Tilghman Hardware, Inc. v. Larrimore

RODOWSKY, Judge. This case involves the credit sale of a Chesapeake Bay skipjack, the Nellie L. Byrd. 1 The sole issue is whether the deferred portion of the purchase price was secured by a security interest in the vessel, or whether the transaction was an unsecured sale on credit. On March 10, 1989, petitioner, Tilghman Hardware, Inc. (Tilghman), agreed to purchase the Nellie L. Byrd from respondent, Darryl Larrimore (Larrimore), “subject to the terms and conditions contained in” a written contract, signed by both parties (the Agreement). A United States Coast Guard documented vessel, the Nellie L. Byrd weighs twenty-two tons and is 53.6 feet long.

Included in the sale of the ³⁹³ vessel was its fourteen foot auxiliary yawl or push boat, the certificate of title to which was issued by the Maryland Department of Natural Resources. 2 The price was $55,000, payable over time. The Agreement called for a series of deposits: an initial deposit of $500, an additional deposit of $4,500 payable within forty days of execution of the Agreement, $5,389 payable by June 15, 1989, and a debt exchange valued at $2,111. 3 Tilghman had until June 15 to inspect and accept or reject the vessel. If rejected, all deposits would be returned. If accepted, the vessel would be delivered to the buyer.

The balance of the purchase price, $42,500, referred to as the “[a]mount to be financed,” was to be paid, with interest at nine percent per annum, over five years in accordance with an amortization schedule attached to the Agreement. Section Six of the Agreement, “Warranties,” reads in part: “Vessel is being sold and purchased free and clear of all debts, claims, liens and encumbrances of any kind whatsoever, except as noted hereinafter and seller warrants and will defend that seller has good and marketable title and will deliver to the buyer all necessary documents for transfer of the title to buyer on or before the dates set forth for final payment.” Section Eight, “Risk of Loss,” provides: “It is agreed by the parties that the risk of loss, injury or destruction of the above described vessel and equipment ³⁹⁴ shall be borne by seller until this transaction is closed and the vessel delivered.” Section Ten, “Binding Effect,” provides, in part: “Seller agrees not to sell vessel or to enter into any contract for the sale of vessel while this agreement is in effect.” The Agreement did not state what constitutes a buyer’s default; nor did it set forth, directly or by reference, any remedies available to Larrimore in the event of Tilghman’s default. Tilghman took delivery, but failed to make the payments as agreed. In August 1990, Larrimore filed with the District Court of Maryland in Talbot County a “Complaint for Replevin” and a “Request for Emergency Ex Parte Order.” 4 The complaint alleged that “title [was] to remain in plaintiff until final payment,” and that the historic vessel was not being maintained.

Larrimore’s request for an ex parte injunction, authorizing him to take immediate possession of the vessel, was granted. At the hearings in the action, and by a memorandum of law, Tilghman argued that the Agreement transferred all ownership rights in the vessel to Tilghman and that Larrimore had not obtained a security interest in the vessel under Article 9, the Secured Transactions Article, of the Uniform Commercial Code (U.C.C.), Md.Code (1975, 1992 Repl.Vol.), Title 9 of the Commercial Law Article (CL). 5 Thus, Tilghman submitted, Lárrimore’s remedies were to be found exclusively in Title 2, ³⁹⁵ the Sales Article of the U.C.C. Title 2 remedies do not include replevin by a seller. The District Court ruled that, under the Agreement, Larrimore held a security interest in the vessel. First it noted that “the contract itself, which was drawn ... by Tilghman ... has to be construed, if there is any doubt with regards to the meaning of any specific term ... in favor of Mr. Larrimore and against Tilghman Hardware.” Next the court observed that “the contract itself ... appears to be basically a ... conditional sales contract, whereby title ... to the vessel was held by Mr. Larrimore and never actually delivered to Tilghman Hardware” and that “at the time of the default ... title to the vessel had never been transferred to Tilghman.” The District Court found “that the intention of the parties ... was that Mr. Larrimore would retain title to the vessel to secure any interest which he might have, pursuant to the conditional sales, and the sales nature of the contract, rather than pursuing the Uniform Commercial Code security interest requirements.” The court said that the U.C.C. was not the exclusive “means” by which a security interest could be created; rather, Larrimore could have the remedy of repossession or replevin by retaining title subject to Tilghman’s making the agreed payments.

Accordingly, the court concluded that Larrimore’s remedy was not limited to a contract action for the unpaid balance of the price. The writ of replevin issued. Tilghman appealed to the Circuit Court for Talbot County, which affirmed. The circuit court, relying heavily on § 9-201, reasoned that the U.C.C. had not abolished the ability of a creditor to create an enforceable security interest by a conditional sales contract.

The circuit court additionally held that the record supported the District Court’s finding that the intent of the parties was to create what amounted to an enforceable security interest in the Nellie L. Byrd. We granted Tilghman’s petition for certiorari which raises fundamental questions concerning security interests in credit sales. ³⁹⁶ Tilghman’s various arguments can be summarized as follows: I. Because the Agreement does not undertake to create a security interest specifically under U.C.C. Art. 9, the Agreement cannot create any enforceable security interest; and II. The Agreement fails to create a security interest because (A) there is no language granting a security interest and (B) repayment of the amount to be financed is not a condition of the transfer of title. I In its certiorari petition Tilghman framed the question presented to be: “Does Maryland recognize a common law right to create consensual security interests in personal property which are exempt from the mandates of [Title] 9 of the Commercial Law Article?” That phraseology is a hyperbolic characterization of the District Court’s rationale.

We understand the District Court to have held that an enforceable Title 9 security interest can be created by manifesting the intent to do so through language referring to a delivery of possession with a reservation of title to be delivered upon satisfaction of a condition. The circuit court affirmed on that same basis. We agree. A “security interest” is “an interest in personal property ... which secures payment ... of an obligation.” § 1-201(87).

With an exception not relevant here, § 9-102 provides, in part, that Title 9 applies “(1) ••• (a) To any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods____ (2) This title applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust, trust deed, factor’s lien, equipment trust, ³⁹⁷ conditional sale, trust receipt, other lien or title retention contract and lease or consignment intended as security.” The comments to § 9-102 make the rule even more plain, stating, in part: “Purposes: “The main purpose of this section is to bring all consensual security interests in personal property and fixtures under this Title, except for certain types of transactions excluded by Section 9-104.... “1. Except for sales of accounts and chattel paper, the principal test whether a transaction comes under this Title is: is the transaction intended to have effect as security? ... When it is found that a security interest as defined in Section 1-201(37) was intended, this Title applies regardless of the form of the transaction or the name by which the parties may have christened it. The list of traditional security devices in subsection (2) is illustrative only; other old devices, as well as any new ones which the ingenuity of lawyers may invent, are included, so long as the requisite intent is found.

The controlling definition is that contained in subsection 1 [of § 9-102]. “The Title does not in terms abolish existing security devices. The conditional sale or bailment-lease, for example, is not prohibited; but even though it is used, the rules of this Title govern.” Similarly, the comments to § 9-101 state in part: “Under this Title the traditional distinctions among security devices, based largely on form, are not retained; the Title applies to all transactions intended to create security interests in personal property and fixtures, and the single term ‘security interest’ substitutes for the variety of descriptive terms which had grown up at common law and under a hundred-year accretion of statutes. This does not mean that the old forms may not be used, and Section 9-102(2) makes it clear that they may be.” This Court had occasion to comment on the foregoing sections of Title 9 in Universal C.I.T. Credit Corp. v. Congres ³⁹⁸ sional Motors, Inc., 246 Md. 380 , 228 A.2d 463 (1966), a case involving the priority of creditors’ claims to the debtor’s inventory. This Court said: “The official comment states that the purpose of § 9-102 is to bring all consensual security interests in personal property, with exceptions specified in §§ 9-103 and 9-104, under subtitle 9. ‘The Subtitle does not in terms abolish existing security devices’ but if they are used the rules of subtitle 9 govern.” Id. at 389, 228 A.2d at 469 .

Legal commentators agree. See 8 R. Anderson, Uniform Commercial Code § 9-102:7, at 452 (3d ed. 1985) (“The preCode devices are not abolished and may still be employed but they must meet the standards and requirements imposed by the Code on all secured transactions in personal property.” (Footnote omitted)); 8 W. Hawkland et al., Uniform Commercial Code Series § 9-102:02, at 42 (1990) (“Subsection 9-102(2) represents an attempt by the drafters to make clear the broad applicability of Article 9 by indicating that any contractual arrangement that creates a security interest is within its coverage.” (Footnote omitted)); J. White & R. Summers, Uniform Commercial Code § 22-1, at 874 (2d ed. 1980) (“In place of the various bodies of substantive law governing the various pre-Code security devices, the draftsmen substituted a single body of law in Article Nine.”). But see I G. Gilmore, Security Interests in Personal Property § 11.1, at 337 (1969) (“But beyond the area of institutionalized transaction, there stretches a no-man’s land, in which strange creatures do strange things. For these strange things there are no rules.”).

Thus, the fact that the Agreement employs language invoking concepts that are more appropriate to a pre-U.C.C. conditional contract of sale does not prevent the Agreement from creating a security interest governed by CL Title 9. II We now consider those aspects of the Agreement that Tilghman argues prevented the Agreement from effecting a security interest in the vessel. Our concern in this case is ³⁹⁹ with the rights between the debtor and the party allegedly secured. No third party rights are involved.

In general, “a security agreement is effective according to its terms between the parties.” § 9-201. Under § 9-203(1) “a security interest is not enforceable against the debtor ... with respect to the collateral ... unless: (a) ... the debtor has signed a security agreement which contains a description of the collateral ...; (b) Value has been given; and (c) The debtor has rights in the collateral.” Fulfillment of the requirements of subsections (b) and (c) of § 9-203(1) is not an issue here. Tilghman asserts, however, that because the Agreement does not “create[ ] or provide[ ] for a security interest,” § 9-105(l)(Z), it is not a security agreement. A The principal defect asserted is that the Agreement fails to “contain ‘language which grants to the creditor a security interest.’ ” Appellant’s Brief at 8 (quoting L & V Co. v. Asch, 267 Md. 251, 258 , 297 A.2d 285, 288-89 (1972)).

Tilghman’s position is that words of grant are required. At issue in Asch was whether a financing statement could serve as a security agreement. The debtor, a manufacturing corporation, had received advances under a line of credit from the creditor, The L and V Company (L and V). The parties did not memorialize their bargain with a security agreement, but L and V had recorded a financing statement covering most of the debtor’s assets.

Later the debtor also had executed three demand promissory notes to L and V, the total of which equalled the outstanding principal balance of the advances. When the debtor executed a deed of trust for the benefit of its creditors, and L and V petitioned for a preferred claim to the assets, the claim was denied. This Court stated the issue on appeal, ánd its holding, to be ⁴⁰⁰ “whether the appellant, L and V, had an enforceable security interest on the basis of the notes and financing statement alone which would entitle it to a preferred claim. We hold that L & V cannot have an enforceable security interest because there was no security agreement signed by the debtor ... as required under [§ 9-203(l)(a) ].” 267 Md. at 254 , 297 A.2d at 286-87 .

We said that the definition of security agreement (“an agreement which creates or provides for a security