Western Decor & Furnishings Industries, Inc. v. Bank of America

• Decision Date: 30 March 1979
• Citation: 154 Cal.Rptr. 287,91 Cal.App.3d 293
• Parties: , 26 UCC Rep.Serv. 567 WESTERN DECOR & FURNISHINGS INDUSTRIES, INC., Plaintiff, Appellant, and Respondent, v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Defendant, Respondent, and Appellant. Civ. 43240.
• Court: California Court of Appeals Court of Appeals

Page 287

154 Cal.Rptr. 287

91 Cal.App.3d 293, 26 UCC Rep.Serv. 567

WESTERN DECOR & FURNISHINGS INDUSTRIES, INC., Plaintiff, Appellant, and Respondent, v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Defendant, Respondent, and Appellant.

Civ. 43240.

Court of Appeal, First District, Division 4, California.

March 30, 1979.

Seyranian & Seibert, Hal F. Seibert, Oakland, for plaintiff, appellant, and respondent, Western Decor.

Severson, Werson, Berke & Melchior, Donald J. Querio, Edmund T. King, II, William S. MacKay, Theodore Sachsman, San Francisco, for defendant, respondent, and appellant.

CALDECOTT, Presiding Justice.

Plaintiff Western Decor & Furnishings Industries, Inc. (hereinafter Western Decor) filed a complaint against defendant Bank of America National Trust and Savings Association (hereinafter Bank of America) alleging three causes of action: the first for conversion, the second for interference with business relationship, and the third for breach of contract. Bank of America answered the complaint and filed a cross-complaint alleging that Western Decor failed to pay on several promissory notes.

At trial by jury, the court granted Bank of America's motion for nonsuit as to causes of action II and III.

The jury returned its verdict in favor of Western Decor on the first cause of action awarding damages in the amount of $1. The jury also found in favor of Western Decor and against Bank of America on the cross-complaint. ¹

Each party filed a cost bill and each party moved to tax the opposing party's costs. The court granted Bank of America's motion to tax Western Decor's cost bill, but only as to the attorneys' fees, allowing the remainder of the costs to stand. The court granted Western Decor's motion to tax Bank of America's entire cost bill.

Both parties have appealed from the judgment.

Prior to and during 1970, Western Decor received loans from Bank of America. However, in the latter part of the year, Bank of America declined to extend any further credit either through accounts receivable financing or through direct loans.

In December 1970, Western Decor was successful in obtaining accounts receivable financing through Morris Plan. According to the financing agreement, after Western Decor sold a product, Morris Plan would pay Western Decor 80 percent of the amount of invoice sent to the buyer. Morris Plan then had the responsibility of collecting the amount owed. Before commencing the financing program, Morris Plan requested Bank of America to sign a release of its security interest in Western Decor's accounts. On December 18, 1970, Bank of America signed a release.

On February 9, 1971, Western Decor and Bank of America executed a new security agreement which updated the existing security agreement. This was done primarily because the existing security agreement had predated both a merger and a name change on the part of Western Decor.

In June 1971, William Horne (hereinafter Horne), a loan officer at the Bank of America, formally notified Western Decor that it was in default in its indebtedness to Bank of America which totalled approximately $50,000.

On July 20, 1971, Bank of America proposed a consolidated lending plan which provided that Bank of America refinance all of Western Decor's indebtedness, including that which was owed to Morris Plan. The board of directors of Western Decor rejected the proposal.

Bank of America then decided to foreclose its security interest in Western Decor property. On July 26, 1971, Bank of America mailed a notice to 335 of the 356 account debtors, informing them of its security interest and of their duty to make payments to the Bank of America instead of Western Decor. Bank of America and Morris Plan had agreed that all monies collected by the Bank of America on overlapping accounts would be forwarded to Morris Plan. From the 335 accounts which had a face value of approximately $183,000, Bank of America and Morris Plan were able to collect only $12,347.46. ²

In August 1971, Bank of America seized the inventory from the Western Decor premises and on August 16, 1971, published a notice of public sale with respect to the inventory. Most of the inventory was sold for a total of $1,951.03. That which remained was later sold privately raising the total sale to $2,805. Although Western Decor had notice of the public sale, it did not receive notice of the private sale. After the collateral was liquidated, Western Decor owed Bank of America a deficiency balance of $32,231.72.

I Bank of America Was Entitled As A Matter of Law to Collect Directly From Western Decor's Account Debtors

In an instruction to the jury, the court stated it had determined as a matter of law that Bank of America had the right to notify each of the account receivable debtors in the manner it did on July 26, 1971. It is the contention of Western Decor the court erroneously relied on the Security Agreement executed on February 9, 1971, ³ and that no security interest in accounts receivable was granted in that agreement.

Western Decor contends that the February 9, 1971 agreement gave Bank of America only those rights it already had under the prior security agreement executed in 1967. Furthermore, that by signing a release of its security interest in accounts receivable on December 18, 1970, in favor of Morris Plan, Bank of America was without any security interest in accounts receivable on the date of the new security agreement. Since the new agreement did not provide for an increase in indebtedness to Bank of America, it lacked consideration to give Bank of America a security interest in accounts receivable.

It is Bank of America's contention that the release signed in favor of Morris Plan was only a partial release resulting in subordination of its security interest in the accounts against which Morris Plan had loaned money. Even if the release extinguished Bank of America's security interest, Bank of America contends the new security agreement grants a security interest in accounts receivable. No new advancement of funds is necessary to support the new security agreement since a preexisting indebtedness is sufficient consideration.

California Uniform Commercial Code section 9203 states in pertinent part: "(1) a security interest is not enforceable against the debtor . . . with respect to the collateral and does not attach unless (a) . . . the debtor has signed a security agreement which contains a description of the collateral . . . and (b) Value has been given; and (c) The debtor has rights in the collateral." ⁴

California Uniform Commercial Code section 1201, subdivision (44), defines "value" in the following manner: a person gives value for rights if he acquires them as security for or in total or partial satisfaction of a pre-existing claim.

There is no dispute that Western Decor was in debt to Bank of America on February 9, 1971. Western Decor's preexisting debt is sufficient consideration for the execution of the new security agreement.

Western Decor further contends that the February 9, 1971 agreement did not give the Bank of America a security interest in both the inventory and the accounts receivable. The security agreement expressly provides that Bank of America as the secured lender is granted a security interest in Western Decor's inventory and the proceeds thereof.

Western Decor contends that the phrase "proceeds thereof" was never intended to cover accounts receivable but instead, referred to insurance proceeds in case of any damage or theft of the inventory.

California Uniform Commercial Code section 9306, subdivision (1) defines "proceeds" as follows: " 'Proceeds' includes whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds. Insurance payable by reason of loss or damage to the collateral is proceeds . . . . Money, checks, deposit accounts, and the like are 'cash proceeds.' All other proceeds are 'noncash proceeds.' "

Although we find no California case on point, the use of case law in other jurisdictions which have adopted, like California, the Uniform Commercial Code's definition of "proceeds," is appropriate.

The Supreme Court of Rhode Island stated in Matthews v. Arctic Tire, Inc. (1970) 106 R.I. 691, 262 A.2d 831, 833, that: "Proceeds . . . is whatever is received when the collateral (in this case the inventory) is sold. Accordingly, when respondent sold any of the collateral, it received cash or a right to payment at a future date an account. Thus it is clear that accounts resulting from any sale of respondent's inventory are indeed proceeds . . . ." (See Farnum v. C. J. Merrill, Inc. (Me.1970) 264 A.2d 150.)

Although the parties had a right to limit the broad statutory definition of proceeds, there was no expression in the new security agreement that a narrower interpretation of proceeds was to be used. Thus, we are bound by the statutory meaning, and hold that Bank of America, while obtaining a security interest in the inventory and proceeds thereof, was also granted a security interest in the accounts receivable.

Western Decor also asserts that only an assignee of accounts receivable may seek payment from the account debtor, citing California Uniform Commercial Code section 9502, subdivision (1), which states: "When so agreed and in any event on default the secured party is entitled to notify an account debtor or the obligor on an instrument to make payment to him whether or not the assignor was theretofore making collections on the collateral, and also to take control of any proceeds to which he is entitled under Section 9306." Western Decor claims that since Bank of America is a creditor and not an assignee, it cannot take the benefits of section 9502, subdivision (1), in reducing Western Decor's indebtedness. This theory that a distinction exists between an assignee of accounts receivable and a holder of a security interest in proceeds in the application of section...