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Enforceable Security Agreement Implied From Bill of Sale—UCC § 9-203

On Behalf of | Feb 12, 2014 | Firm News |

Tough Company, Inc. v. Wurlitzer 2014 WL 298699 (January 28, 2014)

California Court of Appeal, Third District
(Not Officially Published)

In a legal battle between a “Tough Company” and a “Wurlitzer,” you might expect the tough company to prevail. You’d be wrong.
In this case, Mr. Wurlitzer sold three pieces of construction equipment to Tough Company, Inc., for $59,000, specifying the purchase amount for each (bulldozer, $48,000; truck, $5,000; trailer, $6,000). The bill of sale also listed the equipment by serial, VIN or license number, for each. Tough Company paid only $40,000. Tough Company expected to borrow the remaining $19,000 purchase price but was unable to do so. The parties executed a second, shorter bill of sale, acknowledging that the balance due was payable “as soon as possible.” There was no separately identified security agreement and no specific wording regarding the granting of security in either bill of sale. Wurlitzer filed title documents with the Department of Motor Vehicles identifying himself as the lienholder on the truck and trailer. Wurlitzer did not file a UCC-1 financing statement or DMV lien document for the bulldozer. Tough Company never coughed up the remaining $19,000 unpaid balance. Wurlitzer took back possession of all three pieces of equipment.
True to its name, Tough Company sued Wurlitzer, claiming he had no right to possession of the bulldozer, since there was no enforceable security interest.
Interpreting California Uniform Commercial Code § 9203 (UCC § 9-203), the Court held that an enforceable security interest could be implied from the terms of the bill of sale and the creditor’s testimony that they intended to create a security interest. Section 9203 requires an “authenticated … security agreement that provides a description of the collateral…” The trial court found that “the parties gave respective values to the truck, trailer, and … [bulldozer] from which a reasonable inference can be drawn that … it was intended that the [bulldozer] was part of the collateral.” The court found that they could have excluded the bulldozer from the collateral if they had intended to do so. Or they “could have adjusted the values,” presumably by listing a value for the bulldozer equivalent to the check paid ($40,000) instead of an amount including future payments ($49,000).
The court of appeal affirmed, finding substantial evidence to support this conclusion. The result is somewhat unusual, because there was no specific written statement of lien or security interest, and no perfecting instrument like a UCC-1 financing statement was filed for the bulldozer. The court of appeal relied on earlier cases holding that “nothing in the code requires the debtor to sign a separate, formal document labeled ‘security agreement’ in order to create a valid security interest.” (Citing Komas v. Future Systems, Inc. (1977) 71 Cal.App.3d 809, 814, 816.) No “magic words” or “precise forms” are “necessary to create a security interest.” (Citing In re Amex-Protein Development Corp. (9th Cir. 1974) 504 F. 2d 1056, 1058-59.) The court decided the issue “by considering together all the documents and circumstances related to the transaction.”
The court also relied heavily on the Comment to UCC 9-203 which states that nothing in Section 9203 “rejects the deeply rooted doctrine that a bill of sale, although absolute in form, may be shown in fact to have been given as security.”
The court of appeal rejected an assertion that this comment only protected debtors, not creditors. The court found that the follow-up sentence to this comment did not limit the creditor’s right to use parol evidence of a security agreement: “Under this Article, as under prior law, a debtor may show by parol evidence that a transfer purporting to be absolute was in fact for security.” (Cal. Uniform Commercial Code § 9203, at Comment 3; emphasis added). The court distinguished a case which contained contrary language (Burlesci v. Peterson (1998) 68 Cal.App.4th 1062) as unpersuasive dictum.