Court Opinion

ID: 9791480
Source: CourtListenerOpinion
Date Created: 2023-08-31 02:11:35.915584+00
Date Added: 2024-06-11T07:37:36.173197
License: Public Domain

OPINION FRANCHINI, C.J. {1} This is a secured transactions case. We address a single issue: whether the proceeds of an unauthorized sale of a tractor, in which Petitioner Case Credit Corporation (Case) held a prior security interest, were converted by Respondent Portales National Bank (Bank), which held a junior lien in the same tractor, when the Bank, having come into ownership of the proceeds as payee on the check, disbursed the money to a third party (the debtor). The trial court’s ruling that there was no conversion was affirmed by the Court of Appeals in an unpublished opinion. We hold that the trial court erred as a matter of law in failing to conclude, based on its findings, that the Bank’s actions constituted conversion. We reverse. FACTS {2} The following facts are agreed on by the parties. J.L. Morris, the debtor, bought a tractor and executed a security agreement and financing statement securing the unpaid balance owed on the tractor. The security agreement and financing statement were filed in Curry County on July 3, 1991. This created a perfected security interest, which was subsequently assigned to Case, which became the secured party. Later, the debtor executed a security agreement and financing statement in favor of the Bank in the same tractor. The Bank filed appropriately on March 4, 1992, and had a junior security interest in the tractor. This security agreement was signed by Nancy Tivis, vice-president of the Bank. On September 30,1993, the tractor was sold to one McLaughlin for $40,-000. This was an unauthorized sale and constituted a default on the security agreement with Case. The sales transaction was handled by the same Bank, where the debtor maintained an account. A check in the above said amount was made out to the Bank, since it was its practice to have its name put on a check covering a sale of goods in which it had a security interest. The Bank took the check, indorsed it by the name of Nancy Tivis, and deposited it in the debtor’s account. The bank did not offset its lien, for reasons which are unclear. The money was paid out of the debtor’s account in the normal course of business. DISCUSSION  {3} Under NMSA 1978, § 55-9-306 (1961, as amended through 1996), it is clear that Case would have had a continuing security interest in the proceeds had they gone directly into the hands of the debtor. A security interest continues in collateral, notwithstanding its sale, where, as here, the sale was unauthorized. Section 55-9-306(2). The check constituted “cash proceeds” of the collateral, Section 55-9-306(1), which were identifiable as such, Section 55—9—306(3)(b). Furthermore, a filed financing statement covered the original collateral. Therefore, since the security interest in the original collateral was perfected, there would have been a “continuing perfected security interest” in the proceeds. Section 55-9-306(3).  {4} The purpose of filing a security agreement and financing statement is to put third persons on notice of the security interest. The underlying purpose of filing financing statements is to provide an opportunity for the debtor’s other creditors and transferees to independently ascertain whether the property they will rely on as backup for the payment of claims against the debtor ... is subject to prior claims. Arnold B. Cohen, Guide to Secured Lending Transactions ¶ 3.03 (1988). An examination of the facts as found by the trial court in the instant case shows that the Bank, when it took a second security interest in the tractor, had actual or constructive notice of Case’s prior lien as a matter of law. {5} The next question is whether a security interest under Section 55-9-306(3) was effective against the Bank as the recipient of the proceeds. The statute does not preclude it, and it is held generally that a junior lienholder who is the distributee of proceeds of a sale may not participate therein until senior lienholders have been paid. Bank of Danville v. Farmers Nat’l Bank, 602 S.W.2d 160, 164 (Ky.1980).  {6} One conceptual difficulty with this case appears to be the fact that the Bank was serving in two roles with respect to the same collateral. It was a junior secured creditor as well as the bank handling checks for the debtor. In the normal course of banking business, a bank in the latter role would have no obligation to investigate the sale of a tractor with the proceeds coming into the bank into the seller’s account. However, a bank in the former role-secured creditor on the tractor, on notice, coming into possession of the proceeds of the sale-would. The Bank already had all the knowledge necessary to require it to allow the first lienholder to be paid. {7} We find useful the case of AAA Auto Sales v. Security Federal Savings & Loan on the subject of how the mechanics of Section 55-9-306 lend themselves to theories of conversion when property is handled to the exclusion of a senior interest. See 114 N.M. 761, 763, 845 P.2d 855, 857 (Ct.App.1992). The Court of Appeals in AAA Auto Sales quoted Harley-Davidson Motor Co. v. Bank of New England—Old Colony, N.A., 897 F.2d 611, 617 (1st Cir.1990), with approval in this regard: “[C]ase law from other jurisdictions amply ‘supports the proposition that, when a debtor makes an unauthorized sale of collateral, and when that transfer constitutes a default under the terms of a security agreement, the secured party obtains an immediate right to the collateral, permitting him to maintain an action for conversion.’ ” AAA Auto Sales v. Security Fed. Sav. & Loan, 114 N.M. at 763, 845 P.2d at 857.  {8} Thus, upon an unauthorized sale, the property right of the senior creditor vests immediately in the collateral, or in this case, as indicated by Bank of Danville, in the proceeds in the hands of a junior secured party. That party, the Bank, did not issue to Case its share of the proceeds. One authority has written, “it seems clear that there are situations in which a wilful omission which deprives the plaintiff of his property can serve as a foundation for the action [of conversion].” W. Page Keeton et ah, Prosser and Keeton on the Law of Torts Ch. 3 § 15 (5th ed.1984). The issue then is whether the acts or omissions of the Bank in this case, given the meaning and intent of Section 55-9-306, constitute the tort of conversion. We hold that they do. {9} Our holding is logical in light of our own case law as well. We defined conversion in Apodaca v. Unknown Heirs, 98 N.M. 620, 624, 651 P.2d 1264, 1268 (1982), as a “wrongful detention amounting to repudiation of the owner’s rights or any exercise of dominion inconsistent with such rights.” Here, the Bank was on notice that immediately upon default of the debtor, Case’s security interest became a possessory right. Detention of the check and then depositing it into the debtor’s account amounted to a repudiation of this right. Furthermore, since the check was made out to the Bank (for the very reason that the Bank had a lien on the tractor), it was in the Bank’s domain for a period of time and the Bank had ownership of it. The Bank was not in the role of a mere collecting bank, through whose hands the check moved. Rather the check stopped in the hands of the Bank, which had total control over its disposition. The Bank then acted on the check by indorsing it and giving it in its entirety to the debtor. Our careful definition of conversion does not require any benefit going to the Bank; the above acts alone were illegal acts of dominion inconsistent with Case’s rights. {10} The Bank, for the first time on appeal, raises the argument that it was a holder in due course of the check and therefore took it free of the claim of Case. We do not address this argument in detail since it does not pertain to jurisdiction and since there was no opportunity for necessary factual development or argument before the trial court. See State ex rel. State Highway Commission v. Pelletier, 76 N.M. 555, 559, 417 P.2d 46, 48 (1966). We do note that from all the facts and circumstances known to the Bank at the time, it had reason to know of the existence of the fact of Case’s claim in the proceeds, apart from and beyond the notice given by the filing of the financing statement. See NMSA 1978 § 55-1-201(25) to (27) (1993). Notice of this kind defeats holder in due course status. NMSA 1978 § 55-3-302 (1992). CONCLUSION {11} Therefore, we reverse the Court of Appeals and remand to the District Court for computation of damages and interest. {12} IT IS SO ORDERED. BACA, SERNA and McKINNON, JJ., concur.