Security Bank v. Chiapuzio

• Decision Date: 15 December 1987
• Parties: , 76 A.L.R.4th 745, 5 UCC Rep.Serv.2d 8 SECURITY BANK, an Oregon banking corporation, Respondent on review, v. Robert CHIAPUZIO, individually and as Trustee of Robert Chiapuzio, M.D., P.C., Defined Benefit Pension Plan and Trust, Petitioner on review, Henry K. Bunnell and Kandice Bunnell, husband and wife, Defendants. CC 85-712; CA A36872; SC S33920.
• Court: Oregon Supreme Court

Page 335

747 P.2d 335

304 Or. 438, 76 A.L.R.4th 745, 5 UCC

Rep.Serv.2d 8

SECURITY BANK, an Oregon banking corporation, Respondent on review, v. Robert CHIAPUZIO, individually and as Trustee of Robert Chiapuzio, M.D., P.C., Defined Benefit Pension Plan and Trust, Petitioner on review Henry K. Bunnell and Kandice Bunnell, husband and wife, Defendants.

CC 85-712; CA A36872; SC S33920.

Supreme Court of Oregon In Banc.

Argued and Submitted Sept. 3, 1987.

Decided Dec. 15, 1987.

[304 Or. 439-A] John H. Draneas, of John H. Draneas & Associates, P.C., Portland, argued the cause and filed the petition for petitioner on review.

Martin E. Stone, of Slack, Stone and Gillespie, Coquille, argued the cause and filed a response to the petition for respondent on review.

JONES, Justice.

The issue in this case is whether the assignment of a vendor's security interest in a land sale contract, together with his interest in the land subject to the contract, all for the purpose of securing a loan, is a security interest covered by Article 9 of the Uniform Commercial Code (UCC) and therefore required to be recorded under ORS 79.1010 to 79.5070 (hereafter referred to as Article 9). The Court of Appeals held that it was not. Security Bank v. Chiapuzio, 84 Or.App. 35, 733 P.2d 80 (1987). Although we hold that the assignment of one of the two interests involved--the interest in the land sale contract--is subject to Article 9, we affirm the result of the Court of Appeals' decision on other grounds.

This case involves a dispute over the priority of claims to a land sale contract in Coos County. The dispute arose when plaintiff, Security Bank (the Bank), sued to foreclose its security interest in a land sale contract and the land subject to the contract. The Bank had acquired the vendor's interest in the land sale contract and the property subject to the contract as collateral for a loan to the vendor, Henry Bunnell. Defendant Robert Chiapuzio, who, without actual knowledge of that earlier transaction, also purchased the vendor's interest in the contract and the land after the vendor had transferred his interest to the Bank as security, contests the foreclosure. He claims that the Bank's interest is inferior to his later-acquired one because the Bank did not file notice of its security interest in accordance with the requirements of Article 9 of the UCC.

The central point of Chiapuzio's claim to the contract and the land is that, despite the vendor's continued interest in real property, the Bank's security interest in the vendor's interest is within the coverage Chiapuzio asserts that Article 9 applies to the Bank's transaction with the vendor because the transaction involved, inter alia, the Bank's taking a security interest in a contract; the fact that the Bank also took an interest in the land subject to the contract is, in Chiapuzio's view, irrelevant. The Bank takes the opposite tack, arguing that Article 9 does not apply because the transaction involved the vendor's assignment of his interest in land subject to a contract of sale. To the Bank, the fact that it also took an interest in the contract is irrelevant.

of Article 9. Chiapuzio seeks the protection of Article 9 because, he argues, as a purchaser of these interests he has a better claim than does the Bank. Chiapuzio asserts that the Bank is the holder of an unperfected security interest. ¹

Answering these claims requires harmonizing two sections of the UCC which mirror the competing claims of the parties. ORS 79.1040(10) (upon which the Bank relies) states that Article 9 does not apply to the creation or transfer of an interest in or lien on real estate, ² while ORS 79.1020(3) (upon which Chiapuzio relies) states that the "application of the Article to a security interest in a secured obligation is not affected by the fact that the obligation is itself secured by a transaction or interest to which this Article does not apply." ³

Resolution of these competing claims requires us to examine the nature of the interests in a land sale contract held by a vendor and to determine whether Article 9 of the UCC as adopted in Oregon includes any or all of these interests within its regulatory framework.

INTERESTS IN THE LAND

There is no dispute in this case that the transfers by Bunnell to the Bank were intended to give the Bank a security interest and were not intended to be a sale or other absolute transfer. Because the subject of Article 9, secured transactions, is involved, Article 9 is potentially applicable, unless all the rights that the Bank acquired Bunnell transferred all of his "right and interest in and to" the property to secure his loan. In spite of this absolute language, however, he was attempting only to create a legal position akin to a mortgage on the property. Even absolute language of a transfer of title will be considered to be a mortgage if that is the intent of the parties. Kohler v. Gilbert, 216 Or. 483, 339 P.2d 1102 (1959); Umpqua Forest Industries v. Neenah-Oregon Land Co., 188 Or. 605, 217 P.2d 219 (1950); Conley v. Henderson, 158 Or. 309, 75 P.2d 746 (1938). The Bank filed notice of this collateral interest in the county records to give notice of its prior claim to Chiapuzio or other subsequent purchasers of the land. In the event of a default by Bunnell, absent any other intervening interests, the Bank would claim the right, through proper foreclosure proceedings, to gain full title to the vendor's interest in the land. The Bank's position is to this extent sound, for, when Bunnell transferred this interest to the Bank as part of the security for his loan, the Bank became equivalent to a holder of a mortgage on real property. Because it involved an interest in real property, this part of the transaction was outside Article 9, specifically exempted by ORS 79.1040(10).

from Bunnell are exempted interests in or liens on real estate under ORS 79.1040(10).

DIVISIBILITY OF THE INTERESTS

The fact that the Bank gained an interest in Bunnell's real property does not completely answer Chiapuzio's argument that the Bank's security interest comes within Article 9, however. The answer to this argument turns on whether Bunnell's assignment of the land sale contract was separate or separable from the assignment of the interest in the land. The Court of Appeals assumed that, because the assignment of an interest in the land and the interest in the contract together constituted an interest in real property, the entire transaction was excluded from the UCC by ORS 79.1040(10). This assumption overlooks the fact that the interest in the land may be separated from the interest in the contract. When viewed separately, the fact that the interest in the land is exempt does not mandate a conclusion that the interest in the contract is exempt.

Although Oregon law holds that the "assignment of a debt carries with it the security for the debt," First Nat'l Bk. v. Jack Mathis Gen. Cont., 274 Or. 315, 321, 546 P.2d 754 (1976), this court has held that an assignment of an interest in a land sale contract does not automatically include the transfer of an interest in the land. Howes v. Sherlock, 233 Or. 429, 378 P.2d 713 (1963); ⁴ see also Citizens Valley Bank v. Prahl/Benton Co., 11 Or.App. 97, 502 P.2d 284 (1972). In Pedersen v. Barkhurst, 139 Or. 483, 10 P.2d 347 (1932), this court held that a vendor can mortgage his interest in the land subject to a land sale contract without affecting the rights and obligations created by the land sale contract. Lathrop v. Lewis, 247 Or. 560, 431 P.2d 268 (1967), demonstrates that when the interests become separate the original intent of the party transferring the interest under the contract determines which subsequent holder has better rights to the land or to the proceeds of the contract.

These cases reflect that a vendor's interest in a land sale contract and in the land itself are separate interests. However, no Oregon case holds that a security interest in collateral that may become an interest in real property, such as a security interest in a land sale contract, is subject to Article 9 through ORS 79.1020(3).

The divisibility of the interests creates problems because, without the protection of Article 9, there is no certain method to determine priorities in such security interests in land sale contracts. ORS 93.710(1) provides for recordation of the interests created by a land sale contract and, now more clearly, for recordation of a security interest in the land subject to a land sale contract. ⁵ There is not, however, a corresponding provision allowing recordation of a security interest created in a land sale contract. The dispute in the present case is the result of just such a lack of recordation. In the present case the Bank has argued that recordation in the real property records is an acceptable means to meet the needs of purchasers and secured parties dealing in such interests. However, a decision by this court that recordation only in the real property records would be adequate to protect both interests against every type of subsequent claimant will not reflect the proper scope of either ORS 93.710(1) or 79.1020(3). Because it is possible to use the vendor's interest in the land sale contract as security without thereby automatically including the vendor's interest in the land, recording any security agreement involving a vendor's interest in a land sale contract may not protect the holder of that interest against all other claimants. When an interest in a land sale contract is assigned without a corresponding assignment of an interest in the land, recording in the real property records may not protect the security interest.

A vendor who assigns the vendor's interest in a land sale contract for security purposes may be assigning something separate from the vendor's interest in the land and, as we have said, these assignments are outside the protection of the land recordation system. The question...