Winifred MANGER, Plaintiff and Appellant, v. Steven DAVIS; James B. Medlin; Word Making Productions, Ltd.; CD&M Company and Michael Allred, Defendants and Respondents.
No. 16744.
Supreme Court of Utah.
Oct. 15, 1980.
687
Earl Jay Peck of Nielsen, Henriod Gottfredson & Peck, Salt Lake City, for Word Making Prod.
Melvin E. Leslie of Dart & Stegall, Salt Lake City, for CD&M Co.
Steven R. McMurray of McMurray, McIntosh, Butler & Nielsen, Salt Lake City, for Davis.
MAUGHAN, Justice:
Plaintiff, alleging her ownership of a valuable diamond ring, initiated this action to recover possession from Word Making Productions, Ltd., hereinafter “W.M.P.” Plaintiff‘s consignee, Steven Davis, authorized Jack Anderson and Michael Allred to pledge the ring to W.M.P. The trial court ruled plaintiff‘s ownership was subject to the perfected security interest of W.M.P. in the ring, securing sums advanced by the pledgee. The judgment of the trial court is reversed, and the cause is remanded to the trial court for disposition in accordance with this opinion. All statutory references are to
Plaintiff is an octogenerian and widow of an academy award recipient, movie star, Warner Baxter. In the 1930‘s he gave her a diamond ring containing an emerald cut diamond of approximately 9.72 carats with six baguettes totalling .967 of a carat. Plaintiff met Davis at a dinner party given by her niece, whose husband was a successful Hollywood producer and friend of Davis. Plaintiff was in need of funds and Davis, a recent graduate of a school of gemology, informed her he could find a buyer for the ring. She gave him possession and a writing, which stated:
“Dear Mr. Davis It would please me so much if you would sell my emerald cut diamond ring for me at whatever percent you consider OK. It was nice meeting you and your charming wife.
4/18/76
Sincerely
Winifred Manger”
There was an explicit understanding between plaintiff and Davis that any offer to purchase was to be submitted to plaintiff for approval. Davis made a brief attempt to sell the ring in San Francisco, but the offer to purchase was unsatisfactory. Davis took the ring to Salt Lake City, where he assured plaintiff, through telephonic communication, that it was secured in a vault in a bank. From time to time he
Without plaintiff‘s knowledge or consent Davis embarked on a peculiar course of action. He testified that he did not apprise her of his actions because she was too old to understand. Davis had met two promoters named Jack Anderson and Michael Allred, who owned stock in a local company, CD&M. The promoters explained that if they effected certain mergers of CD&M with companies in Colorado and Texas, they would be able to borrow money to purchase the ring. Davis gave possession of the ring to Anderson, who without the knowledge or authority of Davis, took the ring to Zions Bank, represented it was his property and pledged it to secure a personal loan for $10,000. The promoters gave Davis some stock certificates they represented to be worth $200,000.00. He determined the stock was worthless and returned it on October 12, 1976.
Thereafter, Allred approached James B. Medlin, President of W.M.P., which is a close corporation, to seek further loans, offering a valuable ring as security. Allred was indebted to Medlin, who knew Allred had few assets, and Medlin was suspicious about the proffered security. Allred explained that Davis was the owner of the ring and had consented to the pledge. Subsequently, Anderson, Allred, and Davis met with Medlin to arrange the loan and pledge. At this time Medlin required Davis to execute an affidavit, which provided:
“Steve Davis, being first duly sworn on oath, deposes and says: As full payment for services rendered to the Estate of Winifred Manger, on or about August, 1975, I received the following described ring:
* * * * * *
“The ring has been appraised with a retail replacement value of approximately $140,000.00.
“I am a certified diamond appraiser and have been duly certified by the Gemological Institute of America. My appraised value was $165,000.00.
“I have entered into an agreement with Michael Allred and Jack Anderson to allow them to use my ring as collateral to raise money for their private ventures in exchange for securities which they have allowed me to use as collateral for my own private ventures.
“I understand that Jack Anderson and Michael Allred may be using the above-described ring as collateral to borrow money from Word Making Productions and/or James B. Medlin, and agree that said ring may be used as collateral for said loan in any manner in which Jack Anderson and Michael Allred see fit to use it.
“Dated this 18th day of October, 1976.
Steve Davis.”
Medlin, who is also an attorney, did not inquire what type of services were rendered by Davis, who was a young man, to receive this substantial compensation. Neither was Medlin curious about verification of the existence of such an estate, which he was informed was in Los Angeles, nor the unorthodox manner of compensation for services. He testified he relied on the statements of Allred and Anderson that the father of Davis was a prominent business man to verify the ownership of the ring. Medlin was similarly disinterested as to the motive of Davis to exchange a valuable asset with the promoters, one of whom was a debtor of Medlin and without assets, to further his own business interests. Medlin further arranged an agreement to notify the bank holding the ring as security for Anderson‘s loan of his subsequent security interest and appointing the bank as escrow agent to hold possession as a means of perfecting Medlin‘s security interest.
Plaintiff‘s ring was thus pledged to W.M.P. by the promoters to secure a loan of $20,000. Allred paid $5,000 of this loan to Medlin to discharge his prior indebtedness. Subsequently, Allred, alone, received an additional advance of $10,000, which was also secured by the pledge.
The promoters defaulted on all the loans and Anderson died. W.M.P. paid the bank $10,625 to discharge the prior indebtedness
Since the other defendants do not claim any interest in the ring, only plaintiff and W.M.P. are involved in this appeal.
The trial court found the ring was delivered to Davis on a consignment to sell in April, 1976, and plaintiff did not file a financing statement or take any other action designed to perfect a security interest in the collateral. There was a finding that plaintiff had no knowledge of any of the transactions except for the delivery to Davis for purpose of sale. Davis was found not to be a merchant dealing in diamond rings or goods of that kind, and there was no valid or effective sale of the ring ever made to CD&M Co.
In its conclusions of law, the trial court ruled that W.M.P., as a lender and pledgee, was a purchaser of the ring as defined in
The essence of the dispute between the parties involves whether Davis, the consignee, had a voidable title. Respondent persuaded the trial court that Davis had such a title and a provision in Section
In an analysis of this rather complex case, the appropriate point to begin is Section
The Code does not clearly establish the meaning of “rights in the collateral.” Although a debtor has possession of the collateral, that fact does not give him rights. If a security transaction relates to a sale, Article 2 may determine whether the debtor has rights.1 If there be no authority to subject property to a security interest, the creditor has no security interest therein.2
Concededly, under Section
In regard to the application of the Code concerning consignments, there are three distinct consequences depending on the nature of the transaction. First, if a transaction is deemed a consignment intended as a security, it is a secured transaction and Chapter 9 applies, Section
However, under
Second, if a transaction be a true consignment, the Code may or may not control the transaction, depending on the status of the consignee as set forth in
“where goods are delivered to a person for sale and such person maintains a place of business at which he 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....” (Subsection 3)
Under Section
Third, if a transaction be a true consignment and does not fall within the purview of Section
The undisputed evidence in this case establishes that the transaction between plaintiff and Davis was a true consignment, establishing a principal-agent relationship. Davis was given possession with authority to sell only upon the express consent of plaintiff as to the sale price. Davis was to receive a commission and not a profit on the sale. Such a transaction does not fall within the purview of Section
“‘Buyer’ means a person who buys or contracts to buy goods.”
In 2 Anderson, Uniform Commercial Code (2nd ed.), Section 2-401:10, p. 11, it is explained:
“The authority of an agent to transfer title is distinct from the transfer of title which is the sale. Ordinarily the agent to sell, being clothed with no more than authority to make a transfer, does not hold title to the goods....”
To sustain its ruling, the trial court further cited the provisions in Section
It should be asserted parenthetically that even though the entrustment provision of
At this juncture, it is apparent that the transaction between plaintiff and Davis was a true consignment, and the law of agency resolves the conflicting claims between plaintiff and W.M.P. Restatement, Agency (2d), Section 201, provides:
“(1) Apart from statute and except as stated in Subsection (3), the interests of an undisclosed principal who entrusts an agent with a chattel other than a commercial document representing a chattel or chose in action with directions to deal with it in a particular way, as by sale, barter, pledge or mortgage is not thereby affected by a transaction of a kind different from that authorized.
“(2) The interests of the principal are affected by an unauthorized transaction of the same kind as that authorized if it is conducted in the usual and ordinary course of business by an agent with one who reasonably believes the agent to be the owner and who pays value.
“(3) If the principal delivers a chattel to a dealer in such chattels to be sold or exhibited for sale, an unauthorized sale of the chattel by such dealer in accordance with the normal business practices to one who reasonably believes the dealer to be the owner, binds the owner, although the dealer was not authorized to sell it without the consent of the owner or was not authorized to sell it to the person to whom it was sold or at the price at which it was sold.”
Comment (a), following Section 201, refers to the Comments on Section 175. Comment (e), following Section 175, states:
“What transactions are considered to be of a kind different from those authorized is a matter of degree. For the purpose of this Section, authority to barter does not give power to the agent to pledge or to mortgage the property....”
The authority conferred on Davis by plaintiff to sell the ring did not give him the right or power to pledge it in his own interest as an incident to his express authority. The pledge to W.M.P. was a transaction of a different kind than that authorized by plaintiff and therefore her interest in the ring was not affected thereby.15 Since Davis had no authority to pledge the ring, the pledgee, W.M.P., did not acquire a valid security interest therein, and plaintiff is entitled to recover unencumbered possession thereof.
Costs are awarded to plaintiff.
WILKINS and STEWART, JJ., concur.
HALL, J. concurs in the result.
CROCKETT, Chief Justice (concurring in the result):
I concur in the result of allowing the plaintiff to recover her ring. But because I
First, I acknowledge the soundness of the proposition that, generally, where a loss must be borne by one of two innocent parties, it should fall upon the one who made the loss possible; and that this would suggest that it be borne by plaintiff, Mrs. Manger, who delivered the ring into the possession of Mr. Davis. But like all general rules, its purpose is to serve the interests of justice, rather than to defeat them; and accordingly, it is subject to exceptions in circumstances where defeating justice would be the result.
The special circumstances that persuade me to support this Court‘s decision are these:
First, the ring in question was not any ordinary item of personal property or merchandise. It was something so extraordinary in composition and value that it is properly regarded as unique.
Second, Mr. Davis was but a consignee who had no right to sell or to pledge the ring, but only to obtain a prospective purchaser.
Third, he was not regularly engaged in that business.
Because of the foregoing, the exercise of ordinary care and prudence would require that anyone dealing with such a ring should act with commensurate caution. If the defendants had adhered to that standard, they would have discovered the facts. Accordingly, they are not in a position to assert estoppel against the plaintiff. It is for these reasons that I agree that she should be entitled to recover possession of her ring.