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Security Pacific Bank v. White Pass Alaska (3/4/94), 869 P 2d 156
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Notice: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
SECURITY PACIFIC BANK, N.A., )
) Supreme Court No. S-5340
) Superior Court No.
Appellant, ) 1JU-91-881 Civil
)
v. ) O P I N I O N
)
HAINES TERMINAL AND HIGHWAY )
COMPANY, INC., an Alaska )
CORPORATION d/b/a WHITE )
PASS ALASKA, ) [No. 4062 - March 4, 1994]
)
Appellee. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, First Judicial District,
Juneau,
Larry R. Weeks, Judge.
Appearances: Gregory W. Lessmeier,
Hughes, Thorsness, Gantz, Powell & Brundin,
Juneau, for Appellant. William G. Ruddy,
Ruddy, Bradley & Kolkhorst, Juneau, for
Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Matthews, and Compton, Justices.
[Bryner, Justice, pro tem, not
participating].
MOORE, Chief Justice.
INTRODUCTION
In this commercial transaction dispute, Security
Pacific Bank, a secured creditor of Chilkoot Lumber Company,
appeals an order issued by the superior court allowing Haines
Terminal and Highway Company, an unsecured creditor of Chilkoot
Lumber, to recover approximately $23,000 from a bond posted by
Security Pacific. The superior court based this decision on its
finding that Security Pacific had improperly allowed Weyerhaeuser
Corporation to receive part of the proceeds from the sale of
collateral as an offset to prior debts owed by Chilkoot Lumber to
Weyerhaeuser. We reverse.
FACTS AND PROCEEDINGS
Haines Terminal sold fuel on account to Chilkoot
Lumber. Chilkoot Lumber's debt to Haines Terminal was unsecured.
After Chilkoot Lumber's account became overdue, Haines Terminal
filed a complaint against Chilkoot Lumber and Laurence Beck, the
company's general manager, seeking $139,162.26, the overdue
amount.1 On June 13, 1991, Haines Terminal moved for prejudgment
attachment. It sought to attach a load of lumber which was to be
loaded and shipped from Haines on June 16-17. Chilkoot Lumber
opposed the motion, arguing that the lumber was subject to a
number of pre-existing security interests.
The court signed the writ of attachment on June 15,
1991. Two days later, Security Pacific Bank moved to intervene.
Security Pacific filed a motion to release the lumber, arguing
that it possessed a superior security interest in the property.
Security Pacific's secured status was evidenced by UCC-1
financing statements filed in July 1988 and January 1991.2
Security Pacific and its predecessor had filed these statements
to secure two promissory notes with balances due of $6,667,000
and $3,772,011.90. At the time of the attachment, Chilkoot
Lumber's total inventory and accounts receivable, including the
shipment of lumber at issue, were valued at approximately
$3,782,000.
At a hearing before the superior court, Security
Pacific argued that Haines could only attach property which was
subject to execution, and that the lumber was not subject to
execution due to Security Pacific's superior interest. Security
Pacific noted that the debt owed by Chilkoot Lumber to Security
Pacific far exceeded the value of lumber attached by Haines
Terminal and the other inventory and receivables of Chilkoot
Lumber. Haines Terminal responded by arguing that Chilkoot
Lumber had an attachable interest in the lumber under AS
45.09.311 notwithstanding Security Pacific's superior position.3
Because the superior court was not prepared to render a
decision immediately, Security Pacific offered to post a bond in
the amount of $140,000 pursuant to Alaska Civil Rule 89(j) to
obtain an immediate release of the writ of attachment. Upon the
agreement of the parties, the court accepted the bond and quashed
the writ. The court ordered an additional hearing to determine
what should be done with the posted money.
After further briefing, the court issued an Order on
Motion to Release Property in July 1991. The court found that
Security Pacific was a secured creditor and had established that
Chilkoot Lumber's debt exceeded the value of the collateral. The
court "interpret[ed] AS 45.09.311 to mean that attachment may
issue against any property held by a debtor in which the debtor
has any interest above and beyond that of a secured party."
Based upon this interpretation, the court concluded
that [Haines Terminal] may not attach
property that is subject to [Security
Pacific's] security interest when that
security interest is larger than any of
[Chilkoot Lumber's] interests. . . . To the
extent that the representations of counsel to
the court are shown to be in fact what has
happened to the funds in this case, then the
$140,000 bond posted by [Security Pacific]
shall be released to [Security Pacific].
That is, when [Security Pacific] or [Chilkoot
Lumber] shows by affidavit that the proceeds
of the sale of this lumber all went to
[Security Pacific], then the bond shall be
released.
The court also stated that "[n]either the intervenor
nor the court . . . intended [the posting of the bond] to do
anything other than to protect [Haines Terminal's] rights, to the
extent that they had any rights, in [Chilkoot Lumber's] interest
in the lumber . . . ." The court thus concluded that "[i]f it
is shown that the debtor in fact did not have any such interest
in the property, then plaintiff suffered no injury."
Further discovery and briefing revealed that
Weyerhaeuser Corporation sold the lumber for $995,583.72.
Weyerhaeuser paid for the lumber by depositing $968,375.42 with
Security Pacific to reduce the indebtedness of Chilkoot Lumber.
Chilkoot Lumber never had access to these proceeds.
Weyerhaeuser, with the consent of Security Pacific,
retained $27,208.30 from the sale. This amount consisted of
$4000 which Weyerhaeuser had advanced to Chilkoot Lumber to pay
laborers to load the ship; $23,450 as an offset to correct an
overpayment made to Chilkoot Lumber on a previous shipment; and a
credit of approximately $200 to Chilkoot Lumber for a prior
invoice. The $23,450 overpayment on a prior transaction had been
deposited with Security Pacific to Chilkoot Lumber's account.
At oral argument in July 1992, the superior court
concluded that Security Pacific did not have the right
to allow its agents to protect itself
with respect to the [funds] that . . .
Chilkoot owed Weyerhaeuser from other
transactions. And while I don't think that
at that time [Haines Terminal] had any
priority, there is no indication that
Weyerhaeuser had any priority . . . . And
[Haines Terminal] had taken the steps to
protect its interest and has now obtained a
judgment. And I think that to the extent
that it was going to go to any unsecured
creditor, it goes to [Haines Terminal].
Therefore, the court granted Haines Terminal $30,450 from
Security Pacific's bond.4 Security Pacific now appeals this
decision.
DISCUSSION
The issue before this court is whether the trial court
erred in awarding Haines Terminal the $23,450 withheld by
Weyerhaeuser from the sales proceeds remitted to Security
Pacific. The underlying facts are not in dispute. This is a
question of law, subject to de novo review. Klosterman v. Hickel
Inv. Co., 821 P.2d 118, 122 (Alaska 1991) (review of question of
law is de novo); Luedtke v. Nabors Alaska Drilling, Inc., 834
P.2d 1220, 1223 (Alaska 1992) ("'we may review the application of
. . . legal doctrine to undisputed facts without the usual
deference to the superior court'") (quoting Foss Alaska Line,
Inc. v. Northland Servs., 724 P.2d 523, 526 (Alaska 1986)).
We conclude that the trial court's order granting
Haines Terminal $23,450 from the bond posted by Security Pacific
was in error. Security Pacific's perfected security interest in
Chilkoot Lumber's inventory and any proceeds from the sale
thereof was clearly entitled to priority over Haines Terminal's
right as an unsecured creditor to subsequently attach the lumber.
See, e.g., State, Dep't of Natural Resources, Div. of Wildlife v.
Benjamin, 587 P.2d 1207, 1209 (Colo. App. 1978); Shaw Mudge & Co.
v. Sher-Mart Mfg. Co., 334 A.2d 357, 359 (N.J. App. 1975).
In its July 1991 Order on Motion to Release Property,
the trial court properly held that Haines Terminal could not
"attach property that is subject to a security interest when that
security interest is larger than any of the debtor's interests."
In this case, Security Pacific was substantially under-
collateralized. The debt to Security Pacific secured by the
inventory and receivables of Chilkoot Lumber was in excess of ten
million dollars. The collateral, including the attached shipment
of lumber, was valued at less than four million dollars.
Chilkoot Lumber had no equity in the lumber which Haines Terminal
could hope to reach by attachment or execution.
As the trial court noted, the bond posted by Security
Pacific was intended "to protect [Haines Terminal's] rights, to
the extent that they had any rights, in [Chilkoot Lumber's]
interest in the lumber . . . . If it is shown that the debtor in
fact did not have any such interest in the property, then [Haines
Terminal] suffered no injury." Under the facts of this case,
Chilkoot Lumber had no equity in the collateral. Therefore, we
conclude that Haines Terminal has suffered no injury as a result
of Weyerhaeuser's offset.
We are also satisfied that Haines Terminal's right to
the $23,450 retained by Weyerhaeuser was subordinate to
Weyerhaeuser's right of setoff. Alaska Statute 45.09.318(a)
(Alaska's version of 9-318 of the Uniform Commercial Code)
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 AS 45.09.206, 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
therefrom . . . .
Under this provision, the rights of Security Pacific (the
assignee of Chilkoot Lumber's right to payment for the lumber)
were subject to whatever contractual claims and defenses
Weyerhaeuser (the account debtor) would have been able to assert
against Chilkoot Lumber (the assignor). Thus, Weyerhaeuser was
entitled to offset its $23,450 overpayment on a prior lumber
shipment from Chilkoot Lumber and Security Pacific. Under the
facts of this case, its claim to those funds was superior to that
of Security Pacific and, a fortiori, to the unsecured claim of
Haines Terminal.5
This case involves facts strikingly similar to those
addressed in Investment Serv. Co. v. North Pacific Lumber Co.,
492 P.2d 470 (Or. 1972). In Investment Service, the defendant
purchased three shipments of lumber from a lumber producer who
had previously transferred a security interest in its inventory
to a bank. Id. at 471. The defendant received the first
shipment and remitted full payment directly to the bank.
However, the lumber was later discovered to be defective. Id.
The lumber producer then delivered the second shipment and again
assigned the invoice to the bank. Id. The defendant partially
offset its claim for the defective lumber by reducing its payment
to the bank for the second shipment. Id. By the time the third
delivery arrived, the defendant had determined the amount of loss
on the first transaction and deducted the remaining amount from
its payment for the third shipment. Id.
The bank claimed that the defendant did not have any
right of setoff. The court, however, disagreed. Id. The court
relied upon UCC 9-318 and concluded that
[a]n assignee of a contract for the sale
of the lumber is subject to any setoff the
purchaser of the lumber might have because of
a defect in the lumber sold. The setoff is
available for use against any claim made by
the assignee regardless of whether it has any
connection with the claim asserted in the
assignee's complaint.
Id.
The bank further argued that the setoff, if allowed,
would impermissibly defeat the bank's security interest. Id. at
472. However, the court noted that the bank had directly
benefited from the original overpayment:
When [the lumber producer] assigned the
invoice to the bank the bank took it subject
to the defendant's right of offset for the
defective lumber. When the defendant
purchaser overpaid the bank because it did
not know the lumber was defective, the bank
became indebted to the defendant. The
assignment and payment to the bank created a
new relationship between the bank and the
defendant. Stated simply, because of the
defective lumber in the first shipment, the
defendant's overpayment, and the bank's
receipt of the overpayment, the bank now owes
defendant money.
Id. (emphasis added).
The reasoning of the court in Investment Service is
applicable to the facts of the present case. Here, the original
overpayment was made directly from Weyerhaeuser to Security
Pacific for credit to the account of Chilkoot Lumber. Thus,
Security Pacific had received a $23,000 windfall on the prior
transaction. Weyerhaeuser's right of setoff was superior to the
perfected security interest of Security Pacific and therefore
necessarily superior to any claim to the secured property on the
part of Haines Terminal.
Finally, Haines Terminal maintains that the superior
court's order should be affirmed on the grounds that Security
Pacific's counsel misrepresented to the court that all of the
proceeds of the sale of the lumber would be applied to Chilkoot
Lumber's indebtedness to Security Pacific. Haines Terminal cites
to the trial court's order, which states that
[t]o the extent that the representations
of counsel to the court are shown to be in
fact what has happened to the funds in this
case, then the $140,000 bond posted by
intervenor shall be released to the
intervenor. That is, when intervenor or the
defendant shows by affidavit that the
proceeds of the sale of this lumber all went
to intervenor, then the bond shall be
released.
(Emphasis added). While it is true that not all of the proceeds
from the sale went directly to Security Pacific, we nonetheless
find Haines Terminal's argument unpersuasive. First, the record
indicates that counsel for Security Pacific informed the court
prior to the issuance of its order that Weyerhaeuser would
receive a portion of the proceeds. At oral argument below, the
following exchange took place:
The Court: [W]hat [counsel for Haines
Terminal] is saying is . . . how does he know
that the proceeds are all going to go to
Security National instead of Chilkoot Lumber?
Counsel for Security Pacific: The
proceeds are all going to go to Security
Pacific and Weyerhaeuser. There are already
commitments as to how that is supposed to be
applied.
Based on this exchange, we are satisfied that no
misrepresentation on the part of Security Pacific's counsel took
place.
More importantly, the trial court's award of the
$23,450 to Haines Terminal out of Security Pacific's bond was
predicated on its conclusion that "to the extent that [the money]
was going to go to any unsecured creditor, it goes to [Haines
Terminal]." As discussed above, we hold that Weyerhaeuser's
right of setoff was in fact superior to Security Pacific's
interests in the proceeds, and a fortiori, to Haines Terminal's
claim to the funds. Thus, to the extent that the trial court's
order required all of the money from the sale of the lumber to go
to Security Pacific, as opposed to Weyerhaeuser, it was in error.
CONCLUSION
We conclude that the trial court erred as a matter of
law in releasing $23,450 from Security Pacific's bond to Haines
Terminal. We therefore reverse the trial court's order.
REVERSED.
_______________________________
1 Neither Beck nor Chilkoot Lumber are parties to this
appeal. Beck appealed separately; the court's decision
concerning his appeal is found in Beck v. Haines Terminal &
Highway Co., 843 P.2d 1229 (Alaska 1992).
2 The UCC-1 financing statements covered "[a]ll of
[Chilkoot Lumber's] inventory, all accounts, chattel paper,
documents and general intangibles, whether now owned or hereafter
acquired, and wherever located, and all proceeds of the
foregoing." Proceeds and products of collateral were also
covered.
3 AS 45.09.311 reads:
Alienability of debtor's rights;
judicial process. The debtor's rights in
collateral may be voluntarily or
involuntarily transferred (by way of sale,
creation of a security interest, attachment,
levy, garnishment, or other judicial process)
notwithstanding a provision in the security
agreement prohibiting a transfer or making
the transfer a default.
4 The parties agree that the superior court erred in
granting Haines Terminal $7000 for demurrage expenses incurred by
Weyerhaeuser. Haines Terminal delivered a check for that amount
to Security Pacific contemporaneously with the filing of its
brief, rendering the issue moot. The amount in dispute here is
the $23,450 offset for prior transactions between Chilkoot
Lumber, Security Pacific, and Weyerhaeuser.
5 Haines Terminal contends that Security Pacific has
waived its argument that Weyerhaeuser had a legal right to
withhold the $23,450 under AS 45.09.318(a)(1). This court has
adopted a liberal approach in determining whether an issue or
theory was raised in a lower court proceeding. Zeman v.
Lufthansa German Airlines, 699 P.2d 1274, 1280 (Alaska 1985). We
have recognized that a litigant "need not have expressly
presented every theory supporting an argument before the trial
court, but can expand or refine details of an argument otherwise
preserved on appeal." Id. While Security Pacific admittedly
failed to cite AS 45.09.318(a)(1) to the trial court, it did
argue that Weyerhaeuser had a right to offset its overpayments on
prior transactions. We are satisfied that, under our liberal
approach to this issue, Security Pacific adequately preserved
this argument for appeal. See Independent Nat'l Bank v. Westmoor
Elec., Inc., 795 P.2d 210, 216 (Ariz. App. 1990) (failure to cite
Arizona's version of 9-318 held insufficient to establish
waiver where litigant argued that assignee bank was subject to
claims and defenses arising from contract between account debtor
and assignee).
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