### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE April 12, 1999 Session
CONISTER TRUS T LTD. v. BOATIN G CORPORATION OF AMERICA and VILLAS-AFLOAT, LTD. Appeal from the Chancery Court for Sumner County No. 94C-412 Tom E. Gray, Chancellor

No. M1998-00949-COA-R3-CV - Filed March 14, 2002

The buyer of three boats that were to be built pursuant to specific instructions defaulted on payment for the second and third boats by failing to pay the entire purchase price of the boats. The se ller resold the two boats and recovered its da mages caused b y the buyer’s breach. A creditor of the buyer, who furnished funds for the purchase of the fir st two boats, sought the excess proceeds from the sale of

the seco nd boat as serting th at it had a n unperf ected security

interest. Because the buyer didnot attain rights in the collateral sufficient to meet the requirements for attac hment of a security in tere st, the creditor is not entitled to distribution of the proceeds under Article 9 of the Uniform Commercial Code. Instead, the rights of the buyer and seller are governed by Article 2. The creditor
was entitled to assert the buyer’s right to restitution of partial payments, and the seller was entitled to recover its damages from the resale of the two boats. The seller also had a right of setoff which it exercised to recover losses on the third boat from moneys realized

in the sale

of the se cond boa

t. Accordingly, we affirm the trial court.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded

P ATRIC IA J. C OTTRELL , J., delivered the opinion of the court, in whichB EN H. C ANTRELL , P.J., M.S., and W ILL IAM C. K OCH , J R ., J., joined. Todd E. Panther, Nashville, Tennessee, for the appellant, Conister Tr ust Ltd.
Steven C. Douse, Nashville, Tennessee , for th e appellees, Boating Corporation of America and Villas-Afloat, Ltd.
OPINION
The issue presented to the court is whether Boating Corpora tio n of America (“BCA”) or Conister Trust, Ltd. (“Conister”) is entitledto proceeds realized from the sale of a boat. Conister,1 BCA sold i ts asse ts and went out of busi ness in September 1997.

-2- a British f inancing institution , sued Vill as-Aflo at, Ltd. ( “Villas- Afloat” ) and BCA seeking surplus proceeds that

BCA withh

eld from t he sale o f a boat built

by BCA for

Villas-Afloat. Conister had providedfinancing to Villas-Afloat for two boats to be built by BCA, and BCA sold the second after Villas-Afloat

failed to pay . After t

he sale, BCAapplied proceeds from the sale to money s owing on a third boat it had built for Villas-Afloat. The trial court found that no surplus proceeds existed from the sale of the second boat, and Conister appealed. In 1989, Robin Bamford, director of the newly f ormedVillas-A

float, approached Conister about financing the purchase of seve ral boats. Like

Conister, Villas-A

float wa s a

business located
on the Isle of Man

in Great Britain. Villas-Af

loat intended to purchas e the boa ts and off er them to vacatio ners in the Medite rranea n on a time

share ba sis.
BCA was a Tennessee corporation which built house

boats, boa

ts and cr uisers. 1 These

boats
were marketed t

h rough a network of some 23 dealers in the U.S. and Canada w hich ordered and boughtthe boats andsold them to consumers. The boats were typically built to order and delivered only after full payment by the dealer.

In 1989, Mr. Bamford approached BCA about becoming BCA’s exclusive distributor i n Europe. In June, after a telephone convers ation bet

ween the parties, BCA confir

med its agreement witha letter indicating

that Mr. Ba

mford’s c ompany would be the exclusiv e Europe an deale r of BCA boats with a minimum annual order of six boats. In August 1989, acting under this agreement, Mr. Bamford r

equeste d that BCA se

nd him invoi ces for

two boats. His corr

esponde nce stat ed: Although we will have sufficient funds for the first two boats, we are taking advanta ge of an initial loa

n offer ed to us to l eave ca

pital free for ope

ration c osts.

In late November 1989, Villas-Afloat paid a $25,157.68 de posit to BCA on the first boat (“Boat I”). The deposit was a

ccompanied by

a confir mation fa csimile a dvising B CA that the balance would be from a “finance

house.” On December 1, 1989, BCA sent Villas-Afloat I nvoice Number 1766 in the amount of $196 ,934.75 f or Boat I. Th is in voic e provided detailed information on the equipment

and components to be used on the boat and their cost. On Decembe r 6, BCA sent invoice number 1771, whic

h was equ ally detailed

and for t he same a mount, tocover the second boat (“Boat II”).

In Decem

ber 1989, Conister and Villas-Afloat entered into two conditional sales ag reem ents

. The documents purport

to represent a sale by

Conister, called “ seller”in the documents, toVillasAfloat, called “buyer” therein. They included a

section to be signed

by a “deale r,” off ering t o sell the goods to Conister. Although BCA’s name had been f illed in as the dealer, no s ignature was includedfor BCA. Conister never forwarded the documents to BCA for signature. Conister w as to2 At the e xcha nge ra te then p revailing , this sum a mou nted to $16 0,40 0 pe r bo at.
3 BCA applied t

he $25,157.68 deposit

from Vill as-Af

loat an d $171,777.07 of the proce eds wir ed from Conist er to the i nvoi ce pri ce of

$196,934. 75.
4 That amount was $149,002. 93.

5 On December 22, 1989, Mr. Bamford faxed BCA a copy of a l et ter o f intent from the B arcelo na O lympic Organizing Co mm ittee co nfirming that V illas-Afloa t’s prod uct had been s elec ted a s t he of fi cial motor yach t of

the 1992 Olympic games. The Co mmittee required six additional vessels , each with a profes sional ski pper. -3- advanceup to £100,000 per boat 2 and unde r the ag reemen ts, Villas- Afloat w as to be lia ble for the balance. Villas-Afloat sent the invoices it had rece ived from BCA to Conister. On December 13, 1989, pursuant to the conditional sales ag reemen ts between Conister and Villas-A float, Conister wired £200,000 ( approxim ately $320,800) to BCA. The conf irming fa csimile to BCA for t

his wire t ransfe r stated in part: Subject: Invoice 1771 and 1766 Comments: Confirmation of funds of £200,000.00 sterling have been sent to your account by SWIFT to your Banker.
Conister preced ed this fa x with a tele

phone ca ll to BCA’ s president, C lyde C. Head. The Conister representative who made the call, Michael James Lees, reca lled that he “phoned Boating C orporation of America in the afternoon to obtain and confirm the ba nking details of Boating Corporation of America.” These were the first communications betweenConister and BCA. At no time did these two entities enter into any kind of a w ritten contractual arrange ment regarding the boats.
On December 15, 1989, BCA released B oat I to Villas-Afloat, having received full pay

ment for that b oat. 3 This left B CA holding the rema ining fu nds orig inating

from Conis ter and VillasAfloat. 4

On January

19, 1990, Villas-Afloat ordered six additional boats from BCA for the Oly mpic Games Committee. 5 Mr. Bamf ord’s co rrespondence r

equeste d:
From the funds we have already advanced to y ou, please a llocate $25,000 to the deposi t on the fir st of these six boats whi ch are r

equired by t he 1992 Ol

ymp ic Committee. We are at

present attendin g to the f

inal cont ract de tails as a ll six boats are being financed throug h a lending institution for the Olympic Committee.6 That amount was $124,002. 93 -4-

As requested by

Villas-Afloat, BCA used $25,000 of the amount remaining from payment for Boat I as a de

posit on a third boat (“Boat II I”). BCA app li ed t he r ema in in g ba lan ce t o Bo at II. 6 Due to changes and additions requested by Villas-Afloat, $14,191.88 was added to the price of Boa t II. Thus, as of January 30, 1990, BCA’ s records showed that $87,123.70 remained owing on B oat II , which was completed on February 13, 1990.

In January of 1990, Villas-Afloa t failed to make its first payment t o Conister under the Conditional Sales Agreement. Villas-Afloat also fai led to mak e an y payme nt s t o BC A on Boa t II.
On February

21, 1990, E. J. Thorn, Conis ter’s chief executive, corresponded with BCA’ s president, Clyde Hea

d. The letter stated:
We have today de

termined an agreement with Villas-Afloat L imited in respect

of a Mediterranean

Motor Yacht, believed to be recently completed and in your possession. This lette

r serve s as y our autho

rity, from this c ompany

as owner s, to retain p ossession

of this ve ssel and a

wait our f urther in struction s.
Mr. He ad resp onded on Mar ch 12, 1990, with a lett er to C onis ter’s couns el sta ting:
We received a letter from E. J. Thorn . . . concerning the ownership and possession of the seco nd Harbo

r Master Motory acht whic

h we cons tructed fo r Villas- Afloat. This motory acht is owned by and is in the possession of Boa ting Corporation of America. This boat hadbeen sold to Villas-Afloat with partial funding provided by Conister.

. . . It is my u

ndersta nding tha t Conister has funded the purc

hase of t hese Harbor Master Motory achts fo

r Villas- Afl oat. Could

you please s upply

me with documentation to demonst rate Coni ster’s o wn ership position in this vessel? The motoryacht

under discussion was finished on February 13, 1990 andwe anticipated immediate

shipment. We are awaiting shipping instructi ons and sta

nd ready to ship the boat upon payment of the outstanding balance.
Conister’s counsel responded the following day , March 13, 1990, by se nding BCA copi es of th e cond itional sales agreements and explaining that Villas-Afloat wa s in default. No mention
was mad e of

wha t BC A sh oul d do wit h Bo at II.
After Mr. Head received the ag reemen ts, he not iced tha

t BCA’s na

me had been filled

in under a provision of the documents which stated:
To Conister Limited . . . I/We offer to sell y

ou the Goodsdescrib ed in the Sc hedule hereto and request you to supply them on Conditional Sale to the proposed Buy er named in the sche du le-5-

hereto. The Good s refer

red to ar e my /our sole property une

ncumbered and have not been the subject of any pr evious transaction with the proposed Buyer . I/We warrant that the initial Payment shown in the Schedule above has not been increased in any way beyond the actual amount that will be paid in cash by the proposed Buy er or the fair mar ket value of good s traded

in to me/us. NO INVOI

CE OR OTHER DOCUMENTATION I NFERRING A SAL

E OR AN AGREEMENT TO SEL

L HAS BEEN I SS UED BY ME/US A ND WE CERT IFY THAT THIS TRANSACTI ON HAD N

EITH ER B EEN OFF ERED TO NOR REFUSED BY ANY OTHER COMPANY, PERSON OR FIRM. I/WE FURTHER CERTIFY THAT THE MEANING AND EFFECT OF CL AUSE 5 OVERLEAF HAVE BEEN FULL

Y EXPLAI

NED TO T HE PROPO SED BUYER BY ME/US AND I/WE DECLARE AND CERTIFY THAT THE GOODS ARE FIT FO R THEIR I NTENDED USE.
The date, November 12, 1989, was filled in, but a space for the signature of the dealer was blank. When Mr. Hea

d saw BCA ’s name

written in under

this provision, he was concerned and sought leg al counsel.
BCAcontinued work

on Boat II

I because Mr. B amford indicated that he wa s continuing to seek additional financing. On April 4, 1990, BCA sent Villas-Afloat an invoice in the am ount of $209,964 for Boa

t II I. Mr . Bamfo

rd faile d to obtain new financ ing and made no mo

re pay ments to BCA. On July 4, 1990, Conister informed BCA:
We have been extremely

patient in allowing the search for alterna tive funding over this period, but we are now lo oking at an increased probability that the boat which you still have in y

our possession will have to be realized.
Coni ster o ffered two op tion s: (1) to pay BCA the am ount outs tandi ng, take possession of the boat andarrange for its sale afte r its conversion to U.S. specifications or (2) “agree to a sum with you at which we would be prepared to relinquish our interest in the boat.” Conister expressed a preference for the second option.
On October 17, 19 90, BCA’s counsel notified Mr. Bamford, Conister, and Conister’s coun se l that a balance o f $87,100 .73 plus int erest a nd storag e charges rema

ined unpa id on Boa t II and if BCA did not receive pay

ment, it would sell the boat at auction. The letter also stated:

In the event that the boat is sold at an auction, the proceeds from the sale will first be appliedto co ver t

he sto rag e fee s, int

eres t exp ens e and the outstanding principal bal a nce. The remaining amount of the proceeds of the sale will be paid to either Conister Ltd. or to Villas as those two parties shall jointly in st ruc t m e in wri ti ng. If I do not receive joint instructions from said parties, I will file an interpleader action in the appropriate court in Nashville, Tennessee. (e mphasis in original).7 BCA arri ved at thi s number by cr editing Vil las -Afloa t wit h $6,500 f

or ite ms deleted fr om the original invoice and adding $4,660.46 in interest charges and $3 97.50 for a gen erator hush cover.
8 Th is figur e inc ludes a $57,566. 25 shortfal l i n the r esal e from Boat III , $4, 400 in s tora ge and hand ling costs, $4,406. 96 in fees and expenses for resale, $24,000 in costs incurred in mo difying Boat III for th e A me rican ma rket, and $4,000 i n pro-r ata development expense s. BCA sold Boat III for $152, 407.75.

9 BCA calcul ated it s cr edit s as $48,889. 85 in s ur pl us f ro m t he sale of Boat II, $25,000 dep osit on Boat III, (con tinue d...)
-6- Villas-Afloat

did not respond to this letter. Conister’ s counsel inquired about how

the sale would be conducted. The letter closed with the statement, “I would advise that title to the ya cht rests withmy client.” BCA’ s counsel responded with info rmatio n about the sale and asked for clari ficat ion o f the ab ove qu oted s tatem ent, s tati ng:
If your comments ref

er to whether thesale proceeds that may result from the sa

le or auction of the b oat belong to Conister or Villas-Afloat, then I understand your comment. However, as I e xpressed in my letter of Octobe r 17, 1990 , the boat in question had never been

fully paid for and ther efore t itle to it re mains with

my c lient.

. . . Also, please understand that I a mnot in a position to verify, one way or the othe

r, whether your client

or Villas -Afloat

has title t o the boat . To date , the only “proof” that I ha ve to ver ify Conister’ s interes t in the boa t is acopy of a c onditional sales agreement

betwee n Conister

and Villa s-Afloa

t w hich y our clie

nt forwa rded to my client under previous cover. However, not being a solicitor or a barrister in Eng land, I cannot confirm or deny

your client’slegal interest in the boat. But, understand that th e only contractual arr

angeme nt my client ha s concer

ning the boat is wit

h VillasAfloat.
On November

26, 1990, BCA

sold Boa t II for $134, 551.51, le aving a surplus, a

ccording to BCA , of $48 ,89 9.8 5 ab ove th e am oun t o wed it for Boa t II. 7
BCA’s counsel informedConister of the sale and surplus in a December 7, 1990, letter whic h stated:
[ Our

client] has instructed us to pay the remaining proceeds from the sa le t o th e rightful owner of said proceeds. However, in light of our confusion concerning who has the legal right to the se pr oceeds, we resp ectfully request that your

client, Conister, and the appropriate representative of Villas -Afloat , send us joint payment instructions informing us who to pay, etc. BCA completed Boat III in late December 1990 and shortly therea fter sold Boat III. After Boat III was sold, BCA calculated its losses arising from its dealings with Villas-Afloat at $94,373.21. 8 BCA then applied the $48,889.85 credit f rom the sa

le of Boat II to cover its losses on Boat III . BCA calculated th at even with the ad dition of that amount

it faced a shortf all. 99 (.. .continued)

$3,000 in uninc urred tran sportation c osts, and $ 14,00 0 in gaso line engin e substitution sav ings. Credits were total ed at $90,889. 85, while they cal culated t heir l osses at

$94,363.21. Faced with t hese f igure s, BCA concluded “t hat t he pers on or the company that

thes e funds [the $48,889. 85 surpl us] wer e due wa s not [a ] qu estion ma rk. . . . Th ey w ere d ue to Bo ating Co rpo ration of A me rica b ecau se V illas-A float h ad ca used the inc ursio n of these e xpe nses.”

10 Th is letter ind icated that V illas-A float w as “b eing wo und up in the H igh C our t of E ngla nd.”

11 Co nister h as no t purs ued the $ 11,3 77.0 7 claim in this ap pea l.
-7- Conister demanded the $48,889.85 10 surplus fromthe sale of Boat II, but the money was not forthcoming. In August, 1994, Conister commenced this action, seeking a declaration “that asto all persons in the wor

ld Conister

possesse s a super

ior claim to the surplus proceeds from the sale of the secondboat and a judgment for $48,889.85.” Con ister also sought damages of $ 25,000, which it allege d that BCA wr

ongfully a

pplied tow ard Boat I

II, and $ 11,377.07 , which BCA alleged ly wrongfully applied to satisfy the balance on Boat I. 11
After a trial, the court found:
that there has not been any unjust enrichment and that there are no sur plus proceeds [but] [i]f the

re were any surpl us proceeds the c ourt would find th at they are in fact that of Conister and that they should be paid over to Conister.

I. Unifor m Commerc ial Code A

rticle 2 a nd Articl e 9 Claims
Conister does not dispute the com mercial reasonableness of the sale of Boat I I or the accuracy of BCA’s claims for expense s and losses on that boat and does not arguethat its inte rest in Boats I and II was superior to that of BCA. Conister simply maintains that once BCA recouped its losses on Boat II, Conister was entitledto the surplus proceeds from the sale of Boat II bec ause: (1) By advancing $320,800 to BCA pursuant to the conditional sales agreement withVillas-Afloat, Conister acquired a secur ity intere st

in Boat II pursuant to Tenn. Code Ann. § 47-9-107 and that such interest gave Conister rights to proceeds upon the sale of the collateral securing the loan. Conister does not assert th at it perf

ected itssecurity

interest

. (2) Conister’s security interest in Boat II does not confl ict with BCA ’s intere st in that boat. Conister does not dispute that BCA was entitled to sell Boat II andto satisfy its lien on that boat from the proceeds of the sale. However, BCA had no right to apply the surplus proceeds from the s ale to a lo ss resulting from a

separate contract. Conister contends the building of Boat III
was pursuant

to a contr

act with V

illas-Af loat which was se

para te from the contract for Boats I and II.12 Bec ause this case w as tried and briefe d pr ior to th e 20 01 c han ges in Article 9, all refe renc es to statu tes in

Chapter 9 of Art icl e 47 of t

he Tenness ee Code ar e to t hose s tat utes as numbered pr

ior to Jul y 1, 2001. -8- (3) Conister’s communications with B CA limited the use of the $320,800 trans ferredt o BCA to Boat I and Boat II, and BCA’s later conduct and communications confirmed its understanding of that restriction.
On the other

hand, BCA

contendsthat its bui lding of the three boats wa s pursuan

t to a single contractual relationship with Villas-Afloat, arguing that its relationship with Villas-Afloat was an installmentcontract under t he Uniform Commercial Code, Tenn. Code Ann. § 47-2-612(1). Consequently, BCA argues it was entitled to set off its losses on Boat III with the surplus funds from the sale of Boat II.
BCA also argues that e

ven if th ere were separate c ontracts for Boats II and III, BCA was entitled to offset any claim by Villas-Afloat to the surplus from the sale of Boat II

by any cla

im it hadagainst Villas-Afloat, whether the claims ar o se from th

e same c ontract

or not. Con

ister’s interest in BoatII deriv es from Villas-Af loat and i s subject

to the same

limitations and defenses, according to BCA. In addition, BCA asse rts that Conister did not possess a security interest in Boat II and that Conister did not limit use of the £200,000 it wired to BCA to Boats I and II.
The parties’ positions involve two articles of the Uniform Commercial Code, as adopted in Tennessee: Article 2 (Chapter 2 of Title 47 of Tennessee Code Annotated), dealing with sales, and Article 9 (Chapte

r 9 of Title

47 of Tennessee Code Annotated), dealing with secur ed trans actions. BC A is an Arti cle 2 seller with r ights cre ated the

rein, and Conister

claims an

Article 9 security interest

. The boat s in question were undisputedly goods under Article 2, and Conister argues Boat II was also collateral under Article 9. To analyze these competing interests, and the proper me thod to prioritize them, we must first identify each party’s interest and the ac companying rights. We begin with

the part ies’ posit ions.
Conister claims it is ent it led to th e re mai ni ng “ pro cee ds” of t he s ale of B oat II under Tenn. Code Ann. § 47-9-504(1), 12 which provides that proceeds from the disposition of collateral subject to a security intere st are to be distributed in the following order: (a) the rea sonable

expenses o f retak

ing, hold ing, pre paring for sale , or leas e selli ng, leasing and the like and, to the extent provided for in the agreeme n t and not prohibited by l aw, the r

easonab le attorneys’ f

ees and legal expenses incurred by the
secure d party ; (b) the satisfaction of indebtedness secured by the secu rity interest under which the disposition

is made; (c) the satisfaction of indebtedness secured by any subordinate security

interest in the collateral if written notification of demand therefor is received

before distribution of the proceeds is completed. If requested by

the secur ed party, the holde r of a-9-

subordina te security interest must seasonably

furnish r easonab le proof

of his inte rest, and unless he does so, the secured party need not comply with his demand.
Conister’s claim rests upon (c) above and, consequently, on its claim that it ha d a secur ity interest in BoatII. “Unless otherwise agreed, a security agreement gives the secured party the right to proceeds provided by § 47-9-306.” Tenn. Code Ann. § 47-9-203( 3). Tenn. Code Ann. § 47-9- 306(1) defines proceeds as “whatever is received upon the sale, exchange, collection or other disposition of the collateral or proceeds.” BCA asser ts that Conisterdidnot have a security interest which had attached to Boat II.
BCA’s position, however , is primar ily based upon the rights and remedies given to a seller under Article 2. It argues that b ecause it was ent

itl ed to offset its losses or damages caused by Villas-Afloat’s default of

its obligation to pay for Boats II andIII aga inst money s it owed to

VillasAfloat, there were no excess proceeds from its arran ge ment with Villas-Afloat. Consequently, Villas-Afloat

had no inte

rest in the proceeds from the sale of Boat II which it could have transferred to Conister.
The UCC addre sse s, to s ome extent, the interaction between Article 2 and Ar ticle 9. In particular, certain formalities otherwise r equisite to the enforceability of a security interest are waivedfor those

interest s arising u

nder the article on sales, Article 2. Tenn. Code Ann. § 47-9-203. In additio n:
A security interest arising solely under the chapter on sales (c hapter 2 of this title)

. . . is subje ct to the p

rovis ions of this c hapter e xcept tha t to the ex

tent that a nd so long as the debtor does not haveor does not la

wfully obt

ain posse ssion of the goods: (a) no security agreement is necessary to make the security interest enforceable; and (b) no filing is required to perfect the security interest; and (c) the rights of the secu red party o n default by the debtor are governed by the chapter on sales (chapter 2 of this title) in the case of a security interest arising solely under such chapter . . . . Tenn. Code Ann. § 47-9-113.
The interests which arise solely under Article 2 include t hose cle arlydenomina

ted secu rity interest s by Article 2 as well as ot her inte rests not s o clear

ly labele d. “Whe

never A rticle 2 r efers to
a nonconsensual security interest arising by operation of law or purely as a result of the sales transaction (i.e., w ithout any intent to c

reate a secure d credit

transaction), se ction 9-1 13 will probably apply.” W ILL IAM D. H AWKLAND , H AWKLAND U NIF ORM C OMMERCIAL C ODE S ERIES § 9- 113:2 (2001) [hereinafter HAWKLAND UCC S ERIES ].13 As an exa mp le of those is sues where l it tl e li ght has been cas t, White & Summers pose the foll owing inqui ry,

“sell er st ops or withhol ds, and li en-cr edit or of t he buyer s eeks t o levy on t he goods i n sel ler ’s ha nds. Do sect ions 9-201 and 9-3 01 c ontr ol, or is the s olut ion t o be found i n Arti cle 2, or i n st il l other l aw?” White and Summers al so di rect the read er to th e Jack son and Peters article as “ cast[in g] co nside rable light.” -10- The drafte

rs call c ertain in

terests t hat arise u nder the

Article on sales “ security interest s” even t

hough the y genera lly arise by opera tion of law . An exam

ple is the interest of a buyer exercising a right of rejection under section 2-711(3). Also, there is a series of rights that are not labeled security intere sts under Article 2 but are similarto security interests. Examples of these are the seller’s rights under sections 2-702 [seller’s remedies on buyer’s insolvency] and 2 -705 [stoppag e of good s in transit].
Section 9-113 pla

inly addr esses the extent to which Ar ticle 9 go verns tho se Artic le 2 interests, there called “security interests.” Comment 2 to sec tion 9-113 suggests that this secti on may als o address seller’s rights which are like security interests but which are not labeled as such by Article 2.

J AMES J. W HITE & R OBERT S. S UMMERS , U NIF ORM C OMMERCIAL C ODE § 30-11, a t 75 (4th ed. 1995).
The result of

disputes b etween

Article 2 intere sts and Artic le 9 inter ests is not s ubject to uniformrules or interpretations. See W HITE & S UMMERS , supra, §30-11, at 76-77 (“few Code cases cast little light on such issues”); 13 Thomas H. Jackson & Ellen A. Peters, Quest for Uncertainty: A Propo sal f

or Flexib le Resolu tion of Inh erent Con flicts bet ween Artic le 2 and 9 o

f the Unifo rm Commercial

Code , 87 Y ALE L.J. 907 (1978). Nonetheless, where a buyer defaults, it would appear that a seller’ s rights wouldbe governed by Article 2’s provisions establishing the seller’s remedies rather than Article 9’s default provisions. 8 H AWKLAND UCC S ERIES § 9-113:2; In Re Aul t , 6 B.R. 58 (Bankr. E.D. Tenn. 1980).
Before we reach anyquestion o f priorit y of competing interests created under the diffe rent article s, an analy sis of the rights or interests claimed by each party is necessa ry to determine if such competin g intere sts actua lly exist. II. Rights and Remedies Under Article 2
Under Article 2 of the UCC, when a buyer wrongful ly f ails t o make a pay

ment due on or before delivery, the a

ggrieved seller

has several options to protect itself from loss and may , as BCA didhere, withhold delivery of the goods and resell and recove r damages. Tenn. Code Ann. § 47-2- 7 03. If th e seller

resells t he good s in good

faith an d in a rea sonable manner, n either o f which is challenged

herein, the seller may

recover the difference

between the resal e price and the contract price together with allowable incidental damag es, less expenses saved by buy er’s breach. Tenn.14 The sel ler is not r equir ed to a ccount to the defa ulting buy er for any pro fit on the r esal e. Tenn. Code Ann. § 47- 2-7 06( 6); see also cmt. 11. Since the e ventual sal es of Boat I I and Boat

III res ult ed in alower price than t he contr act with Vi ll as-Afl oat, the pr ofit provis ion i s notinvol ved.

15 BC A’s agre ement

wit h Vil las -Af

loat forBo at II set the price at $1 96,9 34.7 5, bu t chang es in specificat ions increa sed the price by $14,191.88, makin g the t otal $211,126.63. BCA sold the boat f or $134,551.51. Under the s tatu te, BCA was en titled to re cov er the d ifference in the two price s as well as its costs of sal e and storage. After deducti ng those damages from th e amounts BCA had been paid toward Bo at II by Villas A-float, BC A reco vered $ 48,88 9.85 in exc ess of it s da mage s. As t o Boat II I, th e con tr act pri ce wi th BCA was $209, 964, and t he boa t s old f

or $15 2,40 7.75 , a nd BCA sust ained addit

ional expens es f

or st orage and han dli ng, modif icat ion of the bo at for t he American mar ket, and other exp enses. B CA gave c redit fo r unincu rred transp ortatio n cos ts and o ther sav ings. Th us, B CA was en titled to recover from Villas-A float the d iff erence i n the contract price an d the res ale pri ce ($57,556.25), and inci dental damages ( $36,80 6.96), less savings ($17 ,000). T hat amou nt was $77 ,363.2 1. Against that amo unt due to B CA from VillasAfloa t, BC A ap plied the $4 8,89 9.85 from th e sale o f Bo at II and the $2 5,00 0 de pos it on B oat II, lea ving a d eficit.

16 BCA releas ed Boat I to Vil las- Afloat because it received full payment. Conist

er l ater repos sess ed Boat I and resold it.

17 “A lie n, in i ts broades t sens e, is a legal clai m or charge on real or pers onal propert y used as secur it y for the payment of some debt or obli gation. ” Keep Fres h F ilters, Inc. v . Reg uli , 888 S. W.2d 437, 443 (Ten n. Ct. App. 1994 ). -11- Code Ann. § 47-2-706(1). 14 According to the evidence, B CA calculated its damages for each boat in accor dance w ith the sta

tute, and Conister d

oes not dis pute thes e calculations. 15

BCAnever r

eli nquished pos session of Boat II or Boat II

I to Villas-Afloat; it retained possession of thempending full pay ment. 16 This acti on was co nsistent w ith the UCC. Unless otherwis e agreed, tender o f pay ment by the buy er is a c ondition pr

eceden t to seller’s duty to tender andcomplete

deliver y. Tenn. Code

Ann. § 47- 2-511(1) . A seller “is n ot requir

ed to give up possession of the g oods until he has received p ayment” absent an agreement for c redit. Tenn. Code Ann. § 47-2-310, cmt. 2. The fac t that BCA retained possession strengthens its position and broadens its range of remedies under Article 2. A seller in possession of the goods when the buyer breaches the contract can r ely on the g oods for its recovery

. In re Ault , 6 B.R. at 67.
The rights or remedies given to a non- breach ing seller under Article 2 are akin to the
common law seller’s lien. 17 See Jackson & Peters, supra, 87 Y ALE L.J. at 914-15. We are of the opinion that a seller who never delivers goods because the buyer fails to tender

the required payment simply remains the owner of the goods. See W HITE & S UMMERS , supra , § 7-6, a t 375. None

theless, we are aware that a non-br eaching seller’s interest s may also constitute

“a secu rity inter est arising solelyunder the chapter on sales,” Tenn. Code An n. § 47-9 -113, or r

ights simila

r to secu rity interest s, as discussed above. Whichever title is given to the seller’s rights, they clearly arise f rom Article 2.

Tenn. Code Ann. § 47-2-706 ’s listing of the ty pes of da mages a vailable to the seller indicates the seller w ould not be entitled to retain partial pay ments which exceed its damages after re sale. Otherwise, the seller could be unjustly en riched. The damages allowed are de signed to “put the seller in as good a position as performance would have done .” Tenn. Code Ann. § 47-2-708(2).-12-

Accord in gly, Article 2 also addresses the rights of a breac hing buyer who made par tia l paymentsto arefund o f some or all of such partia

l payment s. Tenn. Code Ann. § 47-2-718(2). That provision entitles the breaching buyer to restitu tion of its d

own payme

nt accor ding to the

formula set out therein. R.E. Davis Chem. Corp. v. Diasonics, Inc. , 826 F.2d 678, 681 (7th Cir. 1987).
Where the seller justifiably withholds a delivery of goods because of the buyer’ s breach, the buyer

is entitle d to restit

ution of a ny amount b y which the sum of hi s paymentsexceeds . . . (b) . . . twenty p ercent (20%) of the value of the total performance

for wh ich th e buyer is obligated under the contract or five hundred dollars ($500), whichever is smaller.

Te nn. Code Ann. § 47-2-718(2). However, the amount of re stitution is limited by the seller’s damages

. Subsection ( 3 ) provides that “the buyer’s right to restitution under subsection (2) is subject to offset to

the extent that the seller

establishes (a) a right to recover damage s under the provisions of this chapter . . .” Id . Thus, a breaching buyer may receive as restitution its deposit, down payment, or partial payment to the extent any of it remains after the se ller exercises its rights or remedies under Article 2, including resale and deduction of authorized damages, except the seller retains at least $500. Madsen v. Mu rrey & Sons Co., Inc ., 743 P.2d 1212, 1215-16 (Utah 1987); Wendling v. Puls , 610 P.2d 58 0, 585-86 (Kan. 19 80); Anheuse r v . Oswald Refractories, Inc ., 541 S.W.2d 706 , 711-12 (

Mo. Ct. App. 1976). Th

is restitu tion to a br

eaching buyer is consistent

with the now general rule:
That a person wh o br eaks his contract may still be entitled to the restitution of the benefit s that he conferred on the other party before the breach, once the victim of the breach has been fully compensated by an award of damages. An award not reduced by the benefit received by the plaintiff would be too large to be compensatory, and
so it would be p unitive, and punitive damages are rarely . . . awa rded in contract cases; and so a victim of a breach of contract who w ants to keep the contract breaker’s money above and beyond the amount necessary to compensa te for the breach may be sa

id to be “u

njustly en

riched” , entitling

the contr

act bre aker to restitution.

Micro Data Base Sys., Inc . v. Dharma Sys., Inc ., 148 F.3d 649, 656 (7th Cir. 1998) (citations omitted).
Article 2 also addresses partial payments by buyers in one other instance. A buyer who has paid a part of the price of

goods in which the buyer has a “special property” ma y make tender

of any unpaid portion of

the pric e and re cover th

e goods from the seller, if the seller becomes insolvent within ten days of receipt of the partial payment. Tenn. Code Ann. § 47- 2-502. Villas-A float did nottender the full purchase price, and BCA did n ot bec ome insolvent in the relevant time period. Thus, this provision has no direct app licability to the case before us. However, its mention of “special property” refers to another potential source of interest for a buy er, and t

he comme

nts to this section p rovide c larific ation of th at intere st.18 Conister asserts it had a purchase money securit y inter est i n Boat II because the money it advanced was used by the d ebto r to pur cha se the c ollatera l. See Ten n. Co de A nn. § 47- 9-1 07( b); John D eere Co. v. Production Cred it Ass’n of Mu rfreesboro , 686 S.W .2d 9 04 ( Ten n. Ct. A pp. 1 984 ). A purchas e money secur it y int eres t must als o meet t he requ irem ents o f a secu rity inter est. Id. at 90 7; Mays v. Br ight on Bank , 832 S.W .2d 347, 349 (Tenn. Ct. App . 1992).

19 Attac hment is di fferent from perfecti on, and Conister does not

ass ert that it perfe cted it s i nter est

by fi li ng. -13- Under Tenn. Code Ann. § 47-2-501 a buyer obtains “a special pr operty” and an insur abl e i nterest in goods by identification of the goods to the contract. Other than triggering the right t o reco ver identified goods from an insolvent seller, as set out in Tenn. Code Ann. § 47- 2-502, an d other potential remedies not relevant, the extent and effect of this “special property” is not explained. See Jackson & Peters, supra , 87 Y ALE L.J. at 937 n.100. What is clear, however, is that whatever
a “specia l proper ty” is, it is not a se curity int

erest. T he UCC’s d

efinition of secur ity intere st

states, “The special property interest of a buyer of goods on the identification of those goods to a contract for sale under

§ 47-2-40 1 is not a

‘secur ity intere st,’ but a

buyer ma y also ac quire a ‘ security

interest ’ by complying

with chapter 9 of th

is title.” Tenn. Cod

e Ann. § 47 -1-201. O fficial Comment 2 to Tenn. Code Ann § 47-2-502 reaffirms this principle, even where a buyer has made partial payment andthe seller becomes insolvent, stating “The question of whether the buyer also acq uires a s ecurity interest in identif ied goods a

nd has rights to the goods when insolvency takes place after the ten-day periodprovided

in this sec ti o n depends upon compliance with the Article [Chapter] on Secur ed Transactions (Article [Chapter] 9).” Villas-Afloat did not atte

mpt to compl

y with the r

equirem ents of Article 9. III. Rights and Remedies Under Article 9
Conis ter ’s position rests fundamentally on its claim that it had a security interest pursuant to the Unifo

rm Commercial Code. U nder the UCC, the te

rm secur ity inte rest is de fined as “an interes tin personal property or fixtures which secures pa yment or performance of an obligation.” Tenn. Code Ann. § 47-1-201(37). 18 A secur ity intere st can onl

y be enforced against the

debtor or third parties if it has “attached.” 19 (1) Subject to the provisions of § 47-4-208 on the security interest of a collecting bank, § 47-8-32 1 on secu rity inter ests in sec

uriti es and § 47- 9-113 on a security interest arising under the

chapter on sales, a secur

ity in tere st is not enf

orceab le against the debtor or third parties with respect to the collateral and doe s not attach unless: (a) the collateral is in the po ssession o f the sec ured par ty pursua nt to agreem ent, or the debtor has signed a security agreement whic h contains a description of the collateral . . . ; and (b) the value has been given; and20 “Va lue” is d efined in § 47 -1-20 1, whic h states:

. . . a person gives “value” for ri ghts if he acquires them: (a) i n return for a bi nding com mitme nt t o extend credit

or for t he exten sion of

immediat ely a vai labl e credi t whether or not drawn upon and whether or no t a char ge-ba ck is pr ovid ed fo r in the ev ent of d if ficu lt ies in c oll ecti on . . . or(d) gene rally, in return for any c onsid eratio n sufficient to supp ort a sim ple co ntract.

Tenn. Code Ann. § 47-1- 201. Coni ste r ext ended cre dit to Vil las -Afloa t, then, Conister “gave value ” wit hin the meaning of the Code.

21 Conister

ass ert s t hat t

he condi ti onal s ales agreement si gned by Vil las -Afloa t sufficie ntl y descr ibed t he collate ral, here the b oats, to me et the re quir em ents o f the C ode . Altho ugh the co nditio nal sale s agre em ent b etw een Conister and Vil las -Afloa t i s nota for mal sec urit y agreement , the UCC does not requi re s uch f orm ality. Other less formal docu me nts, standing alone or in various com binations, have been held to satisfy the requirements of § 47-9-203. See Wray v. Es tat e of J ames Frankl in Wray , No. 01A01-9509-PB-00392, 1996 Tenn. App. Lexis 300, at *3 (Tenn. Ct. App. May 22, 1996) (no Ten n. R. A pp. P . 11 a pplic ation filed); W HITE & S UMMERS , supra, at § 23 -3. In Wray the court held that a hand wri tt en note that st ated, “Wayne Wray fir st li enh older $45 00 p aya ble o n de ma nd, n o inte rest” in addition to a not ati on on the certi ficat e of ti tle that Wayne Wray was the f irs t l ienhol der both of which wer e si gned by the debtor a nd inclu ded a d escription o f the collateral, a car, w ere, in com bination, su fficient to satisfy the se curi ty agreement

requ irem ent. Wray ,1996 Tenn. App. Lexi s 300, at *1- *2. The s ales agreement at i ssue herei n is si gned by the debtor in that it

is si gned by Mr. Bamford, the dire ctor of V illas-Afloa t, on its be half. Further, t he sales agreement contains a sectio n entitled “Par ti culars o f Goo ds Including Model and Se rial numbers” aft er which Boats I and II are described an d seria l numbers given on the t wo respect ive document s. However, under th e document, Coniste r agrees to sell t he boat to Villas-Afl oat, even though Conister had no contractual agreement with BCA for the manuf actu re or sale of the boa t. -14-

(c) the debtor ha s rights in t

he colla teral. (2) A secur

ity interest

attache s when it becomes en forcea ble against th

e debtor with respect to the collateral. Attachment occurs as soon as all of the even ts specified in subsection ( 1) h ave taken place unless explicit agreement postpones the time of attaching. Tenn. Code Ann. § 47-9-203.
There is no question that Conister gave value. 20 Be cause Bo at I I was never in Conister’s possession, it must demo nstrate t hat Villa s-Afloa

t signed a

security agreement

that meets the require ments of § 47-9-20 3(1) (a). A “security agreement” is de fined in Tenn. Code Ann. § 47-9-105(1 )(l) as “an agreement which crea tes or provides for a security interest.” Further, for purposesof this statute, “ any desc ription of persona l proper ty . . . is suf

ficient w hether o r not it is specific if it reasonably identifies what is described.” Tenn. Code Ann. § 47-9- 11 0. If the conditional sales agreement signed by Villas-Afloa t is suffi cient to meet the requirement of subsection (1)(a), 21 which we do not decide, then the remaining hurdle for Conister is to show that Villas-Afloat

had “rights in the collateral” as required in subsection (c ). Mays , 832 S.W.2d at 349.-15-

The phrase “rights in the collateral” i s not defined in the Code. Kunkel v. Sprague Nat’l Bank , 128 F.3d 636, 642-43 (8 th Cir. 1997 ); First Tenn. Bank, Nat’ l Assn v. G raphic Arts Centre , Inc ., 859 S.W.2d 858, 864 (Mo. Ct. App . 1993); Pet erson v. First Tenn. Bank , 1985 Tenn. App. Lexis 3059, at *14 (Tenn. Ct. App. July 30, 1985) (no Tenn. R. Ap p. P. 11 appl ication filed). Generally, issues such as owner ship, posse ssion, and their indi ces such

as title, p hysical c ontrol, and risk of loss enter into consideration of whether a debtor ha s suffici ent rightsin the collateral so as to allow attachment of a security interest. See Kunkel , 128 F.3d at 641 (courts consider factors such
as the exte

nt of the debtor’ s control over the property and whether the debtor be ars the risk of ownership); Kinetics Tech. Int’l Corp. v. Fourth Nat’l Bank , 70 5 F.2d 396, 399 (10th Cir. 1983) (debtor’s c ontrol); Chambersburg Trust Co. v. Eichelberger , 588 A.2d 549, 552-53 (Pa. 1991) (debtor had risk of

ownersh ip); Hong Kong & Shanghai B anking Cor

p. v. HFH

USA Corp ., 805 F. Supp. 133, 141-42 (W.D.N.Y. 1992) (court looked to whether title passed because title is indicative of rights buyer

has to dispose of

goods); Peterson , 1985 Tenn. App. Lexis 3059, at *14 (where true ownership lies with another party, mere acquisition by debtor of possession is not enough, bu t owner was estop

ped to den

y creat ion of sec urity inte rest whe re owne r gave de btor per mission to us e goods as collateral).
The importanc e of posse ssion has b een note d in many cases. See Douglas G. Baird & Thomas H. Jackson, Possession and Ownership: An Examination of the Scope of Article 9 , 35 S TAN

. L. R EV . 175, 202-06 (1983). Both Article 2 and Article 9 place significance on the physical location of contract goods as an indicator of statutory rights. Jackson & Peters, supra, 87 Y ALE L.J. at 912. Courts in Tennessee have also found possession to be a determinative fa ctor. “Possession is also significant

as a means of giving notice of rights in the goods, since notice is the basis of perfection of security interests. And possession must be measured in part by its ability to give notice.” In Re Ault , 6 B.R. at 65; see also AHCI, Inc. v. S hort , 878 S.W.2d 112, 114 (Tenn. Ct. App. 1993) (seller divested itself of

title to property at the time of the execution of the sales agreement where delivery hadalready taken place and the buye r was in po sse ssion of the proper ty); Weaver v. Ford Motor Credit Co. , 112 B.R. 906, 912 (Bankr. E.D. Tenn. 1990) (once goods have been delivered into the possession of the buyer under a sales contract, the most the seller c an retain is a security interest).
The importance of possession is acknowledged in Tenn. Code Ann. § 47-9-113, quoted earlier, which states that interests arising solely under Article 2 are governed by Article 2 “so long
as the debtor does not have or does not lawfully obtain possession of the goods.” In other

words, “once a debtor

-buyer o btains pos session of

the goods, lawful a s against the selle r, the tra nsactio n loses its overriding sales characteristics and resemb les more closely a credit transaction.” 8 H AWKLAND UCC S ERIES § 9-113:3. The converse must be presumed to be as accurate: as long as the seller retains possession, the more thetransaction reta ins its cha racter as a sale subject to Article 2.

In the case before us, Villas-Afloat never obtained possession of Boat IIor Boat III because it did notpay for them, a requirement of delivery. However, Conister does not base its position on any ar g ument tha

t Villas-A

float ha d owners hip, title o

r possess ion to Boat I

I. Inste ad, it alleges, “Villas-Afloat

acquired rights when it placed the order, there by entering into contrac ts for t he-16-

purchas e of the boat, and when it paid money to BCA pursuant to this contract,” without specifying the nature or legal source of those rights. Because the allegation is that the rights arose by virtue of the sales transaction, we interpret the statement as ref erring to contractual rights or rights and remedies available under Article 2. Where the claimed security interest rela tes to a sale of goods, the questions of whether the debtor has rights in the collateral, and the extent of those rights, should be determined by ref erence to Article 2 and with reference to the policies unde rlying it. Trust Co. Bank v. The Gloucester Corp., 643 N.E.2d 16 , 18 n.6 (M ass. 1994) (citi ng 8 A NDERSON , U NIF ORM C OMM ERCIAL C ODE § 9-203:44, at 688 (3d ed. 1985) and Johnson v. Conrail- Amtrak Federal Cred

it Union , 37 U.C.C. Rep. Serv. 933, 942 (D.C. Super. 1983)); Manger v. Davis , 619 P.2d 687, 690 (Utah 1980) ; Heidelberg Eastern, Inc. v. Weber Lithography, Inc. , 19 UCC Rep. Serv. 2d 767, 769 (N.Y. Sup. 1992). “In general, the debt or’s ‘rights in the collateral’ are determined not by Article 9, but by Ar ticles 2, 2A, by th e common law, and by other rules.” WHITE & S UMMERS , supra, at § 31-6, at 127.

We have previously identified theonly applicable buyer’s interest s in Artic le 2: the r ight to restitution of partial payments and a special property in the goods. The ques tion is whe ther the se identified remedies are sufficient to grant Conister an attached

security interest. The partial payment made by Villas-Afloat gaveit a right t o restitution of that portion of its payments that remained after the seller’s resale and recoupment of da mages, under Tenn. Code Ann. §§ 47-2-718(2) and (3), as discussed above. W

e do not, h owever , equate a rig ht to restitution of payments to rights in the collater al. First , a br eaching

buyer’srights in mo neys remaining af ter resa le of good s arises only after the goods (or collateral under Article 9) have been disposed of by the seller. Thus, the remedy
was not intend

ed to have any appli cation to

the goods themselves. Second, a number of courts have ruledthat a

seller’ s right to r

eclaim go ods when p ayment is d ishonore d after

deliver y to buyer does notinclude the right t

o recovery of proceeds from the r esale of those goods. See , e.g. In re Coast Trading Co. , 744 F.2d 686, 691 (9th Cir. 1 984) (citing prior preced ent on issue); Morken v. Kunkel , 182 B.R. 1007 (Bankr. D. Minn. 1995). W e think the

reasoning of those

courts is a

pplicabl e here. Where the UCC spe aks only of goods, pr oceeds a re not inc luded. Lo gically, then, whe re the UC C grants an interest in money generated from the sale of goods, that intere s t does not exten d to the goods themselve s. There fore, Villas-Af

loat’s int erest in restitu tion of its p artial pa

yments is not a “right in the collateral” sufficient to create a n enforceable security interest in Conister.
The remaining question, therefore, is whether the “special property” in Boat II acquired by Villas-Afloat pursuant to Tenn. Code Ann. § 47-2-501, discussed above, constitutes “rights in the collater al” sufficient to give Conister a security interest. We believe any consideration of that issue must begin with the UCC’s discussion of the nature of the “special property.” As explained ea rlier, the UCC clear

ly states t hat a spe cial pro

perty is n ot a secu

rity inter est. Thus, it could not h ave bestowedon Villas-Afloat a security interest in Boat II that Villas-Afloat could convey to Conister. Comment3 to Tenn. Code Ann. § 47-2-401 states that the incident s o f a special property of the buyer “are de fined in the provisions of this Article [Chapter] such as those on the rights of the seller’s creditors, on good faith purchase, on the buyer ’s right to goods on the seller’s insolvency, and on the buyer’s right to specific performance or replevin.”22 Gra phic Arts Cen tre , 859 S. W.2d at 865; Crocker Nat’l Bank v. I

deco Divi sion of Dresser Indus., Inc. , 839 F.2d 1104, 1108 ( 5th Cir. 1988) ; 3 R. A NDERSON , U N I F O RM C OMM ERCIAL C ODE , § 2-501: 16, at 612 (“by vi rtue of t he specialpropert

y of t he buyer in the i dentifi ed goods he may, even though titl e has not pass ed to him, recover the goods in the e vent of

the s ell er’s ins olvency, or upon t he sel ler ’s de faul t or repudi ati on, and he has a l imit ed ri ght to recover goods by replevin”).

23 Coni st er al so di d no t t end er fu ll

pay ment

af te r n ot ic e f

ro m BCA.

24 In support of s uch stat ements, those cou rts hav e gen erally relied o n trea tises, suc h as 1 Gilm ore, S ecu rity Interests i n Personal Property, § 11.5, at 353 (1 965). -17- Thus, the incidents of a

special propert y are specifically limited to those given explicitly by a provision in Article 2. The only rights given directly to a buyer with a special property are very limited. 22 For example, such a buyer who has made partial payments may recover the goods from
an insolvent seller within ten days of the payment. Ten n . Code Ann . § 47-2-5 02. That r ight to
recover the goods, however, is contingent upontender o f the full purchas e price. Villas-Afloat made
no such tender here and consequently was ineligible to exercise the so le remed y given by

the UCC to a buyer holding a special property. 23 We fail to see h ow a limited rem edy afforded to nonbreaching buyers, unexercised in this case prior to the resale of Boat II, can constitute “r ights in the collater al” sufficient to create a security interest. See Graphic Arts Centre, Inc ., 859 S.W.2d at 865, discussed below.

In a few c ases, co ur ts ha ve fo un d t ha t a sp ec ia l p ro pe rt y, when coupled with possession, was sufficie nt to const

ituterights in

the colla teral. As explained by the Massachuse tts Supreme Court in Trust Co. Bank v. The Gloucester Corp. , 643 N.E. 2d 16 (Mas s. 1994), this reas oning be gins with the propo sition that

possessio n alone isgener ally not sufficient.
While a debtor’s merepossession of goods usually is not enoug h to satisfy

the “rig hts in the c ollate ral” requirement of § 9-203(1)(c) , “the cases generally hold . . . that where a debtor

gains possession of collateral pursuant to an ag reemen t endowin g him withany interest other

than naked possession, the debtor has acquired such rig hts as would allow [a] security interest to attach.

. . .” Consistent with this standard, it has been held that, a de btor’s po ssession o f goodswithcontingent rights of ownership, gives the debtor “rights in the collatera l.”
Id

. at 17-18 (citations omitted). The court found that deliv ery

to the debtor buyer

of the goods gave the debtor r

ights in the collateral because there had been ide ntificat ion of the goods to the contr act, giving the buyer a

special property , the delivery ha d been made pursuant to the sales agreement, and the buy er acqu ired a degree o f contro l and authority over the goods. Id. at 18. Although some cou

rts have use d langu age ind icating that the sp ecial pr

operty given to the buyer upon iden

tification is sufficie

nt to cre aterights in goods so that a security interest may attac

h, 24 in each of those cases, the debtor had actual possession. See, e.g. , In Re Mc Laughlin , 183 B.R. 171,-18-

173 (Bankr . W.D. Wis. 19 95); In Re McFarland , 112 B.R. 906, 90 8 (Bankr. E.D. Tenn. 1990) (c onside ring whether security interests held by cr

editor were preferential transf ers under the Bankruptcy

Code).
However, in cases where the seller retained posse ssion, the conclus ion has be en diffe rent. For example, in

Central Prod. Credit Ass’n v. Hopkins , 810 S.W.2d 108, 113 (Mo. Ct. App. 1991), the court held that fo r a secu rity in terest to attach, a debtor must have some degr ee of control or authority over the goods pl aced in

the debtor’s possession. While supposing that it could be argued that the buyer a

cquireda specia

l proper ty, arising upon iden

tification of the g oods to the contract, the court concluded that

such an interest is not sufficient, without possession, to permit attachment of the creditor’s security

interest. Id . at 113-14. Becau se the de btor neve r acquir ed posses sion, it
never acquired any

rights or int erest in t

he good s, there

in cattle . “A holding that [d ebtor] could transfer a security intere st to the plaintiff would contravene the genera l principle that one cannot encumber another person’s property .” Id. at 114.

In Graphic Arts Centre, Inc ., the Missouri Court of Appeals found that the debtor never had actual or constructive possession. The court also considered the effect of identification of the goods to the contr

act, the event

which gives rise to the “special property ,” beginning with the principle that identification serves a limited function. The speci al pro perty and insura ble interest given to the buyer upon identification allows the buyer a limited right to recover the goods. 859 S.W.2d at 865. The court found:
However, these re

medial ri ghts derived from identification are available only upon misconduct

by the seller. He

re, buyer , rather than seller, failed to fully perform unde

r the contract. Thus, these remedial provisions are unavailable to [debtor-buyer] and [its creditor] and therefore fail to provide them the requ isite “ri ghts in the collateral.” . . . Identification by

itself does not confer “rights in the collateral”

. . . . Id. (citations omitted).
We have foundno instance wherein a court has found

that a buy

er’s special pro

perty is, in andof itself

, without po ssession, sufficie nt to cre ate “rig

hts in the collateral .” The F ifth Circu it dealt with the issue in the context of a seller who retained possession in Crocker Nat’l Bank, wherein a buyer contracted to pur

chase forty oil rigs f

rom the seller who was to manufacture them. The buyer later canceled the order, and the rig s were never delivered, althoug h seller maintained that buye r was obligated to pay for them b ecause

the manufacturing process wastoo far along when buy er attempted to cancel. 839 F.2d at 1106. The buy er and seller ev entually

settle d their differences, but upon buyer’s insolvency, buy

er’s creditor who had a perfected security interest in buyer’ s inven tor y asserted it was entitled to recover the rigs. The court fir st determined that the seller, who retained25 Th e same conclusion could be made in t he case before us, that BCA held a perfect ed purch ase mone y
secu rity interest in the bo ats. See In R e Au lt , 6 B.R. at 67 (s tat ing t hatunder

UCC § 2-505(1) (b) s ell er wit h posse ssi on had a per fected secu rity inter est). H ow eve r, Co nister d oes n ot disp ute BC A’s prior ity to proceeds from Boat II t o the extent of its dam ages. Th e dispute is ov er disposition of the am oun t in excess of those dam ages. While Con ister’s claim to that m one y is ba sed u pon Article 9’s p rov ision re gard ing p roce eds fr om collate ral an d, the refo re, its cl ai m to an Artic le 9 sec urity in terest, B CA ’s claim is not b ased on a ny A rticle 9 in terest. -19- titlean d p os se ss io n t o g oo ds , h el d a pe rf ec te d p ur ch as e m on ey s ec ur it y intere st in the g oods, pursuant to UCC §§ 2-401, 9-107, and 9-305. 25

In addressing the creditor’s assertion that its debtor, the buy er, had acquired rights in the collateral suff

icien t for the creditor’s security interest to attach because upon identification of the goods to the contract the buy er was given a spec ial property in the rig s, the court explained the relation ship of posses sion to special property . That explanation, being particularly relevant to the situation before us, bears quotation at some length:
The Uniform Commercial Code does not define the term special prop ert y in terest. However, comment

3 to § 2.401 indicatesthat the sp ecial pr operty interest is not a security interest but essentially rela tes to a purchaser’s remedial ri ghts . “[I ]ts incident s are defined in provisions of th e Article such as those on the rights of the seller’s creditors, on good faith purchase, on the buyer’ s right to goods on theseller’s insolvency, and on the buy er’s right to specific performanc e or replevin.” The Buy er and the Bank

argue that because § 9.203 does not specify any minimum quantumof rights in the collat e ral that m ust be hel d by

a debtor before a secur ity interest can atta ch, the sp ecial pr

operty interest is suffic ient for a

security interest to attach. The parties rely

on L.B. Smith

, Inc. v. Foley , 341 F.Supp. 810 (W.D.N.Y. 1972) and In re County Green Ltd. Partnersh ip , 438 F.Supp. 693 (W.D.Va. 1977), butmiss the important distinction in both of those cases thatthe buyer had physical possessio n of the g oods to supp ort the a ttachmen t of a sec urity interest

. The court in In re County Green held that “the mere delivery of the appliances to the construction site for use on the construction project gave the debt or rights in the collateral for purposes of § [9.203].” 438 F .Supp. at 696. In County Green , the buyer actually possesse d the go ods and thu s the cas e is dist inguishab le from the present facts. L.B. Smith, Inc. v. Foleyarises in a different factual framework. There the I

nternal Revenue Service asserted a tax lien on two trailers delivered by the seller to the buye

r pursuant to a conditional sales agreement. The buyer never made any

payment to the seller for the trailers. The district court was called upon to deter m ine the r elative priorities of the IRS’s tax lien and t h e un per fec ted in ter est of t he u npa id sel ler . In determining whether or not the IRS’s lien was perfected, the court examined the issue26 The text of the foo tnote in the o pinion is:

L. B. Smith, Inc. v. Foley is t he basis for the s tate ment that “a debtor has r ight s i n the c oll ater al i f he
*** is a buyer wi th s pecia l prope rty r ight s i n goods by virtue of U.C.C. § 2-501, even t hough he has not yet acquir ed tit

le under U.C.C. § 2-401 * * *.” 8 A NDERSON , U N I F O RM C OMM ERCIAL C ODE § 9- 203.45. The other

case rel ied upon by An derso n fo r this pr opo sition, Holstei n v. Greenwic h Yacht Sales, Inc. , 122 R. I. 211, 404 A.2d 842 (1979) , i s al so di sti nguishable f rom this case . T here t he Rhode Isl and court

held t hat t he spec ial propert

y int eres t ac quire d by the buy er of an undelivered sail boat wa s sup erior to the sec urity in terest o f the se ller’s floo r-plan finan cer. Ho lstein , howeve r, is dist ingui shed bec ause i t di d not determine t he ri ghts of

the buyer as against the seller/ holder of a purch ase money secur it y int eres t i n the goods . Ret enti on of poss essi on was not an is sue i n Ho lstein , while it is cent ral t o the ri ghts of t

he parti es here.

-20- “whether and to what extent the taxpayer-conditional vendee had property andrights to propert y in the two Coa stal Trailers to wh ich the federal tax lien could attach.” 341 F.Supp. a t 813. The cour t conclud ed that “ whateve

r the full nature o f this ‘special propert

y’ interest in the buyer, it is of a natur e sufficient to permit attachment of a lien by the buy

er’s creditor.” Id

. Although the court did not discuss the buyer’s posses sion of the trailers, that change of possession to the buy er did occur and the opinion must be read and construed in light of the buy er’s possession. 26

In In the Ma tter of Sam uels & Co ., 526 F.2d 1238 (5th Cir.) (en banc), cert. denied , 429 U.S. 834, 9 7 S.Ct. 98, 50 L.Ed .2d 99 (19 76), this c ourt focuse d on t he importance of posses sion in det ermin ing th e relat ive ri ghts o f part ies cl aimi ng a security interest in property. The opinion add ressed the following question: is the interest of an unpaid cash seller in goods already

delivered to a buy er superior or subordina te to the interest of a bank, the holder of a perfected sec u rity interest in those sa me go ods ? Id . at 1241. This cour t held tha t the buy er had th e right to encu mbe r the goods upon their delivery having obtained that right upon acquiring possession of the goods. The decision rested upon posse ssion. Indeed, as the opinion made clear, the bank’s security interest attached onlyas a direct result of the seller’s voluntar

y a ct of del ivery of the ca ttle to the buy er with out r eserving any written security intere st. Id . at 1247. See Inte rf irst Bank o

f A bilene, N. A. v. Lull Mfg ., 778 F.2d 228, 233 (5th Cir.1985).
This case is differe

nt from Samuels

. The Seller never delivered the rig s to the Buyer

. Neverth eless, the analysis in Samuels is important here because it demonstrates the im p ortant role of possession in determining rights in collateral. See Kinetics Technology Int’l Corp. v. The Fourth Nat’l Bank of Tulsa , 705 F.2d396 (10th Cir. 1983), where the court held that for a secur ity interest to attach, a de

btor must have
somedegree of

control or

authority over c ollateral placed in the debtor’s possession.
The Seller in this case retained possession of the rigs at all times, thus preserving a purchas e mo ney security interest in them. The Buyer never paid for the rigs and27 Becau se the only ri ght Vill as-Afloat could c onvey was an i nter est based on i ts posit

ion as a buyer maki ng parti al payments unde r Art icl e 2, i ts int eres t i s one “ari sing sole ly under the chapter on sales (chapter 2 of this ti tle)” and conseque ntl y, “t

he ri ghts of

the s ecured party on defaul t by t he debt or are governed by the chapte r on sales (chapter 2 of this ti tle). ” Tenn. Co de An n. § 47-9-11 3(c). -21- never acquired any control over them. A holding that the Buyer could trans fer a security interest to the Bank

would contravene the general principle that one c annot encumber another person’s property. See Kine tics Tech nology In t’l Corp ., 705 F.2d at 398. As the

district c ourt note d, “[i]t w ould asto nish the selle rs of the world to discover that a seller who has not parted withgoods nor received payment for them has an i nterest in the goods inferior to the creditor of a holder of a n executor

y contract to buy them.” Such a holding would offend the commercial expectations of all sellers who retain possession of goods to protect themselves against a defaulting buyer.

We thus hold

that where the seller has never relinquished possession of the goods the special property right of

§ 2.401 in and of itself does not constitute a sufficient right in t he colla

teral to e nable a buyer who

has not pa

id for tho se goods to

tr ansfer a security interest in them to a third party.
Crocker Nat’lBank , 839 F.2d a

t 1108-09; see also Heidelberg Eastern, Inc. , 19 UCC Rep. Serv. 2d at 770 (citing Crocker Nat’l Bank with appro v al for principle that “the requirement of UCC 9- 203(1)(c) that a debtor have r ights in the collateral is a reflection of the genera l principle that one cannot encumber another’s property. . .” and holding the UCC “e

mbodies a

policy of protecting the priority of a seller’s . . . interest . . . .”)

. For the reasons stated above, and in particular re liance on Crocker Nat’l Bank , w hose reasoning and resu

lt we adopt, we find

that Villa s-Afloa

t never acquired rights in the collateral sufficien tto meet the requirement for attachment of any security intere st in Conister. Therefo re , Conister cannot rely on a

ny Article 9 intere st to enforce its claimed right to proceeds, and Tenn. Code Ann. § 47-9-504(1) does not apply to the dispute. 2728 The examp le given by these authors is i llus trative:

For example, ass ume thatBoeing l eases air craf t t o Pan Am on t wenty-y ear lea ses at $100,000 per month. Do es Pa n A m e njoy “righ ts in the c ollatera l” sufficie nt to p ass on to a third party a secu rity interest in the a ircraft? I fwe assume t hat Boei ng’s c onsent

to an a ssi gnment of t

he le ases is not requi red, t he an s we r s ee ms to be yes. See, e.g., In re H oliday A irlines Corp ., 647 F.2d 977 (9th Cir. (con tinue d...) -22- IV. Rights Which Were Convey ed
Alth ough Villas-A

float did not have sufficien t rights in the collateral to create an attached
sec urity interest to Conister under Tenn. Code Ann. § 47-9-203 (1)(c), it was nevertheless able t o convey to Conister what r ights it had under the agreement with B CA or under Article 2.
Sometimes courts us e the “rights in the collateral” requirement as a way of limiting the scope of

the secu rity inter est, vis à vis prior cla

imants. Thus, an expansive security interest in goods granted by the lessee of such

goods nevertheless rises no higher than the lessee’s rights and thus is not superior to the lessor’s rights. . . .
Viewed in that way, “rights in the collateral” language merely states a trui sm , namely, that the debtor normally can only convey something once it has something, andthat somet

hing may be

le ss than the f

ull bundle

of rights t

hat one ma

y hold in such property. The “rights in the collateral” language is a ga tew ay through which
one looks to oth

er law to determin e the ext ent of the debtor’ s r i ghts, and thus the interest the debto r can gr ant to a th ird party by way of

a secur ity intere st.
W HITE & S UMMERS , supra , § 31-6, at 126-27.
The question r

eally is w hat rights a breaching b uyer may pass on to a creditor. We agree with the f ollowing a

nalysis:
A secured party (or other pro perty claimant) may hold rights that are derived from the debtor and yet may nonethel ess find th at he enj oys no gre ater rig hts against the “owner” of the goods tha n does the debtor himself. As long as the rights of the secured party (o r other p roperty claimant ) to the collateral remain only derivative of the debtor’ s, the “r

ights in the

collater al” issue seems lar

gely uncontrover sial. Regardle ss of whether

the rights in the collateral are asserted by the debto r are those of the hol der of a

“specia l proper ty intere st” in

the goods or

of “title ” to the go ods, the debtor ha s some rights in th e coll ater al. However limited those rights may be, there is no reason that a secured party (or other property claimant) should not be able to succe ed to them

. Baird & Jackson, supra , 35 S TAN

. L. R EV . at 203. 2828 (.. .continued) 1981). But to s ay that a th ird pa rty ca n ob tain a se curity interes t in the a ircraft is not to say th at its
secu rity inter est ent

itl es it to pr evail

agai nst Boeing. Rather, “attach me nt” of the third party’s interest
means nothi ng mor e than that u pon Pan Am ’s default against t he third party, the lat

ter can assert whatever rights Pan Am enjoys i n the air craft against Boeing. The secured part y may take pos sess ion of the ai rcraft

by step ping i nto t he shoes of Pan Am and ass uming both i ts right s and obl igations under t he l ea s e. Th e s ec ur ed pa rt y wi l l ac qu i re no t t he ai rc ra ft bu t r at he r Pa n Am ’s r i gh t t o u s e t he m. Assuming that t

he secured party ’s righ ts to th e a ir cr af t are but deriv at iv e of

Pa n Am’ s, whe n Pa n Am loses its right to poss ess the aircraf t as aga inst Bo eing , so too will the sec ured party lose its rig hts to possess the airc raft as ag ainst B oein g. Be cau se Pa n A m h as the r ight to use th e airp lanes only if it pays Boeing $100,000 a mon th, t he secu red p arty w ill be abl e to us e the air planes only i f it

pays Boeing the sam e am oun t. Thus, t he ri ght the thi rd part

y acqui res to s ecure i ts debt (the right to r ent airpl anes from Bo eing at $1 00,0 00 a mo nth) will prove val uable only i f the $10 0,00 0 ren tal price is belo w th e pre vailing ma rket ra te for a irplan es of th at typ e at the time of Pa n A m’ s defa ult.

Id . at n.85.

-23- Thus, we conc lude that

Villas-A float could only co nvey to Con ister thos e intere sts or rights it had. Because the dispute herein is over the proceed s f rom the sale of Boat II, the relevant right
so conveyed was Villas-Afloat’s right to restitution of that portion of its partial payments which exceed ed BCA’s c osts and da

mages. V. Resolution of Competing Claims to Excess Proceeds from Boat II
The outcome of the conflicting claims to the $48,889.85 depends upon an analysis of the rights and inter

est of the two parti es under

Article 2 and othe

r applic able

state law. Tenn. Code Ann. § 47-1-103 : Haverla h v. Mem phis Aviation, Inc ., 674 S.W.2d 297, 306- 07 (Tenn . Ct. App. 1984). Villas-Afloat

had, and conveyed to Conister, a right to restitutionunder Tenn. Code Ann. § 47-2- 718(2), which translates to claim for the $48,889.8 5 minus $500 . On the ot her hand , BCA has a claim against Villas-Afloat arising from its rights as a seller under Article 2 and cla ims a right

to setoff its losses on Boat III against the same money. Article 2 provides no guidance on resolving the dispute, but is the source of the debts claimed byeach. We resort, therefore, to the law of setoff. Haverlah, 674 S.W.2d at 306-07.
The fundamental philosophy of all setoff s and recoup ments is tha t a party being sued for money may claim entitlement to money from the party br

inging thesuit, permitting the adjudication of countervailing claims in one suit.
A set-off is a count erdema nd which a

defenda nt holds ag ainst a

plaintiff, arising out of a tr ans act io n ex tri nsi c of pl ain ti ff’ s ca use of a cti on. It is the right which e

xists betweentwo parties, each of whom under an independe nt contract owes an ascertained

amount to th

e other, to set-off their respective debts by way of mutual deduction, so th at in any action broug ht for the larger debt the residue only , after deduction , ma y be rec overed. The right of set-off is a c ommon-law right, which29 BCA argues that the boa ts were bui lt pursua nt to an installm ent co ntrac t betw een BC A a nd V illas-A float; Conister argues there were separate contracts, at l east with regard to Boat II and Boat III. The tr ial court found “Boating Co rpo ration of A me rica co ntrac ted w ith V illas-A float to build a series o f bo ats, that th ree b oats w ere b uilt.” -24- belon gs to every c

reditor, to apply unappr

opriated monies of his debtor, in his hands , in extinguishment of debts due to him. It allows part ies that ow e mutual d

ebts to eachother to assert amounts owe d, sub tract one from the other, and pay only the balance.
80 C.J.S. Set-off and Counterc laim§ 3 (2000) (footnotes omitted). “[A]nyclaim or demand the defendant may have against the plaintiff may be used as a set off, while it is nota subjec t of rec oupment un less it gr ows out of

the very sametransaction which furnishes the plaintiff’s ca use of action.” Howard v. Abernathy , 751 S.W.2d 4 32, 434 (Tenn. Ct. App. 1988). Thus, whether BCA’s arrang ement with Villas-Afloat is treated as one contract or as three, BCA is entitled to claim a right of setoff. 29 See also Tenn. R. Civ. P. 13.02 (allowing as permissive counter

claims “a ny c laim ag ainst an o

pposing party , whethe

r or not a rising out of the transaction or occurrence that is the subject matter of the opposing party ’s claim.”).

In In Re Paul

Pack Steel Erection Co., Inc ., 126 B. R. 310 (Bankr. E.D. Tenn. 1991), the court
was called upon to determine whether a creditor c ontractor could setoff against retaina ges it was holding the total a

mount due t

o the cont

ractor from a now ban krupt subcontractor under three separa te subcontracts. The bankruptcy trustee objected to using the entire retainag e from the third contract to setoff the claim s resulting from t he fir s t two contracts. The court determined that retai nage on a subcontract was simply a debt owed by

the contractor to thesubcontr actor and, as such, was subject to the common law rul es of setoff. Consequently, the contractor creditor was entitled to setoff the retainage from one c ontract against debts owed it by

the subcontractor arising from all three subcontracts. Id . at 312.
A setoff must be a v alid claim for whic h the def endant mi ght hav e sued the plain tiff an d recovered. Howard , 751 S.W.2d at 434. In other words, a setof f claim must be sufficient to support
an independent actionby the defe ndant against the plaintiff. Combustion Eng’g Co. v. McFarland , 209 Tenn. 75 , 349 S.W.2d 138 (1961). An essential requirement to a right of setoff is that the demands, or claims, are mutual, that is subsisting between the same parties. Auton’s F ine Jewe lry & Bridal Center, Inc. v. Beckner’s, Inc. , 707 S.W.2d 539, 540 (Tenn. Ct. A pp. 1986) (citing Edington v. Pickl

e , 33 Tenn. 122 (1853 )). Addit ionally , the reciprocal

claims “m

ust be of the same grade and nature or be due in the same capacity or right.” Id . The rig

ht to setof f is available to assert claims only to liquidated damag es or those capable of being asc ertained by c alculation. Howard , 751 S.W.2d at 434.
A remedy pr

ovided by Article 2

can be the basis of a setoff claim. First Tenn. Bank Nat’l Ass’n v. Hurd Loc

k & Mfg. Co ., 816 S.W.2d 38, 41 (Te nn. Ct. App. 1991). In Hurd Lock , a buyer
was allowed to set off its Tenn. Code Ann. § § 47-2-714 and -715 damages ag ainst amounts it owed-25-

under the sales contract. Because the da mages incurred

by the buy er were

great er than t he amount s due under the contract, the seller’s secured creditor was not entitled to any amount from

the buyer.
The claim by BCA for

its damages arose from its rights and re medies under

Article 2 of the UCC because of

th e b re ac h b y Vi ll as -A fl oa t i n f ai li ng to pa y fo r t he bo at s i t c on tr ac te d t o b uy. Conister’s claim

rests on the rights transferred to it by Villas-A float, a nd Villas- Afloat ha

d a claim for restitutio n of part

ial pay ments for Boat I I als o found in A

rticle 2. Thus, we f

ind there is mutuality of partie s and the c laims are of t he same n ature. B ecause

the UCC creates the formula for calculation of both claims, they wer e both capable of being asce rtainedby calcula tion and w ere, in fact, so calculated before the lawsuit was broug ht by Conister. Theref

ore, BCA has met the requirements for asserting a valid cla im of setoff against Villas-Afloat.
This court has also allow ed a party to assert a claim of setoff where “complete justice and equitycannot be meted o ut to the part ies” otherwise. Haverlah , 674 S.W.2 d at 307; Moore v. Howard Pontiac-Am., Inc ., 492 S.W.2d 227, 230 (Ten n. Ct. App. 1972). In

other wo rds, there is no
reasonto subject

the parties to two lawsuits when they have claims against each other. See also ECHO, Inc. v. Whitson Co., Inc. , 52 F.3d 7 02, 704 (7 th Ci r. 1995) (In allowing buyer to assert counter claims against the seller w ho bro ught suit to c ollect money owed f rom the sa

le of good s, which counterclaims where based on a separate distribution agreement, the court stated “T he real pointis that only the resolution of the counter claim will ultimately determine how much money each party owes each other.”).

It does not change the outcome of the case that for some period of time after the sale of Boat II BCA indicated that the $48,889.85 belonged to Villas-Afloat. After Boat II I was sold, B CA realized a net lossin its deal

ings with Villas-Af

loat. It subseq

uentlydetermined that it w ould apply the proceeds from the $48,889.85 to the money Villas-Afloat owed it on Boat

III. Although the right of setoff is an exercisable prerogative, not a natura l right c onclusive

ly e stablishe d becau se the parties have claims ag ainst

one another, In re Holder , 182 B.R. 770, 776 (Ba nkr. M.D. Tenn. 199 5), BCA exercisedthat rig

ht, asser ted its cla im to setof

f in a timely ma

nner, and did not wa

ive it. The court had authority to allow the claimed setoff. Tenn. Code Ann. § 25-1-105; McReynolds v. Cherokee Ins. Co. , 815 S.W.2d 201, 206 (Tenn. Ct. App. 1990). The par ty asser ting a cla im to setof

f has the burden o f establi shing its rightto setoff. Polk
v. Torrence , 218 Tenn. 680, 683, 405 S.W.2d 575, 576 (1966). BCA has proved its losses and the claims it had agai nst Villas -Afloat . In fac t, Conister does not di spute the

amounts or

that Villa sAfloat was liabl e to BCA for

its damages. Further, setoff is an equitable doctrine, and gener ally rests in the inherent authority of the cour t to do justice to the parties before it and, therefore, will not be allowedwhere to do so would work injustice. Auton’s Fine Jewelry &Bridal Center, Inc. , 707 S.W.2d at 540. We find not hin g about the situation before us which indicates that allowance of BCA’s right

of setoff would be inequitable. BCA performed all its obligations under its ag reement withVillas-A

float an d took rea sonable s teps to recover it s losses. Co nister, a lendin g institu tion, made a loan to Villas-Afloat which later proved to have been

improvident, but failed to take the steps necessary to insure its loan would be secure before delivering the proceeds of the loan.-26-

Therefore, we concludethat BCA wa s entitled to setoff the amoun

t owed it by Villas-Afloat against the money left after the resale of Boat II. T here is sufficient evidence in the record to prove that the amount of BCA’s setoff exceeds the $48,889.85. In essence, our conclusion is the same as the trial court’s : there w ere no e

xcess pr oceeds.
VI. Conist

er’s Non -Deriva

tive Claims

In addition to

its claim to

the proc eeds f

rom the sale of Boat II based upon its assertion of
an attached security intere st, and in add ition to those rights derived from Villas-Afloat, Conister makes other claims whichwe interpret as not deriving from Villas-Afloat. These c laims begin with the assertion that communications from Conister to BCA made contemporaneously with its wire of the procee ds of its loa

n to Villas -Afloat

restric ted appli cation of

those funds to Boats I and II. The only communication con tem poraneo us with del

ivery of the fundswas the f

ax which simply referenced, in the subj ect line, two invoic es by numb er. There wa s a telephone con versation to confirm the deta il s of the process for wiring the money, but there was no testimony that anything else of substance took place in that conversation. The trial c ourt held:
The evidence is insufficient for the Court to find that Conister Trust gaveany written instructions or verbal instructions to Boating Corporation of America on the use of the funds or o n any limita tion of the

funds. One canno t read the fax wh ich conf irms the wiring of

the 200,0 00 pounds with refer ence to t he invoic e number s on the fi rst two boats a s a limitati on on the a pplicatio n of those

funds.
Conister asserts the trial court’s holding was in error. We cannot agree. The evidenc e does not preponderate against the trial court’s factual finding.

In addition, Conister recounts numerous statements from BCA offic ials acknowledging the entitlement

of Villas-Afloat and/or Conister to the $48,889.85 remaining after the resale of Boat II. We do notinterpret

these sta tements a s supporting any ar gument tha

t Conister actually or effectively limited use of the funds it loaned Villas-A float to Boats I and II. As set out earlier, after the sa le of BoatII on November 26, 1990, BCA considered the $48,889.85 as surplus from the sale and made
no claim to that money. In fact, BCA offered to forward the money to the proper party upon receipt of joint payment instructions. BCA sold Boa t III in late December of 1990. Conister claims that BCA made simil ar state

ments disc laimin g intere stin the proceeds from Boat II and carried that amount as a credit balance on its books for some time after the sale of Boat III. BCA a sserts tha

t it did not realize the full extent of its losses in its dealings with Villas-Afloat until “the dust settled” andthat the is sues res olved in de termining the entitl ements to

the money

were c omplex. W

e note that Conister did not initiate this litigation until August of 1994, and the record would indicate there had been silence between the parties f rom early 1991.
These factual allegations concerning the contemporaneous communications and subsequent statemen ts appear to bethe basis, in part, for the equitable arguments made by Conister. Conister argues that, even if it does not have a superior interest to the proceeds of the s ale of Boat II vi a a-27-

security interest, it is still entitled to the money under the doctrines of constructive trust and equitabl e lien. As foundation for this argument, Coni ster states that BCA knew that Conister only f unded Boats I and I

I and was not involved with Boat II I, but BCA still applied $25,000, of Conister funds towards Boat II

I and offset its loss on Boat I II with the surplus from Boat II . Therefore, Conister argue s, it is entitled to both the $25,000 deposit on Boat III and th e $4 8,8 89. 85 s urp lu s on Boa t II.
To clarify , we point

out that the

$25,000 th at is the subject of Conister’s claim is the amount BCAapplied, at the dir

ection of Villas-A float, a s a deposit on

Boat I II . Conister ’s claim t

hat BCA
was not entitled to so appl y th at amount

rests upo n its claim

that BCA was restricted in its use of the funds wired by Conister. This arg ument, however, overlooks the fact that Villas-Afloat had supplied
an initial $25,158 as a depo sit. Conister’s argument in this regard lacks a n evidentiary ba sis that the money used as a

deposit on Boat II

I was part of the money

wired by Conister.
Ad di ti on al ly, and more significantly , Conister’s argument that BCA could not apply either the $25,000 or

th e $4 8,8 89. 85 i n pr oce eds fro m t he s ale of B oat II contains two defects. First, the money wired to BCA was money loaned to Villas-Af loat and was no longer Conister’s money . The fact that Conister made the transfer instead of giving the money to Villas-Af loa t to make the payment d oes not alter the fact that the money was Villas-Afloat’s and was sent to BCA at the direction of Villas -Afloat . While Conis ter coul d put conditions on the use of the money by VillasAfloat, it had no relationship with BCA through which it co uld impos e such conditions on BCA. Second, as we havedetermined earl ier, BCA was entit led to the reme dies aff

orded under the UCC andto offset its total damages against amounts paid to it by Villas-Afloat. These problems doom Conister’s final two claims.
A. Constru ctive Tr ust Conister argues that this court should apply the principle that “when one acquires propert y withnotice that

another is entitled to its benefits, equity constructs a trust out of the tra nsaction and makes a trus tee of t he pers on th us acq uirin g titl e” cit ing Browder v . Hite , 602 S.W.2d 489 (Tenn. Ct. App. 1980). As such, BCA was the trustee as to both the $25,000, deposit and the $4 8, 000, surplus. I mplicit in Co nister’sargume nt is that th

is case s atisfiesthe crite

ria for the imposition of a constructive trust. We disagree.
Constructive trusts arise through equity to satisfy the demands of justice. Rowlett v. Guthrie, 867 S.W.2d 732, 734 (Tenn. Ct. App. 1993); Akers v. Gillentine , 191 Tenn. 35, 39, 231 S.W.2d 369, 371 (1948 ). A cons tructive trust ari ses against one who: . . . by fraud, actual or c onstructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, a rtifice,
concea lment, or qu estionable means, or who in any way against equity and good conscience, either h as obtained or hold s the lega l title toproperty which heought not, in equity and good conscience hold and enjoy.-28-

Livesay v. Keaton, 611 S.W.2d 581, 584 (Tenn. Ct. App. 1980) (citationomitted). Tenness ee cour ts have found constructive trusts in several si tuations, and included among them is “where a per son acquires property with notice tha tanother is entitled to its benefits.” Myers v . Myers , 891 S.W.2d 216, 219 (Tenn. Ct. App. 1994). This gro und includ

es a req uiremen t that the p arty

seeking to impose a constructive trust must own the property in que stion or have a beneficial interest in it. Browder , 602 S.W.2d at 493. A constructive tru st is a device used by c ourts app lying equita ble princ iples “to compel one who unfairly holds a prope rty interest to convey

that inter est to another to whom it justly belongs.” Akers , 191 Tenn. at 39, 231 S.W.2d at 371 (c i tation omitted). Finally, to establish a constructive trust the proof must be “‘clear, coge nt, convinci ng, and irrefrag able.’” Browder , 602 S.W.2d at 493 (c itin g Cook v. Cook, 521 S.W.2d 80 8 (Tenn. 1975); Seaton v. Dye , 37 Tenn. App. 323, 263 S.W. 2d 544 (19 53)); see also Li nder v. Lit

tle , 490 S.W.2d 717 (Tenn. Ct. App. 1972).

In the case herein, we find that a number of the prerequisites for a

constructive trust do not exist. BC A has not engaged in the ty pe of conduct required; Conister was not entitled to the “p ro pe rt y” at issue; a

nd Conister

receiv ed the be

nefits its was entitled to, in that it c ould asse rt its debtor’s rights to

restitution. W e find no basis for the application of the equitable principles underlying

the theor y of constructive trust

in this busin

ess arrangement wherein both Conister and BCA had available remedies to protect their intere sts. B. Equitable Lien
Si mi la rl y, we find that the doctrine of equitable lien does not apply to the circ umstances herein. An equita

ble lien is a right of a special nature over property

which constitutes a charge or encumbrance

so that the

propert y its elf may be proce eded ag ainst

in an equitable action, and either sold or sequestered, and its proceeds or profits supplied on the debt of the person in whose favor the lien exists. Shipley v. Metropolitan Life Ins. Co. , 25 Tenn. App. 452, 158 S.W.2d 73 9 (1941). This court ha s discussed the doct rine as f ollows:
An equitabl e lien is a r

ight, not existing a

t law, tohave specific pr

operty applied in whole or in part to pay

ment of a particular debt or class of debts. I t is not an est

ate or property in the

thing itse lf, nor is i t a righ t to recove

r the thing ; that is, it i s not a right which may be ma

de the basis of aposs essor y action, but i s mere ly a charge upon it. Greer v . Americ

an Secur ity Insurance Co. , 223 Tenn. 390, 445 S.W.2d 904, 907 (Tenn.1 969); See Allen v. Cunningham , 143 Tenn. 11, 223 S.W. 450 (Tenn.1919). An equitable lien arises either from a written contract which shows a n inten tion to cha rge some particular property with a debt or obligation or is implied anddeclared by

a court of equity out of ge

neral considerations of right and justice as appliedto relations of the parties and circumstances of their dealings. I n the absence of an expres s contra

ct, a lien is based u

pon the fu

ndame ntal maxims of equity and may be implied and declared by a court of chancery out of general considerations of right and justice as applied to the relations of the parties and the circ umstance s o f their dealings. Greer, 445 S.W.2d at 907. There must be an intent to make the particular propert y, r eal or pe rsonal, a security for the obligation. Id. An equita ble lien cannot be founded merely upon moral obligations alone, but must find a bas i s-29-

in established equitable principles. Id.; See also Stansell v. Roach, 147 Tenn. 183, 246 S.W. 520 (Tenn.1922).
Muller v. Lannom , No. 02A0 1-9702-C H-00043, 1997 Tenn . App. L exis 904, at *14-*15 (Tenn. Ct

. App. Dec. 17, 1997) (c itations om itted) (no Tenn. R. App. P. 11 applic ation filed). I mportantl y, t his court has stated, “there must be an established obligation befor e a lien may be dec lared to secure it.” Shipley , 25 Tenn. App. at 455, 158 S.W.2d at 741.
It is undisput

ed that there wa s no expres s contract between BCA and Conister. BCA did not have an obligation to Conister regarding the mone y sent it at the direction of its buy er Villa s-Afloa

t. Further, we find that no “fundamental maxims of equity” we re triggered. Thus, we

find there was no equitable lien upon the funds.
VII.
Ac co rd in gl y, the decision of the trial court is affirmed and t he case is remanded for such proceedings as are nec essary. Costs of this appea l are taxed to Appellant, Conister Trust Ltd., for which execution may issue if necessary.

_______________ ____________________________ PATRICIA J. COTTRELL, JUDGE