American Heritage Bankv.O. E., Inc.

Colorado Court of Appeals. Division IIIJan 5, 1978
40 Colo. App. 306 (Colo. App. 1978)
40 Colo. App. 306576 P.2d 566

No. 76-823

Decided January 5, 1978. Rehearing denied January 26, 1978. Certiorari denied March 27, 1978.

In consolidated action relative to foreclosure of security interests in the various property of a business, the security interest of bank premised on its financing of original owners was afforded priority over lien of junior lienor who had subsequently taken over operation of the business, and junior lienor appealed.


1. SECURED TRANSACTIONSUCC — Debtor's Rights — May Be Transferred — But — Security Interest — Continues in Collateral — Transfer of Business — Not Invalidate — Lien — Financing Bank. Although provision of Uniform Commercial Code provides that a "debtor's rights may be voluntarily or involuntarily transferred," that provision must be read together with another code provision that states, "a security interest continues in collateral notwithstanding sale, exchange, or other disposition," and thus, the security interest in business property held by financing bank was not invalidated by transfer of assets of business to a new owner.

2. Security Agreement — Original Business Owners — Financing Bank — After-Acquired Property Clause — Public Filing — Applicable to Successors — Bank's Lien — Extended — Property Brought In — Subsequent Owner. Since security agreement entered between original owners of business and financing bank contained after-acquired property clause, since it was properly filed to give public notice, and since it specifically provided that it would bind not only the original parties but their successors and assignees, the trial court properly determined that bank's security interest extended to cover assets brought into the business by a subsequent owner.

3. Junior Lienor — Took Over Business — Not — Comply — Notice Provisions — UCC — Trial Court Order — Sale — Disposition of Assets — Priority — Financing Bank — Proper. Upon default of business on its debts, the junior lienor who had taken over the operation of the business from its original owners did not proceed in accordance with the notice provisions of the Uniform Commercial Code vis a vis notice to the financing bank, and therefore, in subsequent foreclosure action, trial court properly ordered that the assets of the business be sold and the proceeds be used first to pay the costs of the sale, next to pay the financing bank, and last to pay the junior lienor.

Appeal from the District Court of El Paso County, Honorable Hunter D. Hardeman, Judge.

Leo P. Sterling, for plaintiff-appellee.

Raymond Duitch, for defendant-appellant.

Clyde and Marlys Trees, owners of the Wine Shop, Inc., personally and on behalf of the corporation, executed a promissory note, security agreement, and financing statement to the American Heritage Bank and Trust Company. These documents were properly filed and granted the Bank a security interest in the the Wine Shop's inventory, stock in trade, furniture, fixtures, and equipment "now owned or hereafter to be acquired." Thereafter, one Oakley Ellickson became a junior lienor by obtaining from the Wine Shop a promissory note secured by the same collateral.

The Wine Shop subsequently defaulted on both notes. Ellickson, without informating the Bank, took over the assets of the Wine Shop, began operating the business, and then commenced an action entitled "Complaint in Foreclosure," naming the Bank and Mr. and Mrs. Trees as defendants. In that suit Ellickson admitted that he had taken possession of the Wine Shop property subject to the Bank's security interest and sought to discharge the obligation owed to the Bank to enable him to achieve "effective ownership of the security."

Upon receiving a copy of this complaint, the Bank contacted Ellickson's attorney and received repeated assurances that Ellickson intended to make full payment to the Bank. In reliance thereon, the Bank took no further action to protect its security until it discovered that Ellickson had formed a wholly owned corporation, O. E., Inc., had transferred the Wine Shop's lease and liquor licenses to that corporation, and was selling the original inventory, commingled with new inventory. Fearing that its security interest would not be adequately protected by Ellickson's actions, the Bank filed a complaint in replevin and, pursuant to a writ, took possession of what it deemed to be collateral.

In the proceedings that followed, Ellickson and O. E., Inc., were treated as one entity. Ellickson was plaintiff in the foreclosure suit, while the corporation was the defendant in the Bank's action.

The Bank's complaint and Ellickson's foreclosure action were consolidated for trial, and, after hearing the evidence presented, the court found that the Bank's security interest was at all times paramount to Ellickson's junior lien. The court also held that the after-acquired property clauses contained in the Bank's security agreement and financing statement covered items which Ellickson had added in his operation of the business as O. E., Inc. The court then granted judgment to the Bank and against the Wine Shop and Mr. and Mrs. Trees for the unpaid balance of their note to the Bank, and ordered the Bank to sell the collateral, to apply the sale proceeds first to the costs of the sale, then to satisfy the Bank's interest, and finally to give the surplusage, if any, to Ellickson as junior lienor. O. E. appeals and we affirm.

O. E. argues, first, that the after-acquired property clauses contained in the Bank's security agreement and financing statement did not cover the additional inventory and other items Ellickson brought to the Wine Shop premises when he was operating its business and, second, that its own "Complaint in Foreclosure" should not have been ignored, in effect, by the trial court in its determination that the Bank, rather than O. E., should control the sale and disposition of the property. We disagree with both contentions.

[1] The issues in this case are governed by Article 9 of the Uniform Commercial Code, § 4-9-101 et seq., C.R.S. 1973. Section 4-9-204, C.R.S. 1973, allows a security interest to attach to after-acquired property where there is an agreement therefor, under circumstances such as those involved here. Also, § 4-9-306(2), C.R.S. 1973, provides that:

"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 . . . ."

While § 4-9-311, C.R.S. 1973, states that a "debtor's rights in collateral may be voluntarily or involuntarily transferred," these two provisions must be read together. Section 311 does not invalidate the prior security interest under § 306(2). Fliegel v. Associates Capital Co. of Delaware, Inc., 272 Ore. 434, 537 P.2d 1144 (1975).

In Inter Mountain Ass'n of Credit Men v. The Villager, Inc., ___ Utah ___, 527 P.2d 664 (1974), the court held that an after-acquired property clause in a security agreement covered not only the inventory and proceeds of the original debtor company, but also that obtained by a newly formed corporation which took over the operation of a business after the original security agreement had been made. In so holding, the court stated that:

"A debtor cannot destroy the perfected security interest of a secured party by merely changing its name or corporate structure, particularly when there is no evidence to indicate that the secured party had any knowledge thereof."

[2] The Utah court also noted, as further support for its holding, that the security agreement, properly filed to give public notice, specifically provided that it would bind the original parties' "successors and assigns," (a provision similar to one contained in the Bank's security agreement in this case) and the agreement should be given effect according to its terms. Section 4-9-201, C.R.S. 1973. See also Fliegel, supra, which, under similar facts, followed the reasoning of Inter Mountain. Consequently, we hold that the trial court's determination that the Bank's after-acquired property clause also covered assets brought in by Ellickson was proper.

With respect to O. E.'s second argument on appeal, § 4-9-505(2), C.R.S. 1973, provides that when a secured party in possession of the collateral proposes to retain it, he must give written notice to the debtor and any other secured party. Ellickson gave no such notice and the Bank did not learn of his attempt to foreclose until it was served with the complaint in the foreclosure action. Nor did the Bank have knowledge of the transfer of the Wine Shop's lease and liquor license to O. E.

[3] Consequently, because Ellickson did not proceed in accordance with the provisions of the code on default of the Wine Shop, the disposition of the collateral ordered by the court was also proper. Section 4-9-507, C.R.S. 1973. See William Iselin Co. v. Burgess Leigh, Ltd., 52 Misc. 2d 821, 276 N.Y.S.2d 659, 3 UCC Rep. Serv. 1168 (Sup.Ct. 1967); Harrison Music Co. v. Drake, 43 Pa. D. C. 2d 637, 5 UCC Rep. Serv. 417 (C. P. 1967); J. White R. Summers, Uniform Commercial Code § 26-7 (1972).

Judgment affirmed.