Opinion ID: 1700887
Heading Depth: 2
Heading Rank: 1

Heading: Was Kurylas' Security Interest Extinguished by an Authorized Disposition?

Text: The trial court found that the security interest Kurylas retained when it dealt with Kiser was extinguished thereafter by an authorized disposition, thus giving Bank a superior security interest in the inventory, accounts, and liquor licenses as of December 11, 1984. Any interest Kurylas obtained in the April 1985 transaction was inferior to Bank's prior perfected security interest pursuant to SDCL 57A-9-312(5)(a). There is no doubt that Kurylas consented to the disposition of the collateral in his exchange agreement with Kiser: The Purchaser agrees not to assign this Agreement or sell or otherwise dispose of any interest in the real property described herein, either in whole or in part, to any other person, firm or corporation, without first receiving Seller's permission, and said permission cannot be unreasonably withheld. This contract may not be assigned nor may the underlying property be sold without the written consent of the Sellers. Such written consent shall not be unreasonably withheld. It is the intent of this paragraph to adequately protect the Seller's security and not to restrict the sale or other alienation of the property, by the Purchaser hereunder. Seller agrees that Purchaser may assign this Agreement to a corporation to be hereafter formed. Such assignment shall not however, relieve Purchaser of any obligations assumed hereunder. (emphasis added) As authorized by Kurylas, the assignment of this agreement was executed by Kiser one week later in favor of Motel Company, Inc. Bank claims that Kurylas' security interest was terminated by this assignment on July 1, 1983, and that by failing to protect itself by not obtaining a new security agreement and financing statement from the assignee, Motel Co., Inc., Kurylas became an unsecured creditor. SDCL 57A-9-105(1) and Comment (2). Kurylas argues that its written consent given pursuant to the exchange agreement is contingent on its security interest remaining attached to the collateral. SDCL 57A-9-201 states: Except as otherwise provided by this title a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors. The otherwise provided referred to in that section which is pertinent to this case is found in SDCL 57A-9-306(2) and 57A-9-402(7). SDCL 57A-9-306(2) reads as follows: Except where this chapter otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise .... (emphasis added) This court has recognized that an authorized disposition or consent to sale has the effect of extinguishing a security interest and thus the transferee takes free of the security interest. Aberdeen Production Credit v. Redfield Livestock, 379 N.W.2d 829 (S.D.1985). See also Swift v. Jamestown Nat. Bank, 426 F.2d 1099 (8th Cir. 1970). Under SDCL 57A-9-306(2), the burden is on Bank to show that the authorization to sell was given by Kurylas in the (1) security agreement or (2) otherwise, if it is to prevail. United States v. E.W. Savage & Son, Inc., 343 F.Supp. 123, 125 (D.S.D. 1972); Aberdeen PCA, supra at 831. Unlike Aberdeen PCA, this case concerns a consent to sale clause in the security agreement, and therefore, the question of other outside consent to sale by the secured party does not arise. We thus must determine what constitutes an authorization for sale. In the context of this case, is an authorization by a secured party an all or nothing proposition which, if given, waives the creditor's rights to its secured interest? Or may that party give an authorization to which conditions may be attached, such as the continuation of the security interest in the collateral after sale? Kurylas cites a line of cases which hold that when a security agreement expressly prohibits the disposition of collateral without the written consent of the secured party, in order for a court to find an authorization permitting disposition free of the security interest within the meaning of section 9-306, subdivision (2), there must either be actual prior or subsequent consent in writing by the secured creditor manifesting a purpose to authorize the disposition free of the security interest. Central California Equipment v. Dolk Tractor, 78 Cal.App.3d 855, 862, 144 Cal. Rptr. 367, 371 (1978). (emphasis added) See also Matter of Franchise Systems, Inc., 46 B.R. 158 (Bkrtcy.N.D.Georgia 1985); In re Southern Properties, Inc., 44 B.R. 838 (Bkrtcy.E.D.Va.1984); Matter of Matto's, Inc., 8 B.R. 485 (Bkrtcy.E.D.Mich.1981); Baker PCA v. Long Creek Meat Co., 266 Or. 643, 513 P.2d 1129 (1973). The key factor in the line of authority cited by Kurylas is that all of the secured creditors had perfected their security interest. Thus the effect of SDCL 57A-9-402(7) came into play: A filed financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer. The benefit of perfection to the creditor is more specifically addressed by Official Comment 8 to UCC § 9-402: [9] Subsection (7) also deals with a different problem, namely whether a new filing is necessary where the collateral has been transferred from one debtor to another. This question has been much debated in preCode law and under the Code. This article now answers the question in the negative. Thus, any person searching the condition of the ownership of a debtor must make inquiry as to the debtor's source of title, and must search in the name of a former owner if circumstances seem to require it. The problem with Kurylas' reliance upon the authority cited above is that it does not fit the facts of this case. When Kurylas consented to the transfer of the property from Kiser to Motel Co., Inc., on June 1, 1983, it was not a holder of a perfected security interest since it had not filed a financing statement. SDCL 57A-9-302(1). Kurylas thus was denied the protection afforded a perfected secured party under SDCL 57A-9-402(7). Kurylas nevertheless was a holder of an unperfected security interest on that date. SDCL 57A-1-201(37) and 57A-9-203(1). That is made clear by the contract for deed and exchange agreement between himself and Kiser. Thus, the question arises whether Kurylas had the right as an unperfected holder of a security interest to condition the approval of the transfer of the collateral from Kiser to Motel Co., Inc. on the requirement that its unperfected security interest continue on in the collateral. SDCL 57A-9-306(2) speaks only of a disposition. Unlike SDCL 57A-9-402(7), there is no mention of any type of conditional disposition. This has led the Supreme Court of Idaho to conclude: [Comment three of UCC § 9-306] states: The transferee will take free whenever the disposition was authorized ... Therein, no distinction is made between conditional authorization or any other kind of authorization. As between a third party purchaser who agreed to no condition and the security holder which permitted the goods to be placed on the market, clearly the third party has superior right to the goods. Western Idaho Production Credit v. Simplot Feed, 106 Idaho 260, 678 P.2d 52, 56 (1984). This rationale is also in accord with our long-standing principal of statutory construction that the legislature said what it meant and meant what it said. Crescent Electric v. Nerison, 89 S.D. 203, 232 N.W. 2d 76 (1975). Such a holding is also in harmony with the UCC's goal of preventing secret liens. In re Hodge Forest Industries, Inc., 59 B.R. 801 (Bkrtcy.D.Idaho 1986); In re Vieths, 9 UCC Rep.Serv. (Callahan) 943 (Wis. 1971). The cases cited by Kurylas are also exclusively disputes between the original secured party and subsequent transferees. Here the dispute is between a seller and Bank, an innocent third party. To expand the doctrine of conditional assignments in this case would in effect make Bank an insurer of the obligations originally assumed by Kiser and Motel Co. and thereafter by a subsequent transferee, Ceasar's. Bank loaned money to Ceasar's which was to be paid as rent and which would ultimately go to Kurylas. When Ceasar's defaulted on this obligation, Bank should be entitled to its collateral rather than now finding out that Kurylas is entitled to it under a prior unknown conditional sale or secret lien. This type of situation is similar to those cases in which the secured creditor has attempted to condition his consent to disposition upon a requirement that the proceeds of the sale be remitted to him. As the innocent third party has no control over the dealings between the creditor and his original debtor, the courts have struck down such attempts to make the third party the insurer of the debt. Aberdeen PCA, supra at 834 (Henderson, J., dissenting and cases cited therein); Vacura v. Haar's Equipment, Inc., 364 N.W.2d 387 (Minn.1985). [10] In summary, only those conditional consents by a secured party to the disposition of his collateral which are recognized by the UCC are effective to preserve his interest in the property. [11]