Summary
finding the collateral repossessed by a perfected secured party was sold free and clear of the promissory note of an unsecured general creditor, in accordance with Ohio's equivalent of section 504 of Article 9
Summary of this case from Richmond Ready-Mix v. Atlantic Concrete Forms, Inc., 92-0960 (2004)Opinion
No. 86-967
Decided July 1, 1987.
Uniform Commercial Code — Secured transactions — Secured party who takes collateral and sells or retains it is a "purchaser," when — Foreclosing creditor passes unencumbered title, when — R.C. 1309.47(D).
O.Jur 2d Secured Transactions §§ 257, 266, 270.
1. A secured party that takes collateral and sells or retains it in order to satisfy the debt for which the collateral is given is a purchaser in its own right.
2. A foreclosing creditor under R.C. 1309.47(D) passes unencumbered title to a purchaser for value of the collateral.
APPEAL from the Court of Appeals for Cuyahoga County.
Heritage House Products Corp. ("Heritage House") was engaged in the manufacture and sale of certain garden products. On December 31, 1979, the Midwest Bank Trust Company ("Midwest Bank") took a security interest in all tangible and intangible property of Heritage House to secure payment of its $500,000 loan to Heritage House.
The Andersons, a partnership, supplied to Heritage House certain materials necessary for the manufacture of the garden products. By late 1980, payment of approximately $165,900 on accounts receivable was owed from Heritage House to The Andersons. On January 12, 1981, Heritage House executed a proeissory note to The Andersons for $165,900. On the same day, Heritage House entered into a "Product Licensing Agreement" with The Andersons authorizing the partnership to sell Heritage House products. The license agreement provided that a certain percentage of The Andersons' gross sales would be paid to Heritage House as license fees. The promissory note referred to the product licensing agreement and provided the following:
"Heritage House Products Corp. and The Andersons have entered into a Product Licensing Agreement. This Agreement provides for payment by The Andersons of certain licensing fees to Heritage House. The Andersons shall apply 33-1/3% of all such licensing fees payable to Heritage House directly against the balance of this promissory note, first as to interest, then as to principal. In the event no licensing fees are generated in any year prior to the June 30, 1985 maturity date, equal annual installment payments shall be made by Heritage House on June 30th of each such year, in an amount adequate to pay this note in full by June 30, 1985."
On January 16, 1981, Midwest Bank notified Heritage House that it was in default on its notes and demanded total payment of $501,475.42 by January 31, 1981. Following Heritage House's failure to satisfy the demand, Midwest Bank notified the corporation that the collateral described in the security agreement would be sold at a private sale after February 17. Subsequently, Midwest entered into a sale agreement with Liqui*Lawn Corporation ("Liqui*Lawn") wherein Midwest agreed to sell, transfer and assign to Liqui*Lawn all of its interest in Heritage House's tangible and intangible property.
Pursuant to this sale, Liqui*Lawn became the successor to Heritage House's rights in the product licensing agreement with The Andersons. The Andersons continued to sell some of the products and paid Liqui*Lawn some resulting license fees. The Andersons ceased promoting and selling the products in the summer of 1981.
Liqui*Lawn, plaintiff-appellee, then filed an action against The Andersons, defendant-appellant, seeking damages for breach of the product licensing agreement and a judgment for unpaid license fees. The Andersons denied it breached any duty owed under the agreement and asserted the Heritage House debt, evidenced by the promissory note, as a setoff against any liability on the claim asserted by Liqui*Lawn. The trial court granted judgment in the amount of $55,853.22 for Liqui*Lawn against The Andersons for unpaid license fees for products sold by The Andersons prior to July 1981. The trial court denied damages for The Andersons' nonperformance of the licensing agreement and denied The Andersons' claim that it could set off the unpaid part of Heritage House's $165,900 note obligation against Liqui*Lawn's recovery.
Liqui*Lawn appealed the denial of any recovery for the Andersons' nonperformance of the product licensing agreement. The Andersons cross-appealed, challenging the trial court's denial of its right to a setoff. The court of appeals reversed the trial court on Liqui*Lawn's appeal and remanded the case to the trial court for a determination of damages resulting from The Andersons' nonperformance, and affirmed the trial court's denial of a right to set off to The Andersons.
The cause is now before this court pursuant to the allowance of a motion to certify the record.
Zellmer Gruber and Timothy R. Sweeney, for appellee.
Hertz, Kates, Friedman Kammer and Harlan Stone Hertz, for appellant.
The issue presented by this appeal is whether The Andersons may assert a licensor's unpaid debt as a setoff against its liability arising under a licensing agreement which has been sold by the licensor's creditor.
The Andersons first contend that Liqui*Lawn is an assignee of Heritage House. It bases this contention on the claim that Midwest Bank, in disposing of its collateral after default, is acting as the selling agent for the debtor. Therefore, the person who ultimately owns the collateral has acquired his interest from a secured party acting as an agent for the debtor. The purchaser then is actually acquiring its interest from the debtor. Consequently, the purchaser of collateral is an assignee of the debtor. If Liqui*Lawn is deemed to be an assignee of Heritage House, then R.C. 1309.37(A) provides that the account debtor (The Andersons) may raise any defenses or claims against the assignee (Liqui*Lawn) that it could raise against the assignor (Heritage House). Thus, it is argued, The Andersons may raise the right to set off Heritage House's prior debt, evidenced by the promissory note, against Liqui*Lawn's claim to license fees.
R.C. 1309.37 provides:
"(A) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in section 1309.17 of the Revised Code, the rights of an assignee are subject to:
"(1) all the terms of the contract between the account debtor and assignor and any defense or claim arising thereform; and
"(2) any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment."
We disagree with the contention that a secured party is an agent of its debtor. A secured party that takes collateral and sells or retains the collateral in order to satisfy the debt for which the collateral is given is a purchaser in its own right. It takes title to the goods and can pass this title in a sale to a good faith purchaser for value. The secured party does not act as an agent for the debtor.
"Purchase" and "purchaser" are defined in R.C. 1301.01 as follows:
"(FF) `Purchase' includes taking by sale, discount, negotiation, mortgage, pledge, lien, issue or reissue, gift, or any other voluntary transaction creating an interest in property.
"(GG) `Purchaser' means a person who takes by purchase."
It is generally accepted that the definition of "purchaser" includes a secured party who has acquired an interest in the property of the debtor by a voluntary transaction; the voluntary transaction being the agreement to enter into the debtor-creditor relationship. (White Summers, Uniform Commercial Code [1980] 973, Section 23-18.)
It follows that when Liqui*Lawn purchased the collateral from Midwest Bank, it was buying the property from a purchaser and not an agent. Liqui*Lawn is not merely an assignee of Heritage House; it is a purchaser of the assets. By virtue of the purchase, Liqui*Lawn received the assets of Heritage House, including the product licensing agreement, but it did not thereby assume the liabilities of Heritage House. Liqui*Lawn also meets the requirement of good faith purchaser for value, there being no allegation of bad faith or lack of consideration. R.C. 1309.47(D) provides:
"When collateral is disposed of by a secured party after default, the disposition transfers to a purchaser for value all of the debtor's rights therein, discharges the security interest under which it is made and any security interest or lien subordinate thereto. The purchaser takes free of all such rights and interests even though the secured party fails to comply with the requirements of sections 1309.44 to 1309.50 of the Revised Code or of any judicial proceedings." (Emphasis added.)
Thus, a foreclosing creditor under R.C. 1309.47(D) passes to a purchaser for value unencumbered title to the collateral. R.C. 1309.47(D) operates to extinguish all of The Andersons' rights in the collateral and transfers those rights to Liqui*Lawn, as a purchaser for value. Auton's Fine Jewelry Bridal Center, Inc. v. Beckner's, Inc. (Tenn.App. 1986), 707 S.W.2d 539.
To give to The Andersons a right to set off the unpaid debt owed by Heritage House would, in effect, elevate its claim as an unsecured general creditor above that of a perfected secured party. Midwest apparently perfected its security interest by filing financing statements as required by R.C. 1309.21. The security agreement in favor of Midwest covered all intangible items, which included the Heritage House product name and the good will associated with that name. Accordingly, when The Andersons executed the product licensing agreement with Heritage House, it was given the right to sell Heritage House products. But The Andersons assumed that right subject to Midwest's previously perfected security interest. This right was a general intangible pursuant to R.C. 1309.01(A)(16). In order to perfect a security interest in a general intangible, R.C. 1309.21 requires the filing of a financing statement. The Andersons apparently failed to file and thus failed to perfect a security interest in the product licensing agreement. The Andersons was, therefore, merely an unsecured creditor of Heritage House. Midwest, as the perfected secured party, had priority over The Andersons' claim. R.C. 1309.12. R.C. 1309.47(D), as discussed above, operates to prevent The Andersons from asserting its claim against Liqui*Lawn, the purchaser of the collateral.
The Andersons urge, in the alternative, that the two agreements are so intertwined as to be inseparable so that Liqui*Lawn cannot claim the benefit of the product licensing agreement without also assuming the liabilities of the promissory note. It contends it is therefore entitled to an equitable setoff. As this court stated in Walter v. National City Bank (1975), 42 Ohio St.2d 524, 71 O.O. 2d 513, 330 N.E.2d 425, in paragraph one of the syllabus:
"Setoff is not strictly limited by statute, and the courts can allow setoff upon equitable principles where necessary to prevent clear injustice."
The Andersons' claim of a right to equitable setoff requires a finding that the licensing fee transaction was entered into as a means of satisfying the debt obligation between The Andersons and Heritage House evidenced by the promissory note. It is argued that the two documents must be viewed as a single transaction so that it would be inequitable not to allow the setoff.
The trial court found that the evidence did not support such a finding. Although these two documents were executed on the same day, certain other factors support Liqui*Lawn's contention that these two transactions were independent of each other.
The promissory note refers to the licensing agreement, but the licensing agreement makes no reference to the promissory note. Secondly, only a partial setoff by the license fees is provided for in the promissory note. The term of the note was four years while the license agreement terminated in eighteen months, subject to renewal. Therefore, there was no certainty that the license agreement would be in effect when the note came due. Furthermore, the note provided for installment payments rather than credits for licensing fees only "[i]n the event no licensing fees are generated in any year prior to June 30, 1985." The note permitted The Andersons to charge only one-third of the license fees against installment payments. Finally, the equities of the case suggest that The Andersons will not be substantially prejudiced by disallowing its setoff. By not securing its interest with collateral, The Andersons had a claim which could be wholly defeated by the security interest of Midwest Bank. The licensing agreement improved The Andersons' position by providing for a method of payment but did not transform it into a secured creditor. To deny the setoff merely returns The Andersons to its position as it relates to the secured claimants against Heritage House. Accordingly, we agree with the trial court's finding that, although these transactions were related, they were not so closely connected as to be viewed as a single transaction entitling The Andersons to the setoff.
For the foregoing reasons, we hold that The Andersons had no right to a setoff against the license fees owed to Liqui*Lawn.
The judgment of the court of appeals is affirmed.
Judgment affirmed.
SWEENEY, LOCHER, DOUGLAS and H. BROWN, JJ., concur.
RESNICK and WRIGHT, JJ., concur in part and dissent in part.
ALICE ROBIE RESNICK, J., of the Sixth Appellate District, sitting for HOLMES, J.
I have no quarrel with the syllabus law as announced by the majority in this case. However, I disagree with the determination that the product licensing agreement and the promissory note were transactions independent of each other as this result conflicts with facts that are undisputed in the record. Consequently, I respectfully dissent to the portion of the opinion denying The Andersons an equitable setoff.
The promissory note and the product licensing agreement were drafted together by The Andersons and were executed concurrently therewith on January 12, 1981. The product licensing agreement is specifically mentioned in the body of the promissory note and the documents were discussed jointly in correspondence preceding their signing. As Judge Markus stated in his opinion in the court of appeals, "the evidence unequivocally showed that the note and the licensing agreement were part of a single transaction. The note simply replaced the licensor's antecedent debt when the licensor executed the license agreement to assist it in satisfying that debt." Accordingly, I would find that these two documents were both part of one transaction and, thus, an equitable setoff would not be precluded.
RESNICK, J., concurs in the foregoing opinion.