Summary
In Surety, the Kanzigs bought a modular home from a dealer and financed their purchase and necessary site improvements through Wayne Savings.
Summary of this case from National City Bank v. Victor Building Co.Opinion
No. 77-350
Decided February 15, 1978.
Secured transactions — Collection rights of secured party — R.C. 1309.35(A) — Notification to account debtor ineffective, when.
In order for a secured party to exercise its collection rights under R.C. 1309.45(A), it must, pursuant to R.C. 1309.37(C), give the account debtor notification which sets forth: (1) that the account has been assigned; (2) that payment is to be made directly to the secured party; and (3) a reasonable identification of the rights assigned.
APPEAL from the Court of Appeals for Ashland County.
On April 9, 1973, Starling and Carolyn Kanzig purchased a Fairfax modular house from Glatt's Mobile Home Sales and Service, Inc. (Glatt's), whose name was subsequently changed to Holmes Housing, Inc. (Holmes), for a total price, including tax, of $10,972.50. The modular home was to be installed by Glatt's on a basement foundation on the Kanzigs' lot when the basement was completed. The Kanzigs applied for a construction loan from appellant, Wayne Savings Loan Company (Wayne), to cover the cost of the home, the construction of the basement, and other construction work. The loan was granted, and a mortgage deed and mortgage note in the amount of $14,500 were executed by the Kanzigs to Wayne Savings on August 6, 1973.
Having been advised that Wayne was financing the purchase of the modular home, appellee, Surety Savings Loan Company (Surety), by letter dated July 30, 1973, sent Wayne the statement of origin for the modular home enclosed with a letter stating: "The floor plan due on this unit is $9,204.30. Interest will be billed directly to Glatts."
After some telephone conversation between them, Surety sent Wayne another letter dated October 24, 1973, stating: "May we please have a reply by return mail either with the check for the balance due of $7,908.60 or a firm date when the money will be mailed our Company?" Wayne responded to Surety by letter dated November 23, 1973, stating: "We can not disburse any more money until the house has been put on the foundation. We have been waiting for more work to be done, but as yet nothing has been done."
The delivery of the modular house being delayed, no disbursement was made by Wayne until March 8, 1974, when it disbursed the sum of $8,778 by check payable to Starling Kanzig. Wayne had typed on the check a restrictive endorsement, which was signed by Starling Kanzig, making the check payable to Holmes Housing, Inc. Either Holmes or Glatt's cashed the check, but paid no part of the proceeds thereof to Surety. At no time did Wayne or Surety advise the Kanzigs that Glatt's had a floor-plan financing arrangement with Surety with a balance due attributable to the modular home in question.
Thereafter, in June 1975, appellee Surety commenced this action, seeking to recover from Wayne and the Kanzigs the balance due on the floor plan in the amount of $5,865.48. The Kanzigs filed a cross-claim seeking indemnification from Wayne in the event Surety obtained a judgment against them.
Surety and Glatt's entered into a floor-plan financing arrangement in 1972 with respect to mobile homes to be sold by Glatt's and defined in the agreement as "a moveable dwelling constructed to be towed on its own chassis and under carriage, having minimum dimensions of 40 feet in length by 10 feet in width and containing living facilities suitable for year-round occupancy by one family," and also with respect to all inventory of Glatt's and all proceeds of such inventory. The financing statement was filed both with the Secretary of State and the Holmes County Recorder.
The Court of Common Pleas of Ashland County rendered judgment for Surety against both the Kanzigs and Wayne and judgment for the Kanzigs for indemnification from Wayne. The court found that Surety has an enforceable security interest in the modular home and, accordingly, that Surety was entitled to judgment since the parties had treated the modular home as a motor vehicle.
An appeal was taken to the Court of Appeals which affirmed that judgment and held "that by reason of the provisions of the Uniform Commercial Code, specifically R.C. 1309.25(C), R.C. 1309.37(C), and R.C. 1309.45, that once Wayne became subjectively aware that Surety had a recorded security interest in the inventory and proceeds of sale of the business from which Kanzigs purchased the modular home, that thereafter Wayne paid out at its peril and is by reason of its failure to protect Surety liable to Surety for the unpaid amount due on that particular modular home and is likewise liable in law to reimburse the Kanzigs for any amount that they may have to pay by reason of the same claim."
The cause is now before this court pursuant to the allowance of Wayne's motion to certify the record.
Messrs. Wilson Murray and Mr. Joseph Murray, for appellee.
Kauffman, Eberhart, Cicconetti Kennedy Co., L.P.A., and Mr. Charles A. Kennedy, for appellant.
The issue in this cause is whether Surety can enforce its financing agreement with Glatt's as against Wayne and the Kanzigs. Wayne has raised no issue with respect to indemnification of the Kanzigs, acceding thereto, and thus essentially stands in place of the Kanzigs.
The modular home in question, not having wheels or runners, is not a motor vehicle as defined by R.C. 4505.01 since it does not appear to be a vehicle as defined by R.C. 4511.01(A), and thus not a house trailer as defined by R.C. 4501.01(L). The parties, however, agree that the result in this case is not dependent upon whether the modular home in question is a motor vehicle and concede that this case is governed by the provisions of the Uniform Commercial Code. Similarly, although a factual issue might arise, Wayne concedes that in its communications with Surety it acted as agent for the Kanzigs. Surety, on the other hand, concedes that it no longer has a security interest in the modular home, but contends that it has a security interest in the proceeds of the sale of the home, the contract right, or account, and that Wayne and the Kanzigs were required to make payment to it, rather than Glatt's, after notification to Wayne of the existence of Surety's security interest.
Since the modular home constitutes consumer goods sold in the ordinary course of business by Glatt's, the Kanzigs took the modular home free of the security interest of Surety pursuant to R.C. 1309.26(A), which provides that: "A buyer in ordinary course of business * * * takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence."
Even though R.C. 1309.26(C) provides that the section does not apply to security interests in motor vehicles (and even assuming the modular home to be such), Glatt's was authorized by the security agreement to sell its inventory in the ordinary course of its business so that the Kanzigs took free of Surety's security interest in the modular home pursuant to R.C. 1309.25(B). This subsection provides that: "* * * 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."
Surety contends that it had a security interest in the proceeds of the sale of the modular home and was entitled to have payment made to it, rather than Glatt's (or Holmes), pursuant to R.C. 1309.37(C) and 1309.45(A) by virtue of the communications sent to Wayne.
R.C. 1309.37(C) states that: "The account debtor is authorized to pay the assignor until the account debtor receives notification that the account has been assigned and that payment is to be made to the assignee. A notification which does not reasonably identify the rights assigned is ineffective. * * *" In order to obligate the account debtor to make payment to the assignee, rather than the assignor, the notification must set forth: (1) an indication that the account has been assigned; (2) a specific direction that payment is to be made to the assignee, rather than the assignor; and (3) a reasonable identification of the rights assigned. The notification must be in such form as to enable the ordinary consumer, or account debtor, to understand from the notification received that the account has been assigned and that payment is to be made to the assignee, rather than the assignor.
The notifications sent by Surety to Wayne failed to meet the statutory standard. The first notification merely stated that "the floor plan due on this unit is $9,204.30. * * *" It is neither indicated (1) that the account had been assigned by Glatt's to Surety; (2) that payment was to be made to Surety, rather than Glatt's; nor (3) identified in any way the rights assigned, merely referring to a floor plan. Likewise, the second notification did not state that the account had been assigned, nor did it reasonably identify the rights assigned, even if it could be construed as a request that payment be made to Surety, rather than Glatt's. At best, the second communication was ambiguous because it did not specify to whom the check should be made payable and it indicated that payments were being made on the floor plan by Glatt's since the amount stated to be due in the notification was less than that stated due in the first notification.
Surety relies further upon R.C. 1309.45(A), which provides: "When so agreed and in any event on default, the secured party is entitled to notify an account debtor or the obligor on an instrument to make payment to him whether or not the assignor was theretofore making collections on the collateral, and also to take control of any proceeds to which he is entitled under section 1309.25 of the Revised Code." R.C. 1309.45(A) establishes when the secured party is entitled to notify an account debtor to make payment to him, rather than the assignor, and must be read in pari materia with R.C. 1309.37(C), which prescribes the manner of making such notification.
Although there is some question as to whether Surety was entitled to the benefit of R.C. 1309.45(A), inasmuch as there is no indication of an agreement between Glatt's and Surety that payments were to be made to Surety, rather than Glatt's, and it does not appear that Surety treated Glatt's as being in default, Surety's failure to comply with R.C. 1309.37(C) precludes it from being entitled to direct payment from the Kanzigs or Wayne. R.C. 1309.37(C) expressly provides that: "A notification which does not reasonably identify the rights assigned is ineffective." The notifications sent by Surety to Wayne did not reasonably identify the rights assigned and, therefore, were ineffective in accordance with the statute.
Accordingly, the judgment of the Court of Appeals must be reversed.
Judgment reversed.
O'NEILL, C.J., HERBERT, W. BROWN, P. BROWN and STRAUSBAUGH, JJ., concur.
CELEBREZZE, J., dissents.
STRAUSBAUGH, J., of the Tenth Appellate District, sitting for SWEENEY, J.
WHITESIDE, J., of the Tenth Appellate District, sitting for LOCHER, J.