EAC Credit Corp. v. Bass

Citations: 21 Cal. App. 3d 645; 98 Cal. Rptr. 681; 1971 Cal. App. LEXIS 1104Docket: Civ. 28202

Court: California Court of Appeal; November 30, 1971; California; State Appellate Court

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EAC Credit Corporation initiated a claim to recover personal property sold under a conditional sales contract to William A. Bass, whose equipment was taken by the sheriff in a claim and delivery action. Harry R. Johnson Farms (HRJ), the third-party claimant, asserted ownership of the fixtures left by Bass, claiming CAE Investment and Realty Corporation (the tenant) and Bass had abandoned the leased premises, thus transferring title of the fixtures to HRJ. A 20-year lease between HRJ and CAE stipulated that any permanent alterations, except for movable furniture and trade fixtures, would become HRJ's property, and any personal property left by the lessee upon abandonment would be deemed abandoned by HRJ. Although the lease prohibited assignment without consent, it allowed CAE to sublet to a franchisee. Bass purchased the cleaning equipment on June 6, 1967, with financing eventually assigned to EAC Credit Corporation. HRJ invested significant funds in necessary alterations for the equipment, which was permanently affixed to the premises. HRJ’s president, Johnson, was aware of the lease to CAE and the intended use of the premises but was not informed of the sublease to Bass. Rent payments were made by CAE until February 1969, when they defaulted.

Johnson discovered the leased premises locked and vacant in late February or early March and informed his attorney, Joseph Stave. On March 5, Stave notified CAE that the lease was terminated due to CAE’s failure to pay rent, abandonment of the premises, and unauthorized subletting. In mid-March, Johnson changed the locks and took possession of the building and cleaning equipment. Stave wrote to CAE again on March 25, declaring the personal property abandoned. CAE did not respond to either letter. William Bass defaulted on a contract to purchase the cleaning equipment from McGraw-Edison.

On April 2, an EAC Credit Corporation representative, claiming to have consent from HRJ to remove the cleaning equipment, contacted Stave. Stave asked to see this consent, but it was never provided. Johnson denied giving anyone permission to remove any property. On April 14, EAC Credit Corporation sued Bass for possession of the cleaning equipment. The following day, the sheriff notified Stave of an impending equipment seizure; Stave refused consent. On April 16, he communicated that HRJ did not consent to the removal of the equipment, which was not in Bass's possession. Nonetheless, the sheriff removed the equipment, causing significant damage to the premises and leading HRJ to incur a $3,400 repair bill.

HRJ subsequently filed a third-party claim, asserting ownership of the removed property. The trial court found that most of the property was permanently affixed, and its removal damaged the premises significantly. While a financing statement for the property was filed in 1967, HRJ lacked actual notice of any conditional sales contract or liens. The court concluded HRJ had proven the lease was abandoned and violated by CAE’s unauthorized assignment to Bass. HRJ established its title to the affixed property, while EAC Credit Corporation held title to the movable items due to its valid conditional sales contract.

Judgment has been issued dividing property between the parties, with EAC Credit Corporation appealing and HRJ as the respondent. The California Legislature, in adopting the Uniform Commercial Code, omitted section 9-313, relevant to this case. In enacting section 9-102, it removed "or fixtures" from subsection (a) and added a provision that transactions creating security interests in goods that may become fixtures are governed by applicable state real property laws against third-party interests. California case law establishes that a lessor does not gain interest in fixtures installed by a lessee if owned by a third party. 

In Hendy v. Dinkerhoff, the court ruled in favor of the plaintiff who sought to reclaim machinery leased to a lessee (Lampson) that had been affixed to a mill. Despite being attached, the machinery remained personal property because it was leased, and the defendants, as mill owners, had no greater rights than the lessee. This precedent was upheld in Best Manufacturing Co. v. Cohn, where a lessee's machinery, purchased under a conditional sales contract, was also deemed personal property despite being affixed to the leased premises. The case concluded that the lessor's position did not improve due to the lease's record status. Similar facts appeared in Byron Jackson Iron Works v. Hoge, reinforcing that machinery affixed under a conditional sales agreement retains its character as personal property despite its installation.

The lessee did not complete the purchase of machinery and left it on the defendants' property upon relinquishing its lease. The plaintiff sued the defendants for recovery of the machinery and won at the trial court level. The appellate court upheld this decision, referencing the Dinkerhoff case, which established that defendants were aware the lessee would need to purchase equipment for the mining operation. The court affirmed that the pump and motor remained personal property in the defendants' possession, similar to when they were with the lessee, based on established state law regarding conditional sales.

While the respondent HRJ cited Frick v. Frigidaire Corp. as controlling, the appellate court found it distinguishable. In Frick, a property owner hired a contractor to install refrigeration equipment purchased under a conditional sales contract, and the contractor's knowledge of the equipment's intended permanent installation was critical. The court ruled in that case that the property owner retained ownership of the equipment due to the lack of notice from the conditional vendor about title retention.

In contrast, the Dinkerhoff rule applies here, as the landowner's recovery of property relies on the lease terms regarding the lessee's conditional purchase. The lessor cannot claim rights exceeding those of the lessee. Respondent HRJ, as lessor, attempted to assert ownership of the cleaning equipment based on lease provisions binding the sublessee, William Bass. However, Bass defaulted on payments to the conditional vendor, forfeiting any interest in the equipment. Despite HRJ's claim of a different rule due to its lease negotiations, it was informed of the subletting to a franchisee, which was permitted by the lease. The trial court's finding that the sublease violated the lease terms lacked evidentiary support.

Respondent was aware that a cleaning business would operate on the leased property and engaged in significant remodeling to accommodate the cleaning equipment. Consequently, respondent's claim to the equipment, as it relates to its sublessee, was deemed invalid. Any damages from equipment removal or lease breaches were to be claimed against its tenant, CAE. Respondent argued that the accession section of the Civil Code, section 1013, was applicable; however, it pertains only to the attachment of one’s property to another's land, which was not the case here. Respondent contested that, despite appellant EAC being the conditional vendor's assignee, the trial court's ruling in favor of EAC was flawed because EAC failed to prove that the property was in the possession of the defendant. Appellant's complaint incorrectly stated that the equipment was in the possession of Bass, who had abandoned it before the action commenced, leaving it in respondent's possession. Citing California Packing Corp. v. Stone, respondent argued that the trial court's judgment against parties not in possession of the property was improper. Nonetheless, respondent maintained exclusive possession when the action began. Even if Bass was misidentified as a defendant, respondent had no grounds for complaint since it actively litigated the ownership issue. The case was properly contested between EAC, claiming ownership, and respondent, who held the property. A retroactive application of Blair v. Pitchess was raised but not previously argued in court. The title issue had been fully litigated, and the judgment was reversed, directing the trial court to award all property to appellant EAC Credit Corporation, with each party bearing its own costs. Judges Taylor and Kane concurred.

A retired superior court judge, assigned by the Chairman of the Judicial Council, clarifies that EAC and CAE are distinct entities, with EAC being wholly owned by McGraw-Edison and CAE by Cal-Am Equipment Company, indicating no interrelationship between McGraw-Edison and Cal-Am. The excerpt references Section 9-313 of the Uniform Commercial Code, which establishes that a security interest in goods that attaches prior to them becoming fixtures has priority over claims related to real estate interests, except under certain conditions outlined in subsection (4). These exceptions include: (a) a subsequent purchaser for value of any interest in real estate, (b) a creditor with a judicially obtained lien on the real estate, and (c) a creditor with a prior recorded encumbrance, provided they act without knowledge of the security interest before it is perfected. Additionally, the excerpt notes changes made by the state Legislature to Section 9-102 of the Uniform Commercial Code, which governs transactions intended to create security interests in personal property and fixtures within the state’s jurisdiction.