Title: Frantz v. First Nat. Bank & Trust Co. of Wyoming

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Frantz v. First Nat. Bank & Trust Co. of Wyoming1984 WY 102687 P.2d 1159Case Number: 84-32Decided: 09/28/1984RON FRANTZ AND FANITA FRANTZ, APPELLANTS (DEFENDANTS), 

MIDWEST UNCUTS, INC., AN IOWA CORPORATION (DEFENDANT), 

v. 

FIRST NATIONAL BANK & TRUST COMPANY OF WYOMING, APPELLEE (PLAINTIFF).

Supreme Court of Wyoming
RON FRANTZ AND FANITA 
FRANTZ, APPELLANTS (DEFENDANTS), 

MIDWEST UNCUTS, INC., AN IOWA 
CORPORATION (DEFENDANT), 

v. 

FIRST NATIONAL BANK & 
TRUST COMPANY OF WYOMING, APPELLEE 
(PLAINTIFF).

 
 
Appeal from the District 
Court, LaramieCounty, Alan B. Johnson, 
J.

 
 
Richard Wolf and 
Martin J. McClain, Cheyenne, for appellants; oral argument by Martin 
J. McClain, Cheyenne.

Todd S. Welch of 
Loomis, Lazear, Wilson & Pickett, Cheyenne, for appellee.

Before ROONEY, C.J., and 
THOMAS, ROSE, BROWN and CARDINE, JJ.

CARDINE, 
Justice.

[¶1.]     This is an appeal from 
a judgment in favor of First National Bank and Trust Company of Wyoming 
(hereinafter bank) against appellants Frantzes based upon the bank's secured 
interest in the balance due upon the purchase of the assets of Capitol Optical 
by appellants. We will affirm.

[¶2.]     Appellants raise a 
single issue on appeal:

"Whether a secured 
creditor can collect from the purchaser of a business, which had assets pledged 
as collateral to the creditor, the purchase price still to be paid pursuant to a 
promissory note."

[¶3.]     Tommy D. and Mari Ann 
Carver, upon borrowing money, executed and delivered to the bank in June of 1981 
their installment promissory note, security agreement, and financing statement. 
It is not disputed that the security agreement and financing statement were 
signed by the Carvers and the bank, and was properly filed with the LaramieCounty clerk, thereby creating a perfected 
security interest. The collateral for this security agreement and financing 
statement was all accounts receivable and all equipment and inventory "now owned 
or hereafter acquired." The collateral related to three optical shops owned by 
the Carvers; one of these shops was Capitol Optical.

[¶4.]     In February 1982, the 
Carvers sold the assets of Capitol Optical to Ron and Fanita Frantz. The 
Frantzes were not aware of the bank loan to the Carvers or the security 
agreement. The Carvers and Frantzes entered into a security agreement and 
financing statement. As consideration, the Frantzes gave the Carvers $5,000 down 
and signed a contract providing for the remaining $40,000 to be paid at the rate 
of $915 per month with interest at 18% per annum. The security agreement and 
financing statement between the Carvers and the Frantzes indicated that a 
negotiable promissory note evidencing this agreement was in existence. Mr. 
Frantz testified that he did not remember seeing or signing a promissory note. 
The Frantzes made monthly payments of $915 from March 1982 until October 1982. 
On October 12, 1982, the Carvers filed for bankruptcy. Shortly afterwards, a 
senior vice president for the bank contacted Mr. Frantz and informed him that 
the optical shop's inventory and equipment was included in the collateral for 
the loan between the bank and the Carvers. At that time the Frantzes ceased 
paying the debt to the Carvers on the rationale that the Carvers had breached 
the purchase agreement by not revealing the existence of the security interest 
in the assets of the optical shop.

[¶5.]     The bank petitioned the 
bankruptcy court for an order permitting it to foreclose on the collateral. A 
hearing was held at which time the attorney for the Carvers stated that the 
Carvers had no title to the collateral, did not claim any interest in the assets 
of Capitol Optical, and moved that the case be dismissed as to debtors Carvers. 
The bankruptcy court stated in its order of dismissal 
that,

"Neither plaintiff nor 
the Frantzes are parties in the bankruptcy case. The collateral which is the 
subject of the proceeding is not property of the bankruptcy estate. Therefore, 
the bankruptcy court does not have jurisdiction over any of the remaining 
parties or the property."

The bank then 
initiated this lawsuit against the Frantzes in district court contending that 
under its security agreement with the Carvers it was entitled to either the 
collateral or the proceeds from the sale of the collateral. Appellants defended 
on the theory that the bank was only entitled to take possession of the 
collateral but that it did not have a claim to the $40,000 owed under the 
security agreement and financing statement.

[¶6.]     The trial court found 
that the security agreement and financing statement signed by appellants could 
be considered as noncash proceeds from the sale of collateral, as that term is 
defined in § 34-21-935(a), W.S. 1977, 1983 Cum.Supp. The court also found that 
although the bank could have proceeded against the obligors, that was not their 
exclusive remedy.

[¶7.]     Section 34-21-935, W.S. 
1977, 1983 Cum. Supp. (U.C.C. § 9-306) states in part:

"(a) `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, except to the extent that it is payable to a person 
other than a party to the security agreement. Money, checks, deposit accounts 
and the like are `cash proceeds'. All other proceeds are `noncash 
proceeds'.

"(b) Except where this 
article otherwise provides, a security interest continues in collateral 
notwithstanding sale, exchange or other disposition thereof unless the 
disposition was authorized by the secured party in the security agreement or 
otherwise, and also continues in any identifiable proceeds including collections 
received by the debtor."

[¶8.]     The debtor's interest 
in property, which is subject to a perfected security interest, may be validly 
transferred without the consent of the secured party, contrary contractual 
provisions notwithstanding. First 
Pennsylvania Banking & Trust Co. v. Liberati, 282 Pa. Super. 198, 422 A.2d 1074 (1980). A perfected security interest continues in the collateral following 
a change in ownership. City National Bank 
and Trust Company, Norman, 
Oklahoma v. Pyle, 25 Wn. App. 583, 609 P.2d 966 (1980). The perfected security interest continues in the 
collateral even though it has been sold unless the sale is authorized or the 
buyer is in the ordinary course of business. Walter E. Heller Western, Inc. v. Bohemia, 
Inc., 61 Or. App. 57, 655 P.2d 1073 (1982). A buyer is not considered to be 
in the ordinary course of business when the transfer includes the bulk of 
inventory. In that case the purchaser's interest is junior to the secured 
interest of the bank. Community Bank v. 
Jones, 278 Or. 647, 566 P.2d 470 (1977). A security agreement is effective 
according to its terms between the parties and subsequent purchasers if properly 
perfected by filing. The subsequent purchasers are presumed to have notice and 
are, therefore, subject to the provisions of the agreement. Gorham v. Denha, 77 Mich. App. 264, 258 N.W.2d 196 (1977).

[¶9.]     A secured party 
ordinarily may proceed against the debtor to either collect the debt or to 
obtain the proceeds from the transfer or maintain an action against the 
purchaser for repossession of the collateral or an action for conversion. American East India Corp. v. Ideal Shoe 
Co., 400 F. Supp. 141 (1975). Ordinarily one who acquires by purchase or 
otherwise is liable in trover or conversion for the value of the property or the 
amount paid. South Omaha Production 
Credit Ass'n v. Tyson's, Inc., 189 Neb. 702, 204 N.W.2d 806 
(1973).

[¶10.]  A secured creditor is not required to 
elect a remedy in enforcing his interest. He can take any permitted action or 
combination of actions. Although he is entitled to only one satisfaction for the 
underlying debt, he may seek it in different ways. Citicorp Homeowners, Inc. v. Western Surety 
Co., 131 Ariz. 334, 641 P.2d 248 
(1981).

"The secured party may 
claim both proceeds and collateral, but may of course have only one 
satisfaction." 1972 Official Comment, Uniform Commercial Code (U.L.A.) § 
9-306.

A secured party, 
upon the default of a debtor, may reduce a claim to judgment, foreclose or 
otherwise enforce the security interest by any available judicial procedure. Clark Jewelers v. Satterthwaite, 8 
Kan. App. 2d 
569, 662 P.2d 1301 (1983).

[¶11.]  Appellants concede 
that:

"* * * Appellee possessed 
a security interest in all accounts receivable of Capitol Optical and two other 
optical shops, as well as in their inventory and equipment. * * * Further, there 
is no dispute that the Carvers sold the Appellants the inventory, the equipment 
and some of the accounts receivable of Capitol Optical. Appellants also admit 
that Appellee had a security interest in the equipment, inventory, and accounts 
receivable which the Carvers transferred to them."

Appellants 
contend, however, that the proceeds from the sale of this collateral are in the 
form of a negotiable promissory note and that appellee must, therefore, sue the 
Carvers in order to obtain the note. Appellants further contend that without the 
negotiable promissory note, appellee may not sue appellants for payments under 
that instrument without proving that the note is lost, destroyed, or stolen. 
Finally, appellants contend that the bank's remedies are limited because of the 
rights which they, as third party, might have against the 
debtor.

[¶12.]  In First Security Bank of Idaho v. Absco 
Warehouse, Inc., 104 Idaho 853, 664 P.2d 281 (1983), a case similar to this 
one, the secured party-bank brought a conversion action against a supplier to 
whom the debtor had returned his inventory for credit on an open account. The 
debtor then filed for bankruptcy and thereafter the secured bank filed suit 
against the supplier. The court, after stating,

"For reasons beyond the 
scope of this opinion, the trustee in bankruptcy determined that the debtor had 
no interest in the inventory and accounts receivable, and abandoned those items 
as assets in the bankruptcy." 664 P.2d  at 283,

awarded the 
secured bank a summary judgment against the supplier.

[¶13.]  In the present case, the secured bank 
attempted to establish its interest in the debt and recover in the bankruptcy 
proceedings. The debtors disclaimed any interest in the collateral; and the 
bankruptcy court, holding that the collateral was not part of the bankruptcy 
estate, dismissed the bank's petition. The bank then sued and obtained judgment 
against the subsequent purchasers, appellants in this 
action.

[¶14.]  It is immaterial that the bank did not 
obtain the promissory note, for appellants testified as 
follows:

"Q. Did you sign a 
promissory note for $40,000?

"A. I don't remember 
signing one.

"Q. Now, in your Answers 
to Interrogatories and in the Request for Admissions that were filed, you 
indicated - I asked the question, did you enter into a promissory note with 
Tommy D. Carver and Mari Ann Carver for $40,000, and your response at that time 
was yes.

"A. At that time, I 
thought that was part of the security agreement and everything. I was shown 
today a copy of what the promissory note was, and I don't remember seeing it 
before.

* * * * * 
*

"A. This is the contract 
between the Carvers and my wife and myself that we signed, this is all that I 
remember seeing at the time."

It is not clear 
whether or not a promissory note existed. Appellee had already attempted to 
assert a claim to the promissory note through the bankruptcy proceedings. At 
that time the bankruptcy court disclaimed jurisdiction. We cannot resolve this 
case on the basis of a promissory note that might not exist. Appellants 
testified that the security agreement and financing statement comprised the 
contract. They cannot now argue that appellee is precluded from judgment because 
it does not possess the note, the existence of which they deny. Appellants have 
always admitted the debt to the Carvers upon the purchase of the accounts 
receivable, assets and inventory of Capitol Optical. The money owing under their 
contract, therefore, is clearly "identifiable proceeds" from the sale of the 
collateral and, as such, subject to the bank's security interest as provided in 
§ 34-21-935(b), W.S. 1977, 1983 Cum.Supp., supra.

[¶15.]  Appellants also sought to defend 
contending that the value of the collateral which they had in their possession 
was significantly less than the amount that the court ordered them to pay, and 
that they should have been allowed to present defenses to a claim upon the 
promissory note (which they said did not exist) against the Carvers. The only 
evidence they offered, however, was hearsay; and, when objection to the evidence 
was sustained, appellants made no offer of proof. The trial judge stated 
that:

"After having heard the 
evidence in this case, the Court fails to find as claimed by the defendants that 
they were induced to enter into the contract with the Carvers fraudulently. 
Further, the Court cannot see and does not understand how the action of the 
Carvers in filing bankruptcy constitutes a breach of the contract between 
Carvers and Frantzes. The Court has not been directed to any provision contained 
in the agreement of Carvers and Frantzes which would serve as a bar to relief 
under the Bankruptcy Act."

[¶16.]  It is not disputed that the bank loaned a 
significant amount of money with the assets of Capitol Optical being security 
for the loan. Appellants bought the assets of Capitol Optical for the sum of 
$45,000, $5,000 being paid down with $40,000 to be paid pursuant to a signed 
contract at the rate of $915 a month. They made monthly payments from March 1982 
until October 1982 without complaint. The judgment entered in this case requires 
only that they continue those payments as agreed.

[¶17.]  We must, therefore, agree with the trial 
judge. Appellants' lack of notice concerning the bank's interest is not a basis 
for breach of contract; they are presumed to have notice of the perfected 
security interest. Appellants purchased the assets and inventory of Capitol 
Optical for the sum of $45,000, which was represented by a security agreement 
and financing statement. It should not matter to appellants whether they pay the 
money owing to the Carvers or to the bank. If they had defenses, they did not 
develop them by discovery, adduce evidence with respect to the same, or preserve 
them in the record by offer of proof or otherwise.

[¶18.]  Appellants took the assets of Capitol 
Optical subject to a prior perfected security interest of the bank; they are 
held to notice of that interest. The bank, having a valid interest in the 
property and in the proceeds from the sale of the property, is entitled to 
satisfy the debt out of either provided there may be but one satisfaction. The 
judgment, therefore, is affirmed.