Wo Co. v. Benjamin Franklin Corp., No. 77-1070

• Decision Date: 30 September 1977
• Docket Number: No. 77-1070
• Citation: 20 UCC Rep. 1015,562 F.2d 1339
• Parties: WO CO. (Formerly NYTCO Leasing, Inc.), Plaintiff, Appellant, v. BENJAMIN FRANKLIN CORPORATION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 1339

562 F.2d 1339

WO CO. (Formerly NYTCO Leasing, Inc.), Plaintiff, Appellant, v. BENJAMIN FRANKLIN CORPORATION, Defendant, Appellee.

No. 77-1070.

United States Court of Appeals First Circuit.

Argued April 7, 1977.

Decided Sept. 30, 1977.

Richard B. Couser, Concord, N. H., with whom Orr & Reno Professional Ass'n, Concord, N. H., was on brief, for plaintiff, appellant.

Bernard A. Dwork, Boston, Mass., with whom John C. Ottenberg and Barron & Stadfeld, Boston, Mass., was on brief, for defendant, appellee.

Before COFFIN, Chief Judge, MILLER, Judge, ^* CAMPBELL, Circuit Judge.

LEVIN H. CAMPBELL, Circuit Judge.

In this diversity action for conversion of property claimed as collateral for a purchase price financing arrangement, WO Co. sought damages against the Benjamin Franklin Corporation (Franklin), which had sold the property to itself at a foreclosure sale pursuant to a competing security interest. Franklin answered that its claim to the disputed property was senior to WO Co.'s, but that in any event WO Co.'s interest was limited to the price paid for personal property sold at the latter of two consecutive foreclosure sales. After hearing some evidence concerning what the parties meant by a stipulation entered into before the foreclosure sales, the district court granted partial summary judgment for Franklin and bound WO Co. to the $30,000 realized at the second sale. At the end of the trial, the court entered judgment for WO Co. in the amount of $30,000, which WO Co. has appealed as inadequate. The sufficiency of this judgment is the only issue on appeal.

On August 17, 1972, Hagad Co., a five-man partnership formed to open a Holiday Inn in Campton, New Hampshire, mortgaged the premises of the new motel with Franklin in return for $1,200,000 construction financing. The mortgage included

as part of the realty all portable or sectional buildings, heating apparatus, plumbing, mantels, storm doors and windows, oil burners, gas and oil and electric fixtures, screens, screen doors, awnings, and other fixtures of whatever kind and nature, on said premises, or hereafter placed thereon prior to the full payment and discharge of this mortgage, insofar as the same are or can by agreement of the parties be made a part of the realty.

The mortgage was recorded September 8. On September 12, Hagad gave additional security to Franklin in the form of a chattel mortgage covering

All the furniture, furnishings and equipment, including all replacements, additions, and substitutions thereto, located or to be located in the motel . . . .

Franklin's chattel mortgage was filed with the Secretary of State of New Hampshire and the Town Clerk of Campton on October 12 pursuant to the UCC.

NYTCO Leasing, Inc. (NYTCO), the predecessor to WO Co., entered into a purchase money financing agreement with Hagad on September 25, 1972. NYTCO's security agreement, which was cast in the form of a leasing arrangement, had a seven year term and provided the nominal lessee, Hagad, an option to buy the property at the end of the term for "no more than 10% of the original equipment cost." The property covered by the agreement included bedroom furnishings, kitchen equipment, the front desk, two bars and bar furnishings, carpeting, cash registers, dining room furnishings, drapes, an internal telephone system, and various other furnishings appropriate to a motel. The security agreement included a clause stating:

It is mutually agreed that if leased (property) is attached to the real estate, it shall at no time become, or be considered a part of the real estate to which it is attached, but will at all times during the term of this Agreement remain the personal property of the Lessor.

NYTCO filed the leasing agreement with the Secretary of State on January 18, 1974, long after the time for obtaining priority over Franklin under N.H.Rev.Stat.Ann. § 382-A:9-312. NYTCO expended $362,504.62 for that portion of property leased to Hagad which is in dispute here.

On September 21, 1972, four days before Hagad signed the agreement with NYTCO, Franklin had sent a letter to Hagad concerning the contemplated purchase money financing of the furnishings:

Please be advised that the Chattel mortgage and financing statements under the Uniform Commercial Code which you have executed to this Corporation on the equipment to be installed in the Holiday Inn in Campton, N.H. shall be subject only to the purchase money financing of said equipment so that this Corporation will hold a second position with reference to the Chattels and equipment.

Although Franklin contended at trial that this letter constituted only a statement of intent, the district court found it to be an effective subordination agreement.

The motel at Campton never made a profit, and on May 1, 1974, Hagad, by that time a corporation, filed a petition for rearrangement under Chapter XI of the Bankruptcy Act. Matters did not improve, and on March 27, 1975, Hagad filed for bankruptcy and was adjudicated a bankrupt. Franklin applied to the bankruptcy court for permission to foreclose its real estate and chattel mortgages and on April 1 published notices regarding the sales. The notice of the real estate sale stated in part:

Said premises are conveyed subject to and with the benefit of easements, restrictions, agreements and reservations of record, if any there be, insofar as the same may be in force and applicable.

Notice of the personal property foreclosure sale described the covered property as:

All tangible property of the Debtor however characterized or described, including without limitation, all equipment, inventory, machinery, furniture and furnishings and motor vehicles, wherever located, and whether now owned or hereafter acquired.

NYTCO also requested permission to foreclose its security agreement with respect to the various furnishings. Negotiations ensued between the two creditors concerning a joint sale of the mortgaged premises and collateral, as the motel had a higher market value if fully furnished and the furnishings were worth much more if left in the motel. There was testimony that during these negotiations Mr. Walter Richey, President of NYTCO (and later President of WO Co.), said that the property it claimed, if removed from the premises, would have a value to his firm of only $30,000. While details of the negotiations remain murky, there was evidence that because they could not reach any agreement Franklin and NYTCO signed a stipulation permitting a sale to go forward while reserving their rights. The stipulation read:

STIPULATION

Benjamin Franklin Corporation and Nytco Leasing, Inc. agree as follows:

1) There are conflicting claims between these two parties as to their respective rights in and to certain personal property situated on the premises of the bankrupt in Campton, New Hampshire.

2) It is to the mutual benefit of the parties that the said personal property be offered for sale at the same time as the real estate in Campton, New Hampshire on which the business of the bankrupt was conducted, without prejudice to the rights of either party.

3) Nytco Leasing, Inc. agrees that Benjamin Franklin Corporation may sell said personal property in conjunction with or immediately following the sale of said real estate without waiving any claim or right, title and interest in and to said personal property that it has.

4) Benjamin Franklin Corporation agrees that the sale of said personal property, if sold, will not prejudice any claim or right, title or interest Nytco Leasing, Inc. has in and to said personal property, which claims and rights may be adjudicated in any forum having jurisdiction of the claims subsequent to the sale.

The sales went forward on April 25. Franklin without competition bid $750,000 for the realty and $30,000 for the personalty. Before the personal property sale, Franklin's attorney directed the auctioneer to read through the itemized list of property covered by NYTCO's lease, apparently because some reservations were entertained about the efficacy of the sale as to covered items which had become attached to the realty. Richey and counsel for NYTCO attended the auction but made no effort to bid. Richey testified that he believed the stipulation fully preserved NYTCO's rights in the property, so that he did not need to bid.

Immediately before the sale, both NYTCO and Franklin had attempted to obtain an appraisal of the personal property installed in the Campton motel. NYTCO hired Gary Gabrielson, a former employee of the company that supplied Holiday Inns with its furnishings, who visited the premises on April 24 and 25. Gabrielson attempted to evaluate the worth of the property in place, as used by the owner of the motel, by estimating the "reproduction cost less depreciation" of the property. He determined the cost of the property at past rates, added eight percent for shipping and eleven percent for appreciation over the two-and-a-half years since purchase, and then subtracted depreciation on a straight line basis with different useful lives calculated for various categories of property. The...