Title: McCormack v. EE McCormack Co.
Citation: 239 Or. 264, 397 P.2d 198
Docket Number: N/A
State: Oregon
Issuer: Oregon Supreme Court
Date: December 16, 1964

Affirmed as modified December 16, 1964.
*265 Robert H. Huntington, Portland, argued the cause for appellant. With him on the briefs were Rockwood, Davies, Biggs, Strayer and Stoel, Portland.
C.E. Wheelock, Portland, argued the cause for plaintiffs-respondents. On the brief were Wheelock, Richardson, Niehaus &amp; Baines, Portland.
Before PERRY, Presiding Judge, and SLOAN, O'CONNELL, DENECKE and LUSK, Justices.
AFFIRMED AS MODIFIED.
PERRY, J.
The plaintiffs E.E. McCormack and Caroline McCormack brought this suit to foreclose a contract of sale wherein plaintiffs agreed to sell to the E.E. McCormack Co., a corporation, a plant manufacturing concrete products.
It is conceded on this appeal that the defendant E.E. McCormack Co. breached the sales agreement *266 with plaintiffs and that foreclosure was properly decreed.
The question raised on appeal is as to the priorities between liens claimed by the plaintiffs and liens claimed by the defendant Investment Service Co., as assignee of the United States National Bank of Oregon.
The contract of sale was entered into on March 1, 1961, and possession of the E.E. McCormack Co. and its assets was then taken over and held until the default sometime in February, 1963. In June, 1962, the E.E. McCormack Co. leased a portion of its premises to the Lawrence Warehouse Co. In July, 1962, the E.E. McCormack Co. began borrowing money from the United States National Bank and secured these loans through the pledge of manufactured products deposited with the Lawrence Warehouse Co., which warehouse company then issued its non-negotiable receipt to the bank.
The bank had notice of the provisions of the contract of sale at the time it advanced money to the E.E. McCormack Co. on the basis of the warehouse receipts. Also, the plaintiffs had notice that E.E. McCormack Co. was obtaining financing from the bank under the warehouse agreement.
The trial court held that the McCormacks held a lien under their contract of sale prior in right to that of the bank upon all of the unsold manufactured products of the E.E. McCormack Co. The Investment Service Co., as successor in interest of the bank, has appealed.
1. This case is a vivid illustration of the need of the Uniform Commercial Code in the commerce of this age. The Uniform Commercial Code was passed by the *267 1963 legislature, but, since the contract of sale and purchase was entered into before that act took effect, the case must be decided upon the law as it existed prior to its passage.
The contract of sale entered into between the sellers and purchasers clearly expresses the intention that the title to the real property, the machinery, furniture, fixtures and stock in trade (described as raw materials and finished products at the time of sale) should remain in the sellers until full payment of the purchase price had been made by the purchasers. The contract also provides:
It is the contention of the defendant Investment Service Co. that the contract of sale as drafted was insufficient to grant the sellers a lien upon the property later acquired by E.E. McCormack Co. through the manufacture of merchantable concrete products. The defendant also contends, if such a lien is valid, it could attach to no more than the stock of merchandise, materials and supplies required to be maintained by the E.E. McCormack Co. under the contract.
2. While the following discussion speaks of chattel mortgages, it must be remembered that, while the instrument may be in form a conditional sale, such a security contract will be treated in equity as a chattel mortgage, unless contrary to the express intention of the parties. Davis v. Wood et ux., 200 Or 602, 268 P2d 371.
The Investment Service Co. argues that the intention of a mortgagor to cover after-acquired property within the lien of a chattel mortgage must be clearly expressed, otherwise, in the absence of an express agreement, the property substituted for that mortgaged is not within the lien coverage. In re John Hoos Co., 203 FS 641; 10 Am Jur 804, Chattel Mortgages § 137.
Other jurisdictions do not seem to follow this strict *271 rule, but state that, where the mortgage instrument clearly shows an intention by the mortgagor to subject after-acquired property to the coverage of the lien, this is sufficient, and that an agreement to keep a stock of merchandise in a certain amount or in present condition is sufficient to show such intention of the parties. In re Simpson (DC) 31 F2d 317, (CCA) 35 F2d 840; Kettenbach v. Walker, 32 Idaho 544, 186 P 912; Cadwell v. Pray, 41 Mich 307, 2 NW 52; Wilson v. Lewis, 63 Neb 617, 88 NW 690; Madson v. Rutten, 16 ND 281, 113 NW 872, 13 LRA NS 554; Albien v. Smith et al, 24 SD 203, 123 NW 675; Ayers, Weatherwax &amp; Reid Co. v. Sundback, 5 SD 31, 58 NW 4, 929; Armstrong v. Ford, 10 Wash 64, 38 P 866.
We have found no cases, and the parties have cited none, wherein this particular issue has been considered or decided by this court. However, in Flanagan Bank v. Graham, 42 Or 403, 417, 71 P 137, 790, we stated:
3. A chattel mortgage upon after-acquired goods is valid against a bona fide purchaser with actual notice upon the theory that such purchaser can have no better title than his vendor. 1 Jones, Chattel Mortgages and Conditional Sales (Bowers Edition) 262, § 156.
Since the bank, through whom the Investment Company claims, had knowledge of the contract and is placed in the shoes of the mortgagor, it would logically follow that the rule of intention to subject the after-acquired property to the lien of the mortgage should apply, and we so hold.
4. In our opinion, section 10 of the agreement, although not expressly providing that the after-acquired "stock-in-trade" should be subject to the contractual lien, is sufficient to express the intention of the parties that the after-acquired property should be subject to the lien securing the debt and bind a subsequent purchaser with knowledge.
There is, however, no expressed intention in the agreement nor any language used that indicates an intention of the parties to subject all the after-acquired "stock-in-trade," as defined in the agreement, to the lien of the mortgage. The lien is expressly limited to the inventory requirement "equal in value at cost to $40,000.00."
5. The defendant Investment Service Co. also contends that regular and continuous advances made upon the finished goods of the E.E. McCormack Co. should *273 be considered as sales made in the regular course of business.
We can find no merit in this contention. It is clear the transaction between the bank and the E.E. McCormack Co. was that of lender and borrower and not purchaser and vendor.
6. The Investment Service Co. also contends that, since E.E. McCormack and wife knew that the E.E. McCormack Co. was pledging the property manufactured and made no complaint to the bank, they should now be estopped to assert the priority of their lien.
Since the bank had knowledge of the rights of E.E. McCormack and wife in the after-acquired "stock-in-trade," it is not in a position to contend that it was misled.
The decree of the trial court is affirmed, except as above modified.
Neither party to recover costs.