Sturdevant v. First Security Bank

Opinion

No. 14803 IN THE SUPREME COURT OF THE STATE OF MONTANA 1980

HAROLD LEE STURDEVANT, JR., Plaintiff and Appellant, VS . FIRST SECURITY BANK OF DEER LODGE, a banking corporation, and FIRST NATIONAL BANK OF HELENA, a nationally chartered bank, Defendants and Respondents.

Appeal from: District Court of the First Judicial District, Honorable Gordon R. Bennett, Judge presiding. Counsel of Record: For Appellant: Tipp, Hoven and Skjelset, Missoula, Montana For Respondents: ~anielsand Mizner, Deer Lodge, Montana

Submitted on briefs: January 24, 1980 Decided: 'EB 1 3 ,980 Filed: ~'Ec 2 & Mr. J u s t i c e J o h n C . Sheehy d e l i v e r e d t h e Opinion o f t h e C o u r t .

Appeal i s from a summary judgment g r a n t e d i n t h e D i s t r i c t

C o u r t , F i r s t J u d i c i a l D i s t r i c t , L e w i s and C l a r k County. The

D i s t r i c t C o u r t e n t e r e d summary judgment u p h o l d i n g t h e r i g h t

o f t h e r e s p o n d e n t b a n k s t o r e p o s s e s s a Mooney a i r c r a f t and

s e l l t h e same; t h e p r o c e e d s t o be a p p l i e d t o d e b t s owed by

H a r o l d Lee S t u r d e v a n t , S r . t o t h e banks.

The a c t i o n w a s f i l e d by Harold Lee S t u r d e v a n t , J r . on

O c t o b e r 31, 1978 when t h e p l a i n t i f f a l l e g e t h a t a Mooney

a i r c r a f t was w r o n g f u l l y r e p o s s e s s e d by t h e d e f e n d a n t b a n k s .

He p r a y e d f o r a p r e l i m i n a r y i n j u n c t i o n r e s t r a i n i n g t h e d i s p o s i n g

o f t h e a i r c r a f t and a s k e d t h a t he be g i v e n p o s s e s s i o n o f i t

d u r i n g t h e pendency o f t h e s u i t . The D i s t r i c t C o u r t i s s u e d a

temporary r e s t r a i n i n g o r d e r . The d e f e n d a n t banks f i l e d m o t i o n s

t o d i s m i s s on t h e ground t h a t t h e c o m p l a i n t f a i l e d t o s t a t e a

c l a i m upon which r e l i e f c o u l d be g r a n t e d . On November 21, 1978,

a h e a r i n g was h e l d o n t h e m o t i o n s t o d i s m i s s and a t t h e same

t i m e on a n o r d e r t o show c a u s e why a p r e l i m i n a r y i n j u n c t i o n

s h o u l d n o t be g r a n t e d t o g i v e p l a i n t i f f t e m p o r a r y p o s s e s s i o n

of t h e plane. Upon s t i p u l a t i o n by c o u n s e l , t h e m o t i o n s t o

d i s m i s s w e r e c o n v e r t e d t o m o t i o n s f o r summary judgment and

a f t e r p o s t h e a r i n g b r i e f s w e r e f i l e d and t h e m a t t e r s u b m i t t e d ,

t h e c o u r t g r a n t e d summary judgment i n f a v o r o f t h e banks.

The a g r e e d f a c t s a r e t h a t on August 4 , 1972, H a r o l d

Sturdevant, Sr. ( p l a i n t i f f ' s f a t h e r ) executed a s e c u r i t y

a g r e e m e n t w i t h F i r s t S e c u r i t y Bank o f D e e r Lodge s e c u r i n g

a n o t e f o r $15,069.62 t o p u r c h a s e a Mooney a i r c r a f t . The

p l a n e was l i s t e d a s c o l l a t e r a l on t h e s e c u r i t y agreement

which was r e c o r d e d w i t h t h e FAA on J a n u a r y 23, 1973.

-1- On August 21, 1975, t h e l o a n had been p a i d down by t h e

f a t h e r b u t t h e n o t e w a s renewed by him f o r a t o t a l sum o f

$10,970. There i s no e v i d e n c e t h a t any s e c u r i t y a g r e e m e n t

i n c o n n e c t i o n w i t h t h i s l o a n w a s f i l e d w i t h any o f f i c e .

On A p r i l 7, 1977, t h e f a t h e r e x e c u t e d a s e c u r i t y a g r e e m e n t

w i t h F i r s t S e c u r i t y Bank o f D e e r Lodge f o r a l o a n o f $32,249.40

t o p u r c h a s e a Cessna a i r p l a n e which was t o be i t s collateral.

T h e r e i s no e v i d e n c e t h a t t h i s s e c u r i t y a g r e e m e n t w a s f i l e d w i t h

any o f f i c e .

On O c t o b e r 25, 1977, H a r o l d S t u r d e v a n t , Jr. p u r c h a s e d t h e

Mooney p l a n e from h i s f a t h e r . N n o t i c e o f t h i s s a l e was g i v e n o

t o t h e s e c u r e d bank and t h e r e i s no e v i d e n c e t h a t t h e s a l e w a s

a u t h o r i z e d by t h e Bank. H a r o l d S t u r d e v a n t , Jr. knew o f t h e

e x i s t i n g s e c u r i t y i n t e r e s t i n t h e p l a n e when h e p u r c h a s e d it.

On O c t o b e r 4 , 1978, payments t o t h e bank on t h e Cessna p l a n e

and t h e Mooney p l a n e w e r e d e l i n q u e n t . Plaintiff's father

m a i l e d a check t o t h e Bank t o s a t i s f y t h e o b l i g a t i o n on t h e

Mooney p l a n e .

On O c t o b e r 6 , 1978, F i r s t S e c u r i t y Bank o f Deer Lodge i n

c o n j u n c t i o n w i t h F i r s t N a t i o n a l Bank o f Helena r e p o s s e s s e d t h e

Mooney p l a n e f o r d e l i n q u e n c y o f t h e payments on t h e s e c o n d

Mooney l o a n .

On O c t o b e r 9 , 1978, t h e Bank r e c e i v e d t h e payment on t h e

Mooney d e b t t h a t had been m a i l e d by t h e f a t h e r on O c t o b e r 4 .

A f t e r t h e r e p o s s e s s i o n , t h e s o n p e r s o n a l l y t e n d e r e d payment

o f $1,632.54 and $47.79 ( s t o r a g e c o s t s ) , t h e f u l l amount o f t h e

r e m a i n i n g Mooney o b l i g a t i o n , i n a n a t t e m p t t o redeem t h e Mooney

p l a n e , p u r s u a n t t o s e c t i o n 87A-9-506, R.C.M. 1947 (now s e c t i o n

30-9-506, MCA). The t e n d e r was r e f u s e d by t h e d e f e n d a n t banks.

The amount i s p r e s e n t l y d e p o s i t e d w i t h t h e c o u r t p e n d i n g t h e

- 2- outcome o f t h e s u i t . I t i s c l e a r t h a t t h e d e f e n d a n t banks

i n t e n d t o s e l l t h e Mooney p l a n e t o s a t i s f y t h e d e l i n q u e n t

o b l i g a t i o n s on t h e Cessna l o a n .

On t h a t s t a t e m e n t o f f a c t s , t h e son p h r a s e s t h e i s s u e

as whether a bank may h o l d p r o p e r t y f o r t h e payment o f a

d e b t of a n o t h e r when t h a t p r o p e r t y i s no l o n g e r owned by

t h e borrower and i s n o t d e s c r i b e d i n t h e s e c u r i t y agreement.

W r e s t a t e t h e i s s u e s a s follows: e

(1) Does t h e s e c u r i t y agreement of August 4 , 1972 i n

which t h e Mooney a i r c r a f t i s l i s t e d a s c o l l a t e r a l i n c l u d e a

s e c u r i t y i n t e r e s t f o r t h e l a t e r i n c u r r e d Cessna d e b t of t h e

father?

(2) What e f f e c t d o e s s e c t i o n 30-9-311, MCA, have on t h e

s a l e o f t h e Mooney a i r c r a f t by t h e f a t h e r t o t h e son?

(3) What a r e t h e redemption r i g h t s of t h e son under t h e s e

f a c t s and under s e c t i o n 30-9-506, MA C?

Each s e c u r i t y agreement e x e c u t e d i n t h i s c a s e c o n t a i n e d

t h e f o l l o w i n g l a n g u a g e , d e s c r i b e d by t h e D i s t r i c t C o u r t a s a

"dragnet clause":

"The u n d e r s i g n e d ( h e r e i n a f t e r c a l l e d Borrower) h e r e b y g r a n t s t o t h e s e c u r e d p a r t y i n t h e above note ( h e r e i n a f t e r c a l l e d 'Bank') a s e c u r i t y i n t e r e s t i n t h e following described property (hereinafter called 'Collateral') including p r o c e e d s and p r o d u c t s : [herein i s specific property description] together with a l l p a r t s , a c c e s s o r i e s , r e p a i r s , improvements and a c c e s - s i o n s t h e r e t o now o r h e r e a f t e r a t any t i m e made o r a c q u i r e d ; and A l l p r o p e r t y o f e v e r y k i n d and d e s c r i p t i o n i n which t h e Borrower h a s o r may a c q u i r e any i n t e r e s t now o r h e r e a f t e r a t any t i m e i n t h e p o s s e s s i o n o r c o n t r o l o f t h e Bank f o r any r e a s o n i n c l u d i n g w i t h o u t l i m i t a t i o n , p r o p e r t y d e l i v e r e d t o t h e Bank as c o l l a t e r a l f o r s a f e k e e p i n g , o r f o r c o l l e c t i o n o r exchange f o r o t h e r p r o p e r t y , and a l l d i v i d e n d s and d i s - t r i b u t i o n s on and o t h e r r i g h t s i n c o n n e c t i o n w i t h s u c h p r o p e r t y t o s e c u r e payment t o t h e Bank a t i t s banking house a t t h e a d d r e s s s t a t e d on t h i s n o t e and a l l o t h e r n o t e s g i v e n h e r e a f t e r i n renewal t h e r e o f , and a l l o t h e r n o t e s o f Borrower c o n c u r r e n t l y h e r e w i t h , heretofore o r hereafter delivered t o o r p u r c h a s e d o r o t h e r w i s e a c q u i r e d by t h e Bank and a l l o t h e r l i a b i l i t i e s and i n d e b t e d - n e s s of Borrower t o Bank due o r t o become due, d i r e c t o r i n d i r e c t , a b s o l u t e o r con- t i n g e n t , j o i n t o r s e v e r a l , howsoever c r e a t e d , a r i s i n g o r e v i d e n c e d , now e x i s t i n g o r h e r e - a f t e r a t any t i m e c r e a t e d , a r i s i n g o r i n c u r r e d , ( h e r e i n a f t e r c a l l e d 'Secured O b l i g a t i o n s ' ) . "

The D i s t r i c t Court found t h a t t h e f o r e g o i n g c l a u s e was

c l e a r , unambiguous and t h e r e f o r e it must be upheld. I n Re

R i s s Tanning C o r p o r a t i o n (2nd C i r . 1 9 7 2 ) , 468 F.2d 1211;

Kenneally v. S t a n d a r d E l e c t r o n i c s C o r p o r a t i o n ( 8 t h C i r .

1 9 6 6 ) , 364 F.2d 642; I n Re I r e d a l e ' s L t d . (9th C i r . 1973) ,

Nothing i n t h e Uniform Commercial Code t h a t we a r e a b l e

t o f i n d p r o h i b i t s s u c h a c l a u s e a s w a s used i n t h e s e s e c u r i t y

instruments. T h e r e f o r e , t h e e f f e c t of t h e e x e c u t i o n of t h e

s e c u r i t y i n t e r e s t i n t h e Mooney a i r c r a f t i n s t r u m e n t , b e i n g

v e r y b r o a d l y s t a t e d , e x t e n d s t o and c o v e r s t h e d e b t i n c u r r e d

i n c o n n e c t i o n w i t h t h e Cessna a i r c r a f t , even though a s e p a r a t e

s e c u r i t y agreement was e x e c u t e d f o r t h a t p u r c h a s e .

The b r o a d language used i n t h e f i r s t Mooney s e c u r i t y a g r e e -

ment meant t h a t t h e Mooney a i r c r a f t was c o l l a t e r a l n o t o n l y

f o r t h e f i r s t n o t e , b u t f o r t h e renewal n o t e , and f o r any o t h e r

s u b s e q u e n t l o a n s made by t h e bank t o Harold S t u r d e v a n t , S r .

The s e c u r i t y agreement f o r t h e Mooney a i r c r a f t had a f u r t h e r

p r o v i s i o n t h a t p r e v e n t e d s a l e of t h e Mooney u n l e s s t h e p r o c e e d s

o f t h e s a l e were p a i d t o t h e bank. That provision s t a t e d :

"Borrower w i l l n o t s e l l , t r a n s f e r , l e a s e o r o t h e r w i s e d i s p o s e of t h e C o l l a t e r a l , o r a t t e m p t o r o f f e r t o do any of t h e f o r e g o i n g w i t h o u t t h e p r i o r w r i t t e n c o n s e n t of t h e Bank, and u n l e s s t h e P r o c e e d s o f any s u c h s a l e , t r a n s f e r , l e a s e , o r o t h e r d i s p o s i t i o n a r e paid d i r e c t l y t o the Bank. 'I The bank had no knowledge of, and did not receive the proceeds of the sale. Harold Lee Sturdevant, Jr. argues however, that he was within his rights to purchase from the father under section 30-9-311, MCA, of the Uniform Commercial Code, which provides as follows: "The debtor's rights in collateral may be voluntarily or involuntarily transferred (by way of sale, creation of a security interest, attachment, levy, garnishment or other judicial process) notwithstanding a provision in the security agreement prohibiting any transfer or making the transfer constitute a default." It is incorrect to assume that section 30-9-311, MCA, permits a transfer by a debtor of collateral under a security agreement free of the security interest of the creditor in the collateral. Sturdevant, Jr. refers us to the official Code Comment under section 9-311, Uniform Commercial Code, apparently to the language regarding the purpose of that section whichstates that it is "[tlo make clear that in all security transactions under this Article, the debtor has an interest (whether legal title or an equity) which he can dis- pose of and which his creditors can reach". The body of a law developing with respect to this section indicates that the interest of the debtor in the collateral may be transferred by him even though the security agreement purports to prohibit such transfer and makes the transfer a default. Production Credit, Etc. v. Equity Coop, Etc. (Wis. 1978), 261 N.W.2d 127. However, the fact that the collateral may be transferred voluntarily or involuntarily does not des- troy or adversely affect a prior perfected security interest, without the consent of the secured party. Am. Heritage Bank ' A p t ', & Trust Co. v. 0 & E., Inc. (Cola.!1978), 576 P.2d 566, 568. I n f a c t s e c t i o n 30-9-311, MCA i s i n t e n d e d t o p r o t e c t t h e

s e c u r e d c r e d i t o r ' s i n t e r e s t by a s s u r i n g t h a t any s a l e of

t h e c o l l a t e r a l o r t r a n s f e r by o p e r a t i o n of law i s s u b j e c t

t o the security interest. Earthmovers, I n c . v. C l a r e n c e L .

Boyd Company, I n c . (Okla. App. 1 9 7 6 ) , 554 P.2d 877, 879.

I r r e s p e c t i v e of t h e s e c t i o n , a s e c u r i t y agreement may

d e c l a r e t h a t t h e d e b t o r commits a d e f a u l t when he makes

a t r a n s f e r of t h e c o l l a t e r a l b e c a u s e t h e c r e d i t o r h a s a

r i g h t t o d e t e r m i n e who s h a l l be t h e d e b t o r i n p o s s e s s i o n .

Poydan, I n c . v. Agia K i r i a k i , I n c . (N.J. 1 9 7 4 ) , 130 N . J . Super.

T h e r e f o r e , t h e f a t h e r had t h e r i g h t transfer his

i n t e r e s t i n t h e Mooney a i r p l a n e t o h i s s o n where t h e s e c u r i t y

i n s t r u m e n t i s p e r f e c t e d , and he i s n o t i n d e f a u l t ; b u t t h e

c r e d i t o r , w i t h o u t knowledge o f t h e t r a n s f e r and under t h i s

agreement, n o t h a v i n g r e c e i v e d t h e p r o c e e d s , c o u l d under t h e

s e c u r i t y agreement c o n s i d e r such a t r a n s f e r a d e f a u l t . In

any e v e n t , t h e s e c u r i t y i n t e r e s t o f t h e c r e d i t o r h e r e f o l -

lowed t h e c o l l a t e r a l though t h e t r a n s f e r o c c u r r e d under

s e c t i o n 30-9-311, MCA.

The r i g h t s o f redemption of t h e son a r e found i n s e c t i o n

30-9-506, MCA. That s e c t i o n provides:

"At any t i m e b e f o r e t h e s e c u r e d p a r t y h a s d i s p o s e d of c o l l a t e r a l o r e n t e r e d i n t o a c o n t r a c t f o r i t s d i s p o s i t i o n under 30-9-504 o r b e f o r e t h e o b l i g a t i o n h a s been d i s c h a r g e d under 30-9-505(2), t h e d e b t o r o r any o t h e r s e c u r e d p a r t y may u n l e s s o t h e r w i s e a g r e e d i n w r i t i n g a f t e r d e f a u l t redeem t h e c o l l a t e r a l by t e n d e r i n g f u l f i l l m e n t of a l l o b l i g a t i o n s s e c u r e d b y t h e c o l l a t e r a l as w e l l a s t h e e x p e n s e s r e a s o n a S l y i n c u r r e d by t h e s e c u r e d p a r t y i n r e t a k i n g , h o l d i n g and p r e p a r i n g t h e c o l l a t e r a l f o r disposition, i n arranging f o r t h ~ s a l e , and t o t h e e x t e n t p r o v i d e d i n t h e agreement and n o t p r o h i b i t e d by law, h i s r e a s o n a b l e a t t o r n e y s ' f e e s and l e g a l e x p e n s e s . " Here t h e a g r e e d f a c t s a r e t h a t t h e f a t h e r m a i l e d a

check f o r t h e b a l a n c e of t h e Mooney d e b t b e f o r e t h e r e p o s s e s s i o n

b u t t h e check w a s r e c e i v e d by t h e bank a f t e r t h e r e p o s s e s s i o n .

Also t h e sum t e n d e r e d c o v e r e d o n l y t h e amount of t h e Mooney

d e b t and s t o r a g e c o s t s . I n t h i s c a s e , s e c t i o n 30-9-506, MCA,

r e q u i r e d more: t h e d e b t o r o r any o t h e r s e c u r e d p a r t y s h o u l d

t e n d e r " f u l f i l l m e n t o f a l l o b l i g a t i o n s s e c u r e d by t h e c o l -

lateral." I n t h i s c a s e t h a t i n c l u d e d t h e f u r t h e r d e b t on

t h e Cessna a i r p l a n e . S i n c e t h a t f u l l t e n d e r was n o t made,

t h e t e n d e r o f f e r e d by t h e son i n t h i s c a s e d i d n o t f u l f i l l

t h e r e q u i r e m e n t s o f s e c t i o n 30-9-506, MCA.

No q u e s t i o n s a r e r a i s e d a s t o t h e i d e n t i t y o f t h e a i r c r a f t ,

o r t h e p r o p r i e t y o f t h e r e p o s s e s s i o n , e x c e p t a s we have d i s c u s s e d

foregoing. A c c o r d i n g l y , we a f f i r m t h e ~ i s t r i c C o u r t . t

y- - -~% z Justice - - - . .

W e Concur:

m i e f Justice