Northern Counties Bank v. Earl Himovitz & Sons Livestock Co.

We granted a rehearing in this case because at the time of preparing our original opinion we were under a misapprehension concerning an important circumstance. The circumstance involved the actual date and the conditions under which a negotiable draft bearing date of November 30, 1960, was issued to Himovitz, the third party claimant. Both parties to this appeal agree as to the actual event. Not by way of complaint but simply in passing, we note that appellate courts do not have the benefit of trial court findings in third party claim proceedings.

Jack Rose was an independent cattle buyer and feeder. During 1959-1960 his operations were financed by Earl Himovitz and Sons Livestock Company. Rose would select cattle and agree to buy them in his own name. Himovitz would advance the funds. Rose and Himovitz would then sign a so-called “sale and repurchase agreement.” According to this agreement Himovitz would “purchase” the cattle; Rose would

Diamond Meat Company was one of the packers to whom Bose sold cattle. In November 1960 Himovitz learned that Bose was in financial difficulty. In order to bolster his own security Himovitz decided to withdraw his consent to the arrangement by which Bose received sales proceeds directly from his customers. About November 16, 1960, Himovitz notified Bose’s customers, including Diamond Meat Company, of his interest under the “sale and repurchase agreement” and demanded that future remittances of sales proceeds be paid directly to him rather than to Bose.

On November 18, 1960, Himovitz and Bose called personally upon Diamond Meat Company. At that time Diamond owed Bose for certain cattle. Diamond drew several drafts payable to Himovitz alone or payable to Bose and Himovitz jointly. At that time Bose also had certain cattle in Diamond’s hands on a consignment basis. Diamond was to pay Bose for these cattle after they were sold or slaughtered, and after Diamond received payment from its own customers. As between Diamond and Bose, the price was to be measured by the market value of the cattle at the time of sale or slaughter. At the November 18 meeting Himovitz orally informed Diamond that the cattle in the latter’s hands were “under contract to me and that the proceeds must and should come to me. ’' Bose concurred in this instruction.

Plaintiff Northern Counties Bank, a creditor of Bose, brought suit against him.. It sought attachment of the cattle, in the hands of Diamond. Oh November 22,’1960, a constable delivered a notice of levy and a copy of attachment writ to Diamond, The constable’s return shows that he levied

On November 30 Diamond issued a draft payable to Himovitz in the identical sum of $15,263.27. Himovitz then presented the draft through banking channels but payment was refused. Himovitz then filed a third party claim alleging that at the time of the levy Diamond had purchased the cattle and demanding that the money held by Diamond be paid to it. After a hearing the court below upheld the third party claim of Himovitz, rejecting that of plaintiff, the attaching creditor. Plaintiff appeals.

An attaching creditor acquires only the interest his debtor possesses. (Kinnison v. Guaranty Liquidating Corp., 18 Cal.2d 256 , 263 [ 115 P.2d 450 ].) If the thing sought by the November 22 levy—whether cattle, debt or money—belonged to Himovitz, then the levy was ineffectual. Plaintiff argues that the November 18 transaction was only an attempt to assign orally to Himovitz an expectancy of money which might be owing at a later date; that on November 22 Bose was owner of the cattle in Diamond’s hands; that the attachment levy was a garnishment of cattle, not money; that the subsequent (unauthorized) sale by Diamond did not defeat the lien of attachment which came into being on November 22; that even if an assignment occurred, it violated the statutes (Civ. Code, §§ 3017, 3018) requiring recordation of assignments of accounts receivable. Finally, plaintiff contends that the original “sale and repurchase” agreement between Himovitz and Bose was either an unrecorded chattel mortgage or an unrecorded conditional sale of cattle, void as to Bose’s creditors under Civil Code section 2957 or section 2980.5.

One of the recurrent ironies of adjudication is the necessity of fitting business transactions into the pigeonholes of standardized legal concepts, when the actors were actually thinking only of money. From such characterizations, conceived after the fact by lawyers and judges, flow secondary consequences hardly foreseen by the actors themselves. Sometimes the available legal concepts overlap, and refined

The trial court adopted the theory that there was an assignment of money to become due when Diamond sold or butchered the cattle; that such an assignment created a present equitable charge on the cattle which were to produce the money; that this charge or right defeated the claim of plaintiff, the assignor’s attaching creditor. (See Kinnison v. Guaranty Liquidating Corp., supra, 18 Cal.2d at 264 ; McIntyre v. Hauser, 131 Cal. 11 , 13 [ 63 P. 69 ]; Gintel v. Green, 165 Cal.App.2d 723 , 725 [ 332 P.2d 298 ]; Smith v. Harris, 127 Cal.App.2d 311 , 316 [ 273 P.2d 835 ].) Accordingly, the trial court sustained the third party claim of Himovitz.

Appellant argues that on November 18, 1960, Rose did not have any assignable interest to transfer to Himovitz. Aside from statutory formalities, an assignment of money to become due under an executory contract of sale is entirely valid. (Fricker v. Uddo & Taormina Co., 48 Cal.2d 696 , 701 [ 312 P.2d 1085 ]; H. S. Mann Corp. v. Moody, 144 Cal.App.2d 310 [ 301 P.2d 28 ]; H. D. Roosen Co. v. Pacific Radio Publishing Co., 123 Cal.App. 525 [ 11 P.2d 873 ].) The essential need is a bona fide agreement for a sufficient consideration and without intent to defraud creditors. (Smith v. Harris, supra, 127 Cal.App.2d 311 , 316.) The antecedent debt from Rose to Himovitz was ample consideration for the transfer. (First National Bank v. Pomona Tile Mfg. Co., 82 Cal.App.2d 592 , 607 [ 186 P.2d 693 ].) There is no issue of bad faith here; Himovitz was acting in legitimate protection of his own interest as Rose’s creditor. That the assignment was oral does not defeat it in the absence of some

The general rule providing priority to the assignee must be appraised in the light of statutory formality requirements. The record does not reveal whether application of Civil Code sections 3017-3029, requiring filing or recordation of assignments of accounts receivable, was debated in the court below. There is some indication in the briefs of trial court argument on the subject of recordation. At any rate, the problem has been argued in the briefs on appeal. It is a question of substance going to sufficiency of the third party claimant’s assertion of title, and we deem it appropriate to consider the matter on appeal.

Principal purpose of sections 3017-3029 is protection of lenders who engage in nonnotification financing secured by assignments of accounts receivable. (H. S. Mann Corp. v. Moody, supra, 144 Cal.App.2d at 313, 315 ; Costello v. Bank of America, 246 F.2d 807 , 810-811.) They achieve this objective by permitting a lender to lend money on the security of an assignment of “accounts,” which assignment, when filed for record, receives priority over the claim of a subsequent assignee, even though the customer-debtors of the accounts have not been notified of the assignment. (Durkin v. Durkin, 133 Cal.App.2d 283 , 291-292 [ 284 P.2d 185 ].) Section 3018, however, not only declares the priority of a first assignment after it has been filed, it also provides:

“Except as to any credit extended by a creditor after the notice provided for in this chapter is filed, an assignment of an account shall be invalid as against any creditor of the.assignor without actual notice unless notice of or of intention to make the assignment as provided for in this chapter is filed at the time of or before the execution of the assignment or within five days thereafter. ’ ’

The quoted provision demonstrates a secondary statutory purpose, that is, to protect the assignor’s creditors against secret assignments. It requires the assignee of an “account” to file his assignment in order to protect his rights not only as against subsequent assignees, but also as against the creditors of the assignor. (Costello v. Bank of America, supra, 246

Subdivision (1) (b) of section 3017 excludes from filing requirements an assignment of a debt arising from sale of tangible personal property if the assignee holds a duly perfected lien or encumbrance on the same property. Here, Himovitz held a lien or encumbrance which was anything but perfected. His so-called “sale and repurchase” agreement with Rose was a hybrid creation which did not cover a real sale but was intended to provide Himovitz with security for cattle purchased by Rose with money advanced by Himovitz. It was either a disguised chattel mortgage, void as to Rose’s creditors because not recorded as demanded by Civil Code section 2957, or a conditional sale of cattle, subject to the recordation demands of section 2980.5. Not being perfected as to Rose’s creditors, Himovitz’s security interest in the cattle did not lift the transaction out of the section 3017 definition of “account.”

Section 3018 permits an assignee to file notice within five days after the assignment. The levy of attachment was made on November 22, 1960, which was only four days after the claimed assignment from Himovitz. On November 22 Himovitz had not yet failed to comply with the filing statute. Under these circumstances he had protection against the intervening attachment by plaintiff, providing that he did comply. His failure to file on the fifth day, however, deprived him of the statute’s protection and subordinated his position, as claimed assignee, to that of the attaching creditor. (Bloom ingdale Bros., Inc. v. Cook, 8 N.J.Misc. 824 [ 152 A. 666 , 668]; 45 Am.Jur., Records and Recording Laws, § 54.)

To the extent, then, that Himovitz’s third party claim rests on an assignment of cattle proceeds to become due from Diamond to Rose, it is invalid as to plaintiff, Rose’s attaching creditor, because of Himovitz’s failure to file it in compliance with Civil Code section 3018. An invalid assignment of the cattle proceeds cannot be the basis of an equitable assignment of the cattle. If assignment of money to become due falls within the ban of Civil Code section 3018, so does the equitable assignment of the chattels.

So much for the equitable assignment approach. Its failure to support the position of the third party claimant requires reversal of the judgment. Availability of other theories, dependent on evidence and on factual determinations, makes

The parties have assumed that Diamond received the cattle from Rose as a consignee for sale. They have not debated the legal questions stemming from that assumption. A consignment of goods for the purpose of sale ordinarily constitutes a bailment. (Perera v. Panama-Pacific Intl. Exposition Co., 179 Cal. 63 , 64 [ 175 P. 454 ]; 7 Cal.Jur.2d, Bailments, § 4; 8 Am.Jur.2d, Bailments, § 34; 8 C.J.S., Bailments, § 3; 4 Williston on Contracts (rev. ed.) § 1035.) If, however, the parties to the transaction intend passage of title, the transaction may be regarded as a contract of sale rather than a bailment. In determining which event occurred, bailment or contract of sale, the intent of the parties is controlling. (8 Am.Jur.2d, Bailments, § 35; 8 C.J.S., Bailments, § 3. ) The bailor may sell or otherwise transfer the subject matter of the bailment and confer on the transferee an immediate and valid title without the necessity of formal delivery. (8 Am.Jur.2d, Bailments, § 84; 8 C.J.S., Bailments, § 32.) Again, the question is one of intent. Intent questions, of course, are entirely factual.

The character of the transaction between Rose and Diamond Meat Company, whether a bailment or contract of sale, would profoundly influence the claim of plaintiff, Rose's attaching creditor. The character of the November 18 transaction between Rose, Himovitz and Diamond, whether an assignment of sale proceeds or a sale of bailed cattle in consideration of an antecedent debt, vitally affects the position of the attaching creditor. Pacts which will assist in determining which of these various relationships occurred may be developed on retrial.

Another possibility is that the November 18 transaction between Rose, Himovitz and Diamond constituted a novation. A novation would consist of a complete substitution of obligations, that is, the Rose-Himovitz debt and the Diamond-Rose obligation would be simultaneously replaced by a new obligation running directly from Diamond to Himovitz. (Civ. Code, §§ 1530, 1531.) Existence of a novation turns on the parties' intention to discharge the old contract and substitute a new one. (Alexander v. Angel, 37 Cal.2d 856 , 862 [ 236 P.2d 561 ]; Ehrenreich v. Shelton, 213 Cal.App.2d 376 , 381 [ 28 Cal.Rptr. 855 ]; San Gabriel Valley Ready-Mixt v. Casillas, 142 Cal.App.2d 137 , 140 [ 298

The judgment is reversed and the cause remanded for further proceedings.

Pierce, P. J., and Schottky, J., concurred.