Mark Products US v. Interfirst Bank

Citations: 737 S.W.2d 389; 4 U.C.C. Rep. Serv. 2d (West) 1333Docket: A14-87-118-CV

Court: Court of Appeals of Texas; August 13, 1987; Texas; State Appellate Court

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In the case of Mark Products U.S. Inc. v. InterFirst Bank Houston, N.A., the Court of Appeals of Texas addressed a dispute regarding priority security interests in seismic exploration equipment. Mark Products U.S. Inc. sold equipment to the Vibrosearch companies on an unsecured basis, with payment due within thirty days of delivery. Following the delivery, the Vibrosearch companies failed to make full payment. Subsequently, InterFirst Bank provided a $9,000,000 loan to Vibrosearch, Inc. and established a credit line, securing these loans with security agreements covering all assets of the Vibrosearch companies, including the equipment sold by Mark Products. InterFirst filed U.C.C.-1 financing statements to perfect its security interest.

In response to concerns about the Vibrosearch companies' debts, Mark Products obtained a promissory note from Vibrosearch, Inc. for the unpaid balance of $772,854.03, along with a security agreement that granted a purported first priority security interest in the equipment. Mark Products filed a U.C.C.-1 financing statement in Texas but not in other states. Both creditors faced defaults on their payments, and portions of the equipment were sold without Mark Products' consent.

Mark Products sued Vibrosearch, Inc. for the promissory note and later included InterFirst, claiming a first priority purchase money security interest and alleging that InterFirst's sale of the equipment violated its rights to the secured collateral. Additionally, the suit named the owners of Vibrosearch, the purchaser of the equipment, and other related individuals as defendants. The trial court granted summary judgment in favor of InterFirst, affirming its priority security interest.

Mark Products filed for partial summary judgment, asserting a first priority purchase money security interest in equipment sold to Vibrosearch on September 3, 1982. In response, all defendants, including InterFirst, countered with cross motions for summary judgment. InterFirst contended it held the first priority security interest, justified its protective actions, and sought dismissal of all claims against it. The Hodgin brothers supported InterFirst's arguments. After hearing all motions simultaneously, the court denied Mark Products’ motions for summary judgment, granting judgment only against Vibrosearch, Inc. for amounts due on a promissory note, along with pre-judgment interest. The court accepted the summary judgment motions from InterFirst and the Hodgin brothers while denying those from other defendants, severing any pending issues against them. Mark Products challenged the court's decisions in its first and third points of error. It claimed that at the time of the equipment sale, Vibrosearch Exploration, Inc. was a wholly owned subsidiary of Vibrosearch, Inc., and that Vibrosearch, Inc. had assumed obligations from Geosignal Exploration, Inc. and N.F. Industries concerning the equipment. Despite this, Mark Products limited its motion to the equipment sold directly to Vibrosearch, which represented less than 0.002% of the total equipment in dispute. The Texas Supreme Court's standards for summary judgment require the movant to prove the absence of genuine material fact issues and entitle them to judgment as a matter of law, with all favorable evidence to the non-movant considered as true. The core issue on appeal is determining the priority of the security interests. Generally, the first party to file a financing statement prevails unless there is a qualifying purchase money security interest, which can attain priority if perfected at the time the debtor receives possession or within 20 days. If Mark Products' claim does not qualify for this status, InterFirst's first-to-file claim prevails.

The Texas Uniform Commercial Code (Tex.UCC.) outlines two types of purchase money security interests: those claimed by sellers and those claimed by financing agencies. A purchase money security interest is defined as either (1) a security interest retained by the seller to secure payment for the collateral, or (2) a security interest taken by a party providing value to help the debtor acquire rights in or use of the collateral. Mark Products claims entitlement to a seller's purchase money security interest, arguing the twenty-day grace period in section 9.312(d) did not begin when goods were delivered in spring 1982, but rather on September 1, when a promissory note and security agreement were finalized. Mark Products maintains that Vibrosearch, Inc. was not considered a 'debtor' and the goods were not 'collateral' until the security agreement took effect, thus filing on September 3 was within the grace period.

Mark Products cites Brodie Hotel Supply, Inc. v. United States, where the court ruled that the grace period does not commence until a debtor-creditor relationship is established. However, this decision has faced criticism for undermining physical delivery's significance in determining priority for purchase money security interests. The court in this case declines to adopt the Brodie precedent, emphasizing that the typical context for a purchase money security interest involves a prior perfected interest and cautioning against broadening protections that could undermine the Texas UCC's goal of ensuring predictability in commercial transactions.

The first-in-time security interest holder may not have priority if the debtor acquires property protected by a properly perfected purchase money security interest. However, if the debtor has possessed the property for over twenty days, a diligent lender who perfects its security interest can rely on the first-to-file priority provisions. The filing system serves as notice to potential lenders of existing interests in the debtor's goods. In the absence of such notice, a creditor may extend credit based solely on the debtor's possession of the collateral after twenty days. A secured creditor's priority remains intact despite their knowledge of the debtor's obligations to unsecured creditors if the seller or financer fails to perfect their purchase money security interest within the twenty-day grace period. 

Mark Products provided invoices showing that Vibrosearch, Inc. entered into a sales agreement for goods delivered by May 1982, with payment due within thirty days, establishing Vibrosearch's obligation by that time. Under the Texas UCC, 'collateral' encompasses property subject to a security interest and property that may become subject to a security interest. The term 'debtor' applies to those obligated to a creditor. A financing statement can be filed before a security agreement is made, indicating that the terms do not limit application to specific time frames. Vibrosearch, Inc. was deemed a debtor in possession of the collateral no later than June 20, 1982. Since Mark Products filed its financing statement on September 3, 1982, it did not perfect its interest within the required time, failing to qualify for special priority as a purchase money security interest. InterFirst perfected its interest in July, thus holding the first priority security interest in the seismic exploration equipment. Mark Products claims to qualify as both a seller and lender under the UCC due to its financing of Vibrosearch’s acquisition of the equipment’s rights.

Mark Products argues for a lender's purchase money security interest regarding equipment financed for Vibrosearch, Inc., asserting that Vibrosearch did not become a debtor until the security agreement took effect. However, this claim is rejected due to the lack of evidence showing that Mark Products provided consideration after the equipment's initial delivery. The Texas Business and Commerce Code excludes security interests for pre-existing debts from the purchase money category. Mark Products' argument contradicts its earlier assertion that Vibrosearch assumed obligations of other companies in May 1982. Consequently, the court will not consider Mark Products' claim for a purchase money security interest on appeal, as it was not raised at the trial level. 

Further, Mark Products identifies factual issues regarding Vibrosearch's rights in the collateral and the location of Mark Products' security interest. However, these issues are immaterial to the determination that Mark Products lacked a purchase money security interest, thereby granting priority to InterFirst's first-to-file interest. The existence of immaterial factual disputes does not prevent summary judgment. Mark Products misinterprets the law by suggesting that InterFirst, as a secured party, must prove it was a good faith purchaser for value; rather, the perfection of a security interest requires compliance with specific sections of the Texas UCC without that additional burden. 

Mark Products also claims that InterFirst's actions raise issues of good faith affecting security interest priorities but fails to cite supporting Texas case law. The evidence presented does not establish a material fact issue regarding InterFirst's good faith. Lastly, Mark Products alleges that deposition testimony suggests InterFirst breached a settlement agreement; however, the testimony indicates that no such agreement was finalized.

Mark Products contests the summary judgment regarding two sales of equipment by the Vibrosearch companies. In December 1982, Vibrosearch sold some equipment to Vibrosonics, Inc., with the Hodgin brothers forgiving $2,700,000 of Vibrosearch's unsecured debt and assuming $3,850,000 in loan liabilities. InterFirst consented to this sale on the condition that it retained a first priority security interest in the equipment. Mark Products argues it held the only security interest in the collateral and claims entitlement to possession due to Vibrosearch's default, asserting that any interference constituted conversion. 

However, the court disagrees, referencing Section 9.306(b) of the Texas UCC, which states that a security interest remains on collateral despite a sale unless authorized by the secured party. Since InterFirst did not provide unrestricted authorization for the transfer of the equipment, the security interest survived the sale, negating Mark Products' claim to possession.

Additionally, Mark Products challenged the legitimacy of a foreclosure sale dated March 8, 1983, alleging it was a sham and commercially unreasonable, seeking a share of the proceeds. The court rejected this assertion, noting that the sale did not raise issues of commercial unreasonableness. Under Texas law, a secured party may sell collateral in its condition post-default, and the sale's private nature does not imply it was a sham. Mark Products failed to contest the debt owed to InterFirst or prove the equipment could have been sold for more than the debt. As Vibrosearch remained indebted to InterFirst post-sale, Mark Products is not entitled to proceeds from the sale. Consequently, the trial court's decision to grant InterFirst's summary judgment motion and deny Mark Products' motion is upheld.

Mark Products' first and third points of error are overruled. In the second point, Mark Products challenges the trial court's denial of its second motion for partial summary judgment, asserting a first priority security interest related to a December 1982 sale without its consent. This issue has been previously addressed in relation to InterFirst's summary judgment motion and is overruled. For the fourth and fifth points, Mark Products argues that the trial court erred in denying its original partial summary judgment motion and in granting summary judgment for David and Roger Hodgin. Mark Products claims the Hodgin brothers are liable for conversion of equipment sold to Vibrosonics, Inc. However, InterFirst held a first priority security interest in the equipment, meaning even if Mark Products' interest could survive the sale, it would still be a subordinant creditor with no right to possession. These points are also overruled. In the sixth point, Mark Products contends the trial court erred by not compelling answers to deposition questions from InterFirst and Vibrosearch, Inc.'s attorneys. This motion to compel was pending during the summary judgment hearings, but Mark Products did not request a continuance or raise this issue in its motion for a new trial, leading to a waiver. To preserve appellate review, a timely motion must be presented to the trial court with specific grounds, and a ruling must be obtained. Consequently, the sixth point is overruled. The judgment of the trial court, which granted summary judgment for InterFirst Bank Houston, N.A., David Hodgin, and Roger Hodgin, and denied Mark Products' motions for partial summary judgment, is affirmed.