Opinion
No. CV-81-77-BLG.
November 26, 1982.
William G. Mouat, Billings, Mont., for plaintiff.
James L. Jones and Andrew J. Lensink, Billings, Mont., for defendant O'Brien Flying Service, and Ideal Mut. Ins. Corp.
P. Bruce Harper, Herndon, Harper Munro, Billings, Mont., for defendant Grumman Credit Corp.
MEMORANDUM OPINION
This is a secured transaction — priority case involving a dispute over the right to insurance proceeds recovered due to an airplane crash. The plaintiff, Western State Bank (Bank), and defendants Grumman Credit Corporation (Grumman), Ideal Mutual Insurance Company (Ideal), and O'Brien Flying Service (O'Brien), have all filed motions for summary judgment pursuant to Rule 56 Fed.R.Civ.P.
FACTUAL BACKGROUND
From the stipulation of facts and the various briefs submitted to the Court, the following factual summary appears to be uncontroverted:
The present conflict arises from the crash of a Grumman Corporation aircraft — a 1977 Grumman American Ag-Cat Serial No. G164B0264, Registration No. N6753Q. The chain of title indicates the crop-duster was owned by several businesses or individuals prior to the crash. In August of 1977, Paumanock Leasing Services, Inc. (predecessor of defendant Grumman Credit Corporation), negotiated a conditional sales contract with a John Sherman, doing business as Mid-State Spraying, for purchase of the crop-duster. Sherman executed a promissory note as security. Grumman, as successor, obtained a senior perfected security interest in the plane. On September 22, 1978, Sherman then sold the plane to Gary Mills, doing business as Wy-Mont Air-Ag, a crop-dusting business. Contemporaneously with the purchase, Mills negotiated a security agreement and executed a note to finance his purchase with the plaintiff, Western Bank. Prior to this agreement, the bank had conducted a title search and determined that Grumman held a prior perfected security interest in the plane. On September 22, 1978, the Bank then properly perfected and obtained a second or junior security interest in the plane. In early May, 1979, Grumman apparently reissued its sales contract on the plane and substituted Gary Mills in place of John Sherman, as debtor. Grumman required that Mills obtain insurance for the crop-duster, which he did with defendant Ideal. Thus, two perfected security interests in the plane existed prior to its crash. The plane was apparently damaged a short time after insurance was procured, in May of 1979. There is no dispute as to the positions of the secured parties as of this date. However, the distribution of the insurance and salvage proceeds subsequent to the crash is the basis for plaintiff's contentions and is the subject of pending motions for summary judgment.
Subsequent to the claim, defendant Ideal issued payment to its adjuster, who ultimately transferred the draft to Reed-Shaw Stenhouse, an insurance broker for Ideal. Reed-Shaw refused to deliver the draft to Grumman until certain overdue premiums on the Mills insurance policy were paid. This demand for past-due premiums was authorized by a provision in the policy which in effect required the lienholder — Grumman — to guarantee premium payments if the insured debtor — Mills — failed to maintain coverage. Additionally, the Grumman-Mills conditional sales contract, No. 19070A, authorized Grumman to intervene and pay past-due premiums and add such additional cost to the unpaid balance — i.e., total unpaid indebtedness owed by Mills. Grumman and Ideal eventually negotiated a settlement by agreeing that: (1) Ideal would remit the $67,500 insurance draft to Grumman; and (2) Grumman would then return to Ideal $9500 in satisfaction of the unpaid premiums.
Subsequent to the insurance settlement, Grumman released its lien on the Mills airplane in August of 1979. Ideal took possession of the wreckage and, after receiving bids for the plane, ultimately sold the wreckage as salvage to defendant O'Brien Flying Service for $12,000. Ideal also agreed to indemnify O'Brien for any ownership disputes arising from this sale. There seems to be some confusion as to the history of the plane from this point forward, although it appears that O'Brien repaired and restored the plane to an operable condition.
PLAINTIFF'S CONTENTIONS
The plaintiff Bank has asserted various claims against the defendants Grumman, Ideal, and O'Brien: (1) Plaintiff asserts that Grumman improperly substituted Mills as debtor within the conditional sales contract and that the $9500 insurance premium payment was not a future advance since such was barred by the terms of the security agreement itself; moreover, the Bank apparently maintains that Grumman did not, in essence, reperfect its security interest concerning the Mills contract, since it failed to file a new financing statement subsequent to the substitution; (2) the Bank has alleged that Grumman and Ideal converted the $9500 designated for premium payments and contends this sum was excess trust proceeds beyond satisfaction of Grumman's security interest and therefore should have been delivered to the Bank as second secured creditor; (3) the Bank also argues that it was entitled to the $12,000 salvage value paid by O'Brien to Ideal since this sum was also excess proceeds from sale of the plane and asserts that failure to remit such was also conversion; plaintiff also maintains Ideal did not possess a valid title to the plane; (4) the Bank further claims that O'Brien is liable for the $67,000 fair market value of the restored plane, since the Bank's security interest extended to all accessions under MCA §§ 30-9-314 and -315 (1979); (5) plaintiff also asserts that when a plane itself is used as collateral, priority of security interest is controlled exclusively by Federal Aviation Administration procedures regarding recordation of aircraft under 49 U.S.C. § 1403.In summary, the Bank argues that any claim asserted subsequent to the release of defendant Grumman's security interest on August 14, 1979, is inferior to the Bank's second or junior lien. Therefore, the Bank alleges it should recover possession of the plane, all proceeds from its sale, and any improvements or attached components.
The Bank has also alleged these defendants acted in conspiracy to intentionally deprive it of its proceeds and therefore has requested an award of punitive damages.
DEFENDANTS' CONTENTIONS
Grumman maintains that its security agreement with Mills expressly authorized the addition of future past-due insurance premiums to increase the total indebtedness to $67,500 ($58,000 plus $9500 insurance premiums). Grumman insists that its payment of the premiums relates back to the date of the first perfected security agreement and these advances take priority over the Bank's lien. Therefore, Grumman contends that this future advance provision concerning unpaid insurance premiums was notice to the Bank that Grumman's security interest might possibly increase in the future if premiums were not timely paid by Mills.
Ideal adopts Grumman's arguments concerning the $9500 past-due insurance premiums. Ideal further alleges that by delivering the insurance draft to Grumman, their insurance policy subrogation clause confers superior lien rights and substitutes Ideal in position of Grumman as senior perfected creditor with an unsatisfied security interest of $55,500 ($67,500 paid on the claim less the $12,000 obtained from sale of the plane as salvage to defendant O'Brien). Therefore, defendant Ideal contends it was subrogated to all the rights of Grumman and the Bank remains a junior lienholder until the insurance company's own expenditures are also recovered. Moreover, Ideal queries how the Bank could claim any loss when the "new" senior creditor (Ideal) remains $55,500 "in the hole". The insurance company concludes that the $12,000 it received from sale of the wreckage was not excess proceeds which inured to the benefit of the Bank; rather, pursuant to its policy, the money recovered was correctly offset from the amount it previously paid on Grumman's claim.
Finally, Ideal argues that the facts do not support the elements of conspiracy asserted by plaintiff. In particular, Ideal maintains that disposal of the plane was not unlawful nor did plaintiff have any original or continuing rights to the plane or proceeds from its salvage unless and until Grumman, and its insured, Ideal, were fully compensated for their losses. From the stipulated facts, it appears Ideal agreed to indemnify defendant O'Brien from claims arising from sale of the wreckage and accordingly its brief also represents the position of O'Brien.
ISSUES
The Court believes three major issues exist in this case: (1) Applicability of the FAA recordation of ownership statute, 49 U.S.C. § 1403, to priority of liens asserted against an aircraft; (2) interpretation of the security agreement; and (3) interpretation of the insurance policy issued by Ideal.
SECTION 1403 AND PRIORITY OF LIENS
The plaintiff contends the FAA recordation procedure under the Federal Aviation Act of 1958, 49 U.S.C. § 1403, preempts state U.C.C. Title 9 priority provisions whenever a transaction involves conveyance of title or interest in an aircraft. We disagree. Section 1403 is only a partial preemption in that its purpose is to provide a central and comprehensive recording system for registering title and security documents on such highly mobile property. See Feldman v. Philadelphia Nat'l Bank, 408 F. Supp. 24, 37 (E.D.Pa. 1976). Thus, § 1403 serves to protect a subsequent good-faith purchaser of an encumbered aircraft from any non-registered interest holders. CIM International v. United States, 641 F.2d 671, 674 (9th Cir. 1980). Section 1406 of the Act clearly states that priority of liens is to be governed by substantive state U.C.C. provisions. Moreover, the legislative history also reveals that Congress did not preempt the states' power to consider the legal effect of a recorded document concerning this subject. Sanders v. M.D. Sales, Inc., 575 F.2d 1086, 1088 n. 2 (3rd Cir. 1978). See also, White and Summers, Uniform Commercial Code, § 25-16, p. 1077 (2d ed. 1980). Therefore, the federal statute simply provides a single repository for interested individuals to rely upon when conducting title and encumbrance investigations concerning aircraft.
Section 1406 provides in part: "The validity of any instrument the recording of which is provided for by § 1403 of this title shall be governed by the laws of the State, District of Columbia, or territorial possession of the United States in which such instrument is delivered, irrespective of the location or the place of delivery of the property which is the subject of such instrument. . . ."
EFFECT OF THE MILLS-GRUMMAN AGREEMENT
The security agreement in this case originally listed Mid-Continent Aircraft Corporation as seller and John Sherman, doing business as Mid-State Spraying Service as buyer. Sherman executed a promissory note in favor of Paumanock Leasing Services, Inc. (predecessor of defendant Grumman Credit), to finance the purchase of the cropduster. A copy of this agreement, No. 19070, dated August 1, 1977, is attached hereto as Appendix "A". When Sherman eventually sold the plane to Gary Mills and Wy-Mont Air-Ag in September 1978, Mills assumed the obligations of Sherman's original note with Paumanock (now Grumman). Defendant Grumman stated it reissued the security agreement and substituted Gary Mills as debtor under this conditional sales contract on or about May 2, 1979. A copy of this transaction is attached hereto as Appendix "B". The Bank has asserted the "reissued" agreement has no legal effect for the following reasons: (1) It was not dated nor signed by Grumman; (2) Grumman did not have authority to substitute Mills as the new debtor under the new agreement; (3) the agreement was not filed with the FAA; (4) the Bank's own security agreement with Mills, dated September 22, 1978, and filed with the FAA is superior to the "reissued" sales contract; (5) the "reissued" contract was not negotiated for a future advance by Grumman to Mills.
The Bank apparently argues that the substitution was in effect a new contract requiring performance of all the steps of perfection previously discussed, i.e., recordation with the FAA, filing a financing statement, etc. The Bank also argues that the insurance provision in the Mills-Grumman agreement could not be considered a future advance since advancements are expressly prohibited by the security agreement and under Montana's adaptation of the Uniform Commercial Code. By inference, the Bank believes the Mills-Grumman agreement somehow divested Grumman of its superior secured position in the aircraft and placed the Bank's own promissory note from Mills in the superior position.
The Bank also urges that Mills could not purchase the encumbered aircraft from Sherman and then assume the obligations of the conditional sales contract. Generically, if this were true, no individual could ever "take over payments" or "assume the note" on various personal or real property. The various courts who have confronted this situation have somewhat exacerbated the confusion which apparently exists in assessing the definition and legal implications of the substituted party to a contract. Some authorities seem to suggest that such a substitution is in fact a simple novation. See, e.g., 15 Williston on Contracts, § 1865 (3d ed. 1972); Restatement of Contracts 2d, § 280, Comment d. Other authorities have equated novation with substituted contract. See, Management, Inc. v. Mastersons, Inc., Mont., 616 P.2d 356, 359 (1980). A third segment of authorities believes that slight alterations in a contract which do not abrogate its general purpose are merely modifications of the original contract which remains enforceable as modified. See, Stinnett v. Damson Oil Corp., 648 F.2d 576, 582 (9th Cir. 1980); 17A C.J.S. Contracts, § 373, p. 419. It appears that the distinctions between novation, alteration, substitution and modification are largely semantic. We believe that the facts of this case fall within the assessment expressed by these latter authorities; i.e., the substitution of Mills as sole debtor under the agreement with Grumman was merely a modification. The terms of the Mills agreement were virtually identical to those set forth in Sherman's original conditional sales contract. In this case, the definition of the assumption is largely irrelevant and would probably not merit discussion had the issue not been raised by the plaintiff. Rather, the effect of this modification governs the resolution of the remaining issues. Further, mutual assent to the substitution of debtor is evidenced by Mills' signature and by Grumman's implied consent through acceptance of payments from Mills. See 17A, C.J.S., Contracts §§ 373, 375, pp. 421-427. Therefore, we find adequate consideration existed to support the discharge of Sherman's obligations and the inception of Mills' rights and liabilities. See, Edwards v. Peavey Co., 170 Mont. 45, 549 P.2d 1082 (1976).
Plaintiff also argues that the Mills-Grumman agreement is invalid since it was not dated nor signed by a representative of Grumman, suggesting that the formal requisites of a valid contract have not been followed. The Court believes this issue may also be summarily resolved. Although some of the formal requirements of an express written contract were lacking, i.e., no signature by Grumman, the conduct of Grumman illustrates an acceptance of the contract by implication in that it intended to be bound by the agreement with Mills. See, generally, MCA § 28-2-103 (1979); 1 Williston on Contracts, §§ 22A, 23 (3d ed. 1972). It is clear that a binding conditional sales contract between Mills and Grumman existed, and that Mills was Sherman's successor in interest, assumed all obligations under the security agreement and obtained possession of the aircraft. Plaintiff has not cited a single authority which would disallow this transaction.
The Bank's next contention raises a central issue in this case — does the modification of the conditional sales contract by substitution of a new debtor require the filing of a new security agreement or financing statement with the FAA? Apparently the Bank believes that once the Mills substitution occurred in May 1979, Grumman's failure to file such change with the FAA invalidated its own security interest and the Bank's own note with Mills dated November 1978 became the senior perfected security interest. The Court must disagree once more, for several reasons.
The "notice filing" purpose of the FAA's recordation procedure is identical to state recordation under the UCC — to give notice to potential creditors of the debtor or to potential purchasers of the collateral, that the named secured party may have a security interest in the collateral. This notice is only the starting point for a thorough investigation and merely informs the searcher and instructs him on where to look for additional information which will be obtained after his own inquiry.
In light of the uncontroverted facts in this case, the Bank's position is particularly unpersuasive when examined in the context of notice filing. Usually, any subsequent name changes concerning the original security agreement or financing statement are important since financing statements are normally indexed according to the debtor's last name. The various authorities have split on the effect of a change in a debtor's identity dependent upon which version of the UCC § 9-402 is applied. Most of these cases discuss § 9-402 in the context of name changes, mergers, partnership reorganizations, etc., rather than actual substitution of a new debtor; however, we believe the rationale discussed is equally applicable here. The 1972 version of the Code added subsection (7) to § 9-402, which basically requires the refiling of a security agreement or financing statement upon change in a debtor's name if the change is misleading. However, since this is a diversity case, we are governed by Montana's enactment of the UCC which primarily follows the 1962 version. Unfortunately, Montana has not adopted the 1972 Code version adding subsection (7), 9-402. MCA § 30-9-402 establishes the formal elements of a financing statement. Section 30-9-402(4) defines a financing statement as the original financing statement and any amendments. However, MCA § 30-9-402(5) further states that a financing statement which substantially complies with § 9-402 remains effective though containing minor errors which are not seriously misleading to searchers of the record. Authorities interpreting § 9-402(4) and (5) of the Code have agreed that the clear import of the subsections are permissive; and when read together with the durational limitations on financing statements found at § 9-403(2), there is no qualification to the continuing effect of the statement in this case. See, e.g., Continental Oil Co. v. Citizen's Trust Savings Bank, 397 Mich. 203, 244 N.W.2d 243 (1976); and the Annotations collected at 99 A.L.R.3rd 1194, 1204-1224.
Section 9-402(7) provides "a financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or names of partners. Where the debtor so changes his name or in the case of an organization its name, identity or corporate structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired more than 4 months after the change, unless a new appropriate financing statement is filed before the expiration of that time. A filed financing statement remains effective with respect to collateral transferred by the debtor even though the secured party knows of or consents to the transfer."
The parties have not cited any Montana authorities regarding subsequent filings due to a change in debtor. Revision of Montana's Code to include § 9-402(7) would clarify the issue. See, In re Taylorville Eisner Agency, Inc., 445 F. Supp. 665 (S.D.Ill. 1977); see also, Comment 8 to the 1978 official UCC text which provides "Subsection (7) also deals with a different problem, namely whether a new filing is necessary where the collateral has been transferred from one debtor to another. This question has been much debated both in pre-Code law and under the Code. This article now answers the question in the negative, thus, any person searching the condition of the ownership of a debtor must make inquiry as to the debtor's source of title, and must search in the name of a former owner if circumstances seem to require it."
Unless some error or omission in the financing statement is seriously misleading, no provision within Montana's adaptation of § 9-402 alters the secured position of Grumman due to change of debtor. Moreover, it is impossible for the Bank to claim that omission of the current debtor's name by failing to amend the financing statement or file a copy of the security agreement with the FAA reflecting the change, created a secret lien or otherwise violated the Codes' duty of good faith established at MCA § 30-1-204 (1979). On the contrary, prior to the loan to Mills, the Bank's research disclosed that the plane involved was encumbered by Grumman's security interest. Thus, the Bank knew that its own promissor would become the new debtor under the Grumman security agreement. Good faith under the Code is defined as "honesty in fact in the conduct or transaction concerned." MCA § 30-1-201(19) (1979). There has been no evidence offered by the Bank nor can we perceive of any which would suggest that the Bank has been misled by Grumman concerning its prior perfected security interest in the plane or concerning the identity of its current debtor under the conditional sales contract. Accordingly, absent evidence that the Bank was seriously misled, no provision in Montana's version of the UCC alters the secured position of Grumman due to a change in debtor subsequent to the filing of the financing statement or security agreement with the FAA. See, In re Hammons, 438 F. Supp. 1143, 1155 (S.D.Miss. 1977). These documents merely give an existing or prospective creditor or purchaser an avenue to discern the extent of a debtor's financial obligations so that interested persons will make informed credit decisions. It is not a guarantee that relieves a searcher of any further investigation. Here, the Bank knew the plane purchased by Mills from Sherman was already encumbered, yet it chose to loan Mills money for this purchase and allowed Mills to provide this same aircraft as partial collateral for the loan. The Bank knew that Mills, as transferee, took possession of the plane subject to Grumman's prior security interest.
The underlying purposes of the UCC are to be liberally construed to avoid contravention of the drafter's intentions. MCA § 30-1-102(1). Requiring Grumman to file the "new" security agreement or an amended financing statement with the FAA would have been a useless act since the Bank also knew of the change in debtor and therefore no deception accrued to the detriment of the Bank. Again, Montana's adoption of § 9-402(7) would resolve the issue here. Therefore, it is clear the Bank's conduct was premised upon a thorough knowledge of the plane's previous history, which is exactly what the concept of notice filing contemplates.
The Bank also argues that because Grumman failed to record anew with the FAA, its own loan and note is superior to the "reissued" security agreement between Mills and Grumman. For the reasons previously cited, Grumman maintained its superior perfected position concerning the collateral (plane) subsequent to the change in debtor. Thus, the Bank's own security interest remained subordinate to Grumman's.
The Bank's final contentions relate to the insurance policy covering the plane, which was required by the terms of the Mills-Grumman security agreement. The Bank contends that the $9500 of past-due insurance premiums was an attempted future advance prohibited by the security agreement itself and by "state law". The Bank further argues that "state" law provides that a single financing statement regarding a security agreement which omits any provision for future advances, cannot form the basis for new security agreements granting such advances, thereby contemporaneously encumbering the same — i.e., original collateral. In essence, the Bank believes that without express language the security agreement here did not cover future advances secured by the same collateral. This is the much-criticized minority position discussed in Coin-O-Matic Service Co. v. Rhode Island Hospital Trust Co., 3 UCC 1112, 1120 (R.I.Sup.Ct. 1966). In Coin-O-Matic, the court determined that a second loan could not obtain priority from the date of filing the original financing statement where the original security agreement did not authorize future advances. See also, Texas Kenworth Co. v. First Nat'l Bank of Bethany, 564 P.2d 222 (Okla. 1977), holding that a security agreement must expressly indicate that the collateral will be subject to a security interest arising from future advances.
The Bank also cites a portion of the Mills-Grumman security agreement, page 1, column 1, paragraph 6, which provides in part: "No other extension of credit exists, or is to be made, in connection with this purchase." The plaintiff apparently concludes this language prohibits any future advances since they would be considered ". . . other extensions of credit. . . ." The majority of courts has concluded that priority concerning future advances relates back to the initial filing, even if the security agreement contemplated only one loan. See White and Summers, Uniform Commercial Code, § 25-4, p. 1039 n. 14 (2d ed. 1980). These authorities assert that an intervening lender cannot divest the superior position of a first-filed lender who makes future advances.
Although admitting that there are no Montana cases concerning priorities of future advances in the 1962 version of the Code, Grumman maintains the security agreement authorized the inclusion of future advances for insurance premiums, and that the Court should adopt the majority opinion — i.e., MCA § 30-9-204(5) should be interpreted to include later advances made in subsequent transactions.
Section 9-204(5) provides: "Obligations covered by a security agreement may include future advances or other value whether or not the advances or value are given pursuant to commitment."
It is true that no Montana cases exist concerning the effect of future advances in this case. Notwithstanding our own inclination to agree with the majority opinion and to apply MCA § 30-9-312(5)(a), the status of priority concerning future advances is still an open question under Montana's version of the Code. Moreover, the issue of insurance proceeds can be resolved regardless of whether or not the security agreement itself authorizes future advances in the generic sense or whether future advances relating back to the original collateral are allowed in Montana. The security agreement specifically provides for the creditor's payment of past-due insurance premiums incurred by the debtor on page 1, column 2, paragraph 2, which states in part:
The UCC 1978 Official Text, App. 2, Reasons for Change Accompanying 1972 Amendments to § 9-312, Comment 5, provides in part: "The priority of future advances against an intervening party has been the subject of much discussion and disagreement. Where both interests are filed security interests, the first to file rule of present § 9-312(5)(a) or the corresponding proposed revision is clearly applicable. Under the 1962 Code, the position of an intervening pledgee in reference to a subsequent advance by an earlier filed secured party is debatable. The proposed unified priority rule of subsection 9-312(5) would indicate that subsequent advances by the first filed party had priority and subsequent-advances under a security interest perfected by possession likewise have priority over an intervening filed security interest. These priority rules are expressly stated in proposed subsection (7)." It should be noted that the proposed subsection 7 was adopted by the 1977 amendments to § 9-312. Once again we find ourselves applying a later version of the Code which codifies the majority view allowing the relation back of future advances regardless of whether the same collateral is security for such future advances. Adoption of this subsection would clearly resolve the issue here. See generally, White and Summers, UCC, § 25-4, pp. 1039-1040 (2d ed. 1980). Additionally, with the apparent paucity of relevant authority, this question would be more appropriately resolved through certification to the Montana Supreme Court pursuant to Rule 1 of the Rules of that court. However, the Court believes that the right to the insurance proceeds here can be determined without resort to further discussion of future advances or certification.
"In the event of failure by Buyer to procure and maintain such insurance, Seller is hereby authorized and empowered to do so and the premiums for same shall be added to the unpaid Total of Payments. The proceeds of any insurance, whether paid by reason of loss, injury, return premium or otherwise, shall be applied at the option of Seller toward replacement of the property or toward payment of the final maturing installments of Total of Payments."
Whether or not Grumman's payment of these premiums is considered a future advance, the security agreement expressly provided for their payment. The provision clearly allows Grumman to protect its position by increasing the total indebtedness due under the security agreement by the amount of overdue premiums, and this is exactly what Grumman in fact did. The Bank is in no position to deny it was aware of this provision after conducting its own research prior to the execution of its note with Mills. It is apparent that the Bank essentially desires the Court to rewrite the contract here by ignoring the insurance premium provision and treating the provision as an unauthorized future advance. We refuse to alter the express terms of this contract. See Schulz v. Peake, 178 Mont. 261, 583 P.2d 425 (1978). Rather, the entire agreement must be read in its entirety, with each clause assisting in interpretation of all other clauses. Downs v. Smyk, Mont., 604 P.2d 307 (1979). The intent of the provision is clear and unambiguous; therefore, even if the premiums were a future advance, we cannot isolate the one paragraph cited by plaintiff as stating the true intent of the agreement. Accordingly, the Court believes plaintiff was not entitled to any of the alleged $9500 excess insurance proceeds.
IDEAL'S RIGHT TO POSSESS AND SALVAGE THE AIRPLANE
The next proceeds issue raised by plaintiff concerns the sale of the plane wreckage by defendant Ideal to defendant O'Brien. The Bank asserts that Ideal was not authorized to obtain possession of nor sell the aircraft; rather, plaintiff argues, the sale of the wreckage as salvage by Ideal was a conversion of excess proceeds which were subject to the Bank's security interest. In other words, subsequent to the satisfaction of Grumman's security interest, all proceeds realized and accessions or components attached to the plane thereafter accrued to the benefit of the Bank's security interest as a lienholder under the insurance policy. Plaintiff therefore contends that as a lienholder within the meaning of the Lienholder's Interest Endorsement in the insurance policy, its lien must be satisfied before Ideal can recoup its own losses.
Ideal derives its authority to possess and sell the plane through a provision of its insurance contract with Mills entitled "Lienholder's Interest Endorsement" which provides in part:
4. Whenever the Company shall pay the Lienholder any sum for loss or damage under this Policy and shall claim that, as to the Insured or owner, no liability therefore existed, the Company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the Lienholder against the Insured or owner and in and to all the property held as security for indebtedness; or the Company may, at its option, pay the said Lienholder the whole amount due or to become due from the Insured or owner, with interest, and shall thereupon be entitled to receive a full assignment and transfer of all the rights of the said Lienholder against the Insured or owner and of all property held as security for the indebtedness. [Emphasis provided.]
Ideal has asserted its conduct is a typical subrogation situation whereby it has become entitled to the plane since it was considered a total loss, much like an automobile insurer is entitled to possess a "totaled" automobile subsequent to payment of a claim. Ideal also argues that the Bank lost its lien rights in the plane upon its destruction and its only remedy was a possible share in insurance proceeds received in payment for that loss. The Bank counters by alleging that subrogation occurs only when some culpable third party is responsible for the damage incurred by an insured, not when the insured himself causes the loss, as occurred here.
It is clear that the Bank would be entitled to a portion of the insurance proceeds if Grumman's lien had not exhausted the insurance fund. However, the insurance proceeds were in fact totally depleted by Grumman's lien. The Bank cannot seriously expect Ideal to, in effect, provide excess coverage beyond policy limits due to a failure by the Bank to initially secure adequate collateral for the Mills note.
In regard to the subrogation argument raised by the Bank, whatever terminology is actually applied, we believe the result urged by Ideal is correct. The possession and subsequent sale of the plane as salvage arose from an equitable assignment, i.e., the insurance company was an assignee in equity subsequent to payment of the claim as provided within Paragraph 4 of the Lienholder's Interest Endorsement of the Ideal insurance policy. Thus, Ideal was obligated to pay only the policy limits less the deductible, and after such payment was tendered, it was entitled to dispose of the plane and obtain any proceeds from its sale. If Ideal had not paid policy limits, then the Bank would be entitled to the remaining proceeds and a security interest in the wreckage. Thus, we believe Ideal performed all the duties contractually required under its insurance policy and by payment of policy limits it is not obligated to remit any additional funds beyond those limits.
PUNITIVE DAMAGES
The plaintiff has also asked for punitive damages asserting the defendants collectively engaged in a conspiracy to deprive the Bank of the various funds previously discussed. An essential element of any conspiracy claim is the commission of an unlawful act. See Duffy v. Butte Teachers Union, No. 322, AFL-CIO, 168 Mont. 246, 251, 541 P.2d 1199 (1975); Mustang Beverage Co., Inc. v. Joseph Schlitz Brewing Co., 162 Mont. 243, 511 P.2d 1 (1973). We believe none of the defendants participated in any illegal acts; rather, they chose to pursue the legal and contractual remedies to which they were clearly entitled.
Based upon the foregoing discussion, there are no material issues remaining for the trier of fact to resolve. Therefore, viewing the evidence in a light most favorable to plaintiff, the Court believes summary judgment is appropriate as to all defendants and accordingly plaintiff's motion for summary judgment should be denied. Ferguson v. Flying Tiger Line, Inc., 688 F.2d 1320, 1322 (9th Cir. 1982) (citations omitted).
An appropriate order has previously been issued in accordance with this Memorandum Opinion.