West One Bank, Utah v. Life Ins. Co. of Virginia

• Decision Date: 21 December 1994
• Docket Number: No. 930476-CA,930476-CA
• Citation: 887 P.2d 880
• Parties: 26 UCC Rep.Serv.2d 1243 WEST ONE BANK, UTAH, Plaintiff and Appellee, v. LIFE INSURANCE COMPANY OF VIRGINIA, Defendant and Appellant.
• Court: Utah Court of Appeals

Page 880

887 P.2d 880

26 UCC Rep.Serv.2d 1243

WEST ONE BANK, UTAH, Plaintiff and Appellee, v. LIFE INSURANCE COMPANY OF VIRGINIA, Defendant and Appellant.

No. 930476-CA.

Court of Appeals of Utah.

Dec. 21, 1994.

Rehearing Denied Jan. 24, 1995.

Russell C. Fericks and Gerald J. Lallatin, Salt Lake City, for appellant.

Carolyn Montgomery and James H. Woodall, Salt Lake City, for appellee.

Before BENCH, BILLINGS and WILKINS, JJ.

OPINION

BILLINGS, Presiding Judge:

Appellant Life Insurance Company of Virginia (Life of Virginia) appeals from a grant of summary judgment in favor of appellee West One Bank of Utah (West One). On appeal, Life of Virginia claims its right to retain United Underwriters Inc.'s (UUI) commissions is superior to West One's prior perfected security interest in these commissions and thus the trial court erred in granting judgment in favor of West One. We affirm.

FACTS

Summary judgment is only proper when "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Utah R.Civ.P. 56(c). In reviewing the trial court's grant of summary judgment, this court accepts the facts and inferences in a light most favorable to the losing party and gives no deference to the trial court's conclusions of law. Litster v. Utah Valley Community College, 881 P.2d 933, 937 (Utah App.1994).

Life of Virginia entered into an insurance brokerage contract with UUI in 1984. Under this contract, Life of Virginia agreed to pay UUI commissions on any Life of Virginia insurance policies it sold.

In late 1987, West One's predecessor, Continental Bank of Utah, loaned UUI $1,500,000. To secure payment of this promissory note, on December 22, 1987 UUI executed and delivered to West One a Collateral Pledge Agreement and Assignment of Contracts giving West One a security interest in commissions payable to UUI from various insurance companies, including commissions due UUI under its brokerage contract with Life of Virginia.

Subsequently, West One sent Life of Virginia a written notice of assignment informing it of the assignment of contracts from UUI, but not directing Life of Virginia to make future commission payments directly to West One.

Life of Virginia acknowledged receipt of the notice of assignment on December 30, 1987 and, because it had not been directed otherwise, continued to pay commissions directly to UUI without objection from West One. On March 2, 1988, West One perfected its security interest in the commissions payable to UUI from Life of Virginia.

In March of the following year, Life of Virginia advanced $100,000 to UUI, secured by a promissory note and an assignment to Life of Virginia of all of UUI's right, title and interest in any and all commissions to which UUI was entitled under the parties' brokerage contract. This assignment specified that Life of Virginia would pay UUI commissions in the form of credits against the balance of the loan. In 1989 and 1990, Life of Virginia applied $123,000 in UUI's commissions as they were earned to satisfy UUI's outstanding debt to Life of Virginia.

On June 19, 1992, West One filed a complaint alleging that UUI had defaulted on its Note and Pledge Agreement with West One and that UUI owed West One in excess of $668,000. In its complaint West One asserted that, contrary to West One's prior perfected security agreement, Life of Virginia had wrongfully retained commissions payable to UUI to offset the balance of its subsequent note.

The trial court granted summary judgment in favor of West One and ordered Life of Virginia to pay West One all of the commissions it had retained as payment under its promissory note with UUI. Life of Virginia appeals, claiming West One's security interest in UUI's commissions is inferior to Life of Virginia's right to retain the commissions. ¹

ANALYSIS

In Utah, as well as in the majority of jurisdictions, a secured creditor's perfected security interest in a debtor's proceeds takes priority over any subsequent right of setoff. See Insley Mfg. Corp. v. Draper Bank & Trust, 717 P.2d 1341, 1347 (Utah 1986) (holding secured creditor's perfected security interest has "priority over 'anyone, anywhere, anyhow' ") (quoting Continental Am. Life Ins. Co. v. Griffin, 251 Ga. 412, 306 S.E.2d 285, 287 (1983)); accord Citizens Nat'l Bank v. Mid-States Dev. Co., 177 Ind.App. 548, 380 N.E.2d 1243, 1248 (1978). ² While conceding that a secured party normally stands before other creditors under article nine of the Uniform Commercial Code (UCC), including those asserting a subsequent setoff, Life of Virginia contends West One cannot benefit from this rule because Life of Virginia did not exercise a setoff when it retained the commissions due UUI under the brokerage contract. Rather, Life of Virginia argues, UUI simply used its commissions to pay its obligation to Life of Virginia, an unsecured creditor, before West One exercised its rights under section 9-318(3) of the UCC. Life of Virginia acknowledges that, if its retention of UUI commissions is, instead, properly characterized as a setoff, its claim to the commissions fails.

Life of Virginia relies on a view of setoff as it is defined under traditional rules of civil procedure. It maintains that its retention of commissions was not a setoff because the contracts giving rise to the retention arose from the same transaction. See Mark VII Fin. Consultants Corp. v. Smedley, 792 P.2d 130 (Utah App.1990). We do not find this argument persuasive. The contracts at issue in the instant matter are separate and do not constitute the same transaction. First, in 1984, Life of Virginia and UUI entered into a brokerage contract wherein Life of Virginia agreed to pay UUI commissions for each Life of Virginia policy that it sold. UUI subsequently assigned its rights to these commissions to West One. Then, in 1989 the same parties entered into a second contract in which Life of Virginia advanced funds to UUI to be paid in the form of credits against the commissions Life of Virginia owed to UUI. We find that these contracts constitute two distinct transactions.

Furthermore, this case is governed by the Uniform Commercial Code as adopted in Utah, see Utah Code Ann. tit. 70A (1990), and concerns the concept of setoff as it relates to priority of creditors under article nine. ³ In several cases factually similar to the case before us, courts have classified parties in Life of Virginia's position as setoff claimants and determined the priority of claims in light of the setoff rules set forth in section 9-318 of the UCC. First, the Utah Supreme Court held in an analogous case "[t]he effect of [the UCC] is to give the Article Nine secured party ... priority over 'anyone, anywhere, anyhow,' except as otherwise provided by the remaining Code priority rules." Insley Mfg. Corp., 717 P.2d at 1347 (quoting Continental Am. Life Ins. Co., 306 S.E.2d at 287). In that case, Insley Manufacturing Corporation (Insley) sold a backhoe to Schneider Machinery Sales (Schneider) and, to secure the debt, obtained a security interest in the backhoe and its proceeds in October 1978. Id. at 1342. In November of the same year, Insley properly perfected its security interest. In March 1979, Schneider established a business banking account with Draper Bank & Trust. Sometime in early October 1979, five checks drawn against Schneider's account were presented to the bank for payment. On October 5, the bank determined Schneider had insufficient funds to cover these checks, but paid them in overdraft. On October 9, Schneider sold the backhoe it had purchased from Insley and deposited the proceeds in its business bank account. The bank credited Schneider's account for the full amount of the deposit and then paid itself the money that it had loaned to Schneider on the overdraft. As a result, Schneider could not thereafter pay Insley the money it owed on the backhoe. Insley filed this action, asserting that its security interest in the proceeds was superior to the bank's right of setoff, and that the bank offset its own debt in derogation of Insley's prior perfected security interest. Id. at 1343. The Utah Supreme Court agreed and held, after a detailed discussion of article nine's applicability to setoff in this case, "the Code's priority rules require that Insley's interest must prevail over [the bank's] right of setoff." Id. at 1347.

Further, in In re Apex Oil Co., 975 F.2d 1365 (8th Cir.1992), the Eighth Circuit Court of Appeals decided another factually similar case under the priority rules of article nine. The controversy in Apex arose from a 1979 assignment and security agreement between Artoc Bank and Trust, Limited (Artoc) and Uni Refining, Inc. (Uni). Under the agreement, Uni assigned to Artoc all its present and future accounts receivable and the proceeds thereof to secure a note Artoc had given it. Id. at 1366-67. As part of the agreement, Artoc required Uni to place two stamped notices on each of its invoices, stating that Artoc had been granted a security interest in Uni's receivables and directing that payments be made to a lockbox in care of Uni and Allied Bank of Texas. In 1980, Uni sold several products to Apex Oil Company (Apex) and issued invoices bearing the stamped notices. Accordingly, Apex made payments to the lockbox. In December 1980, however, rather than remit payment to the lockbox, Apex offset the amount it owed to Uni against amounts Uni owed to Apex on Apex's own invoices. Shortly thereafter, Uni filed a petition for bankruptcy and Artoc filed suit against Apex to recover the sums that Apex used as a setoff. Both the trial court and the Eighth Circuit Court of Appeals applied the notice and priority rules of section 9-318 of the UCC to resolve this controversy. Id. at 1367-70.

Finally, in Pioneer Commercial Funding Corp. v. United Airlines, Inc., 122 B.R. 871 (Bankr.S.D.N.Y.1991), the United States District Court for the Southern District of New York...