BANK OF CALIFORNIA v. THORNTON-BLUE PACIFIC, INC.

OPINION

McDONALD, J.

In this case we determine the relative priority of the claims of the Bank of California (Bank) and Jay Fisher Farms, Inc. (Grower) to approximately $139,000 in a bank account (Fund) of Thornton-Blue Pacific, Inc. (Thornton). The trial court held the Bank was entitled to the Fund because a security agreement and a UCC-1 financing statement filed with the California Secretary of State created a perfected security interest in the Fund in favor of Bank prior to the claim of Grower. Grower contends, inter alia, that neither the source of the Fund nor the Fund was ever owned by Thornton and therefore no security interest in the Fund was created by the security agreement or perfected by the financing statement between Thornton and Bank.

FACTUAL AND PROCEDURAL BACKGROUND

Because of a limited appellate record the background of this case is not free of uncertainty. It appears that Bank made a $600,000 loan to the three shareholders of Thornton. Thornton guaranteed the loan. Apparently to secure the guarantee Thornton and Bank entered into a security agreement granting Bank a security interest in certain assets of Thornton. The security interest was perfected by the filing of a financing statement with the Secretary of State. The shareholders defaulted on the loan and Bank filed an action against the shareholders and Thornton, presumably to collect the balance owing on the loan. Thornton then filed a cross-complaint against Grower and others, the purpose of which is not shown in the record.

Bank and Thornton negotiated a settlement pursuant to which cash received by Thornton in connection with its business was delivered to Bank as payment on the loan and in satisfaction of the guarantee. Grower and others in the same position as Grower then asserted claims to that cash and further asserted that their claims had priority over the claim of Bank. The court approved the settlement subject to resolution of the claims of Grower and others and then ordered approximately $139,000 of Thornton's cash receipts placed in a "blocked" account (referred to in this opinion as the Fund) pending resolution of the competing claims. The court set an evidentiary hearing to resolve the claim priority dispute.1

The evidentiary hearing was conducted by declarations submitted by the parties. The nature of the relationship between Grower and Thornton was established without contradiction: Grower raised flowers. Thornton was a flower "wholesaler." Grower delivered flowers to Thornton for which a delivery receipt was given. Thornton marked the flowers with the name of Grower, packaged the flowers and then sought to sell them to retail florists. The price and terms of sale were determined by Thornton. If the flowers were sold and Thornton received payment, it remitted to Grower 75 percent of the sales price it received and retained 25 percent as its "commission." If the flowers were not sold or were rejected by the buyer or were otherwise discarded, Grower received nothing. Thornton incurred no risk other than its cost of doing business. It was also established without contradiction that until after the default of the loan Bank had no actual knowledge of the nature of the relationship between Thornton and Grower.

Following the evidentiary hearing, the trial court determined that Bank held a first priority claim to the Fund and ordered the Fund released to Bank. Following issuance of the order, Bank and Thornton completed settlement of the dispute between them, and Bank's complaint was dismissed. The record does not disclose the resolution of the cross-complaint filed by Thornton against Grower. Grower appeals the order releasing the Fund to Bank.

DISCUSSION

I

Appealability

Bank contends Grower's appeal should be dismissed. It argues the order from which the appeal is taken is not an appealable order because there was no final judgment in this case. Therefore, Bank argues, Code of Civil Procedure section 904.1, subdivision (a)(1) does not authorize the appeal. It further argues that none of the other subdivisions of Code of Civil Procedure section 904.1, subdivision (a) are applicable to permit appeal from the order.

(1) Code of Civil Procedure section 904.1, subdivision (a) codifies the "one final judgment rule" that an appeal is available only from a final judgment. (See generally, Eisenberg et al., Cal. Practice Guide: Civil Appeals & Writs 1 (The Rutter Group 1996) ¶¶ 2:21, 2:22, pp. 2-13 to 2-14; Cal. Appellate Practice Handbook (5th ed. 1995) §§ 1.1 to 1.4, p. 1.)

Although Bank correctly asserts that no final judgment was entered in the action commenced by the filing of its complaint against Thornton, the order from which the appeal is taken may be considered in legal effect a final judgment for purposes of appeal. As stated in Joyce v. Black (1990) 217 Cal.App.3d 318, 321 [266 Cal.Rptr. 8], the "... order has all the earmarks of a final judgment." There remains nothing for judicial consideration with regard to the priority of claims to the Fund; the order is the only judicial ruling with regard to the Fund; and there is no other opportunity to review the order by appeal. (Id. at p. 321; see generally, Eisenberg et al., Cal. Practice Guide: Civil Appeals & Writs 1, supra, ¶¶ 2:36-2:38, 2:43.1, pp. 2-17 to 2-18, 2-23 to 2-24.) Under these circumstances the order from which the appeal is taken is an appealable order because, in effect, it is a final judgment.2

II

Terms of Security Agreement and Financing Statement

The UCC-1 financing statement between Bank and Thornton describes the collateral subject to the Bank's security interest as: "All inventory ... used ... in [Thornton's] business now owned or hereafter acquired; and all accounts ... and rights to payment of every kind now or hereafter arising in favor of [Thornton] out of [Thornton's] business, ..." (2a) Grower contends this description of the collateral does not include the Fund and therefore the security agreement and financing statement did not create a security interest in the Fund.

Upon delivery of Grower's flowers to Thornton the flowers became "inventory" of Thornton because they were held by Thornton for sale. (See Cal. U. Com. Code,3 § 9109.) For purposes of this appeal, we assume the Fund consists of the "proceeds" of this inventory.4 (See § 9306, subd. (1).) Although the term "proceeds of inventory" is not included in the financing statement description of the collateral, the word "inventory" includes the proceeds from the sale of inventory. Section 9306, subdivision (2) provides in part that "... a security interest continues... in any identifiable proceeds including collections received by the debtor[,]" and section 9203, subdivision (3) provides in part that "... a security agreement gives the secured party the rights to proceeds provided by [s]ection 9306." As stated in Secured Transactions, supra, section 4.55 at page 232, "[t]he present version of the Commercial Code does not require that the financing statement specifically claim the right to proceeds if that right is to be asserted."

We conclude that the description of the collateral in the security agreement and financing statement included the Fund because the Fund consisted of proceeds of inventory and inventory was included in the described collateral. The description of the collateral was sufficient to give notice to Grower that receipts from the sale by Thornton of Grower's flowers were subject to Bank's claimed security interest.

III

Consignment Sale

Grower contends the sale of flowers by Grower to Thornton was a consignment sale; as a result, Thornton never had title to the flowers and Thornton never owned the collateral (inventory) to which Bank's security interest could attach. Grower further contends the exception to this principle set forth in section 2326, subdivision (3) is inapplicable to this case.

A

A consignment sale is one in which the merchant takes possession of goods and holds them for sale with the obligation to pay the owner for the goods from the proceeds of a sale by the merchant. If the merchant does not sell the goods the merchant may return the goods to the owner without obligation. (See Secured Transactions, supra, § 1.18, pp. 21, 22.) In a consignment sale transaction, title to the goods generally remains with the original owner. (See U. Com. Code com., Prior Cal. Law, § 3, 23A West's Ann. Cal. Com. Code (1964 ed.) § 2326, p. 345.) The arrangement between Grower and Thornton was a consignment sale arrangement; Grower was the consignor and Thornton the consignee.

Whatever the respective rights between the consignor and the creditors of the consignee may have been prior to 1963, the adoption of section 2326 established new rules which, under specified circumstances, made the retention of title by the consignor irrelevant to resolving claims between the consignor and the creditors of the consignee. Section 2326, subdivision (3) provides in part:

"(3) Where goods are delivered to a person for sale and the person maintains a place of business at which he or she deals in goods of the kind involved, under a name other than the name of the person making delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return. The provisions of this subdivision are applicable even though an agreement purports to reserve title to the person making the delivery until payment or resale or uses such words as `on consignment'.... However, this subdivision is not applicable if the person making delivery does any of the following:

"(b) Establishes that the person conducting the business is generally known by his or her creditors to be substantially engaged in selling the goods of others....

"(c) Complies with the filing provisions of the division on secured transactions (Division 9).

"(d) Delivers goods which the person making delivery used or bought for use for personal, family, or household purposes." The effect of a consignment arrangement being deemed on sale or return is that "... goods held on sale or return are subject to... [the claims of the consignee's creditors] while in the [consignee's] possession." (§ 2326, subd. (2).)

(3) If section 2326, subdivision (3) is applicable to the arrangement between Grower and Thornton, then the retention by Grower of title to the collateral is irrelevant to the ability of Bank to obtain a security interest in the collateral.5 (See Minor v. Stevenson (1991) 227 Cal.App.3d 1613, 1619 [278 Cal.Rptr. 558]; Escrow Connection v. Haas (1987) 189 Cal.App.3d 1640, 1644 [235 Cal.Rptr. 200].)

B

Grower does not contend that it complied with the filing provisions of division 9 or that the delivered goods were used by Grower for personal, family or household purposes or that its arrangement with Thornton was not otherwise within the arrangement described by section 2326, subdivision (3). (4) Grower contends section 2326, subdivision (3) is inapplicable to this case because at the evidentiary hearing Grower established that Thornton was generally known by its creditors to be substantially engaged in the business of selling the goods of others — the section 2326, subdivision (3)(b) exception to applicability of section 2326, subdivision (3).

At the evidentiary hearing the declarations of two Bank officials stated the Bank was unaware that Thornton was selling the goods of others. The declarations of three flower growers who had consignment arrangements with Thornton stated that Thornton was "well-known as a commission selling agent." There was no other evidence on this issue. Based on this evidence the trial court found there was insufficient evidence to establish that Thornton was "generally known by [its] creditors to be substantially engaged in selling the goods of others" within the meaning of section 2326, subdivision (3)(b).

The finding of the trial court is a finding of fact which will not be disturbed on appeal unless on review of the entire record it is unsupported by substantial evidence. (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 872-874 [197 Cal.Rptr. 925].) It is true that all of the flower consignors to Thornton, among whom was Grower, were also creditors of Thornton between the time Thornton sold their flowers and the time Thornton paid them 75 percent of the sale price received by Thornton. It is also true that these consignor creditors knew that Thornton substantially engaged in the business of selling goods of others. However, the knowledge of the consignors cannot necessarily be extrapolated into a fact "generally known by its creditors." The purpose of section 2326, subdivision (3) is to protect general creditors of the consignee from the claims of consignors having undisclosed consignment arrangements with the consignee. Those general creditors do not need the protection of section 2326, subdivision (3) if they know the debtor substantially engages in the business of selling goods to others; with that knowledge they can take steps to protect themselves. However, consignors who are also creditors are not within the category of creditors protected by section 2326, subdivision (3); they, of course, know of the consignment arrangement. To impute as a matter of law the knowledge of the consignors who may also be creditors to general creditors does not further the purpose of section 2326, subdivision (3) because the knowledge of consignor creditors does not give general creditors the opportunity to protect themselves from the undisclosed consignment arrangement. Rather, establishment of the section 2326, subdivision (3)(b) creditor knowledge exception to the applicability of section 2326, subdivision (3) is a question of fact to be determined by the trial court. Evidence of the knowledge of consignor creditors may be relevant but is not conclusive. In this case there was no evidence of the knowledge of creditors other than the consignors. We conclude there is substantial evidence to support the trial court's finding that Thornton was not generally known by its creditors to be substantially engaged in the business of selling goods of others.6

C

(2b) Grower contends that even if section 2326, subdivision (3) were otherwise applicable, Bank's claim is prior to Grower's claim only to the flowers in Thornton's possession, and that section 2326, subdivision (2) applies only to "goods" in the "possession" of Thornton and not to the proceeds received upon sale of those goods; the Bank, it is argued, therefore has no prior claim to the Fund by reason of section 2326, subdivision (3).

The parties have not cited, and we are not aware of, any California cases which address this issue. Grower relies on the Oregon Supreme Court case of Belmont Intern. v. American Intern. Shoe, supra, 831 P.2d 15 to support its contention. Grower correctly notes that the Belmont court stated at page 17 that the Oregon statute comparable to section 2326, subdivision (3) does not apply to the proceeds from the sale of consigned goods but only to claims to the goods themselves when in the possession of the consignee. However, in Belmont the court determined the section 2326, subdivision (3) priority protection was inapplicable because the creditor had actual knowledge of the consignment arrangement which established the section 2326, subdivision (3)(b) creditor knowledge exception to the applicability of section 2326, subdivision (3); therefore, the consignor held a claim prior to the consignee's creditor. It was thus unnecessary to the decision to state that section 2326, subdivision (3) does not apply to proceeds for the sale of goods because the court held in the circumstances of that case section 2326, subdivision (3) did not apply to the goods themselves. (Belmont Intern., supra, at p. 20.)

Contrary to Belmont is GBS Meat Industry Pty. Ltd. v. Kress-Dobkin Co., supra, 474 F.Supp. 1357, in which it is stated at page 1362: "... [section 2326, subdivision (3)] gives priority to secured creditors ... over consignors ... when each makes a claim to consigned goods or the proceeds from the sale of such goods ...." (Italics added.) However, as in Belmont, the GBS Meat Industry court found the secured creditor of the consignee was aware of the consignment arrangement and therefore section 2326, subdivision (3) was not applicable because of the section 2326, subdivision (3)(b) creditor knowledge exception to the applicability of section 2326, subdivision (3). As in Belmont, the language in GBS Meat Industry Pty. Ltd. regarding the applicability of section 2326, subdivision (3) to "proceeds" is unnecessary to the decision.

Also contrary to Belmont and holding directly that a secured creditor of the consignee has priority over the claim of the consignor to the sale proceeds of the consigned goods is the Illinois case of Martin v. First Nat. Bank of Joliet (1984) 127 Ill.App.3d 485 [82 Ill.Dec. 348, 468 N.E.2d 1002]. In Martin the court noted at page 1003 that, as here, the consignor had not complied with the filing provisions of the division of the Uniform Commercial Code on secured transactions (div. 9) and therefore under the Illinois statute comparable to section 9114, subdivision (2), "[i]n the case of a consignment... a person who delivers goods to another is subordinate to a person who would have a perfected security interest in the goods if they were the property of the debtor." The Martin court applied this priority rule to the proceeds of the sale of consigned goods without discussion of the section 2326 issue raised in this case by Bank. (See also Sterling Boat Co. v. Arizona Marine, Inc. (1982) 134 Ariz. 55 [653 P.2d 703, 706].)

In our view the language of GBS Meat Industry Pty. Ltd. quoted above and the result in Martin are correct and we disagree with the contrary language in Belmont.7 Bank had a perfected security interest prior to Grower in the flowers delivered to Thornton by Grower and under section 2326, subdivisions (2) and (3) Bank retained that security interest in the flowers during the time Thornton retained possession of the flowers. The Belmont decision is consistent with this conclusion. At the time Thornton sold the flowers, Bank's security interest in the flowers, and any claim of Grower to the flowers, terminated. (§ 9307; see generally, Secured Transactions, supra, § 4.9 et seq., p. 188 et seq.) However, termination of Bank's security interest in the flowers did not result in Bank's no longer holding a security interest in anything; rather, the sale of the flowers and termination of the security interest in the flowers resulted in Bank's holding a security interest in the proceeds of the sale of the flowers under section 9306, subdivision (2). (See Discussion, pt. II, ante.) The Belmont decision on which Grower relies did not consider the Commercial Code provisions relating to imposition of the security interest to the proceeds of the sale of the goods; in our view the Belmont analysis is therefore incomplete. We discern no reason the proceeds of inventory provisions of the Commercial Code should not be applicable when the priority of a secured claim is first established in the inventory by section 2326, subdivision (3). We conclude that sections 9203 and 9306 are applicable to this case and that as a result Bank holds a security interest in the Fund prior to any claim of Grower.8

DISPOSITION

The order of the trial court is affirmed.

Benke, Acting P.J., and Haller, J., concurred.