National Bank of Harvey v. International Harvester Co., 870092

• Decision Date: 16 March 1988
• Docket Number: No. 870092,870092
• Citation: 421 N.W.2d 799
• Parties: NATIONAL BANK OF HARVEY, Harvey, North Dakota, Plaintiff, Appellee and Cross-Appellant, v. INTERNATIONAL HARVESTER COMPANY and International Harvester Credit Corporation, Defendants, Appellants and Cross-Appellees. Civ.
• Court: North Dakota Supreme Court

Page 799

421 N.W.2d 799

NATIONAL BANK OF HARVEY, Harvey, North Dakota, Plaintiff, Appellee and Cross-Appellant, v. INTERNATIONAL HARVESTER COMPANY and International Harvester

Credit Corporation, Defendants, Appellants and

Cross-Appellees.

Civ. No. 870092.

Supreme Court of North Dakota.

March 16, 1988.

Zuger & Bucklin, Bismarck, for plaintiff, appellee and cross-appellant; argued by Daniel S. Kuntz.

Vogel, Brantner, Kelly, Knutson, Weir & Bye, Ltd., Fargo, for defendants, appellants and cross-appellees; argued by Jon R. Brakke.

MESCHKE, Justice.

International Harvester Company [IH] and International Harvester Credit Corporation [IHCC] appealed from a decision that the National Bank of Harvey held a superior security interest in the paid-for parts inventory of Bentz Implement Company, that IH and IHCC converted the Bank's property when they repossessed that parts inventory, and that the Bank was entitled to $204,689.11 in damages for the conversion. The Bank cross-appealed, seeking prejudgment interest on the award of damages. We remand to modify calculation of damages and to award prejudgment interest, and we otherwise affirm.

Bentz Implement Company, a sole proprietorship owned by Gordon Bentz, was an International Harvester dealer at Harvey, North Dakota. Bentz Implement used "floor-plan" financing from IHCC for its wholegoods inventory, but purchased its parts inventory from IH on a "30-days cash" basis. Both IH and IHCC held perfected security interests in Bentz Implement's inventory, accounts receivable, and proceeds.

On May 8, 1976, the Bank loaned Bentz $68,000 to purchase additional inventory, and the Bank took a security interest in Bentz Implement's inventory, accounts receivable, and proceeds, which was then clearly subordinate to the perfected security interests of IH and IHCC.

In the fall of 1976 Gordon Bentz and his son, Bruce, went to the Bank for additional financing. They contemplated that Bruce would acquire an interest in the business, by either incorporation or transfer of the dealership. The Bentzes sought a loan of $300,000, including $150,000 to pay on the "floor-plan" obligation to IHCC. One of the Bank's conditions for the loan was that IH and IHCC subordinate their first priority in Bentz Implement's paid-for parts inventory.

Gordon and Bruce Bentz then met with officials of IH and IHCC to seek approval of a transfer of the dealership to Bruce. They informed IH and IHCC about conditions for the Bank loan, including the requirement that IH and IHCC subordinate their interest in the paid-for parts inventory. IH and IHCC were also made aware that if transfer of the dealership to Bruce Bentz was rejected, Gordon Bentz nevertheless intended to proceed with the refinancing plan.

On October 29, 1976, IH wrote Bentzes that it would not approve transfer of the dealership to Bruce. The letter referenced an enclosed subordination agreement signed by representatives of IH and IHCC, which Bruce forwarded to the Bank. The agreement was signed by a Bank officer and returned to Bruce Bentz, who returned it to IH and IHCC to add omitted signatures of witnesses. The Bank, believing that the subordination agreement gave the Bank priority in the paid-for parts inventory of Bentz Implement, then loaned $300,000 to Gordon Bentz. $150,000 of the loan proceeds was paid to IH and IHCC on Bentz Implement's obligations. Bentz Implement thereafter periodically gave the Bank statements showing the value of the parts inventory.

Bentz Implement was closed in October 1983, and IH and IHCC repossessed the inventory. While IH and IHCC representatives were packaging the parts for return to IH, Bank officials informed them that the Bank claimed a superior interest in the parts. After discussion, the parties agreed that IH and IHCC could remove the parts, subject to later resolution of the priorities of their respective claims.

Both sides also claimed security interests in a used 1480 IH combine. The combine had been taken on trade by Bentz Implement and IHCC acquired a security interest in the combine through its floor-plan agreement. Thereafter, this combine was sold to Tim Seibel, although Bentz Implement failed to remit the proceeds to IHCC. Later, the combine was placed back on the lot when Bentz Implement agreed to sell it for Tim Seibel or to buy it back from him. Bentz Implement was unable to sell the combine, and, lacking funds, failed to purchase it. Finally, the combine was sold by Tim Seibel to the son of Gordon Bentz, Paul Bentz, and to Paul's wife, Londa. The purchase money was loaned by the Bank which perfected a security interest in the combine. The Bank later repossessed it.

The Bank sued IH and IHCC for conversion of the parts and to establish the priority of its security interest in the combine. The trial court ruled that IH and IHCC had wrongfully converted the stock of paid-for parts and that they had no interest in the combine. The trial court awarded the Bank damages of $204,689.11, but without prejudgment interest. IH and IHCC appealed, and the Bank cross-appealed, raising these issues:

1) Was the subordination agreement ambiguous?

2) Did the trial court properly interpret the subordination agreement?

3) Did the trial court apply the correct measure of damages?

4) Did IH and IHCC have a security interest in the combine?

5) Was the Bank entitled to prejudgment interest?

I.

IH and IHCC assert that the subordination agreement was not ambiguous and, therefore, the trial court should not have allowed extrinsic evidence about the intent of the parties.

Whether a contract is ambiguous is a question of law. Graber v. Engstrom, 384 N.W.2d 307, 309 (N.D.1986). A contract is ambiguous when rational arguments can be made for different positions about its meaning. Johnson v. Arithson, 417 N.W.2d 373, 375 (N.D.1987). On appeal, this court will independently review the contract to determine whether it is ambiguous. Vanderhoof v. Gravel Products, Inc., 404 N.W.2d 485, 491 (N.D.1987).

This subordination agreement provided:

"1. IH and IHCC hereby subordinate their security interests to the security interests of the Bank with respect to all inventory now or in the future held for resale by (Dealer) other than new inventory manufactured or sold by International Harvester Company and the proceeds thereof. IH and IHCC further subordinate their security interests to the security interests of the Bank and in the proceeds of the sale, in the ordinary course of retail trade, of any specific item of such new inventory manufactured or sold by International Harvester Company for which IH or IHCC have been paid in full by (Dealer), provided any specific item of equipment constituting proceeds is not being financed or to be financed by IHCC under IHCC's trade-in floor plan terms.

"2. The Bank hereby subordinates its security interest to any interests of IH and IHCC in all new inventory manufactured or sold by International Harvester Company now or hereafter held for resale by (Dealer). Further, the Bank subordinates its security interests to the interests of IH and IHCC in the proceeds of the sale of any item of such new inventory for which IH or IHCC have not been paid in full by (Dealer) or any item of equipment constituting proceeds which is being financed or to be financed by IHCC under IHCC's trade-in floor plan terms." (Emphasis added).

The Bank's position is that, by the second sentence of Paragraph 1, IH and IHCC subordinated their security interests in inventory manufactured or sold by IH for which IH and IHCC had been paid in full, as well as in its proceeds. The first sentence of Paragraph 2, however, seems to give IH and IHCC a superior interest in all new inventory manufactured or sold by IH, whether paid or unpaid.

IH and IHCC argue that the second sentence of Paragraph 1 applies only to the proceeds of sale of new inventory for which IH and IHCC had been paid. Based upon testimony of a Bank officer that the Bank would have believed it had a superior interest even if the word "and" was not in the second sentence of Paragraph 1, IH and IHCC make an argument that the word "and" can be read out of the agreement. But, the testimony of how someone would interpret an agreement if its language were different is of little aid in construing it as written.

IH and IHCC also argue that because Paragraph 2 of the agreement clearly gives them priority as to all new inventory that provision should control. IH and IHCC therefore contend that the word "and" should be read out of the contract and Paragraph 1 should be construed to apply only to proceeds.

Section 9-07-06, N.D.C.C., requires that a contract be interpreted as a whole:

"The whole of a contract is to be taken together so as to give effect to every part if reasonably practicable. Each clause is to help interpret the others."

The intention of the parties to a contract must be gathered from the entire instrument, not from isolated clauses, and every clause, sentence, and provision should be given effect consistent with the main purpose of the contract. Vanderhoof v. Gravel Products, Inc., supra, 404 N.W.2d at 491. IH and IHCC's contention that Paragraph 2 unambiguously gives them priority in new inventory ignores the conflicting provision in the agreement. See Bismarck Realty Co. v. Folden, 354 N.W.2d 636, 640 (N.D.1984).

We conclude that rational arguments can be made for different interpretations of the subordination agreement. Therefore the trial court properly concluded that it was ambiguous.

II.

IH and IHCC assert that the trial court erred when it interpreted the subordination agreement to give priority to the Bank's security interest in Bentz Implement's paid-for parts inventory.

IH and IHCC argue that, even if the agreement is ambiguous, the court must first look to the language of the contract in an attempt to reconcile conflicting provisions and determine the intent of the parties. IH and IHCC apparently misunderstand the...