Peoples Bank and Trust v. Reiff
| Decision Date | 27 July 1977 |
| Docket Number | P,No. 4698,No. 9303,4698,9303 |
| Parties | 22 UCC Rep.Serv. 823 The PEOPLES BANK AND TRUST, a corporation, formerly known as Peoples State Bank, of Parshall, North Dakota, and Donald Olson, Plaintiffs and Appellees, v. Marvin J. REIFF, d/b/a Gamblesarshall, North Dakota, and Anita M. Reiff, Defendants and Appellees, and Gamble-Skogmo, Inc., a Foreign Corporation, Defendant and Appellant. Civ. |
| Court | North Dakota Supreme Court |
Bosard, McCutcheon, Kerian, Schmidt & Holum, Minot, for defendant and appellant; argued by Jon R. Kerian and Robert S. Rau, Minot.
Bair, Brown & Kautzmann, Mandan, for plaintiffs and appellees; argued by Malcolm H. Brown, Mandan.
This appeal involves the priorities of Gamble-Skogmo, Inc., The Peoples Bank and Trust of Parshall, North Dakota (hereinafter the Bank), and Donald Olson, secured creditors of Marvin J. Reiff, d/b/a Gambles No. 4698.
In July of 1972 negotiations were entered into by Olson and Spidahl, Inc., Donald Olson (a shareholder in that corporation), The Peoples Bank and Trust (formerly known as Peoples State Bank) of Parshall, North Dakota, Gamble-Skogmo, Inc., and Marvin J. Reiff. At that time Reiff purchased from Olson and Spidahl, Inc., a hardware store, Gambles No. 4698, located in Parshall, North Dakota. On July 5, 1972, Reiff and his wife Anita executed a promissory note to the Bank in the sum of $46,300.
On July 7, 1972, Reiff and Gamble-Skogmo entered into a "security agreement and wholesale credit agreement", the terms of the security agreement granting to Gamble-Skogmo a security interest in "All inventory of goods and merchandise now in the possession of, or hereafter acquired by the Debtor which is held for sale or lease in connection with the Debtor's business", as well as the proceeds of such collateral. A financing statement relating to the security agreement was filed in the office of the North Dakota Secretary of State on July 20, 1972, at 3:30 p. m. as file No. 34,662.
Reiff executed two separate security agreements, dated October 1, 1972, in favor of the Bank, and on the same day signed a renewal promissory note for the $46,300. One security agreement, before us as plaintiffs' exhibit 2, stated as security "all inventory and accounts receivable", and checked off as collateral several items on the printed form, including personal property held for sale or lease, documents of title, accounts, contract rights, proceeds, and after-acquired property. The other security agreement, before us as plaintiffs' exhibit 3, lists as collateral "all furniture and fixtures of the Gamble Store No. 4698 located on lot 5, block 17, original townsite, Parshall, North Dakota." A financing statement relating to this collateral was filed with the North Dakota Secretary of State on November 2, 1972, at 11:00 a. m. as file number 36,436.
A subordination agreement was entered into on July 12, 1972, under the terms of which the Bank agreed to subordinate its claims against Reiff to those of Gamble-Skogmo. The agreement contained the following language: "The Subordinated Creditor agrees to and does hereby unconditionally, but subject to the terms, conditions and provisions herein (and in any RIDER annexed hereto and executed on behalf of Gambles) set forth, subordinate its claims against the Debtor . . .." This agreement was signed by Gary Lerberg for the Bank and by Marvin Reiff. Jim Isaak, an employee of Gamble-Skogmo, witnessed the signatures of Lerberg and Reiff. His signature did not indicate that he was signing for Gamble-Skogmo as a party.
By the terms of the subordination agreement the Bank agreed not to accept payment of the subordinated indebtedness until all of the superior indebtedness owed to Gambles shall have been paid in full. This document set no limit on the amount of subordinated indebtedness.
On December 11, 1973, a rider to the subordination agreement was executed by Reiff, the Bank, and Gamble-Skogmo. The operative part of that rider reads:
"Anything in the Subordination Agreement to the contrary notwithstanding, it is hereby mutually agreed that the provisions of the Subordination Agreement shall only apply to that portion of the Superior Indebtedness (as that term is defined in the Subordination Agreement) up to and including the first Fifteen thousand Dollars ($15,000.00) thereof unpaid from time to time; and that the priority of the remainder of the Superior Indebtedness unpaid from time to time shall be determined in accordance with the provisions of Article 9 of the Uniform Commercial Code, as adopted by the state wherein the Debtor's business is located." (Emphasis added.)
On May 15, 1974, Reiff issued a promissory note to the Bank in the sum of $15,000. Gary Lerberg, an officer of the Bank, testified that this $15,000 loan was made at the request of Gamble-Skogmo, so that Reiff could use the money to reduce his indebtedness to Gamble-Skogmo.
In early December of 1975, Gamble-Skogmo entered into possession of Gamble Store No. 4698 and began to liquidate assets of that store. Money from this liquidation was deposited to the account of Gamble-Skogmo, Inc. at the Peoples Bank & Trust of Parshall. The Bank refused to allow checks to be drawn on Gamble-Skogmo's account, and brought this action by summons and complaint dated December 30, 1975. Donald Olson was also a plaintiff in this action, brought against Marvin Reiff, Anita Reiff, and Gamble-Skogmo, Inc. Gamble-Skogmo answered and brought a counterclaim (which counterclaim was dismissed after trial and is not a subject of this appeal).
At the close of the trial, the district court for Mountrail County concluded that Gamble-Skogmo, by execution of the rider dated December 11, 1973, waived its priority in filing against Reiff for any money due it in excess of $15,000. The court, in its judgment, made the following determination of priorities with respect to the assets of Marvin Reiff in Gamble Store No. 4698:
Gamble-Skogmo appeals from this judgment.
The crux of Gamble-Skogmo's argument on appeal is that the rider to the subordination agreement did not operate to waive its priority against Reiff as to sums in excess of $15,000.
It has been the contention of the Bank, both at trial and on appeal, that it was the intention of the parties, in executing the rider, that the claim of the Bank be subordinated to that of Gamble-Skogmo only in the amount of $15,000. Gary Lerberg testified on behalf of the Bank that this was his intention, and that past transactions between Gamble-Skogmo and the Bank involving similar subject matter had been so limited, though this testimony was objected to by Gamble-Skogmo as violative of the parol evidence rule. The following letter was offered into evidence and was received over the objection of Gamble-Skogmo:
The trial court had before it evidence from which it could well have concluded that the Bank intended that there be a $15,000 limit on the subordination agreement. We must determine whether some form of parol evidence rule applies to this situation and, if so, what the scope of its application would be.
As the substance of the subordination agreement is not a "transaction in goods", it is questionable whether it is within the scope of Chapter 41-02, N.D.C.C. (Article 2 of the U.C.C.) and the parol evidence rule stated in Section 41-02-09, N.D.C.C. (U.C.C. § 2-202). See Section 41-02-02, N.D.C.C. (U.C.C. § 2-102). This question need not be resolved in the instant case because Section 41-02-09 N.D.C.C. and Section 9-06-07, N.D.C.C. are compatible. See Section 41-01-19, N.D.C.C.
Recognizing that the U.C.C., although specifying areas of exclusion and inclusion, nowhere delineates its general scope, we must determine whether the general provisions of Article 1 (Chapter 41-01, N.D.C.C.), relate to the subordination agreement involved in this case.
Section 41-01-02(1), N.D.C.C. (U.C.C. § 1-102(1)), states that the U.C.C. "shall be liberally construed and applied to promote its underlying purposes and policies." A comment to that section thus speaks of extending the coverage of broad acts:
"(Courts) have recognized the policies embodied in an act as applicable in reason to subject-matter which was not expressly included in the language of the act, . . . They have done the same where reason and policy so required, even where the subject-matter had been intentionally excluded from the act in general. . . . " Uniform Commercial Code § 1-102, Comment 1.
At least one treatise perceives Article 1 as relating to commercial transactions not covered in the other articles:
"Article 1 thus has a two-dimensional significance: it states basic concepts and definitions that run through all the remaining articles of the Code and for most courts it...
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