Mitchell v. Shepherd Mall State Bank

• Decision Date: 14 April 1972
• Docket Number: No. 71-1342.,71-1342.
• Citation: 458 F.2d 700
• Parties: In the Matter of Richard Dudley MITCHELL and Ruby Della Donelson, d/b/a Marby's Style Shop, a Partnership, Bankrupts-Appellees, v. SHEPHERD MALL STATE BANK and Small Business Administration, Respondents-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

458 F.2d 700 (1973)

In the Matter of Richard Dudley MITCHELL and Ruby Della Donelson, d/b/a Marby's Style Shop, a Partnership, Bankrupts-Appellees, v. SHEPHERD MALL STATE BANK and Small Business Administration, Respondents-Appellant.

No. 71-1342.

United States Court of Appeals, Tenth Circuit.

April 14, 1972.

Michael Kimmel, Atty., Dept. of Justice, Washington, D. C. (L. Patrick Gray, III, Asst. Atty. Gen., William R. Burkett, U. S. Atty., and Walter H. Fleischer, Atty., Dept. of Justice, Washington, D. C., with him on the brief), for appellant, Small Business Administration.

Norman E. Reynolds, Oklahoma City, Okl. (Paul F. Fernald, Oklahoma City, Okl., with him on the brief), for appellees, Trustee in Bankruptcy.

Before MURRAH, SETH and BARRETT, Circuit Judges.

MURRAH, Circuit Judge.

In April of 1968, the Shepherd Mall State Bank (Bank), located in Oklahoma City, made a $25,000 loan to James Edwards and Ruby Donelson, partners doing business as Marby's Fashions, a ladies' clothing concern with retail shops in two suburbs of Oklahoma City. The loan was guaranteed to the extent of 75% by the Small Business Administration (SBA) pursuant to the Small Business Act (15 U.S.C. § 636(a)) and its implementing regulations (13 C.F.R. 122.10). In order to secure the loan the parties also entered into a security agreement set forth on a form provided by SBA.

Section D of the security agreement bears the heading "COLLATERAL," and subsection D.1, thereunder, states: "The security interest is granted in the following collateral: Describe collateral." In the space provided for the description appears the typed statement: "See EQUIPMENT LIST attached hereto and made a part hereof, describing equipment, furniture and fixtures located at Moore and Edmond stores." A two-page list of equipment, furniture and fixtures, was attached to the security agreement.

Subsection D.2 of the section on "COLLATERAL" directs the parties to "Classify goods under (one or more of) the following Uniform Commercial Code categories," and contains five boxes labeled respectively "Consumer Goods," "Equipment (business use)," "Inventory," "Accounts Receivable," and "Contract Rights." All of these boxes except for the first one were checked.

Three days after entering into the security agreement, the Bank properly filed a financing statement which stated that it covered, "The following, now owned and hereafter acquired, located at Moore and Edmond stores: All machinery and equipment, furniture and fixtures, inventory and proceeds, accounts receivable and contract rights."

Approximately 18 months after the security agreement was executed and with a balance of $19,672.70 due on the loan, the debtors filed a voluntary bankruptcy petition. The Bank assigned its rights under the note and security agreement to SBA, and SBA filed its proof of a secured claim with the trustee in bankruptcy. The trustee objected to SBA's claim insofar as it asserted a security interest in any tangible or intangible property of the debtors other than the equipment listed on the pages attached to the security agreement, and the issue was heard by the bankruptcy referee. At this hearing the vice-president of the Bank who handled the loan was permitted to testify, over the trustee's objection, that it was the Bank's intention to take a security interest in inventory, accounts receivable, and contract rights, in addition to the items set forth in the equipment list. The referee found that SBA had an enforceable security interest in all of the items included in its claim. On review the District Court, 324 F.Supp. 1029, vacated the referee's order, concluding that the security agreement was unambiguous, that parol evidence to explain it was, thus, inadmissible, and that under the unambiguous terms SBA's security interest was limited to the items specifically enumerated in the list attached to the security agreement.

On appeal SBA claims that a security interest in inventory, accounts receivable, and contract rights was granted to the Bank by virtue of the check marks appearing in boxes bearing those labels in subsection D.2 of the security agreement. The terms of the financing statement and the testimony of the Bank's vice-president are invoked as extrinsic evidence supporting SBA's construction of the security agreement.

While Article 9 of the Uniform Commercial Code has stripped the formal requirements for creation of a security interest to the bone, certain minimal requirements must still be observed.¹ 12A Okl.St.Ann. § 9-203(1) (b) states that a non-possessory security interest is not enforceable against either the debtor or third parties unless, "the debtor has signed a security agreement which contains a description of the collateral . . .." 12A Okl.St.Ann. § 9-105(1) (h) supplies further explication by defining the term "security agreement" as ". . . an agreement which creates or provides for a security interest." Cases and treatises construing these two sections have almost uniformly come to the conclusion that in order for a security agreement to be effective it must contain language which specifically creates or grants a security interest in the collateral described.² "While there are no magic words which create a security interest there must be language in the instrument which `leads to the logical conclusion that it was the intention of the parties that a security interest be created.'" Evans v. Everett, 279 N.C. 352, 183 S.E.2d 109, 113 (1971).

Section D.1 of the security agreement in this case contains language which explicitly grants or creates a security interest in the collateral to which it refers. An examination of the agreement, however, leads to the inevitable conclusion that these "words of grant" refer only to the items alluded to in the space provided below section D.1, and specifically enumerated in the list attached to the agreement. The language appearing in section D.1 does not refer or apply to the classifications of collateral listed in section D.2, and the latter section contains no language of its own which may be read as granting or creating a security interest. Section D.2 was clearly included only as a means of classifying collateral otherwise described for purposes such as determining the proper place for the filing of financing statements. See 12A Okl.St.Ann. § 9-109, and official comment 1. It cannot reasonably be interpreted as expressing the parties' intention to extend the description of collateral referred to by the words of grant appearing elsewhere in the agreement. "A long and complex security agreement . . . as herein should not have the purpose or effect of concealing a description of the collateral. . . . Anyone who examines the agreement should not be required to read and interpret all of the fine print at his peril. He would only be interested in the collateral, as clearly designated by the form itself." In re Radabaugh, 4 UCC Rep.Serv. 355, 357 (S.D.Ohio 1966) (Referee's opinion).

The fact that the parties signed and filed a financing statement which covered inventory, accounts receivable, and contract rights, in addition to...