NO. COA02-506
Appeal by plaintiff from order entered 14 February 2002 by
Judge Jacquelyn L. Lee in Johnston County District Court. Heard in
the Court of Appeals 29 January 2003.
Ward and Smith, P.A., by J. Michael Fields, Lance P. Martin
and Katherine E. Lewis, for plaintiff-appellant.
Gordon C. Woodruff for defendant-appellee.
MARTIN, Judge.
Plaintiff, First-Citizens Bank & Trust Company, brought this
action alleging that defendant, Four Oaks Bank & Trust Company,
sold collateral, a drill rig engine, in which plaintiff had a
superior security interest and appropriated the proceeds to its own
use. Plaintiff further alleged that defendant had knowledge of
plaintiff's interest in the engine at the time of the sale, and
that defendant sold it without notice to, or knowledge of,
plaintiff. Plaintiff sought to recover the amount of the
outstanding debt secured it by the engine, together with costs and
attorneys fees. Defendant answered, denying it was obligated to
pay plaintiff any amount. Plaintiff subsequently moved for summary
judgment.
The materials submitted to the district court in support of,and in opposition to, the motion for summary judgment establish
that on 17 October 1996, Jimmie and Valerie Beaty borrowed $92,000
from defendant for which they gave defendant a security interest in
a drill machine, consisting of a ten-wheeled truck with its own
engine, as well as a drill rig with its own engine on the back of
the truck frame. In February 1997, plaintiff loaned the Beatys
$13,466 for the purchase of a replacement engine for the drill rig.
The loan was secured by a security agreement giving plaintiff a
security interest in the drill engine, which plaintiff duly
perfected. Mr. Beaty thereafter installed the drill engine on the
drill rig on the back of the truck.
On 9 August 1999, the Beatys filed for Chapter 13 bankruptcy
in the United States Bankruptcy Court for the Eastern District of
North Carolina. Both plaintiff and defendant were listed on the
bankruptcy court's schedule of creditors as having an interest in
the drill rig. Thereafter, on 1 November 1999, defendant filed a
motion in bankruptcy court seeking relief from the automatic stay,
or in the alternative, other adequate protection of its interest in
the drill machine. Although the record indicates a hearing on the
motion was scheduled in bankruptcy court on 1 December 1999, the
record is silent as to whether the hearing was held, and the
outcome thereof, if any. Apparently, plaintiff received no notice
of the hearing. However, on 14 January 2000, upon the Beaty's
motion, the bankruptcy court entered an order, consented to by the
Beatys and the Chapter 13 trustee, authorizing the Beatys to sell
the entire drill machine to Ingle Brothers Drilling for $50,000 anddirecting that all proceeds of the sale be given to defendant.
The district court entered an order concluding there was no
genuine issue of material fact and that defendant was entitled to
judgment as a matter of law. Plaintiff's motion for summary
judgment was denied and summary judgment was entered in favor of
defendant. Plaintiff appeals.
Plaintiff assigns error to the entry of summary judgment in
defendant's favor, arguing that (1) plaintiff had a properly-
perfected purchase money security interest in the drill rig engine
which took priority over any interest of defendant's in the engine;
(2) plaintiff had a properly-perfected security interest in the
drill rig engine which took priority over defendant's security
interest in the drill machine; (3) the new drill rig engine did not
accede to the drill machine and was thus not subject to defendant's
security interest in the drill machine; and (4) public policy
dictates plaintiff should prevail because it did everything
according to law to perfect its interest in the drill rig engine,
and defendant should not be permitted to circumvent plaintiff's
rights.
In essence, plaintiff seeks to collaterally attack the order
of the bankruptcy court, for if this Court were to agree with
plaintiff's arguments and render a ruling to that effect, the
bankruptcy court's order authorizing defendant to retain all
proceeds from the sale of the drill machine would be negated. In
general, the courts of this State must accord a federal judgmentthe same full faith and credit accorded judgments rendered in other
states.
See Hampton v. North Carolina Pulp Co., 223 N.C. 535, 27
S.E.2d 538 (1943);
Van Kempen v. Latham, 195 N.C. 389, 142 S.E. 322
(1928). As with all foreign judgments, a party may collaterally
attack a judgment by establishing one of three grounds: (1) the
court which entered the judgment was without jurisdiction; (2) the
judgment was procured through fraud; or (3) the judgment is against
public policy.
Lang v. Lang, 108 N.C. App. 440, 450, 424 S.E.2d
190, 195,
disc. review denied, 333 N.C. 575, 429 S.E.2d 570 (1993).
“'It is a well-settled general rule that whenever the rights
of third persons are affected they may collaterally attack a
judgment for fraud committed by one party, or for collusion of both
parties.'”
Strickland v. Hughes, 273 N.C. 481, 488, 160 S.E.2d
313, 318 (1968). “'However, to make a successful attack upon a
foreign judgment on the basis of fraud, it is necessary that
extrinsic fraud be alleged.'”
Lang, 108 N.C. App. at 450, 424
S.E.2d at 195 (citation omitted). Extrinsic fraud is that “'which
is collateral to the foreign proceeding, and not that which arises
within the proceeding itself and concerns some matter necessarily
under the consideration of the foreign court upon the merits.'”
Id. (citation omitted). Our Supreme Court has noted that fraud is
extrinsic “'when it deprives the unsuccessful party of an
opportunity to present his case to the court. If an unsuccessful
party to an action has been prevented from fully participating
therein there has been no true adversary proceeding, and the
judgment is open to attack at any time.'”
Smith v. Smith, 334 N.C.81, 86, 431 S.E.2d 196, 199 (1993) (citation omitted).
In the present case, plaintiff asserted it had no knowledge of
the Beaty's agreement with defendant for the sale of the drill
machine with all proceeds going to defendant, and that it had no
notice or opportunity to be heard on the matter prior to entry of
the bankruptcy consent order authorizing the sale. Defendant made
no showing, in the record before the district court, to refute
plaintiff's assertion that it had no notice of the consent order
prior to its entry. The consent order states it was entered upon
the Beatys' motion to sell the drill machine, with all proceeds of
the sale to go to defendant, and makes no mention of plaintiff
having been informed of the sale. Indeed, the fact the consent
order was entered at all is evidence of plaintiff's lack of notice
and opportunity to be heard, for had plaintiff had such notice,
common sense dictates plaintiff would not have consented to its
entry, which resulted in plaintiff foregoing its substantial
interest in the drill rig engine. Moreover, the record contains
the affidavit of Michael Creech, plaintiff's Vice-President who
handled the matter of the drill rig engine on behalf of plaintiff,
who testified the bankruptcy court did not give him notice of the
proposed sale or consent order prior to its entry.
We hold the record sufficiently establishes that plaintiff did
not have proper notice of the pending sale of the drill machine,
nor an opportunity to be heard on the matter prior to entry of the
bankruptcy consent order.
See First Union Nat'l Bank v. Naylor,
102 N.C. App. 719, 404 S.E.2d 161 (1991) (where wife not listed ascreditor and record contains no evidence she had notice or actual
knowledge of husband's bankruptcy petition, wife was unable to
protect her interests in bankruptcy court, and thus her breach of
contract action outside bankruptcy court survived husband's
bankruptcy discharge). The absence of such notice and opportunity
to be heard prior to entry of an order affecting one's rights or
interests constitutes extrinsic fraud for which the affected party
may attack a foreign order. Thus, we believe plaintiff is entitled
to collaterally attack the bankruptcy consent order, and we proceed
to an analysis of the merits of plaintiff's claims.
That analysis leads us to agree with plaintiff that it
maintains an interest superior to that of defendant in the drill
rig engine, and that it is entitled to recoup from defendant the
remaining amount owing on its agreement with the Beaty's. First,
we agree with plaintiff that it maintains a purchase money security
interest in the drill rig engine. Under Article IX of the Uniform
Commercial Code as it was in effect prior to 1 July 2002 and at all
times relevant to this appeal, an interest is a purchase money
security interest to the extent it is “taken by a person who by
making advances or incurring an obligation gives value to enable
the debtor to acquire rights in or the use of collateral if such
value is in fact so used.” N.C. Gen. Stat. § 25-9-107 (2000).
Moreover, a purchase money security interest in collateral other
than inventory “has priority over a conflicting security interest
in the same collateral
or its proceeds if the purchase money
security interest is perfected at the time the debtor receivespossession of the collateral or within 20 days thereafter.” N.C.
Gen. Stat. § 25-9-312(4) (2000) (emphasis added).
The record in this case establishes the Beatys borrowed money
from plaintiff for the purchase of a new drill rig engine for their
drill machine; that plaintiff's check was made out to Covington
Diesel, the seller of the engine; that in exchange, the Beatys
executed a security agreement in favor of plaintiff on 7 February
1997; and that its interest in the drill rig engine was perfected
on 12 February 1997, within 20 days of the Beaty's receipt of the
engine. Moreover, defendant admitted in its answer that plaintiff
maintained a “first priority perfected security interest” in the
drill rig engine as reflected by financing statements filed with
the Johnston County Register of Deeds and the Secretary of State.
Additionally, the record shows plaintiff's security interest
in the drill rig engine had priority over defendant's security
interest in the drill machine, for under G.S. § 25-9-314, “[a]
security interest in goods which attaches before they are installed
in or affixed to other goods takes priority as to the goods
installed or affixed . . . over the claims of all persons to the
whole.” N.C. Gen. Stat. § 25-9-314(1) (2000). Although that
statute provides some exceptions to the general rule, none of the
exceptions applies here. Further, the record shows that the drill
rig engine did not accede to the drill machine, nor was it
otherwise commingled and processed with the drill machine as a
whole such that plaintiff would lose the priority of its interest.
In
Goodrich Silvertown Stores v. Caesar, 214 N.C. 85, 197 S.E.698 (1938), our Supreme Court held that the seller of automobile
tires and tubes who possessed a chattel mortgage on the parts at
the time of sale was entitled to recover those parts or the value
of them even though the parts had been placed on a truck later
repossessed by the seller of the truck under a conditional sales
contract containing an after-acquired property clause. In so
holding, the court addressed the doctrine of accession, stating
“[t]he doctrine of accession is inapplicable in cases where
personal property is placed upon other personal property if the
property so placed had not become an integral part of the property
to which it was attached and could be conveniently detached.”
Id.
at 87, 197 S.E. at 700. Noting that tires are easily identified
and removed without damage to the whole, the court concluded the
doctrine of accession was inapplicable.
Id.
Moreover, the court dismissed the argument that the
conditional sales agreement between the seller and buyer of the
truck which purported to extend the seller's interest over any
replacements or accessories later placed upon the truck defeated
the interest of the seller of the tubes and tires. In support, the
court cited this general principle:
“A mortgage given to cover after-acquired
property covers such property only in the
condition in which it comes into the hands of
the mortgagor. If that property is already
subject to mortgages or other liens at that
time, the general mortgage does not displace
them although they may be junior to it in
point of time. It attaches only to such
interest as the mortgagor acquires.”
Id. at 88, 197 S.E. at 700 (citation omitted). In the present case, Jimmie Beaty testified that he purchased
the drill rig engine separately from the drill machine, that he
removed the old engine himself, and replaced it with the new engine
subject to plaintiff's interest, and that this process in no way
caused any damage to the drill machine or its existing parts. Mr.
Beaty further stated he could have removed the new engine from the
drill machine without harm to the machine as a whole. The record
demonstrates, without contradiction, that the drill rig engine was
a detachable component of the drill machine and therefore had not
become a commingled, integral part of the machine. Furthermore,
any after-acquired property clause in the Beaty's agreement with
defendant does not defeat plaintiff's superior interest in the
drill rig engine, for defendant only acquired an interest in the
engine to the extent of the Beaty's interest, which interest was
always subject to plaintiff's.
Defendant has made no arguments on appeal regarding the
priority of plaintiff's interest in the drill rig engine over its
own interest. The record demonstrates no genuine issue of material
fact as to plaintiff's interest in the drill rig engine, and
accordingly, it was entitled to judgment as a matter of law. For
the reasons stated herein, the trial court's entry of summary
judgment for defendant is reversed and this case is remanded to the
trial court for entry of summary judgment in favor of plaintiff.
Reversed and remanded.
Judges HUDSON and STEELMAN concur.
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