Opinion
No. 70-246 (Supreme Court No. 23625)
Decided May 26, 1970.
Defendant obtained default judgment in an action on account and garnisheed bank which had acted as clerk at a sale of debtor's machinery. Plaintiff intervened claiming the proceeds of the sale on the basis of a chattel mortgage. From order awarding full amount of the default judgment to be paid to defendant with excess to plaintiff, plaintiff appealed.
Reversed
1. CHATTEL MORTGAGES — General Rule — Authorized Sale — Mortgaged Personal Property — Lien of Mortgagee — Waived — Rule Applicable — Where Sale Unconditional. While it is the general rule that if a mortgagor makes a sale of mortgaged personal property pursuant to authority given him by the mortgagee to sell such property and receives the proceeds, the lien of the mortgagee is waived and the lien will not follow the proceeds, such rule is applicable only where the sale is unconditional in nature.
2. Mortgagee's Consent — Sale of Mortgaged Personal Property — On Condition — Proceeds — Paid to Mortgagee — No Waiver of Lien. Where a mortgagee's consent to a sale of mortgaged personal property is given on the express condition that the purchaser or third party receiving the sale proceeds will pay them to the mortgagee, the mortgagee's lien is not waived.
3. GARNISHMENT — Sale of Mortgaged Personal Property — Debtor — No Interest — No Possession — Proceeds — Not Validly Reached — By Garnishment — Bank — Clerk of the Sale. Where the debtor did not have nor claim any interest in the sale proceeds of the mortgaged personal property and where such proceeds at no time were in his actual or constructive possession but rather were held by the bank who had clerked the sale of the property, which sale had been authorized by the mortgagee, then the sale proceeds could not be validly reached by garnishment of the bank by a judgment creditor of the debtor.
Error to the District Court of Logan County, Honorable Francis L. Shallenberger, Judge.
Karl C. Falch, for plaintiff in error.
Donald K. Smith, for defendant in error.
This case was originally filed in the Supreme Court of the State of Colorado and was subsequently transferred to the Court of Appeals under the authority vested in the Supreme Court.
Plaintiff in error, whom we shall refer to as "Sterling Credit," appeared as an intervenor in an action on account brought by the defendant in error, whom we shall refer to as "Skelly Service." The defendant in such action was Ray Mari, and a default judgment in favor of Skelly Service was entered against Mari in the trial court.
In its action, Skelly Service garnisheed the First National Bank of Sterling. The First National Bank of Sterling answered the interrogatory of the writ by stating that it was indebted to the defendant, Ray Mari, by reason of its having clerked a farm machinery sale for the Logan County National Farmers Organization, at which machinery owned by Ray Mari was sold. The Bank further stated that it had been advised by Sterling Credit that the machinery sold was subject to its mortgage and that the Bank had delivered a check for the sale proceeds to the Clerk of the District Court of Logan County, Colorado, which check had been made payable to the Clerk of the Court, Sterling Community Federal Credit Union, and Raymond Mari.
After intervention by Sterling Credit, a trial to the court was held on the issues pleaded by it on intervention. During the course of such hearing, it was established that Sterling Credit did hold a chattel mortgage covering certain of Mari's personal property which had been sold at the National Farmers Organization sale. It was undisputed that the chattel mortgage secured a valid debt and that the same had been filed for record several months in advance of the sale date. Both Ray Mari and an official for Sterling Credit testified that Sterling Credit had authorized the sale of Mari's mortgaged personal property at the National Farmers Organization sale. Mari testified, without contradiction, that proper officials of Nation Farmers Organization of Sterling were advised of Sterling Credit's security rights and were directed that the sale proceeds were to be applied to Sterling Credit's debt from Mari. The record further discloses that the First National Bank of Sterling was employed by National Farmers Organization of Sterling to act as the clerk of the sale at which the Mari machinery was sold. There is no evidence that the First National Bank had knowledge of Sterling Credit's chattel mortgage or of the restriction that the sale proceeds would be used to reduce Mari's indebtedness to Sterling Credit. The record is void of any evidence that the sale proceeds were at any time deposited in any account under the name of Ray Mari or that he was given actual or constructive possession of the sale proceeds. Following trial on the issues raised by Sterling Credit's pleading on intervention, the trial court ordered payment to Skelly Service for the full amount of its default judgment and awarded the balance of the sale proceeds which were held in the court registry to the intervenor, Sterling Credit. Sterling Credit now asserts that the sale proceeds applicable to the mortgaged property should have been paid to it because its chattel mortgage on the sold equipment was superior and prior to any rights in the sale proceeds which Skelly Service could have obtained by reason of its action on account against Ray Mari.
We agree with the position taken by Sterling Credit and hold that the judgment of the trial court was in error.
It is a general rule that if a mortgagor makes a sale of mortgaged property pursuant to authority given to him by the mortgagee to sell such property and receives the proceeds the lien of the mortgagee is waived, and the lien will not follow the sale proceeds. Moore v. Jacobucci, 70 Colo. 171, 197 P. 1015. See 12 Am. Jur. 2d, Chattel Mortgages, § 161. Such rule applies, however, only in an instance where the sale is unconditional in its nature. In the instant situation it is clear that the sale of the mortgaged property was authorized only on the express condition that the consignee for sale of the mortgaged goods, Logan County National Farmers Organization, would deliver over the proceeds of the sale of the mortgaged Mari equipment for application against his indebtedness to Sterling Credit. It is immaterial here that the First National Bank of Sterling, in its capacity as clerk of the sale, and as such an agent of the Logan County National Farmers Organization, had no actual knowledge of the sale conditions.
[2,3] Under prior decisions of our Supreme Court, where a mortgagee's consent to a sale of mortgaged property is not absolute, but is given on an express condition that the purchaser or third party receiving the sale proceeds would deliver the proceeds to the mortgagee, the mortgagee's lien is not waived. Hofmann v. Lamb, 113 Colo. 585, 160 P.2d 995; Arnold v. First National Bank of Cripple Creek, 96 Colo. 104, 39 P.2d 791. Additionally, in the instant case, it is clear that the debtor, Ray Mari, did not have and did not claim any interest in the sale proceeds of the mortgaged property, and that such proceeds at no time were in either his actual or constructive possession. Such being the case, the sale proceeds applicable to the mortgaged property held by the Bank could not be validly reached by the execution proceedings against the Bank. See Smith v. Brooks, 154 Neb. 93, 47 N.W.2d 389.
The judgment of the trial court is reversed, and this cause is remanded with directions that the trial court order the payment from the registry of the court to the plaintiff in error of all sums deposited therein and which had as their source the sale of property encumbered by plaintiff in error's chattel mortgage from Ray Mari, and pay the balance remaining to defendant in error.
JUDGE COYTE and JUDGE PIERCE concur.