Transamerica Commercial Finance Corp. v. Union Bank & Trust Co.

• Decision Date: 14 June 1991
• Court: Alabama Supreme Court
• Parties: 15 UCC Rep.Serv.2d 412 TRANSAMERICA COMMERCIAL FINANCE CORPORATION and Transamerica Fleet Leasing Corporation v. UNION BANK & TRUST COMPANY. 89-1400.

Page 1299

584 So.2d 1299

15 UCC Rep.Serv.2d 412

TRANSAMERICA COMMERCIAL FINANCE CORPORATION and Transamerica Fleet Leasing Corporation v. UNION BANK & TRUST COMPANY.

89-1400.

Supreme Court of Alabama.

June 14, 1991.

Rehearing Denied Aug. 9, 1991.

Philip H. Butler and Scott R. Talkington of Robison & Belser, Montgomery, for appellants.

Robert W. Bradford, Jr. and H. Byron Carter III of Hill, Hill, Carter, Franco, Cole & Black, Montgomery, for appellee.

KENNEDY, Justice.

Transamerica Commercial Finance Corporation and Transamerica Fleet Leasing Corporation (hereinafter together called "Transamerica") ¹ appeal from a judgment entered by the Montgomery Circuit Court for Union Bank & Trust Company.

In 1984, Transamerica executed a "floor plan" agreement with Tom Wright, d/b/a T & W Coach Sales. The agreement provided that Transamerica would finance T & W's purchase of vehicles for resale in exchange for a security interest in T & W's existing and after-acquired collateral. Transamerica properly perfected its security interest in T & W's inventory by filing a financing statement with the Secretary of State of Alabama.

From 1984 to 1988, Transamerica financed, pursuant to the security agreement, the purchase of many vehicles for T & W. The security agreement provided that, until the vehicles were sold by T & W, Transamerica had the right to hold in its possession the "certificates of origin" or the "manufacturer's statements of origin" ² relating to the vehicles purchased by T & W and financed by Transamerica:

"If applicable, [T & W] shall upon the request of [Transamerica], deliver to [Transamerica] the Certificate of Title, Certificate of Origin or Manufacturer's Statement of Origin issued for each item of inventory consisting of Vehicles and [Transamerica] shall have the right to hold the same until such items of inventory are sold and to have its lien or security interest noted thereon." (Emphasis added.)

Edward Price, Transamerica's "division control manager" for Montgomery, stated that upon receipt of notice that a vehicle it had financed had been sold, Transamerica would release to T & W the certificate of origin ("CO") and the manufacturer's statement of origin ("MSO") for that vehicle. It is not disputed, and the security agreement states, that Transamerica could note its security interest in a vehicle on the CO and MSO for that vehicle.

The six vehicles made the basis of this appeal, five limousines and a hearse, were purchased by T & W in 1987 and 1988 pursuant to the security agreement with Transamerica. It is not disputed that Transamerica had a perfected security interest in those six vehicles. Subsequently, T & W informed Transamerica that it had sold the six vehicles. It is undisputed that Transamerica released the CO's for those vehicles to T & W; however, Transamerica did not note thereon its security interest in the vehicles. The vehicles were purchased by Wright Leasing Company, which was owned and operated by Tom Wright, and its place of business was located at the same address as T & W. Transamerica was aware of the existence of Wright Leasing; however, at the time the six vehicles were sold, it did not know that the vehicles were sold to Wright Leasing.

Subsequent to the transfer of the six vehicles to Wright Leasing, Wright Leasing approached Union Bank to obtain loans to pay for the six vehicles. As indicia of ownership of the vehicles, Wright Leasing presented the CO's and MSO's for the vehicles to Union Bank. ³ Union Bank lent the purchase money for the six vehicles to Wright Leasing. In turn, Wright Leasing paid T & W the purchase prices of the vehicles. However, because of "cash flow problems," T & W did not remit to Transamerica the amount it owed for the vehicles. Wright Leasing defaulted on its note payments to Union Bank. Union Bank repossessed the vehicles from Wright Leasing.

Transamerica filed a complaint for declaratory judgment and a temporary restraining order against Union Bank. In its complaint, Transamerica alleged that it had a prior security interest in the six vehicles. The trial court granted Transamerica's application for a temporary restraining order. Thereafter, Transamerica filed an application for a preliminary injunction, in which it requested the trial court to enjoin Union Bank from transferring the vehicles until such time as the trial court could hold a hearing on the merits of its complaint. The trial court granted the application. The case was tried without a jury, and the trial court held that Transamerica did not have a security interest in the vehicles. It further held that, even if Transamerica had a security interest in the vehicles, it was estopped from asserting that it had such a security interest and that it had waived its right to claim a security interest. The trial court entered a judgment for Union Bank. Transamerica appeals.

This Court decides this case on the following issues:

I. Whether Transamerica is estopped from arguing, or has waived its right to argue, that it has a security interest in the six vehicles.

II. Whether the trial court erred in holding that, pursuant to Ala.Code 1975, § 7-9-307(1), Wright's Leasing was a "buyer in the ordinary course of business."

I.

At trial, Transamerica's primary argument was that, pursuant to the Uniform Commercial Code, it had a prior security interest in the six vehicles. Union Bank argued that, under the Uniform Commercial Code, Transamerica was estopped from asserting its alleged prior security interest in the vehicles. Specifically, Union Bank argued: Transamerica's security interest was not listed on the CO's and MSO's for the six vehicles, which, in turn, were presented to Union Bank as collateral for the notes; it is the custom in the lending industry to forgo searches for financing statements on vehicles where one is presented with unrestricted CO's and MSO's; because no security interest was listed on the CO's and MSO's, Transamerica was estopped from asserting its alleged security interest in the vehicles.

In its order, the trial court held:

"[A]s the undisputed testimony indicated, the custom in the lending industry is not to check UCC filings for inventory liens when the bank is presented with unrestricted MSO's, CO's, or certificates of title. As ... Transamerica [did not give] notice of [its] lien on the MSO's or CO's presented to Union Bank, this Court finds that [Transamerica] is estopped from contending that they have a security interest superior to that of Union Bank and that they waived any right to claim a superior security interest. General Electric Credit Corp. v. Strickland Div. of Rebel Lumber Co., 437 So.2d 1240 (Ala.1983); Mazer v. Jackson Ins. Agency, 340 So.2d 770 (Ala.1976); Givens v. General Motors Acceptance Corp., 56 Ala.App. 561, 324 So.2d 277 (1975). Moreover, even if Union Bank had made a UCC search, it would have found no filing mentioning Wright's Leasing."

On appeal, Transamerica argues that it is not estopped from asserting its alleged security interest in the six vehicles.

The trial court's finding that industry custom estops Transamerica from asserting its alleged prior security interest is based on its reading of Ala.Code 1975, § 7-1-205, which concerns the effect of "usage of trade" on the contractual rights of parties. Thus, in order to resolve this issue, a review of the both the caselaw cited in the trial court's order and the relevant portions of Alabama's version of the Uniform Commercial Code is necessary.

While the cases cited in the trial court's order concern the issue of estoppel, they do not hold that a creditor who "floor plans" inventory for an automobile dealership is estopped from asserting a security interest where it has released unrestricted CO's and MSO's to the dealership. See General Electric Credit Corp. v. Strickland Div. of Rebel Lumber Co., 437 So.2d 1240 (Ala.1983) ("floor plan" creditor with perfected security interest in after-acquired inventory not estopped from asserting its security interest where it had not disclosed to consignor of inventory its security interest); Mazer v. Jackson Ins. Agency, 340 So.2d 770 (Ala.1976) (property developer estopped from developing buffer zone where it had failed to inform parties to agreement that original agreement was not permanent agreement); Givens v. General Motors Acceptance Corp., 56 Ala.App. 561, 324 So.2d 277 (Ala.Civ.App.1975) (defaulting debtor waived right to assert right in payments allegedly misapplied to debt where, after notice of alleged misapplication, debtor took no action).

In looking to the Uniform Commercial Code, we note first that Article 9 of the Code--"Secured Transactions"--(Ala.Code 1975, § 7-9-302) requires that a financing statement be filed to perfect a security interest in an automobile that is inventory held for resale by one in the business of selling goods of the kind. In this case, however, the trial court held that Transamerica's failure to observe the custom in the industry--to note its security interest on CO's and MSO's--estops it from arguing that it has a prior perfected security interest in the six vehicles.

The Uniform Commercial Code, Ala.Code 1975, § 7-1-205, defines "usage of trade" and explains its effect on the rights of parties. It states in pertinent part:

"(2) A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts. If it is established that such a usage is embodied in a written trade code or similar writing the interpretation of the writing is for the court.

"(3) A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement.

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