Opinion ID: 1700887
Heading Depth: 1
Heading Rank: 7

Heading: did kurylas convert bank's collateral?

Text: The trial court held that Kurylas converted Bank's collateral on November 6, 1985, when Kurylas took possession of the motel complex and related personal property and thereafter obtained transfer of the on-sale and off-sale liquor licenses. A determination of whether Kurylas converted the collateral in question involves a comparison of Bank's interest in that collateral with the interest of Kurylas, since each party asserts a security interest in the same property. We must decide which party has priority to the collateral and thus lawful right to possession under SDCL 57A-9-301 and 57A-9-312(5)(a).
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]
During the time Ceasar's had possession of the collateral, Bank made various loans to it and secured such loans with Ceasar's inventory, accounts receivable and general intangibles, the liquor licenses. This security interest was perfected on December 13, 1984. In April of 1985 Kurylas regained possession of the motel complex. Kurylas filed a financing statement executed by Lewis as its debtor on April 15, 1985, as a condition of the leaseback from Kurylas to Lewis and Ceasar's. Kurylas now contends that the Lewis and Ceasar's transfer of the collateral back to Kurylas constitutes an authorized disposition extinguishing Bank's security interest pursuant to SDCL 57A-9-306(2). The trial court found that since Bank did not consent to such a transfer, its security interest continued in the collateral. The security agreement between Bank and Ceasar's required Bank to give prior written consent to any disposition of collateral, except inventory, which could be sold to buyers in the ordinary course. It is undisputed that Bank did not execute a written consent authorizing such transfer to Kurylas. Kurylas argues that Bank's knowledge regarding the leaseback constitutes an authorization of the disposition under the or otherwise exception of SDCL 57A-9-306(2). We disagree. This court addressed the same issue in Aberdeen PCA, supra. In that case we refused to find the written consent in documents other than the security agreement. In the present case, unlike Aberdeen PCA, no documents exist that purport to evidence a written consent to transfers by Bank. Yet this court, upon a full review of all the facts in Aberdeen PCA, found that there was no otherwise authorization for the sale of the cattle, and thus, the security interest continued. The same result arises from the facts of this case. Kurylas has shown that Bank knew there was some change in the relationship between Kurylas and Ceasar's, but he failed to establish that Bank knew there had been an actual transfer of the collateral. Absent knowledge of a transfer, there certainly can be no consent to the disposition by Bank. Further, in Aberdeen PCA this court held that even if there is knowledge, it will not be elevated to the legal status of an authorization to extinguish a security interest. 379 N.W.2d at 832. To hold to the contrary would also be inconsistent with the terms of the security agreement which required written consent. Therefore, Bank's security interest survived the unauthorized transfer to Kurylas. Similarly, the November 6, 1985, transfer of the liquor licenses from Ceasar's to Kurylas following repossession of the motel by Kurylas had no effect on Bank's security interest as Bank had also not consented to this transfer.
Bank had a perfected security interest in Ceasar's inventory, accounts receivable and licenses on December 13, 1984, as well as an unperfected interest in Ceasar's equipment in January of 1985. [12] Any security interest Kurylas had in the initial transactions with Kiser was extinguished by the disposition of July 1983 and, therefore, Kurylas did not perfect his security interest in the collateral until the April 15, 1985, transaction. However, this filing was ineffective as to equipment since Kurylas failed to describe the equipment as collateral in the financing statement. Priority between conflicting perfected security interests is determined by time of filing or perfection. SDCL 57A-9-312(5). Thus, Bank achieved priority over Kurylas by being the first to file its financing statement. Bank's unperfected security interest in equipment of January 1985 has priority over the unperfected interest of Kurylas in the same collateral which did not arise until April 11, 1985. Therefore, any interest Kurylas obtained through the Lewis and Ceasar's transaction of April 1985 is subordinate to Bank's interest in the inventory, accounts receivable, liquor licenses and equipment. On November 4, 1985, Ceasar's was in default to Bank by reason of nonpayment of three notes. Bank was entitled to immediate possession of the collateral pursuant to the terms of its security agreements and the provisions of SDCL 57A-9-503. [13] Notwithstanding the fact that Bank had the right to immediate possession of the collateral on November 6, 1985, Kurylas took possession of Bank's collateral. This action constituted conversion. This court has recognized that a conversion action is an appropriate action where a party interferes with a secured party's right to take possession by reason of the debtor's default. Sanborn County Bank v. Magness Livestock Exchange, 410 N.W. 2d 565, 567 (S.D.1987). The UCC also addresses this situation in § 9-306, Official Comment 3: In most cases when a debtor makes an unauthorized disposition of collateral, the security interest, under prior law and under this Article, continues in the original collateral in the hands of the purchaser or other transferee. That is to say, since the transferee takes subject to the security interest, the secured party may repossess the collateral from him or in an appropriate case maintain an action for conversion. Because Kurylas' security interest was subordinate to Bank's, the trial court was correct in holding that Kurylas converted property belonging to Bank. Kurylas argues that upon receipt of a demand for delivery of personal property, the one holding the property of another has a reasonable time to investigate to determine who has the right to possession. Rapid Sewing Center v. Sanders, 79 S.D. 373, 112 N.W.2d 233 (1961). This contention is without merit, as Kurylas did much more than merely investigate ownership. Kurylas transferred liquor licenses to its own name, made beneficial use of the property and leased the property back to Ceasar's and Lewis. These actions illustrate that such property was converted, as defined by Scherf v. Myers, 258 N.W.2d 831, 834 (S.D.1977): Conversion is the act of exercising control or dominion over personal property in a manner that repudiates the owner's right in the property or in a manner that is inconsistent with such right. Because Kurylas took possession of the collateral securing Bank's loan, Bank was prevented from disposing of the collateral pursuant to SDCL 57A-9-503. This conversion entitles Bank to the value of the property at the time of conversion, plus interest. SDCL 21-3-3(1). The trial court assessed these damages as equal to the amount of Ceasar's unpaid obligations to Bank, with interest, since Bank is not entitled to any more than the loss from the disposition of its collateral. SDCL 57A-9-504(1) and (2). We hold that the damages assessed by the trial court were proper. [14]