Security Nat. Bank and Trust Co. of Norman v. Dentsply Professional Plan

Security Nat. Bank and Trust Co. of Norman v. Dentsply Professional Plan
1980 OK 136
617 P.2d 1340
Decided: 09/23/1980
Supreme Court of Oklahoma

SECURITY NATIONAL BANK AND TRUST COMPANY OF NORMAN, OKLAHOMA, APPELLEE,
v.
DENTSPLY PROFESSIONAL PLAN, A DIVISION OF DENTSPLY INTERNATIONAL, INC., APPELLANT.

Appeal from District Court, Cleveland County; Alma Wilson, Judge.

¶0 In bank's action to recover on promissory note, trial court established bank's security interest as prior to that of another creditor and determined that the debtor's overdraft obligation was secured under the future-advances clause in debtor's security agreement.

AFFIRMED.

Luttrell, Pendarvis & Rawlinson by Gary C. Rawlinson, Norman, for appellant.

Phillip Warren Redwine, Wm. Lee Borden, Jr., Norman, for appellee.

OPALA, Justice:

[617 P.2d 1342]

¶1 This appeal deals with priorities between two creditors with security interests in the same collateral. The questions to be answered are: [1] Did the trial court err in refusing to reinstate the first creditor's security interest to its priority which was lost by that creditor's release of its original financing statement? [2] Was the debtor's overdraft obligation due the second creditor a "future advance" pursuant to future-advances clause in their security agreement?

¶2 We hold that [1] the trial court did not err in establishing the priority of the second creditor's security interest in the collateral in suit and [2] the amount of overdraft on debtor's business bank account stood secured under the future-advances clause of the security agreement.

¶3 On December 26, 1973, Ronald Worley [Debtor] purchased dental equipment under a conditional sales contract and security agreement which was assigned to The Dentsply Professional Plan, a division of Dentsply International, Inc. [Dentsply]. A financing statement covering the equipment was filed the same day in Oklahoma County. Some 18 months later, on July 11, 1975, Debtor borrowed money from Security Bank and Trust Company of Norman, Oklahoma [Bank] and executed a promissory note with security agreement in favor of the Bank. The financing statement filed by the Bank in Oklahoma County covered certain assets of the Debtor, including the same dental equipment which was the subject of the security agreement between Debtor and Dentsply. Debtor executed a renewal of his note to the Bank on July 24, 1976. Debtor's obligation to Dentsply was refinanced September 23, 1976 and a financing statement covering the dental equipment was filed by Dentsply in Cleveland County on September 27, 1976. Dentsply then released, on October 27, 1976, its financing statement on file in Oklahoma County.

¶4 The appeal arose out of a suit by the Bank to recover on Debtor's promissory note and for his overdrafts on two of his bank accounts. Dentsply - a party-defendant in the suit because of its status as claimant to some of the collateral - sought to have its security interest declared prior to that of the Bank.

¶5 The trial court determined that the perfected security interest of the Bank, though originally later in time, had advanced in priority when Dentsply released its prior perfected security interest in Oklahoma County. The amount of Debtor's overdraft on his business bank account - found to be secured under the future-advances clause in the security agreement - was added to the Debtor's total obligation that may be satisfied from the sale of the collateral. The future-advances clause was held not to secure an overdraft on Debtor's other (personal) bank account. From the trial court's determination of priorities between competing creditors with security interests in the same collateral and from its finding that the Bank stood secured with respect to the amount representing Debtor's business account overdraft, Dentsply brings this appeal.

I

PRIORITY OF THE SECURITY INTERESTS

¶6 Dentsply contends that equity should reinstate its security interest to the priority lost by the release of its financing statement in ignorance of the Bank's security [617 P.2d 1343] interest. It relies on pre-Code case law

¶7 With narrowly-prescribed exceptions, the Code provides that a security interest is not perfected unless a financing statement is filed.

¶9 Although strict adherence to the Code requirements may at times lead to harsh results, efforts by courts to fashion equitable solutions for mitigation of hardships experienced by creditors in the literal application of statutory filing requirements may have the undesirable effect of reducing the degree of reliance the market place should be able to place on the Code provisions. The inevitable harm doubtless would be more serious to commerce than the occasional harshness from strict obedience.

¶12 Other jurisdictions are not in accord as to the meaning of the code phrase in § 9-401(2) "knowledge of the contents of such financing statement". Some courts have held knowledge of a creditor's prior security interest to be "knowledge of the contents of such financing statement",

II

FUTURE-ADVANCES CLAUSE OF SECURITY AGREEMENT

¶16 Having established the validity of the Bank's priority status, we must next determine [1] whether the security agreement contained language sufficient to cover future advances and [2] if so, whether the Debtor's overdraft in his business bank account may be considered as a future advance under the security agreement.

¶17 The validity of a future-advances clause in security agreements has been recognized. Texas Kenworth Co. v. First National Bank of Bethany, Okl., 564 P.2d 222, 225 [1977]. The Code, in § 9-204(5), provides that "[o]bligations covered by a security agreement include future advances or other value whether or not the advances or value are given pursuant to commitment."

¶18 When the security agreement clearly indicates that the debtor's obligation includes future advances, the collateral pledged will stand as security for future advances.

This security agreement is given to secure: (1) Payment of a note dated 7-11-75 executed and delivered by Debtor to Bank in the principal sum of $12,000.00, payable as to principal and interest as therein provided; (2) future advances to be evidenced by like notes to be made by Bank to debtor at Bank's option; (3) all expenditures by Bank for taxes, insurance, repairs to and maintenance of the collateral and all costs and expenses incurred by Bank in the collection and enforcement of the note and other indebtedness of Debtor; and (4) all liabilities of Debtor to Bank now existing or hereafter incurred, matured or unmatured, direct or contingent, and any renewals and extensions thereof and substitutions therefor." [Emphasis added]

The phrase "all liabilities . . . now existing or hereafter incurred" indicates that the collateral was intended to serve as security for future as well as present debts. We hence hold that the language used is sufficient to secure future advances.

¶20 The test most generally applied to determine whether future liabilities fall [617 P.2d 1346] within a security agreement's future-advances clause is whether the debts are "of the same class as the primary obligation"

¶22 A post-agreement extension of business credit by a lender to a borrower has been held a future indebtedness within "reasonable contemplation" of the future-advances clause of the security agreement.

¶24 In support of its position the Bank cites two cases in which overdrafts by a debtor were determined to be covered by the security agreement. 24 In those cases the court's decision was reached without stating whether or how the overdrafts came to be related to the original obligation.25

¶25 Dentsply refers us to a case in which overdrafts were held not included in the obligation covered by the security agreement.26 The facts in that case are distinguishable from the case at bar. There, the court determined that a certain section of the security agreement set forth all the obligations - i.e. loans, evidenced by notes, interest and certain expenses - secured by the agreement. It was silent as to future or any other indebtedness. There was also no indication the parties ever intended by their agreement to include an addition of [617 P.2d 1347] overdrafts to the obligation secured by the collateral. Those factors - not present here - were decisive in the appellate court's determination that the overdraft debts were not included in the obligation covered by the agreement.

¶26 We hold that the amount of Debtor's post-agreement business-account overdraft, which the Bank had "covered" for him, represented a further extension of credit within the contemplation of the security agreement. The overdraft obligation was not so unrelated as to be in a class different from that of the Debtor's primary indebtedness. It is hence includable in the total obligation for which the collateral stands as security under the future-advances clause.

¶27 AFFIRMED.

¶28 LAVENDER, C.J., IRWIN, V.C.J., and WILLIAMS, HODGES, SIMMS, DOOLIN and HARGRAVE, JJ., concur.

Footnotes:

1 South Beach Lumber Corp. v. Swank, 210 Or. 383, 311 P.2d 1018 [1957]; Pearce v. Buell, 22 Or. 29, 29 P. 78 [1892]; Chase v. McKenzie, 81 Or. 429, 159 P. 1025 [1916]; Cornwell v. Moss, 95 Kan. 229, 147 P. 824 [1915]; Christy v. Scott, 31 Mo. App. 331 [1888]; Foster v. Whitenton, 96 Okl. 187, 221 P. 52 [1923]; Watson v. Butler, 170 Okl. 350, 40 P.2d 653 [1935].

2 12A O.S. 1971 § 1-103 of the Uniform Commercial Code; all section references in the text are to 12A O.S.

3 12A O.S. 1971 § 9-302 .

4 First State Bank in Talihina v. United Dollar Stores, Okl., 571 P.2d 444 [1977].

5 Eastern Indiana Production Credit Ass's v. Farmer's State Bank, 31 Ohio App.2d 252, 287 N.E.2d 824 [Ohio App. 1972]; Stearns Mfg. Co., Inc. v. National Bank and Trust Co. of Central Penn., 12 UCC Rep. 189 [Pa.Ct.Com.Pl. 1972]; Security Savings Bank of Marshalltown, Iowa v. United States, 440 F. Supp. 444 [D.C.S.D. Iowa 1977]; Morse Electro Products Corp. v. Beneficial Industrial Loan Co., 90 Wash. 2d 195, 579 P.2d 1341 [1978]; 12A O.S. 1971 § 9-403 (2).

6 First State Bank in Talihina v. United Dollar Stores, supra note 4. Uniroyal, Inc. v. Universal Tire and Auto Supply Co., 557 F.2d 22 [1st Cir. 1977].

7 12A O.S. 1971 § 9-401 (1)(c) (amended by Okl. Sess.L. 1975, c. 313, § 3).

8 First State Bank in Talihina v. United Dollar Stores, supra note 4.

9 12A O.S. 1971 § 1-201 (25); First State Bank of Talihina v. United Dollar Stores, supra note 4; U.S. v. Ed Lusk Construction Co., Inc., 504 F.2d 328 [10th Cir. 1974].

10 In re Davidoff, 351 F. Supp. 440 [D.C.S.D.N.Y. 1972]; In re Komfo Products, 247 F. Supp. 229 [D.C.E.D.Pa. 1965]; Matter of Enark Industries, Inc., 383 N.Y.S.2d 796 [1976]; Chrysler Credit Corp. v. Bank of Wiggins, 358 So. 2d 714 [Miss. 1978]; Franklin National Investment Corp. v. American Swiss Parts Co., 42 Mich. App. 211, 201 N.W.2d 673 [1972].

11 In re County Green Ltd. Partnership, 438 F. Supp. 693 [D.C.W.D. Va. 1977]. The court in In re Advertising Distributors of America, 2 UCC Rep. 548 [D.C.E.D.Ohio Ref. 1965], aff'd 3 UCC Rep. 225 [D.C.N.D. Ohio 1965] squarely held that knowledge of a prior creditor's lien was not "knowledge of the contents of such financing statement."

12 First State Bank in Talihina v. United Dollar Stores, supra note 4.

13 J. White and R. Summers, Uniform Commercial Code, § 23-15.

14 UCC comment 5 to § 9-401(2).

15 In re County Green Ltd. Partnership, supra note 11.

16 12A O.S. 1971 § 9-312 (5), UCC comment 4, example 1; First National Bank and Trust Co. of Vinita, Okl. v. Atlas Credit Corp., 417 F.2d 1081 [10th Cir. 1969]; In re Smith, 326 F. Supp. 1311 [D.C.D.Minn. 1971].

17 Texas Kenworth Co. v. First National Bank of Bethany, Okl., 564 P.2d 222, 225 [1977].

18 In Texas Kenworth, supra note 17, 564 P.2d at 226, we compared the language in the security agreement in that case with that in two other cases in which the security agreement clearly indicated that the collateral involved was to serve as security for future as well as present debts. In the first case [In re Public Leasing Corporation, 488 F.2d 1369, 1375 (10th Cir. 1973)], the terms of the agreement in pertinent part provided: "Buyer . . . is granted a security interest in any additional security collateral . . . as security for the payment of . . . balance, and also for any and all liabilities of Buyer to `Seller' now existing or hereafter incurred. [Emphasis added]" In the second case [John Miller Supply Co., Inc. v. Western State Bank, 55 Wis.2d 385, 199 N.W.2d 161, 162 (1972)] the agreement provided in pertinent part: "(2) `OBLIGATIONS' means all Debtor's present and future debts, obligations and liabilities to Bank of whatever nature."

19 In re White Plumbing and Heating Co., Inc., 6 UCC Rep. 467 [D.C.E.D. Tenn., Ref. 1969]; Community Bank v. Jones, 278 Or. 647, 566 P.2d 470, 482 [1977]; Marine National Bank v. Airco, Inc., 389 F. Supp. 231, 234 [D.C.W.D. Pa. 1975]; Kimbell Foods, Inc. v. Republic National Bank of Dallas, 557 F.2d 491, 495 [5th Cir. 1977], aff'd 440 U.S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 [1979].

Cf. Thorp Sales Corp. v. Dolese Bros. Co., 453 F. Supp. 196, 200 [D.C.W.D. Okl. 1978]. In Thorp the court stated "that it is no longer necessary, as between the original lender and the original debtor, for future advances to be of the same class as the primary obligation." There the creditor attempted to bring within the security agreement third-party claims - assigned to creditor by third-party claimants - against the debtor. The court held that the creditor could not do so under the agreement as written.

20 In re Glawe 6 UCC Rep. 876 [D.C.E.D. Wisc.Ref., 1969]; Kimbell Foods, Inc. v. Republic National Bank of Dallas, supra note 19; Community Bank v. Jones, supra note 19.

21 Supra note 17, 564 P.2d at 224.

22 Kimbell Foods, Inc. v. Republic National Bank of Dallas, supra note 19.

23 Marine National Bank v. Airco, Inc., supra note 19.

24 South County Sand & Gravel Co., Inc. v. Bituminous Pavers Co., 106 R.I. 178, 256 A.2d 514, 518 [R.I. 1969]; In re Midas Coin Co., 264 F. Supp. 193 [D.C.E.D.Mo. 1967].

25 In South County Sand & Gravel Co. v. Bituminous Pavers Co., supra note 24, 256 A.2d at 518, the court stated that it was obvious that the language in the security agreement - "liabilities . . . now existing or hereafter arising" - embraced overdrafts.

26 Community Bank v. Jones, supra note 19.