Sussen Rubber Co. v. Hertz

• Decision Date: 26 June 1969
• Citation: 48 O.O.2d 12,19 Ohio App.2d 1,249 N.E.2d 65
• Parties: , 48 O.O.2d 12, 6 UCC Rep.Serv. 769 The SUSSEN RUBBER CO., Appellee, v. HERTZ, Trustee, Appellant.
• Court: Ohio Court of Appeals

Page 1

19 Ohio App.2d 1

249 N.E.2d 65, 48 O.O.2d 12, 6 UCC Rep.Serv. 769

The SUSSEN RUBBER CO., Appellee, v. HERTZ, Trustee, Appellant.

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

June 26, 1969.

Syllabus by the Court

1. A security agreement between a dealer and a creditor-supplier, which specifies that property acquired by the dealer subsequent to the time of the making of that agreement shall be further security for the initial indebtedness of the dealer to the creditor-supplier, if accompanied by new value given by the creditor-supplier at the time of the formation of that agreement, will permit the security interest of the creditor-supplier to attach to such after-acquired collateral if and when the debtor acquires same, and has rights therein, by consignment, in the ordinary course of his business.

2. Subsection (A) of Section 1309.15, Revised Code, which specifies that a security interest cannot attach until there is agreement that it attach, and value is given, and the debtor has acquired rights in the collateral, does not limit the rights which a debtor must have in such collateral to that of 'ownership rights.'

3. Where, in an action by a supplier of merchandise to a dealer on consignment against the trustee of a creditor of such dealer, who holds a valid security agreement which includes after-acquired property, the supplier depends for his right to maintain such action upon Section 1302.39(C)(2), Revised Code, it is incumbent upon the supplier to show that such dealer's creditors knew that such dealer was subsequently engaged in selling the goods of others.

4. It is prejudicial error for a trial court to enter judgment for a plaintiff-supplier for the value of merchandise claimed to have been converted by the defendant, when by the defendant's answer the reasonable value of such merchandise is put in issue by defendant, without hearing evidence as a foundation for such determination.

Geraci & LaPerna, Cleveland, for appellee.

Hertz & Kates, Cleveland, for appellant.

ARTL, Judge.

This is an appeal on questions of law from a judgment and final order of the Cleveland Municipal Court against defendant, appellant herein, in the sum of $2,563.85. The action arose out of plaintiff's petition for conversion which contended that defendant wrongfully took possession of goods owned by the plaintiff, which allegedly had a value of $2,347.11.

The facts indicate that, in February 1965, Hillcrest Auto Parts, a dealer in parts for automobiles, and Lee Motor Products, a supplier of such parts, entered into a discussion relative to the extension of credit by Lee to Hillcrest, which extension would be secured by a security interest in all the assets of Hillcrest, including any after-acquired property. Subsequently, Lee appointed defendant herein, Harlan Stone Hertz, as trustee, to be the secured party. Thereafter, the pertinent security agreement and accompanying financing statements were filed with both the Cuyahoga County Recorder and the Secretary of State of Ohio. At the time the agreement was entered into, Lee admittedly knew that Hillcrest would have to acquire goods from other suppliers. This factor caused Lee to extend credit to Hillcrest initially in the sum of $15,000, and, further, to extend additional credit on open account to Hillcrest.

In March 1965, Hillcrest and plaintiff, Sussen Rubber Company, also entered into a written agreement, whereby plaintiff agreed to deliver certain goods to Hillcrest on consignment. About this time, a salesman for Lee was advised that Hillcrest was going to acquire goods from the plaintiff. Thereafter, plaintiff delivered goods to Hillcrest pursuant to the consignment agreement and also pursuant to unrelated outright sales. Although the documents in respect to all the goods delivered to Hillcrest were introduced into evidence by plaintiff and made part of the record, these documents refer to goods sold by the plaintiff to Hillcrest as well as goods consigned by plaintiff to Hillcrest.

At no time did plaintiff file any document with any filing officer in respect to the consignment, and at no time did plaintiff attempt to determine whether the defendant or anyone else had filed financing statements in respect to Hillcrest.

Subsequently, in August 1965, Hillcrest was in default under the security agreement with defendant as trustees. At that time officers of Lee were advised that some of the goods in the possession of Hillcrest were on consignment from plaintiff. Also, at that time and according to defendant's uncontroverted testimony, the total obligations owed to Lee by Hillcrest, all of which were secured by all the assets of Hillcrest, including after-acquired assets, pursuant to the security agreement, were far in excess of $20,000.

Thereafter, the assets of Hillcrest were voluntarily turned over to the defendant, who, after public notice, sold them at public sale for the aggregate price of $20,000. After the giving of public notice, but prior to the sale, the plaintiff gave the defendant written notice of its alleged claim in the consigned goods.

Three major issues are involved in the present case. The first relates to the effect of the after-acquired property feature contained in the security agreement between Hillcrest and Lee Motor Products. The second is whether the present situation is governed by the provisions of Section 1302.39, Revised Code. The third concerns the method used by the trial court to determine the amount of the judgment rendered.

The first issue to be considered is whether the after-acquired feature of the security agreement, involving Hillcrest and defendant as trustee, applied to plaintiff's property which subsequently came into the possession of Hillcrest.

It is agreed that the security agreement between Hillcrest and defendant was effective and executed on February 25, 1965, and that plaintiff's consignment agreement with Hillcrest, as well as the delivery of the goods in question, was accomplished after the effective date of same. Plaintiff readily admits that the Uniform Commercial Code completely recognizes the validity of an after-acquired property clause in a security agreement, but, nevertheless, strongly contends that the effectiveness of such a clause 'is subject to certain limitations.' Plaintiff points out that there are three basic prerequisites to the attachment or to the existence of any security interest. The first subsection of Section 1309.15, Revised Code (U.C.C. 9-204)-entitled, 'When security interest attaches; after-acquired property; future advances'-sets out these specific requirements:

'(A) A security interest cannot attach until there is agreement, as defined in division (C) of section 1301.01 of the Revised Code, that it attach and value is given and the debtor has rights in the collateral. * * *'

Subsection (C), which also pertains to the present problem, should be considered in conjunction with subsection (A) above:

'(C) Except as provided in division (D) of this section (not applicable to the instant case), a security agreement may provide that collateral, whenever acquired shall secure all obligations covered by the security agreement.'

The following excerpt from the official 'Comment' to Section 1309.15, Revised Code, indicates the reason for considering subsections (A) and (C) simultaneously:

'2. Divisions (A) and (C) read together make clear that a security interest arising by virtue of an after-acquired property clause has equal status with a security interest in collateral in which the debtor has rights at the time value is given under the security agreement. * * *. That is to say: the security interest in after-acquired property is not merely an 'equitable' interest; no further action by the secured party-such as the taking of a supplemental agreement covering the new collateral-is required. * * *'

Returning to the question at hand, it must be re-emphasized that only three things are necessary for a security interest to attach to after-acquired property. One, an agreement that the security interest attach must be entered into; two, value must be given; three, the debtor must have rights in the collateral.

Since it must be conceded that, initially, a security agreement was entered into in the present case between Hillcrest (the debtor) and defendant trustee (the creditor), the only remaining questions relate to whether 'value' was given by defendant and whether the debtor had rights in the collateral obtained from plaintiff (Sussen Rubber Company) at the time defendant took possession thereof.

Considering the latter problem first, it appears that plaintiff's argument is based upon the premise that since 'there was a pure consignment; therefore, Hillcrest Auto Parts, Inc., the debtor, acquired no 'rights' in the property since this term as used in the code refers to 'ownership rights" (citing In re American Merchandising Co., D.C., 136 F.Supp. 952, which, however, is inapplicable to the present case). The point which plaintiff attempts to make is that a creditor, such as defendant herein, cannot attach any consignment property which subsequently comes into a debtor's possession from a third party, because such property was not contemplated as coming within the provisions of Section 1309.15, Revised Code, pertaining to attachment of a security interest in after-acquired property. Thus, according to plaintiff's theory, only property which is 'owned' by a debtor and acquired after a security agreement has been entered into can later be subject to a creditor's claim, so as to comply with that feature of Section 1309.15, Revised Code, which requires that 'the debtor has rights in the collateral.' Such an interpretation of the above statute must be rejected.

The specific provisions of Section 1302.39, Revised Code, which may be looked to in determining the status of the consignment property in the instant case, dictate the conclusion that as far as creditors are...