McFadden v. Mercantile-Safe Deposit & Trust Co.

Barnes, J., delivered the opinion of the Court. The principal questions in this appeal from the judg ⁶⁰³ ment of the Superior Court of Baltimore City (Sodaro, J.) of May 25, 1970, in favor of the appellee, Mercantile-Safe Deposit and Trust Company (Mercantile), defendant below, for costs in an action at law to recover damages, filed by the appellant and plaintiff below, Charles D. McFadden, for the alleged conversion by Mercantile of two ice cream trucks purchased by McFadden from Mister Softee of Maryland, Inc. (Softee), are whether the lower court, sitting without a jury, clearly erred (i) in failing to find from the evidence in the case that Mercantile authorized the sale of the trucks so that McFadden purchased them free and clear of Mercantile’s security interest pursuant to the Uniform Commercial Code (UCC) — Code (1964, Repl. Vol.), Art. 95B, § 9-306 (2) and (ii) in finding that McFadden did not purchase the two trucks “in the ordinary course of business” pursuant to the UCC, Art. 95B, § 9-307 (1), and for this reason was subject to Mercantile’s security interest. On October 20, 1967, Mercantile loaned $200,000.00 to Softee.

Softee gave Mercantile two chattel mortgages covering 30 of its ice cream trucks including the two ice cream trucks involved in the present case. Softee and Mercantile executed a financing statement, dated October 20, 1967, pursuant to the Uniform Commercial Code. After describing the debtor (Softee), the secured party (Mercantile) and reciting that the obligation had no maturity date, the financing statement stated: “4. This financing statement covers the following types (or items) of property: (List) “All present and future inventory which includes new and used motor vehicles held for sale or lease including ice cream manufacturing equipment thereon, such as ice cream compressors, generators, and freezers.” (Emphasis supplied.) The indented language was inserted in the printed form by typewriting. ⁶⁰⁴ The form then continues with the following printed material : “Check |ig the lines which apply”.

The third box is: “□ (Proceeds of collateral are also covered)”. This box was marked with an “X” in typewriting. The financing statement was executed by both parties, Softee and Mercantile, and at the bottom of the form appear notations indicating proper recordation on October 24, 1967, and the words “Mailed to Secured Party” were placed on the form by means of a rubber stamp. On March 21, 1968, McFadden purchased two used Ford ice cream trucks from Softee and on that day executed (with his wife Sarah Lorraine McFadden — since deceased) a Conditional Sale Contract on a printed form, apparently used generally by Mercantile inasmuch as its name “Mercantile-Safe Deposit and Trust Company” appears at the top left-hand side of the form.

After the printed word “Buyer” appears the name and address of McFadden written in by typewriting; and after the printed word “Seller,” there is typewritten the name and address of Softee. The printed conditional sale contract then provides: “The undersigned seller hereby sells, and the undersigned buyer (jointly and severally if more than one), having been quoted both a time and a cash price hereby purchases on a time price basis, in its present condition and subject to the terms and conditions herein set forth, the following motor vehicle, including parts, tires, equipment and accessories thereon, (herein sometimes called Car) delivery and acceptance of which in good order are hereby acknowledged by buyer, viz: Two used Ford model No. P.350, Van, Serial Number JE 153983 JE 124272” ⁶⁰⁵ Under the heading “Record of Transaction,” the following appeared: (1) The cash price of car, including extra equipment was $27,000.00; (2) there were no charges for delivery, installation, repairs, or other services not included in Item (1) ; (3) the cash delivered price (the sum of Items 1 and 2) was $27,000.00 and (4) the down payment was $10,000.00, leaving (5) a total unpaid balance of $17,000.00. Various provisions in regard to vehicle insurance were then inserted and then certain charges as follows: Cost to Buyer of Group Creditor Life Insurance $ 340.00 Recording and filing charge 3.50 Principal Balance (sum of Items 5, 6, 7 & 8) 17,343.50 Finance Charge 4,420.00 Time Balance 21,763.50 The buyer agreed to pay the Time Balance at Mercantile in accordance with an attached schedule. This schedule shows the future payment of various monthly amounts on a seasonal basis beginning in May 1968 for $300.00, with $700.00 in June, $1,000.00 in July, August and September of that year and dropping to $500.00 in October and to $50.00 in November and December of that year.

In 1969 the payments varied from $100 to a high of $1,050.-00; in 1970 from a low of $100.00 to a high of $1,041.00; in 1971 from a low of $100.00 to a high of $1,281.50 and in 1972 there were to be four payments of $100.00 each in the first four months of that year. Other provisions of the Conditional Sale Contract will be considered later in this opinion. Also on March 21, 1968, McFadden as Dealer (and his wife, subsequently deceased) executed a “Dealer Franchise Agreement” with Softee as sales franchise Representative for Mister Softee, Inc., a corporation having its principal place of business at Runnemede, New Jersey (Representative). In this Dealer Franchise Agreement, the first whereas clause recites: ⁶⁰⁶ “THAT WHEREAS, Representative has the franchise from Mister Softee, Inc. to sell ‘Mister Softee’ mobile trucks, equipment, supplies, parts and merchandise, to appoint Dealers and to license use of the trademarked and copyrighted name ‘Mister Softee’ in the territory hereinafter described,”.

The second whereas clause recites: “AND WHEREAS, Dealer desires to buy one or more ‘Mister Softee’ mobile ice cream trucks for the sale of soft-serve ice cream, hard ice cream, frozen desserts, novelties, stick items and other products specifically approved and authorized by Mister Softee, Inc. in accordance with the policies and procedures as prescribed from time to time by Mister Softee, Inc.” (Emphasis supplied.) The agreement in Paragraph 1 (a) then grants the Dealer (McFadden) a franchise to conduct a “Mister Softee” mobile truck business for the sale of soft-serve ice cream (and the other products referred to above) in a designated territory in Prince George’s County. Subparagraph (b) provides: “(b) If the Dealer is purchasing more than one ‘Mister Softee’ truck for operation in the above described territory it is agreed there will be a specific franchise agreement for each truck and Dealer agrees to purchase the additional truck (s) in accordance with the following schedule.” (Emphasis supplied.) The term of the agreement is for 20 years from its date and the Dealer may extend it for “any number of additional periods of ten years upon ninety days written notice to Representative prior to the end of said term.” There are provisions in the agreement for bodily lia ⁶⁰⁷ bility insurance, property damage and products liability insurance, issued in the names of the Dealer, the Representative and Mister Softee, Inc. Insolvency of the Dealer automatically terminates the agreement. Paragraph 7 of the agreement provides: “7. ASSIGNMENT. “The franchise granted by this agreement is not assignable by Dealer except upon the following terms: “ (a) Dealer shall first obtain the written consent of Representative and Mister Softee, Inc. “(b) The purchaser shall be a financially responsible person acceptable to Representative and Mister Softee, Inc. “(c) The purchaser shall enter into a new Dealer Franchise Agreement with Representative in the form then current, before financing papers and sale contract have been completed and executed and title has been transferred. “(d) Dealer shall concurrently with the assignment make payment in full of all outstanding obligations to Representative and Mister Softee, Inc. “(e) Dealer shall pay to Mister Softee, Inc. a transfer fee in the sum of Two Hundred and Fifty Dollars ($250.00) for the preparation of a new Dealer Franchise Agreement in the assignee’s name, and for any and all such expenses incurred by Representative and Mister Softee, Inc. in effecting said transfer. “(f) Upon the completion of the sale, with the approval of Mister Softee, Inc., this Dealer Franchise Agreement is hereby terminated and cancelled and Dealer hereby releases Mister Softee, Inc. and Representative from any and all claims of any manner, kind or thing of any description whatsoever and Mister Softee, Inc. and Representative agree to release the Dealer ⁶⁰⁸ from any and all claims of any manner, kind or thing of any description whatsoever when Dealer has fully complied with all provisions of this paragraph 7 and its subsections.” Paragraph 8 gives the Representative or Mister Softee, Inc. the right to terminate the agreement upon an unremedied default in performance of any of the obligations by the Dealer upon 10 days notice.

Paragraph 9 provides: “9. EFFECT OF TERMINATION. “ (a) Upon the termination of this agreement, or any extension, for any reason, Representative or Mister Softee, Inc. or the assigns of either of them, may, at their option, purchase from Dealer one or more of the ‘Mister Softee’ mobile ice cream trucks which Dealer owns at that time for an amount or amounts equal to the following listed percentages of the purchase price paid for each such truck by Dealer. “Length of Time Dealer Owned Truck “Percentage of Dealer’s Purchase Price to he Paid to Dealer 1 year or any fraction thereof 65% 1 year but less than 2 years 45% 2 years but less than 3 years 30% 3 years but less than 4 years 15% More than 4 years 5% “Such option (s) to purchase must be exercised by Representative or Mister Softee, Inc. within sixty days after the termination of this agreement. “ (b) Upon the termination of this agreement, or any extension, for any reason, Dealer covenants that he will not, for a period of two years after such termination, directly or indirectly engage or participate in any business which is the same or similar to that conducted by him under ⁶⁰⁹ this agreement in the territory covered by this agreement or in any county or city whose border is within ten miles of such territory.” The record indicates that McFadden had no knowledge of the existence of any security interest existing in favor of Mercantile on the two trucks. Mercantile does not claim that McFadden had such knowledge. Softee defaulted on its obligations to Mercantile and foreclosure proceedings were instituted by Mercantile on July 9, 1968.

The trustee appointed by the court to sell, sold all of the trucks (including the two trucks involved in the present case) at public auction on July 29, 1968, for $49,000.00. Mercantile received $43,006.34 net as a result of the sale. Thereafter McFadden filed an action at law against Mercantile, claiming in the Fourth Amended Declaration that McFadden had no knowledge of the security interest of Mercantile and as a purchaser of the two trucks in the ordinary course of business took them free and clear of the security interest. The foreclosure sale of the trucks was alleged to be a conversion for which $27,000.00 damages with interest from the date of conversion and costs were recoverable.

Mercantile filed two pleas, i.e., that (1) it did not commit the wrongs alleged and (2) was not indebted as alleged. At the hearing before the lower court, sitting without a jury, the first witness for McFadden was Daniel Fitzpatrick, Vice President of the Loan Department of Commercial Savings and Bank of Bel Air. He identified 13 conditional contracts of sale between Softee and various purchasers for nine Softee ice cream trucks described in the contracts of sale, and, by analysis of the prices in the contracts, possibly 11 additional trucks. A number of the buyers in these Conditional Sale Contracts are from Baltimore City, some are from Glen Burnie and one is from McKeesport, Pa.

The contracts were “Reproduced from records kept by the bank in the ordinary course of business.” The contracts were purchased by the bank “as ⁶¹⁰ third party paper.” An examination of the 13 contracts indicates that the seller in each case was Softee. McFadden, himself, testified that he purchased the two vehicles in question from Softee. He gave Softee two checks for a total of $6,000.00 and a promissory note for $4,000.00 to make up the down payment of $10,000.00 mentioned in the Conditional Sale Agreement. He did not operate the trucks himself, and it was his understanding that Softee would handle the purchase of supplies, employ the drivers and “take care of all the business end of it,” Softee to account to him for the profits.

He did not make any of the payments called for in the schedule attached to the Conditional Sale Contract. He waited several months “possibly” when he heard nothing from Softee. Softee had his down payment and his note and he “assumed it to be all right.” McFadden drove down to Softee’s plant at Glen Burnie after a telephone conversation with a Mr. Seifert, a representative of Softee, from which he had given McFadden the “impression” that financing could not be obtained for McFadden. McFadden wished to speak to a Mr. Marshall but was unable to see him.

Later Marshall called him, indicated that he had heard that McFadden was “a little unhappy” about the situation and stated that if McFadden was unhappy about it, “he would try to rectify it for me.” McFadden said “that if he would give me my money back he could sell my trucks and naturally I would want my note and debt cleared.” Marshall stated “Well, I will sell your trucks.” McFadden also testified that he became involved in the transaction by having heard of it from a friend and it “sounded like a rather nice investment” and “seemed a rather lucrative opportunity to make a little money.” In his federal income tax return for 1968 he had entered on Line 5 of Schedule D: “Investment, Mr. Softee of Maryland, worthless.” Robert E. Ledsome testified that McFadden had come to him with a mutual friend and told him that he was interested in purchasing one Softee truck but ultimately purchased two'trucks. Ledsome had sold some trucks for ⁶¹¹ Softee before, received a commission, and was operating one truck “on my own at the time.” He explained to McFadden that the Efficient Service Corporation, a subsidiary of Softee, would operate the trucks for him. Softee owned the two trucks sold to McFadden. He had seen them — Nos. 72 and 73 — on the Softee lot.

Their condition was “[f]abulous; the best I had ever seen a Softee truck.” Ledsome had sold some five Softee trucks, had, himself, purchased three trucks and had in addition, operated 10 trucks for Softee. In regard to how the two trucks sold to McFadden were to be operated, Ledsome testified: “Mr. Softee of Maryland, Webster H. Marshall in particular, the President of the company, informed me that when I sold the trucks to Mr. McFadden to advise him that his trucks will be operated by Initial Service, Incorporated; that he would handle his insurance; make the payments at the bank; they would handle all Workmen’s Compensation; and they would handle the complete bookkeeping system for ten percent of what that truck would create, and the rest of the money would then go to Mr. McFadden.” In regard to the $4,000.00 note, Ledsome stated: “This note was part of the down payment. He paid $6,000.00 in cash and he signed a note for $4,000.00, of which Softee was going to hold it. But they were also going to retire this note, I think at six cents a gallan on every gallon of mix that he bought.

That is the way the note was to be retired.” This arrangement was acceptable to Softee. It was “their own plan.” The trucks were white and blue and had a distinctive name “Mr. Softee” which is copyrighted. The window area of the truck is illuminated by a fluorescent light on ⁶¹² the outside of the truck and there is a sound device on the truck which plays a song copyrighted by Softee. James H. Everly, a former mechanic for Softee in charge of maintenance of the Softee ice cream trucks, testified that the Boyertown body on the trucks was made exclusively for Softee, and that the ice cream freezer and other additions were installed by Mr. Softee, Inc. at its New Jersey headquarters.

After a motion for judgment in favor of Mercantile at the end of McFadden’s case was denied, Mercantile offered the testimony of three witnesses. Herbert B. Williams, Senior Vice President of Mercantile, testified in regard to the $200,000.00 loan to Softee. He stated that in addition to the 30 trucks, the proceeds of the collateral “was constituted as additional collateral other than the trucks”; and this was marked on the financing statement. When asked why the Mercantile made the loan, Mr. Williams testified: “Well, it was, at the time, it was a way to expand our installment type lending, and also if the trucks were operated that they would be able to pay the loan back.” He also stated that at the time of the execution of the chattel mortgages on October 20, 1967, Mr. Marshall had told him that Softee owned the trucks.

On cross-examination, Mr. Williams testified that he knew the trucks were sold as an integral part of the franchise and that he knew that the people who purchased the trucks “would become the owner of the truck that he had.” He knew Softee was going to operate the trucks and was going to try to sell them, “if possible.” When asked whether Mercantile was going to finance the truck or the franchise, Mr. Williams stated: “Well, we were financing an amount of money and the truck was the vehicle used to generate it in connection to pay back the loan. However, ⁶¹³ the person who was borrowing the money would obviously have to have just more than the truck. “Q. The truck would be used by you as collateral, is that correct? A. We call that additional collateral, not primary. “Q. What would the primary collateral have been? A. The man’s personal statement.” Milton D. Warren, the truck sales manager and equipment specialist for Towson Ford, testified: “I recognize, being a specialized piece of equipment, even at this point before the soft equipment was installed, the body had been altered to a point where it became a specialized body.

With the addition of the equipment it was specialized to a point where it was not salable to the general buying public.” Counsel for McFadden moved to strike out this testimony because Mr. Warren was not qualified to testify so far as ice cream equipment was concerned, his expertise being only as to Ford chassis and Ford engines. This motion was overruled by the lower court. The final witness for Mercantile was Edward C. Mullendore, its Vice President, who testified that he had a telephone conversation with McFadden, discovered he did not have the cash down payment at the time called for in the contract, but signed a note and gave checks. He told McFadden that Mercantile “would not finance the unit for him.” McFadden told him if Mercantile was not going to finance it, he was going to ask for his money back.

He would have to go to Softee. On cross-examination, Mr. Mullendore stated that he did not know when he made his first appraisal, that additional trucks were always coming from New Jersey. He stated: “There were additional trucks there but they belonged to private operators, . . . .” The lower court filed a written opinion on May 20, 1970, indicating that McFadden was not a purchaser in ⁶¹⁴ the ordinary course of business within the meaning of the Uniform Commercial Code, and that the trucks were equipment and not inventory so that the trucks were subject to Mercantile’s security interest and hence were not converted by it when the trucks were sold at the foreclosure sale. As we have indicated, a judgment for the defendant, Mercantile, for costs was entered on May 25, 1970, and a timely appeal taken from that judgment by McFadden.

We have concluded that the lower court was clearly in error in its findings and conclusions and we shall reverse the judgment of May 25, 1970. Initially it might be well to consider whether the transaction constituted an actual sale of the trucks to McFadden. The Conditional Sale Contract used by Softee in the sale to McFadden of the two trucks recites that Softee, the “undersigned seller” by the Conditional Sale Contract “hereby sells, and the