Bank of the West v. Commercial Credit Financial Services, Inc.
852 F.2d 1162, 1988 WL 76010 (1988)
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Rule of Law:
A security interest in a debtor's assets, perfected by filing, remains perfected and maintains its priority over the security interest of a transferee's creditor after an unauthorized transfer of those assets to an affiliated corporation, even if the transferee's creditor filed its financing statement first.
Facts:
- Bank of the West and Allied Canners & Packers, Inc. ('Allied') entered into a loan agreement on April 5, 1982, granting the Bank a security interest in Allied's present and future-acquired assets, which the Bank perfected by filing a financing statement on April 7, 1982.
- Allied and Boles & Co., Inc. ('BCI') were both wholly-owned subsidiaries of a parent corporation, Boles World Trade Corporation ('BWTC').
- In January 1984, Commercial Credit Financial Services, Inc. ('CCFS') entered a factoring agreement with BCI, taking a security interest in BCI's present and after-acquired inventory and accounts, which it perfected by filing a financing statement on January 5, 1984.
- On July 1, 1984, BWTC directed the transfer of a beverage business, including its inventory and accounts, from BCI to Allied.
- This transfer of collateral from BCI to Allied was not authorized by CCFS.
- After the transfer, Allied continued to operate the beverage business and generated new accounts, which CCFS continued to factor and collect upon.
Procedural Posture:
- Bank of the West sued Commercial Credit Financial Services, Inc. (CCFS) in California state court for conversion.
- CCFS removed the action to the U.S. District Court for the Northern District of California, a federal trial court, based on diversity of citizenship.
- Following a trial, the district court entered judgment in favor of Bank of the West, concluding that its security interest had priority under the 'first-to-file' rule.
- Bank of the West appealed to the U.S. Court of Appeals for the Ninth Circuit regarding the damages awarded, and CCFS filed a cross-appeal challenging the district court's underlying priority ruling.
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Issue:
Does a secured creditor of a transferor (CCFS) lose priority to a secured creditor of a transferee (Bank of the West), whose security interest attached via an after-acquired property clause, when the transferee's creditor filed its financing statement first, but the transfer of collateral occurred between two wholly-owned subsidiaries of the same parent company?
Opinions:
Majority - Thompson, J.
No. The security interest of the transferor's creditor (CCFS) retains its priority. The court declined to apply the literal 'first-to-file-or-perfect' rule of UCC § 9-312(5)(a) because the drafters did not contemplate this 'dual debtor dilemma' where creditors of two different but related debtors have competing claims to the same collateral. Instead, the court treated the asset transfer between the affiliated subsidiaries as a 'change in corporate structure' under UCC § 9-402(7), rather than a simple transfer of collateral. This meant CCFS's security interest remained perfected in the assets after they were moved to Allied. The court then reverted to the foundational principle that a transferee (Allied) cannot acquire greater rights in collateral than its transferor (BCI) had. Because BCI's assets were already subject to CCFS's perfected security interest, Allied took them subject to that interest. Therefore, Bank of the West's claim, being derived from Allied's rights, is subordinate to CCFS's pre-existing, perfected security interest.
Analysis:
This decision carves out a significant equitable exception to the UCC's literal 'first-to-file-or-perfect' priority rule in the context of inter-corporate transfers between affiliated entities. It establishes that courts may look beyond the plain text of UCC § 9-312(5) to prevent an inequitable result where a creditor's security is jeopardized by a debtor's internal reorganization. The case prioritizes the creditor of the original debtor (the transferor) over the transferee's creditor whose interest attaches only via an after-acquired property clause. This precedent cautions that the 'first-to-file' rule is not absolute and protects secured parties from losing priority when a debtor transfers collateral to a related entity.
