Opinion ID: 1299095
Heading Depth: 1
Heading Rank: 4

Heading: Does Sac City Have Priority in the Proceeds of the Collateral Transferred to TJC, Inc.?

Text: Trial court's recital of relevant facts (which, except as hereafter noted, we find in our de novo review to be fully supported in the record) reflects that when Thomas S. Johnson's dealership assets were transferred to TJC, Inc., the inventory and accounts receivable were subject to a first perfected security interest held by Sac City. This is not contested by Citizens. The latter bank contends Sac City lost its security interest in these assets because it authorized this disposition of the collateral. This transfer of the collateral occurred in May 1972, therefore the pertinent statute is section 554.9306(2), The Code 1971: Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. (Emphasis added.) This section has been amended slightly since 1971, but not substantively changed. Compare § 554.9306(2), The Code 1971 with § 554.9306(2), The Code 1981. There was no written authorization for this specific sale or disposition. Citizens places some reliance on paragraph 17 of Sac City's security agreement (set out in trial court's findings, above) that provides the obligations of the Debtor shall bind the... successors and assigns of Debtor. To interpret this as an authorization for a subsequent transfer free of the security interest would violate the overall intent and purpose of the agreement, and require us to nullify paragraph 5 (quoted above) that forbids this type of disposition without the written consent of the secured party. We agree with trial court that no conduct of Sac City could be interpreted as a section 554.9306(2) authorization. Although the testimony is conflicting, we find Sac City did not know of the incorporation and transfer of assets until shortly after the event. We have held a prior course of dealing may overcome express terms in the security agreement and translate into an authorization for sale free of lien. Hedrick Savings Bank v. Myers, 229 N.W.2d 252, 256 (Iowa 1975); Lisbon Bank and Trust Co. v. Murray, 206 N.W.2d 96, 98 (Iowa 1973); see § 554.1205(1), The Code. But here there was no prior course of dealing to support a finding that Sac City authorized a bulk conveyance of business assets. Citizens relies on In re Vieths, Inc., 9 U.C.C.Rep.Serv. 943 (Callaghan) (Bankr.E. D.Wis.1971), as authority for finding under the facts before us, a section 554.9306(2) authorization for a bulk transfer of collateral. We are not required to address the Vieths court's analysis since that case, although involving a priority dispute after a sole proprietor incorporated, is distinguishable on its facts because the secured party knew about the collateral disposition before it occurred. The court in dictum stated: Thus if the debtor in this case had formed a corporation and then transferred his assets to the corporation without the knowledge or consent of the bank, the bank's lien on the original collateral would have continued. Vieths, 9 U.C.C.Rep.Serv. at 948. Because we find Sac City did not authorize the transfer from Johnson to the corporation, Sac City's security interest continued in its collateral transferred to TJC, Inc., and in any identifiable proceeds [1] from the disposition of that collateral. See § 554.9306(2), The Code. Sac City's subsequent knowledge of the transfer does not change this result. The third sentence of subsection 554.9402(7), The Code, provides: A filed financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of the transfer. This third sentence, unlike the first sentence in subsection 554.9402(7), The Code 1977, is not deemed a change in the law but declaratory of the meaning of the law at the time these events occurred. See § 554.11108, The Code. Therefore, a new financing statement was not required to preserve Sac City's priority for this collateral.