Opinion ID: 1299095
Heading Depth: 1
Heading Rank: 6

Heading: Did Sac City's Security Interest Cover its Losses on the Full Recourse Chattel Paper Sold it by TJC, Inc.?

Text: When the dealership was being operated as a sole proprietorship Johnson was selling most of his finance paper on car sales to General Motors Acceptance Corporation in Des Moines, but some was sold to Sac City and to Citizens. Sac City's president testified the bank had been buying chattel paper from Johnson before its security agreement was consummated. Sac City held a separate reserve account to be used to offset contracts that might go into default. After TJC, Inc., acquired the dealership it sold consumer paper to Sac City, with recourse. Promptly after the incorporation Sac City obtained an agreement from Johnson individually, guaranteeing any corporate indebtedness. Through the dealership's dishonest practices, both banks suffered losses on consumer paper assigned by TJC, Inc. Sac City claims its loss on this paper should enhance its claim on the proceeds of the sale of TJC, Inc., assets, and that its security interest gives it priority over Citizen's claim. Sac City relies on the following obligations clause language from its security agreement signed by Thomas S. Johnson: to secure the payment of entire indebtedness... and all liabilities and indebtedness of Debtor to Secured Party, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising. Section 554.9204(5), The Code 1971 (now section 554.9204(3), The Code), provides: Obligations covered by a security agreement may include future advances or other value whether or not the advances or value are given pursuant to commitment. Although in other contexts we have limited the range of such dragnet clauses, Freese Leasing, 253 N.W.2d at 927, we do not reach that issue as to TJC, Inc., because, as we have concluded in division V, Sac City's security interest was not perfected as to the corporation and does not extend to corporation property not acquired from the sole proprietorship. The debtor in Sac City's security agreement is identified as Thomas S. Johnson also known as Tommy Johnson Chev. Co., an individual. The indebtedness of TJC, Inc., cannot be included as an obligation of the debtor within the obligations provision of this security agreement. Sac City does not urge that it had a lien (in the amount of the TJC, Inc., indebtedness to it) on the proceeds in the hands of the stakeholder bank because of the personal liability of Thomas S. Johnson on the guaranty to pay corporate indebtedness. This contingent liability was discharged in bankruptcy. Rather, Sac City insists it and Johnson intended that the security agreement cover indebtedness resulting from subsequent consumer paper transactions. This rationale ignores both the separate legal identity of TJC, Inc., and the intervening rights of Citizens through its perfected security interest covering corporate assets. We hold Sac City's security interest did not cover its losses on the full recourse chattel paper it purchased from TJC, Inc.