Mbank Alamo National Ass'n v. Raytheon Co.

886 F.2d 1449, 1989 WL 120010

• Court: Court of Appeals for the Fifth Circuit
• Decided: October 31, 1989
• Docket: Nos. 88-5576, 88-5590
• Status: Published

Opinions

REAVLEY, Circuit Judge:

MBank Alamo National Association (“MBank”) and E.I. DuPont de Nemours Company, Inc. (“DuPont”) pressed this conversion action against Raytheon Company (“Raytheon”), claiming that Raytheon collected certain accounts receivable, in which MBank and DuPont had security interests superior to those of Raytheon. Raytheon’s defense was that it had a purchase money security interest in the accounts receivable. Concluding that Raytheon had no purchase money security interest in the accounts, the district court held that Raytheon’s security interests were subordinate to those of MBank and DuPont, and granted MBank’s and DuPont’s motions for summary judgment. We affirm.

I. Background

MBank and DuPont entered various security agreements with Howe X-ray (“Howe”). By January 10, 1983, in accordance with these agreements, both DuPont and MBank held perfected liens in Howe’s present and future accounts receivable. MBank also held a perfected security interest in Howe’s present and after acquired inventory.

Beginning in January 1983, Raytheon, an x-ray equipment manufacturer, entered a series of transactions with Howe who was one of its distributors. Raytheon agreed to ship x-ray equipment to Howe after Howe contracted with one of its customers for the sale, delivery, and installation of certain Raytheon equipment. In exchange, Howe agreed to assign the specific accounts receivable to Raytheon. Subsequent to the assignments, Raytheon filed financing statements in specific accounts receivable of Howe. Between July 1983 and December 1984, Raytheon collected over $850,000.00.

By November 1984, Howe had defaulted on its obligations to MBank and DuPont. MBank and DuPont, pursuant to their security interests, demanded payment from Raytheon from the accounts receivable that it had collected. Raytheon refused, claiming that it had a purchase money security interest (“PMSI”) in the accounts receivable and that its interests were therefore superior to those of MBank and DuPont.

In addition to its contention that it had a PMSI in the accounts receivable, Raytheon claimed that even if it did not have a PMSI in those accounts, MBank waived its security interest in the accounts. The district court granted MBank’s and DuPont’s motions for summary judgment, deciding that Raytheon had no PMSI in the accounts receivable and that Raytheon had not raised an issue of MBank’s alleged waiver.

Raytheon appeals the district court’s determination that it did not have a PMSI in the accounts receivable. In the alternative, Raytheon contends that if our construction of the PMSI statutory provisions excludes the Raytheon-Howe transaction, the ruling should not apply to this case under the doctrine of nonretroactivity. Raytheon also appeals the district court’s finding that Raytheon failed to produce sufficient evidence of waiver to overcome MBank’s motion for summary judgment.

II. Analysis

A. Purchase Money Security Interests

The rules governing the rights of creditors are set out in Chapter 9 of the Texas Business and Commerce Code (“Code”), which essentially adopted the provisions of the Uniform Commercial Code — Secured Transactions. See Tex.Bus. & Com.Code Ann. § 9.101 et seq. (Vernon 1989).¹ These provisions were enacted “to provide a simple and unified structure within which the immense variety of present-day secured financing transactions can go forward with less cost and with greater certainty.” § 9.101, 1972 Official U.C.C. Comment. In keeping with these goals, rules were enacted prioritizing conflicting security interests in the same property.

The general rule provides that the first perfected security interest to be filed has priority and other perfected interests stand in line in the order in which they were filed. See § 9.312(e). PMSIs are excepted from the first-to-file rule and take priority over other perfected security interests regardless of the filing sequence. § 9.312(c), (d). The district court found that Raytheon did not fall within the PMSI exception, that MBank had priority as the first to file, under § 9.312(e)(1), and that DuPont takes second priority since it filed next.²

Raytheon claims the district court erred by not recognizing its priority in the accounts receivable as a PMSI under § 9.312(d).³ Section 9.312(d) provides that “[a] purchase money security interest in collateral other than inventory has priority over a conflicting security interest in the same collateral or its proceeds if the purchase money security interest is perfected at the time the debtor receives possession of the collateral or within 20 days thereafter.”

As a threshold matter, Raytheon must establish that it meets the statutory definition of a PMSI. Raytheon contends that it fits the statutory requirements of a PMSI under § 9.107(2), which provides:

A security interest is a “purchase money security interest” to the extent that it is

(2) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used.

To meet these requirements Raytheon must show: (1) that it gave value; (2) that the value given enabled Howe to acquire rights in the accounts receivable; and (3) that the accounts receivable qualify as collateral within the meaning of the statute.

The value requirement is satisfied by any consideration sufficient to support a simple contract. See Thet Mah and Assoc, v. First Bank of North Dakota, 336 N.W.2d 134,138 (N.D.1983); § 1.201(44)(D) (Vernon 1968). Assuming arguendo that Raytheon gave value by extending credit to Howe in exchange for Howe’s promise to assign the accounts receivable to Raytheon, see Thet Mah, 336 N.W.2d at 138, Raytheon has failed to satisfy the other two requirements.

To create a PMSI, the value must be given in a manner that enables the debtor to acquire interest in the collateral. This is accomplished when a debtor uses an extension of credit or loan money to purchase a specific item. See Ingram v. Ozark Prod. Credit Assoc., 468 F.2d 564, 565 (5th Cir. 1972); In re Dillon, 18 B.R. 252, 254 (Bkrtcy.E.D.Cal.1982) (PMSI lien attaches to item actually purchased); Jackson & Kronman, Secured Financing and Priorities Among Creditors, 88 Yale L.J. 1143, 1165 (1979) (PMSI priority limited “to loans that can be traced to identifiable, discrete items of property.”).

The collateral at issue here is the accounts receivable. In an attempt to force its interest into the PMSI mold, Raytheon has characterized the transaction as follows: “Raytheon, by agreeing to extend credit on its equipment, enabled Howe X-Ray to enter into subsequent contracts of sale with its customers, thereby acquiring rights in the contract accounts which, upon the specific advance and delivery of equipment, blossomed into a right to the collateral accounts receivable.” Raytheon, however, cannot force this transaction to fit. To accept this characterization, we would have to close our eyes to the true nature of the transaction.

Raytheon, in essence, is claiming that it advanced x-ray machines to Howe on credit, which then enabled Howe to purchase accounts receivable from its customers. This, however, does not comport with our view of commercial reality. While, as Raytheon suggests, it may be theoretically possible to create a PMSI in accounts receivable by advancing funds for their purchase, see Northwestern Nat’l Bank Southwest v. Lectro Systems, 262 N.W.2d 678, 680 (Minn.1977); Gilmore, The Purchase Money Priority, 76 Harv.L.Rev. 1333, 1372 (1963), the same cannot be done by advancing x-ray machines. We view this as a two-step transaction in which Ray-theon first advanced machines to Howe for retail sale and, once these machines were sold, Howe then assigned the accounts receivable to Raytheon. Through the credit advance, Howe acquired an interest in the machines, not the accounts receivable. Raytheon’s credit advance, therefore, did not enable Howe to acquire an interest in the accounts receivable, as collateral within the meaning of the statute.

Additionally, in its characterization of the transaction, Raytheon is attempting to benefit from the PMSI’s preferred status in a manner that was not contemplated by the U.C.C. drafters. PMSIs provide an avenue for heavily burdened debtors to obtain credit for specific goods when creditors who have previously loaned money to the debtor may be unwilling to advance additional funds. Jackson & Kronman, Secured Financing and Priorities Among Creditors, 88 Yale L.J. 1143, 1145 & n. 9 (1979). By giving a PMSI holder a priority interest in the specific goods purchased, there is some incentive for a lender to advance funds or credit for the specific transaction. The scope of a PMSI holder’s preferred interest, however, is specifically limited by the Code.

Under § 9.312(c), a PMSI in inventory is limited to that inventory or to “identifiable cash proceeds received on or before the delivery of the inventory to a buyer....” The drafters noted that general financing of an inventory business is based primarily on accounts resulting from inventory, chattel paper and other proceeds. § 9.312, Official U.C.C. Reasons for 1972 Change comment (4). Reasoning that “[ajccounts financing is more important in the economy than the financing of the kinds of inventory that produce accounts, and [that] the desirable rule is one which makes accounts financing certain as to its legal position,” id., they specifically excluded accounts resulting from the sale of inventory from the protections of a PMSI. Thus, financing statements that are filed on a debtor’s accounts take precedence over any subsequent claim to accounts as proceeds of a PMSI in inventory. Additionally, to protect lenders who make periodic advances against incoming inventory, the PMSI holder is required to notify other secured parties before it can take priority. § 9.312(c)(2); see id., 1972 Official U.C.C. Comment comment 3.

The priority scheme, however, differs in the context of collateral other than inventory. Under § 9.312(d), a PMSI in collateral other than inventory entitles the holder to a superior interest in both the collateral and its proceeds regardless of any intervening accounts. The differing entitlement to proceeds is due to differences in the expectations of the parties with respect to the collateral involved.

Collateral other than inventory generally refers to equipment used in the course of business. See id., Official U.C.C. Reasons for 1972 Change comment (4); Gilmore, The Purchase Money Priority, 76 Harv.L. Rev. 1333,1385 (1963). Since, unlike inventory, “it is not ordinarily expected that the collateral will be sold and that proceeds will result, [the drafters found it] appropriate to give the party having a purchase money security interest in the original collateral an equivalent priority in its proceeds.” § 9.312, Official U.C.C. Reasons for 1972 Change comment (3).

Howe’s business primarily involved the sale of inventory, which included the Ray-theon x-ray machines. See § 9.109(4).⁴ The accounts receivable are proceeds resulting from the sale of the machines. MBank and DuPont took security interests in the accounts receivable, in accordance with their expectation that sale of the inventory would generate the accounts. If we were to accept Raytheon’s argument that it holds a PMSI in Howe’s accounts receivable, we would be giving Raytheon a priority interest in the proceeds of inventory, in direct contravention to the express intent of the drafters. Additionally, Ray-theon would have successfully avoided the notice requirements of § 9.312(c)(2).

Raytheon argues, however, that the policies underlying PMSIs actually favor recognizing Raytheon’s priority interest in Howe’s accounts. It points out that Howe could find no other source of financing besides Raytheon and that “MBank and DuPont benefited by the financing arrangements because the extension of [credit] by Raytheon helped Howe X-ray stay in business thereby servicing its debts.” Ray-theon also contends that if the Code is interpreted to limit the security interests of creditors, such as Raytheon, to a mere promise of repayment and the grant of a PMSI in inventory, a “valuable source of credit” to similarly encumbered debtors would “dry up.” This is because the risk of default is too great in the face of prior liens on the debtor’s accounts.

The Code itself, however, answers this argument. The drafters were apparently well aware that the failure to extend a PMSI holder’s priority status to the resulting accounts would provide less incentive for inventory financiers to provide credit. See § 9.312, 1972 Official U.C.C. Comment comment 8. Yet, they did not extend the protections of a PMSI and merely noted that “[m]any parties financing inventory are quite content to protect their first security interest in the inventory itself, realizing that when inventory is sold, someone else will be financing the accounts and the priority for inventory will not run forward to the accounts.” Id. The drafter’s recognition of the problem and the statutory favoring of accounts financing demonstrate that the drafters were not overly concerned that this source of financing would “dry up.”

Additionally, Raytheon had alternative means of securing its right to receive payment. Besides obtaining a PMSI in the inventory by complying with the § 9.312(c)(2) notice requirements, it could have entered subordination agreements with MBank and DuPont on the specific accounts resulting from the sale of Ray-theon’s x-ray machines. It also could have sold the machines to Howe’s customers who would have paid Raytheon directly, with Howe receiving a commission on the sale. If Raytheon had followed either of these courses, it would not have subverted the notice and filing requirements of the Code. As this transaction goes beyond that contemplated by the PMSI provisions, we decline “to expand the scope of special protection afforded a purchase money security interest, lest in so doing we defeat the underlying purposes of the Code: to bring predictability to commercial transactions.” Mark Prod. U.S., Inc. v. Interfirst Bank Houston, N.A., 737 S.W.2d 389, 393 (Tex.App.—Houston [14th Dist.] 1987).

Since Raytheon did not have a PMSI in Howe’s accounts receivable, the first-to-file priority rules govern. See Ford Motor Credit Co. v. First State Bank of Smithville, 679 S.W.2d 486, 487 (Tex.1984). As the last to file, Raytheon’s interest is subordinate to those of MBank and DuPont.

B. The Doctrine of Nonretroactivity

Having concluded that Raytheon did not have a PMSI, Raytheon now contends that because this case presented a novel question of law, the doctrine of nonretroac-tivity should apply. Under the doctrine of nonretroactivity a court deciding a question of first impression, in a manner that was not clearly foreshadowed, makes the ruling inapplicable to the parties before it. See Chevron Oil Co. v. Huson, 404 U.S. 97, 106, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971). This is no ease for nonretroactivity. The holding that Raytheon did not have a PMSI in the accounts receivable is required by the statute and commentary, given the PMSI restrictions and the Code’s clear mandate that first-to-file rules establish the priorities in accounts resulting from the sale of inventory. The goal of providing predictability in commercial transactions is furthered by the present application of our holding. Moreover, we find no inequity in applying the rule to Raytheon. Raytheon’s credit managers were well aware of the first-to-file rule yet, at no time, attempted to notify MBank or DuPont about its purported interest in the accounts. It did not pursue alternative means of securing payment, but merely claimed a priority right in the absence of any authority to do so.

C. Waiver

Lastly, Raytheon contends that the district court erred in holding that Raytheon failed to produce sufficient evidence that MBank waived its security interest in the accounts to overcome MBank’s motion for summary judgment. To support its claim, Raytheon presented evidence that MBank was informed that Howe and Raytheon were engaged in ongoing credit negotiations and that Howe was assigning the accounts receivable to Raytheon. Additionally, while MBank was aware that it was not receiving full payment of Howe’s accounts receivable, MBank never requested that the accounts proceeds be segregated or held in trust for the bank.

Waiver is a valid defense to an action to enforce a security interest. Weisbart & Co. v. First Nat’l Bank of Dalhart, Texas, 568 F.2d 391, 396 (5th Cir.1978); Montgomery v. Fuquay-Mouser, Inc., 567 S.W.2d 268, 270 (Tex.Civ.App.1978). Under Texas law, “[wjaiver is the intentional relinquishment of a known right or intentional conduct inconsistent with claiming it, with full knowledge of the material facts.” Montgomery, 567 S.W.2d at 270.

Although Raytheon’s evidence suggests that MBank knew about the assignment of the accounts receivable, the assignment alone did not interfere with MBank’s rights, because any assignment would be subordinate to MBank’s security interest. MBank’s rights were not infringed until Raytheon collected the accounts receivable. To raise the issue of whether MBank intended to relinquish its security interest in the accounts receivable, Raytheon would at least have to present evidence that MBank knew Raytheon was collecting the accounts. Raytheon did not do so. The district court properly granted the motions for summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986); Washington v. Armstrong World Indus., 839 F.2d 1121, 1122-23 (5th Cir.1988) (per curiam). The judgments for MBank and DuPont are AFFIRMED.

1 . All statutory references in this opinion are to the Texas Business & Commerce Code unless otherwise indicated.

2 . The district court also found that because MBank had a continuously perfected interest in the inventory since January 17, 1980, MBank has priority in the accounts as proceeds of inventory under § 9.306(c). Because we reach our decision under § 9.312(e)(1), we need not discuss this finding.

3 .Raytheon claims a PMSI in the accounts receivable and not in the inventory. Raytheon cannot claim a PMSI in this inventory because it did not comply with § 9.312(c)(2), which requires a PMSI holder to notify in writing the holder of a conflicting security interest in the same inventory.

4 . "The principal test to determine whether goods are inventory is that they are held for immediate or ultimate sale.” § 9.109(4), 1972 Official U.C.C. Comment comment 3.