Wilson v. M & W GEAR, INC. , 110 Ill. App. 3d 538 ( 1982 )

JUSTICE ALLOY

delivered the opinion of the court:

The defendant, M & W Gear, Inc., appeals from a judgment of the trial court awarding $5,400 to the plaintiff, Henry Wilson.

There is no serious dispute in the relevant facts of this case. On March 7, 1981, Wilson purchased a 14-foot M & W grain drill from Colusa Farm Equipment, Inc. (Colusa). Wilson paid for this drill by trading in his old drill and tendering a check for $3,600. Colusa agreed to deliver a grain drill by May 1, 1981, though it did not have any drills in stock at the time of purchase. On March 20, M & W delivered two identical 14-foot grain drills to Colusa. The owner of Colusa told Wilson that his drill arrived, and on several occasions prior to April 20, 1981, the owner and Wilson discussed which attachments were necessary for the drill as well as delivery arrangements for the drill. All M & W drills have individual serial numbers. The two drills that M & W delivered to Colusa were numbered 1018 and 1057. Wilson’s documentation did not indicate a particular serial number on the drill during his subsequent visits to Colusa.

M & W is a manufacturer of farm equipment. It furnished farm equipment to Colusa under a security agreement. Under the terms of the agreement, Colusa remits payments to M & W upon sale of equipment to a customer. M & W in turn maintains a security interest in the inventory of Colusa. M & W’s security agreement with Colusa was properly filed with the Secretary of State and with the recorder of Hancock County. As part of its procedure to enforce the security agreement, M & W contacted Colusa to make an inventory. Colusa had the two grain drills in its inventory. On March 31, M & W’s sales manager determined that one of the drills, serial number 1057, had been sold by Colusa and that M & W had been reimbursed for this drill. This was not the drill that is subject to dispute in this case. An identical drill, serial number 1018, was listed as unsold on March 31. On April 20, M & W seized this drill under its security agreement with Colusa. After Wilson made an unsuccessful demand upon M & W for the drill, he filed this action in the trial court. Both parties stipulated at trial that the grain drill is no longer in the defendant’s possession. After the hearing, the trial court awarded the plaintiff $5,400, representing the value of the grain drill. The defendant now appeals.

The initial issue the parties address in their appeal to this court is whether the grain drill that M & W seized was sufficiently identified or related to the Wilson-Colusa contract such that Wilson can maintain an action for replevin or damages. A plaintiff can sue in replevin only for property which is capable of identification and return. A plaintiff may, however, also proceed under the original replevin complaint for the value of the property not found or delivered. (S. T. Enterprises, Inc. v. Brunswick Corp. (1974), 57 Ill. 2d 461, 469, 315 N.E.2d 1.) The court may award the value.of the property to the plaintiff only if the property is not found or returned. (Brunswick Corp., citing with approval Kehoe v. Rounds (1873), 69 Ill. 351.) Although the defendant does not clearly argue the point, its initial contention appears to be that the plaintiff failed to establish that the drill in question was identified as the drill referred to in the contract. Therefore, the argument goes, the plaintiff is not entitled to maintain an action for replevin. The failure of his action for replevin would deny him any right to an award for the value of the drill bought and paid for by plaintiff.

Although the defendant’s statement of the law on this point may be correct, it does not determine the resolution of this appeal. Wilson did not merely try to replevin the drill. He also asked, in the alternative, for damages for the wrongful taking and detention of the drill. This alternative does not depend upon a right to maintain an action for replevin. Undoubtedly, specifying the prayer for relief as a separate and alternate count of his complaint would have led to less confusion. Failure to draft this alternative clearly, however, is not fatal to Wilson’s claim for damages.

The issue becomes, therefore, whether Wilson is entitled to the value of thé drill. “As a general rule, the holder of a perfected security interest has an interest in the secured property, and the proceeds from the sale thereof, which is superior to the interests of unsecured creditors of the debtor and subsequent purchasers of the secured property.” (Herman v. First Farmers State Bank (1979), 73 Ill. App. 3d 475, 477, 392 N.E.2d 344.) Under section 9 — 307(1) of the Uniform Commercial Code, however, a buyer in the ordinary course of business takes free of a security interest created by his seller even though the buyer knows of its existence. (Ill. Rev. Stat. 1979, ch. 26, par. 9 — 307(1).) A buyer in the ordinary course of business is a person who “in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind ***.” (Ill. Rev. Stat. 1979, ch. 26, par. 1— 201(9).) Whether a person is a buyer in the ordinary course of business is a question of fact.

In the case at bar, the trial court’s ruling is amply supported by the evidence. It is undisputed that Wilson purchased a drill from Colusa. Colusa is in the business of selling farm equipment and the particular sale to Wilson was normal and typical of the type of sales made in this trade. M & W delivered a drill to Colusa, and it became a part of Colusa’s inventory. Moreover, there is no evidence that Wilson knew of M & W’s security interest or, if he did, that he knew that the sale of the drill was in violation of any security agreement between Colusa and the defendant.

The facts of this case make it indistinguishable from Herman. In Herman, the plaintiff bought 20 tons of liquid nitrogen solution from a dealer. The bank had a perfected security agreement in the inventory of the dealer. The plaintiff paid the purchase price and agreed with the dealer to delivery at a later unspecified date. When the dealer defaulted on the security agreement, the bank seized the dealer’s inventory, including 500 tons of the liquid nitrogen solution. The plaintiff never received the 20 tons she ordered and sued the bank for the value of the solution. On appeal, this court ruled the plaintiff was a buyer in the ordinary course of business who took free from the bank’s security interest.

M & W attempts to distinguish Herman from the instant case. In Herman, M & W argues, the dealer could have complied with the contract by delivering any accumulation of 20 tons of solution. In this case, however, each drill is separate and individually marked with an identifying serial number. This is a distinction without a difference. In Herman, this court placed no reliance on the fact that the goods were not readily and separately identifiable. Moreover, the question of identification is irrelevant to the issue of whether a purchaser is a buyer in the ordinary course of business. Herman.

Antiquated concepts of “title” do not control the resolution of this appeal. In fact, any reliance upon the location in this case would be contrary to the thrust of the Uniform Commercial Code and to modem case law and commentary interpreting the Code. The Code has diminished drastically the importance of title. In particular, the question of whether title has passed is immaterial to the protections afforded to a buyer in the ordinary course of business. Under article II of the Uniform Commercial Code (Ill. Rev. Stat. 1981, ch. 26, par. 2 — 401), “Each provision of this Article with regard to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties applies irrespective of title to goods except where the provision refers to such title.” The Illinois Code Comment explicitly explains the reduced importance of title in determining a buyer’s right to replevin:

“Article 2 deals with issues between buyer and seller in narrow terms rather than on the broad term of whether or not title to the goods has passed. Official Comment 1. The concept of title is thus subordinated under the Code. Instead of approaching a sales problem by first locating title to the goods, as under the Sales Act, a lawyer’s approach starts with an analysis of the problem in terms of these narrow issues (i.e., risk of loss, insurable interest, seller’s right to price, buyer’s right to specific performance or replevin, and rights of creditors of seller and of buyer) and an ascertainment of whether the Code deals specifically with its issues.” (Ill. Ann. Stat., ch. 26, par. 2 — 401, Illinois Code Comment, at 312-13 (Smith-Hurd 1963).)

In the instant case, section 9 — 307 of the Code specifically deals with the buyer’s rights to the goods.

Moreover, to avoid any confusion on the matter, the Code eliminates the importance of title in the law of secured transactions: “Each provision of this Article [article IX] with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor.” (Ill. Rev. Stat. 1981, ch. 26, par. 9— 202.) The comments to this section remove all doubt as to its full import. “This section de-emphasizes whatever significance the concept of ‘title’ may have had under pre-Code chattel security law.” (Ill. Ann. Stat., ch. 26, par. 9 — 202, Illinois Code Comment, at 103 (Smith-Hurd 1974).) The official comments of the UCC are even more specific: “The rights and duties of the parties to a security transaction and of third parties are stated in this Article without reference to the location of ‘title’ to the collateral.” Ill. Ann. Stat., ch. 26, par. 9 — 202, Uniform Commercial Code Comment, at 103 (Smith-Hurd 1974). See also 1 Anderson, Uniform Commercial Code sec. 1 — 201:19 (1970).

Furthermore, there is no need for the goods to be identified to the contract before section 9 — 307 will protect this plaintiff. Although many of the cases involving section 9 — 307 dealt with goods identified, most courts have not placed any critical emphasis upon that fact. (See, e.g., Chrysler Credit Corp. v. Sharp (1968), 56 Misc. 2d 261, 288 N.Y.S.2d 525; Rex Financial Corp. v. Mobile America Corp. (1978), 119 Ariz. 176, 580 P.2d 8. But see Holstein v. Greenwich Yacht Sales, Inc. (1979), _ R.I. _, 404 A.2d 842 (court ruled upon identification to characterize purchaser as a buyer in the ordinary course of business).) Identification of goods to a contract is relatively unimportant under the UCC. (T.M. Quinn, Uniform Commercial Code Commentary and Digest par. 9 — 307(A)(8) (1982 Cum. Supp. No. 1).) The official comments to section 2 — 501 of the Code — concerning the identification of goods — demonstrates the unimportance of identification. In Comment 5, for example, the Code drafters explained that:

“Undivided shares in an identified fungible bulk, such as grain in an elevator or oil in a storage tank, can be sold. The mere making of the contract with reference to an undivided share in an identified fungible bulk is enough under subsection (a) to effect an identification if there is no explicit agreement otherwise. The seller’s duty, however, to segregate and deliver according to the contract is not affected by such an identification but is controlled by other provisions of this Article.” (Ill. Ann. Stat., ch. 26, par. 2 — 501, Uniform Commercial Code Comment, at 349-50 (Smith-Hurd 1963).)

In Martin-Marietta Corp. v. N.J. National Bank (3d Cir. 1979), 612 F.2d 745, 750, the court observed that the “crux of the passage (Comment 5) is that if a seller removes some of the tangibles and later replaces them, that should not undercut the policy favoring identification, probably because such conduct is quite natural with tangibles and cannot be taken as an intent to negate the buyer’s interest in them.”

We are not arguing, of course, that grain drills are fungibles. There is no substantial distinction, however, between buying 20 tons of a fungible out of a dealer’s 500-ton inventory (as in Herman) and buying one grain drill out of a dealer’s two-drill inventory. The case law considers the goods in the first scenario as “identified” to the contract. We see no reason to give the purchaser in the second instance any less protection. Rather than distort the meaning and purpose of identification in the Code, it is better to recognize its relatively limited importance in the scheme of the UCC. In particular, substantive rights under section 9 — 307 should not. turn upon a concept so elusive and ephemeral.

Not surprisingly, neither Holstein, Martin-Marietta nor the defendant offer any reasonable justification for enhancing a relatively inconsequential concept to a position of such overwhelming importance. In regard to Herman, we saw no need for the seller of a particular group of gallons of liquid nitrogen to label it “Mrs. Herman’s.” In fact, even if the dealer had done so, he could have sold that group to someone else and the buyer still would have an interest in the remaining bulk of nitrogen. In other words, even if we adopt identification as a prerequisite to protection of buyers in the ordinary course of business, the Code would not change the result in Herman. As we have already stated, there is no logical reason to afford the purchasers of appliances or equipment any different protection.

The holding of Troy Lumber Co. v. Williams (1971), 124 Ga. App. 636, 185 S.E.2d 580, does not change our view of the law. The holding in Troy is not on point and the opinion — if anything — supports our view. In Troy, the plaintiffs placed $600 with a mobile home dealer as a down payment on a home. The contract did not specify any particular mobile home. The manufacturer of the mobile homes retained a security interest in the dealer’s inventory under a floor plan that was similar to the scheme in the case at bar. Subsequently, the dealer embezzled all the funds of the business. The manufacturer, not having been paid for any of the homes that it delivered to the dealer, seized the mobile homes in inventory. The plaintiff sued the manufacturer for a refund of the $600, claiming he was a buyer in the ordinary course of business.

Although the court rejected the plaintiff’s arguments, the court’s opinion fully supports our holding in the instant appeal:

“Plaintiffs’ main contention is that they are buyers in the ordinary course of business, and therefore take the property free of a security interest created by the seller. (UCC citations omitted.) This would be a valid argument if the plaintiffs were in fact buyers, i.e., if they were either attempting to enforce the contract of sale or defending their right to free possession of the property after having performed under the contract. However, the plaintiffs have, in effect, rescinded this contract by demanding refund of their down payment. They are not asking for a mobile home, they are asking for $600.” (Emphasis added.) (124 Ga. App. 636, 637-38, 185 S.E.2d 580, 582.)

The court characterized the plaintiffs as lien creditors of the dealer who held an inferior position to the manufacturer.

Troy explicitly recognizes the rights of a purchaser, standing as a buyer in the ordinary course of business, to sue the secured creditor which seizes the dealer’s inventory. Unquestionably, the plaintiff in the instant appeal is attempting to enforce the contract of sale and he fully performed his part of the contract. He paid for a grain drill and seeks to obtain a grain drill. Most significantly, Troy implicitly rejects any necessity for identification as a prerequisite to relief and protection under section 9 — 307.

The appellants in the case at bar invite the court to reconsider Herman and resurrect the argument that protecting the buyer will make security on an inventory an unworkable concept. We decline the invitation. All courts that have faced this problem have reached the same conclusion: “If there is a usage of trade which exposes an entruster on floor plan to certain risks, these are risks against which he can guard by audits and accounting procedures or he can refuse to knowingly expose himself to the risk with the particular dealer.” (Chrysler Credit Corp. v. Sharp (1968), 56 Misc. 2d 261, 270, 288 N.Y.S.2d 525, 534, quoted with approval in Herman.) The secured party is in an excellent position to know whether an item has been sold. In the case at bar, for example, the manufacturer could have required copies of all orders before shipment to the dealer. Upon receiving the orders, the manufacturer could have assigned particular grain drills to particular retail purchasers. Failing this simple routine, the manufacturer could have examined Colusa’s records to determine how many grain drills had been paid for but were currently undelivered. M & W would have discovered that two grain drills were paid for, that these two drills had not yet been delivered to the purchasers and that two drills were still in inventory. This information is certainly sufficient to inform the manufacturer that the two drills in inventory have been sold. Requiring a serial number on each order form would be superfluous. Even if these records are unavailable, Colusa’s and M & W’s failure to utilize modern accounting and auditing procedures can hardly be a justification for prejudicing the retail purchaser’s rights under section 9 — 307. Finally, if any particular dealer is unreliable in its inventory or accounting practices, the manufacturer can refuse to expose itself to those risks.

Herman is directly on point for this appeal. It is in accord "with modern case law and understanding of the Uniform Commercial Code. More importantly, Herman was decided by a unanimous panel of this court only three years ago, and it is based on a sound and rational policy of protecting innocent purchasers from the zealous and unilateral actions of secured creditors of the dealers. There is no sensible reason to deviate from Herman, especially where the retail purchaser has fully performed his obligations of the contract. We hold, therefore, that when a person contracts to buy goods and those goods are in the dealer’s inventory, awaiting delivery or being prepared for delivery, that purchaser is a buyer in the ordinary course of business within the meaning of section 9 — 307. Title to the goods does not have to pass to the purchaser nor do the goods need to be identified by number before section 9 — 307 will protect the retail purchasers.

For the reasons stated, the judgment of the circuit court of Hancock County is affirmed.

BARRY, P.J., concurs.