IN COURT OF APPEALS
Allete, Inc., d/b/a
GEC Engineering, Inc., et al.,
January 30, 2007
St. Louis County
File No. 69-C7-04-600200
John H. Bray, Kanuit & Bray, Ltd., 5155 Miller Trunk Highway, Hermantown,
Mark L. Knutson, Dryer Storaasli Knutson & Pommerville,
Ltd., 202 West Superior Street,
Suite 200, Duluth, MN 55802
and decided by Minge,
Presiding Judge; Shumaker,
Judge; and Hudson,
Y L L A B U S
subsequently filed financing statement does not amend a security agreement to
establish a security interest in property.
O P I N I O N
Appellant claimed a security interest in, and
sought to garnish, property originally located in Missouri
which had been acquired by respondent, a Texas
resident, and moved to Texas. Appellant challenges the district court’s
summary judgment determination that it did not have a security interest in the
property. Respondent challenges the jurisdiction
courts. Because we conclude appellant
did not have a security interest in the property, we affirm.
December of 2000, appellant Minnesota Power, Inc.
negotiated an economic-development loan with respondent GEC Engineering, Inc.
(GEC), a start-up company that was attempting to develop technology to convert
diesel engines to run on cleaner-burning propane or natural gas. GEC and appellant are Minnesota
corporations. To secure the loan, GEC
executed a security agreement dated December 28, 2000. As collateral for the loan, the security
agreement granted appellant a security interest in, “[a]ll equipment and
inventory located at Borrower’s facility at 510 W. 3rd Avenue North, Aurora,
Minnesota.” A financing statement listing equipment and
inventory located at that Minnesota
site was filed in this state.
agreement to make a loan to GEC was based on its understanding that GEC, then
operating in Missouri, was relocating to
appellant’s service area in Aurora,
Minnesota. But by April 15, 2001, the target moving date,
GEC had not relocated to Aurora
and was experiencing financial difficulty.
Appellant and GEC then filed a standard Minnesota UCC-1
financing statement in Missouri. The financing statement states:
This financing statement covers the
following types or items of property. . . .
All equipment and inventory located at Borrower’s facility located at 116 Holloway Road, Ballwin, MO[.]
The financing statement was
recorded on May 3, 2001 and signed by respondent Jerry Brougher, the then-president
of GEC. GEC never moved to Aurora, and early in 2002,
the company ceased its operations and became insolvent. GEC failed to repay its loan with appellant,
and appellant obtained a default judgment against GEC in Minnesota.
subject of this dispute is a diesel engine that GEC purchased in Minnesota on April 15,
1999, to develop a prototype engine that would enable it to design and
manufacture conversion kits for other engines.
GEC bought the engine in South St. Paul
and shipped the engine to CK Engineering (CK) in Ballwin, Missouri. GEC used CK’s Missouri location for its operations. CK assisted in the testing and development of
the engine. But GEC never paid CK for
its services, and apparently abandoned the engine and other property at CK’s
site when it ceased operating. To
recover some of the money owed to CK for its work on and storage of the engine,
CK sought to sell the engine. In the summer
of 2004, respondent Danielle Dellhomme
purchased the engine from CK Engineering for $18,000. Respondent was an investor in and former
director of GEC. She is a Texas resident. CK shipped the engine to respondent in Texas, where it is
currently stored. The engine was never
located in Aurora, Minnesota.
Although it appears that respondent was aware of appellant’s loan to GEC
and that she had visited Minnesota as a part of GEC’s business, the record does
not indicate that she was personally involved with or personally liable for GEC’s
debt to appellant.
its post-judgment collection process in Minnesota
state courts, appellant learned respondent was in possession of the engine and the
testing equipment attached to it, property it claims was collateral for its
loan to GEC. Appellant served respondent
with Minnesota garnishment pleadings and moved
district court for an order requiring her to surrender and deliver the engine
to appellant. Respondent claimed that
court lacked subject matter and personal jurisdiction, that appellant did not
have a security interest in the engine, that even if it once had a security
interest, it was displaced by the possessory mechanics lien of CK, and that the
rights she acquired from CK were superior to the claims of appellant. After discovery, the district court granted
summary judgment in favor of respondent and found that appellant never held a
security interest in the engine. This
Does appellant have a valid security interest in the
threshold question is which state’s law governs the determination of whether
appellant has a valid security interest in the disputed engine. As a commercial transaction, this dispute is
subject to the UCC. We note that Minnesota, Missouri, and
all adopted the UCC. See Minn.
Stat. ch. 336 (2006); Mo. Ann. Stat. ch. 400
(West 2006); Tex.
Bus. & Com. Code Ann. §§ 1.101-9.709 (Vernon 2006). There is also no claim that either the UCC or
the caselaw in the various states differs with respect to the issue before us,
and the parties do not dispute the proper choice of law. Under the circumstances, this is what is
often called a “false conflict.” See Alside, Inc. v. Larson, 300 Minn. 285, 293, 220
N.W.2d 274, 279 (1974); Restatement (Second) of Conflict of Laws § 186 cmt. c
(1971); 16 Am. Jur. 2d Conflict of Laws
§ 85 (1998). Accordingly, we apply Minnesota law.
issue is whether appellant has a security interest in the disputed engine. When reviewing the district court’s grant of
summary judgment, we ask whether there are any genuine issues of material fact
and whether the district court erred in applying the law. State
by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).
When the district court grants summary judgment based on the application
of a statute to undisputed facts, the result is a legal conclusion, reviewed de
novo by the appellate court. Lefto v. Hoggsbreath Enters., Inc., 581
N.W.2d 855, 856 (Minn.
Stat. § 336.9-203 (2006) governs the attachment and enforceability of security
interests. Subdivision (a) of that section
provides that “[a] security interest attaches to collateral when it becomes
enforceable against the debtor . . . .” Minn. Stat. § 336.9-203(a). A security interest in collateral “is
enforceable against the debtor and third parties” if three conditions are met:
(1) value has been given;
(2) the debtor has rights in the
collateral or the power to transfer rights in the collateral . . . and
(3) one of the following conditions is
(A) the debtor has authenticated a
security agreement that provides a description of the collateral
. . .
Minn. Stat. § 336.9-203(b). Here, the parties do not dispute that value
was given or that GEC had rights in the engine.
The parties only dispute whether GEC “authenticated” a security
agreement that provides a description of the collateral, sufficient to create a
security interest in the engine.
UCC defines “security agreement” as “an agreement that creates or provides for
a security interest.” Minn. Stat. § 336.9-102(a)(73) (2006). A more general UCC definition section states
that an “agreement” is a “bargain of the parties in fact, as found in their
language or inferred from other circumstances, including course of performance,
course of dealing, or usage of trade . . . .”
Stat. § 336.1-201(3) (2006).
do not understand appellant to claim that the parties’ original security
agreement created a security interest in the engine. Nor could it.
The plain language of the security agreement only grants appellant a
security interest in equipment “located at Borrower’s facility at 510 W. 3rd Avenue North,
Aurora, Minnesota.” It is undisputed that the engine was never
located in Aurora. We consistently give a contract its “plain
and ordinary meaning . . . even if the result is harsh.” Denelsbeck
v. Wells Fargo & Co., 666 N.W.2d 339, 346-47 (Minn. 2003) (quotation omitted).
seizes on the UCC’s flexible definitions of “security agreement” and
“agreement” to argue that the financing statement the parties filed in Missouri creates a
material fact issue as to whether the parties amended the original security
agreement to give appellant a security interest in the engine. Although the UCC does not explicitly address
the question of whether a financing statement can boot strap a lender into a
secured status, there are several provisions that are relevant to the answer.
drafters of the UCC contemplated a distinction between a security agreement and
a financing statement, and defined the two terms differently. See Minn. Stat. § 336.9-102(a)(39), (73) (2006). It follows that the drafters understood the
two documents to have different functions.
Our caselaw confirms that the purpose of a financing statement is
different from an agreement creating a security interest in collateral. “In contrast [to a security agreement], the
financing statement serves the purpose of putting nonparties such as other
subsequent creditors on notice that the debtor’s property is encumbered.” Prod.
Credit Ass’n of W. Cent. Minn. v. Bartos,
430 N.W.2d 238, 241 (Minn.
language used in security agreements and financing statements reflects their
functions. The security agreement must
somehow state that a lien is created in identifiable collateral. Minn.
Stat. § 336.9-102(a)(73). By contrast, the
financing statement is a bare-bones document that simply gives names and
addresses and a description of property.
In fact, until recently, the Minnesota
standard form financing statement had no language that mentioned the term “security
interest” or even referred to the described property as “collateral.” Compare
Minn. R. 8260.0600, subp. 3 (1995), with
Minn. R. 8280.0040, subp. 2 (2005) (setting forth earlier and current standard
forms for UCC-1, the latter of which uses the word “collateral” in the heading
above the space provided for a description of the property).
question we face is whether a financing statement with limited language can amend
the plain and unambiguous description of collateral in a security agreement. We recognize that courts have found that a
financing statement, in conjunction with other writings, constitutes a security
agreement creating a security interest in property. See In
re Numeric Corp., 485 F.2d 1328, 1332 (1st Cir. 1973) (“[A]n adequate
[security] agreement can be found when a financing statement is considered
together with other documents.”). But we
are aware of no court that has held that a standard financing statement,
standing alone or with only parol evidence, is sufficient as a matter of law to
create a security interest in collateral, or to amend an unambiguous security
agreement. See id. at 1331 (“A considerable body of case law has developed to
the effect that a standard form financing statement, taken alone, cannot also
be considered a ‘security agreement’ that satisfies § 9-203(1)(b).”).
the security agreement contains an explicit description of property that is
limited to equipment located at a specific address in Aurora, Minnesota
and certain other assets. There is
nothing in the original security agreement that even implies that the security
interest extends to equipment not located at that site. Appellant is correct that the Missouri financing statement implies a willingness to
grant a security interest in the engine which is located in Missouri.
Further, there is evidence that GEC’s business plan for moving to Minnesota had collapsed,
that appellant had advanced funds, and that the engine in question was of
interest to appellant as collateral.
Appellant’s argument has a certain appeal. But there is nothing from the debtor that grants
appellant a security interest in the collateral located in Missouri.
The financing statement used in this proceeding has no reference to the
described property as collateral. Other
than the financing statement, appellant offers only obscure references to the
engine in various items of correspondence as evidence of such an
amendment. These references are largely
comments by appellant’s employees. The
comments from GEC are oblique at best and require considerable interpolation.
we were simply dealing with the imponderables of what constitutes adequate
evidence of negligence, summary judgment dismissal of appellant’s claim would
be premature. However, the case before
us does not turn on the weight of the evidence.
Instead, we must determine the level of formality needed to establish a
prima facie case that the parties amended a written contract with an explicit
definition of collateral. Appellant’s
claims compete with rights of not just a debtor, whose interests in property
that is not collateral can be overridden by executing on a judgment, but of
other interested parties. Thus, we require
an objective standard. Absent an
indication that there is admissible evidence that the claimed amendment meets
the core requirements needed to establish a security interest in the claimed
additional collateral, there is not an adequate showing that appellant’s claim
can survive summary judgment. These core
requirements include words granting a
lien or security interest. See Minn. Stat. § 336.9-203(b). Some written evidence or acceptable substitute
is needed to establish that such a grant of a lien was made.
because there is no admissible evidence in the record that GEC actually granted
a security interest in the equipment in Missouri to appellant, we conclude that
appellant has no security interest in the disputed engine as a matter of law
and that the district court did not err in ordering summary judgment.
we conclude that appellant does not have a security interest, we do not reach
the questions of whether Minnesota
courts had jurisdiction over respondent or whether the interest she acquired
from CK Engineering was superior to appellants.
D E C I S I O N
on the undisputed facts of this case, appellant has no valid security interest
in the disputed property as a matter of law, we affirm.