Opinion ID: 523161
Heading Depth: 2
Heading Rank: 5

Heading: rights in the collateral

Text: 33 The bankruptcy court found that, There is no evidence in writing of a bill of sale, deed, or other instrument, except for book entries made by the corporate accountant in the depreciation schedules established for the corporation, that any personal property of any kind was ever lawfully transferred into the corporation by John W. Whatley, Ruby G. Whatley, or any other person, firm, or legal entity. The court accordingly determined that Whatley Farms could not pledge the farm equipment because it did not own the equipment. We find the analysis more complex. 34 Mississippi's enactment of the Uniform Commercial Code sets forth the requirements necessary for a valid security interest in Mississippi. A security interest does not arise unless (1) the debtor has signed a security agreement containing a description of the collateral, (2) value has been given, and (3) the debtor has rights in the collateral. Miss.Code Ann. Sec. 75-9-203. The first question before us is whether Whatley Farms had rights in the farming equipment pledged as collateral to the SBA. 35 The bankruptcy court erred in equating a debtor's rights in the collateral with its possession of legal title. The Uniform Commercial Code does not equate the two concepts; they are not the same, and the distinction is crucial to our decision. A debtor need not have legal title to equipment in order to grant a creditor a security interest. See, e.g., Matter of Samuels & Co., Inc., 526 F.2d 1238 (5th Cir.1976) (en banc). Although one cannot generally encumber another's property, several exceptions have long been recognized. Consent by the property owner constitutes one such exception. See In re Pubs, 618 F.2d 432, 436 (7th Cir.1980). This case presents a classic example of consent. 36 John Whatley signed the corporate resolution authorizing the corporation to submit a loan application to the SBA and to pledge its corporate assets as security. More importantly, the SBA's security agreement and financing statement bear the signature of John W. Whatley, on behalf of Whatley Farms. The financing statement specifically identifies and lists the farming equipment piece by piece as pledged collateral. Assuming, therefore, that the bank is correct in its contention that John Whatley actually owned the farming equipment, by signing the corporate borrowing resolution and security agreement, John Whatley consented to the corporation's pledge of the farming equipment. 11 The corporation accordingly had sufficient rights in the collateral irrespective of outright ownership. 37 Our decision is consistent with the Eleventh Circuit's opinion in In re Atchison, 832 F.2d 1236 (11th Cir.1987), which examined the validity of a security agreement granted by a corporation. Estil Atchison, as an officer and shareholder of the corporation, executed a chattel mortgage running from the corporation to Merchants Bank. Later, having filed a Chapter 7 bankruptcy petition, Atchison claimed that the mortgage was invalid because the pledged property belonged to him personally. The court in Atchison disagreed with the debtor, stating that all of the courts that have considered the question have ruled that an owner's permission to use goods as collateral creates rights in the debtor sufficient to give rise to an enforceable security interest [citations omitted]. 832 F.2d at 1239. Since Atchison himself signed the mortgage on behalf of the corporation, the court held, his signature for [the corporation] was sufficient to infer his consent to [the equipment's] use as collateral. As the Tenth Circuit has observed, the UCC was designed, in part, to prevent hidden-title subterfuge in which the true owner of collateral, by permitting another party to exercise an outward appearance of ownership, could deceive third-party creditors to their detriment. See Kinetics Technology Int'l Corp. v. Fourth Nat. Bank, 705 F.2d 396, 399 (10th Cir.1983). Adopting the bank's position would revive the possibility of such subterfuge. 38 The bank also contends that the SBA's security agreement is defective. According to the bank, Sec. 75-9-203(1)(a) requires that the actual owner of the collateral sign the security agreement when the debtor and the owner of the collateral are not the same person. 12 The bank draws support for its argument from Miss.Code Ann. Sec. 75-9-105 (1972), which states in pertinent part: 39 (1) In this chapter unless the context otherwise requires: 40 (d) Debtor means the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral, and includes the seller of accounts or chattel paper. Where the debtor and the owner of the collateral are not the same person, the term debtor means the owner of the collateral in any provision of the chapter dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires; 41 (emphasis added). At least one court has adopted the bank's view. Northwest Bank v. First Va. Bank of Damascus, 585 F.Supp. 425 (W.D.Va.1984). 42 We cannot agree with the bank, however. The definitions in Sec. 75-9-105 are specifically qualified by the phrase unless the context otherwise requires in Subsection (1). The context of Sec. 75-9-203 does just that. Were we to construe the term debtor to mean owner of the collateral, the section's third requirement, that the debtor have rights in the collateral, would be rendered meaningless. As our earlier discussion indicates, the third requirement covers a broader class of debtors than the actual owners of collateral. The term debtor appears three times in Subsection (1) of Sec. 75-9-203. General principles of statutory construction require us to interpret the same word consistently within the same subsection absent an express change to the meaning in the subsection itself. Therefore we must conclude that the drafters of the code did not intend to require the owner of the collateral to sign the security agreement. Rather the debtor must sign the agreement and have rights in the collateral. 43 The bank did not contest the validity of the SBA's financing statement. We note in passing that Miss.Code Ann. Sec. 75-9-402 requires the financing statement to contain the name and signature of the debtor. Some courts have held that under this section, the financing statement must contain the name of the owner of the collateral when the debtor and the owner are not the same. The purpose for the owner's signature on the financing statement is to protect searching creditors from being misled as to prior encumbrances on the debtor's property. Thus, although all parties must comply with all requirements of Sec. 75-9-402 to perfect the security interest, Sec. 75-9-402(8) specifically excuses minor errors which are not seriously misleading. Section 75-9-402(8) was designed to ensure that minor mistakes which would not mislead creditors in their search for prior financing statements would not defeat otherwise valid financing statements. Compare Avco Delta Corp. Canada Ltd. v. United States, 459 F.2d 436 (7th Cir.1972) (financing statement filed under Canadian Parkhill Construction Equipment but Canadian Parkhill Pipe Stringing, Inc. actually owned the collateral) and In re Dwares, 6 B.R. 335 (D.R.I.1980) (name Industrial National Bank used as debtor's name, instead of actual name: Industrial National Bank of Rhode Island) with White Star Distributors v. Kennedy, 66 A.D.2d 1011, 411 N.Y.S.2d 751 (1978) (Scheuerle but not Jerge, true owner of collateral, listed in financing statement) and K.N.C. Wholesale, Inc. v. AWMCO, Inc., 56 Cal.App.3d 315, 128 Cal.Rptr. 345 (1976) (financing statement listing JAPE as debtor did not contain any reference to AWMCO, the actual owner of the collateral). The indexing of financing statements is tied to the name of the debtor. These cases are not inconsistent with our previous conclusion that Whatley's signature, even though perhaps executed in the wrong capacity, was sufficient to bind him to the security agreement with SBA. The security agreement is a document governing only the borrower and lender, while a financing statement must provide notice to the world.