407, 2 UCC Rep.Serv.2d 135

Quinton F. MATTSON, Petitioner on Review, Cascade Logging Corp., Plaintiff, v. COMMERCIAL CREDIT BUSINESS LOANS, INC., Respondent on Review, The Oregon Bank, Defendant.

TC A8303-01531; CA A32139; SC S31706.

Supreme Court of Oregon,

In Banc ^*.

Argued and Submitted Oct. 2, 1985.

Reassigned Feb. 7, 1986.

Decided Aug. 5, 1986.

Quinton F. Mattson, pro se, argued the cause for petitioner on review.

John M. Berman, Beaverton, argued the cause for respondent on review.

CAMPBELL, Justice.

This case involves conversion of lumber and the payment to defendant of the proceeds from the converted lumber. Plaintiffs, ¹ owners of the converted lumber, sought recovery of the proceeds from the sale of the lumber from the defendant creditor of the converter based on two claims for relief. The first was labeled money had and received, pursuant to which plaintiffs requested actual and punitive damages. The second, which was labeled unjust enrichment, requested a constructive trust.

Plaintiffs and West Coast Lumber Sales, which is not a party to this action, had a contract whereby West Coast would cut plaintiffs' logs at plaintiffs' site for orders pre-sold by West Coast and approved by plaintiffs. In May 1980, West Coast removed 285,000 board feet of lumber from plaintiffs' site without plaintiffs' approval. In September 1980, plaintiffs sued West Coast seeking only money damages for conversion of the lumber. Plaintiffs did not seek replevin, or an injunction to prevent the sale of the lumber, or a constructive trust on the proceeds.

In February 1981, while the litigation between plaintiffs and West Coast was pending, Commercial Credit, defendant in this action, opened a line of credit for West Coast which was secured by inventory and accounts. West Coast's attorney advised defendant of the pending litigation between plaintiffs and West Coast, but the attorney advised defendant that the existence of the litigation did not prevent defendant from making a loan to West Coast so long as plaintiffs were making no claim to the collateral on which defendant was relying in making the loan. In June 1982, plaintiffs won a judgment for $192,011.17 against West Coast for conversion. Shortly thereafter, West Coast filed a petition for bankruptcy.

Under the terms of the accounts receivable contract between West Coast and defendant, all money received by West Coast was turned over to defendant; defendant would then make fresh advances. During the one and one-half years that the contract was in operation, defendant loaned West Coast approximately $2,000,000 more than it received back. Defendant declared West Coast in default in July 1982.

During the pendency of the bankruptcy proceeding, plaintiffs learned that defendant claimed a security interest in all of West Coast's inventory, including the converted lumber and the money generated from the sales of the converted lumber. In March 1983, plaintiffs filed this action asserting a claim against the proceeds West Coast received from the sale of the converted lumber which, plaintiffs asserted, defendant received as part of the revolving credit arrangement with West Coast.

Defendant moved for summary judgment and the trial court granted the motion. The Court of Appeals affirmed without opinion. We reverse and remand.

I. SUMMARY JUDGMENT

The trial judge did not state the reason for granting defendant's motion for summary judgment. ORCP 47. Plaintiffs claim that summary judgment could have been based on one of two arguments which defendant presented to the trial court. First, plaintiffs were not entitled to the money generated by the sale of the converted lumber because defendant had a security interest in those proceeds under its accounts receivable financing arrangement with West Coast. Second, even in the absence of a valid security interest, plaintiffs could not recover proceeds from the sale of converted property from third parties; plaintiffs were limited either to recovering the converted lumber from third parties to whom it had been sold, or to recovering the proceeds from such sales from the converter. Plaintiffs contend that the granting of summary judgment on either of these bases was error.

Defendant asserts two other possible bases for the trial court's grant of summary judgment. Plaintiffs may have been barred by laches or by entrusting the lumber to West Coast, thereby giving it actual or apparent authority to sell the lumber to third parties.

II. SECURITY INTERESTS IN PROCEEDS

Plaintiffs deny that defendant had a valid security interest in the proceeds from the sale of the converted lumber.

ORS 79.2030(1) defines three conditions which must exist before a security interest can attach:

"(a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement * * *;

"(b) Value has been given; and

"(c) The debtor has rights in the collateral."

(Emphasis added.)

Plaintiffs cite two cases for the proposition that one without authorization to use collateral cannot grant a valid security interest in the property, Valu-U Const. Co. of S.D. v. Contractors, Inc., 213 Neb. 291, 328 N.W.2d 774, 777 (1983); Manger v. Davis, 619 P.2d 687, 693 (Utah 1980). This, plaintiffs contend, is consistent with ORS 72.4030(1), which provides in part:

"A purchaser of goods acquires all title which the transferor had or had power to transfer * * *. A person with voidable title has power to transfer a good title to a good faith purchaser for value."

Plaintiffs' position is that although a voidable title may transfer a good title, a void title, which is what the converter West Coast had here, cannot pass any title.

Plaintiffs further argue that defendant's security interest in West Coast's accounts could not encompass proceeds from the sale of plaintiffs' property because that would be inconsistent with the definition of "account" in ORS 79.1060. Under ORS 79.1060, "account" means "any right to payment for goods sold." Plaintiffs contend that because West Coast, as a thief, had no "right to payment" from third parties for stolen goods, defendant's security interest could not cover such money.

Defendant asserts that an exception to the rule that a thief cannot pass good title is that a thief can pass good title to money or negotiable instruments. Defendant cites Restatement (Second) Torts, § 229, comment d, which provides in part that:

" * * * no legal interest can ordinarily be acquired in a chattel other than current money or a negotiable instrument, by dealing with one who has stolen it."

Defendant analogizes, "If good title to converted money can be passed to third parties, good title to proceeds can also be passed." Defendant points to Bk. of Cal. Etc. v. Portland H. & W. Co., 131 Or. 123, 282 P. 99 (1929), as support for its contention that Oregon law protects recipients of money from third party claims. That decision, however, does not hold that Oregon law protects all recipients of money from third party claims. Rather, Bk. of Cal. Etc. dealt with the Negotiable Instruments Law involving holders in due course. No holders in due course are involved in the present case; thus Bk. of Cal. Etc. is not applicable. Moreover, defendant's security interest purported to cover lumber and accounts receivable, not money per se.

The third requirement for attachment of a security interest is that the debtor have rights in the collateral. West Coast as a converter had no rights in the collateral (not even voidable title) and could not pass any title even to a good faith purchaser. ² See White and Summers, Uniform Commercial Code 141 (2d ed 1980); 3 Anderson, Uniform Commercial Code 555 (1983); In Re Samuels & Co., Inc., 510 F.2d 139, 150 (5th Cir 1975); Schrier v. Home Indemnity Co., 273 A.2d 248 (DC App 1971); McDonald's Chevrolet, Inc. v. Johnson, 176 Ind.App. 399, 376 N.E.2d 106 (1978); Inmi-Etti v. Aluisi, 63 Md.App. 293, 492 A.2d 917 (1985); Bay Springs Forest Products, Inc. v. Wade, 435 So.2d 690 (Miss.1983); O'Keeffe v. Snyder, 83 N.J. 478, 416 A.2d 862, 867 (1980). Thus defendant had no security interest which could prevail over plaintiffs' claimed rights to proceeds from the sale of the converted lumber. Summary judgment, if entered on this theory, was inappropriate.

III. PLAINTIFFS' ENTITLEMENT TO RECOVER PROCEEDS

The trial court may also have granted summary judgment on the basis that, even in the absence of a valid security interest, plaintiffs could not recover proceeds from the sale of the converted property from third parties. Plaintiffs assert that they are entitled to recover identifiable proceeds based on the theories of tracing rights and unjust enrichment.

A. Tracing

In moving for summary judgment, defendant argued that such tracing and recovery of proceeds are not permitted at common law. Although we have found no cases involving the precise fact situation involved here, there are cases which have permitted tracing and recovery from third parties. As one writer has noted:

"As far back as 1705, courts have held that the victim of conversion could recover the proceeds from the sale of the converted property by the wrongdoer. The early cases justified the result through a fiction that the plaintiff could 'suppose the sale made by his consent, and bring an action for the money [so obtained], as money received to his use.' Lamine v. Dorrell, 2 Ld Raym. 1216, 92 Eng Rep 303 (1705). Modern cases base recovery of the sale proceeds on the principle of unjust enrichment."

Oesterle, Deficiencies of the Restitutionary Right to Trace Misappropriated Property in Equity and in UCC § 9-306, 68 Cornell L.Rev. 172, 219 (1983).

In addition, tracing doctrine operates against innocent transferees who receive no legal title and transferees who are not bona fide purchasers and receive legal but not equitable title. If either type of transferee exchanges the acquired property...