Malcolm GOLDIE, Plaintiff and Respondent, v. BAUCHET PROPERTIES, a limited partnership, and David Pick, Defendants and Appellants.
The question in this case is whether a landlord or a creditor of the tenant is entitled to a trade fixture used by the tenant prior to its default under a lease and consequent surrender of the premises. After a nonjury trial, the trial court made findings generally in favor of the creditor; judgment was entered accordingly. We reverse.
Until November 3, 1966, Henry Kermin was the owner of real property on Bauchet Street in Los Angeles. Mr. Kermin operated a frozen food business on the premises through two corporations. He was the sole shareholder of each of them. On November 3, 1966, Mr. Kermin sold the real property to a group consisting of defendant David Pick (an appellant herein), Mrs. pick, and Mr. and Mrs. Mesler. On that same date the buyers leased the property for a term of years to the two Kermin corporations.
At the time of the sale and lease of the real property there was located on and affixed to the premises a packaging machine. It had been purchased by one of the Kermin corporations1 long prior to the transfer of the real property. It was used in the business conducted on the premises. The trial court concluded that this machine was a trade fixture.2 The lease gave the lessors a security interest in trade fixtures and other equipment on the premises, provided that while not in default the lessee could trade in and replace such items, and gave the lessee the right to remove the items upon termination of the lease if lessee was not then in default.3
The grant deed from Mr. Kermin to the Picks and Meslers was recorded in January 1967.4 The lease itself was not recorded.
In December 1967 one of the Kermin corporations borrowed $10,000.00 from Malcolm Goldie (respondent). The corporation executed a promissory note, calling for interest to be paid on the last day of each month. The note was secured by a security agreement (chattel mortgage) on the packaging machine. This agreement was filed with the Secretary of State on February 23, 1968.
The Kermin corporations defaulted in paying the rent due to the lessors on September 1, 1969. They also defaulted in paying the interest due to Goldie on September 30, 1969. The corporations surrendered the premises to Bauchet Properties on October 6, 1969, by delivering up the keys. About November 25, 1969, Goldie demanded that Pick give up possession of the machine. Pick refused and Goldie then commenced this action on December 4, 1969. On that same day Pick met with Goldie and the latter's counsel. It was agreed that, to avoid the necessity of having the sheriff or marshal remove the machine, Goldie might do so. The removal was accomplished.5 Defendants' answer denied plaintiff's allegation that Pick had no interest, right or title to the machine and denied the allegation that title was solely and exclusively in Goldie. The answer also alleged as an ‘affirmative defense’ many of the facts set forth above relating to appellants' claim of ownership of the packaging machine and ‘prayed for’ return of the property or its value. The trial court entered judgment that Goldie take nothing from Pick and Bauchet Properties ‘as recovery by repossession of the collateral, under Commercial Code Section 9503, completed his remedy for damages. . . .’
The effect of that judgment is to confirm in plaintiff the right to possession of the machine. We deem defendants' appeal, which is noticed as being from the judgment ‘in favor of plaintiff . . . and against defendants,’ to challenge that confirmation.
Elements of the Cause of Action and Constitutionality of the Claim and Delivery Statutes.
Based on the foregoing, the trial court concluded that defendants pleaded no facts by which ‘they could establish and prove a title superior to plaintiff's Security Agreement.’ And, having found that appellants did not assert a third party claim under Code of Civil Procedure, section 519, the court concluded that ‘to protect any interest he may have’ a third party claimant must have proceeded under that section.
Each of these two conclusions reflects an erroneous conception of the law. It is not up to a defendant to establish and prove his superior title to that of a plaintiff in an action for specific recovery of personal property; rather, the plaintiff must establish his right to possession at the time of commencement of the action while, if the defendant desires to prove his right to the possession of the property by virtue of a lien he should plead and prove those facts. (10 Cal.Jur.2d, Claim and Delivery, § 54, p. 553; Flanders v. Locke (1878) 53 Cal. 21.) Here, defendants pleaded facts later established without any dispute. The undisputed facts show, as we point out below, that defendants were entitled to prevail, and the prayer of their answer sought judgment for the return of the machine or its reasonable value.
The judgment recites that defendants take nothing on their ‘affirmative defenses.’ Whether a defendant is, or is not, entitled to a judgment on an affirmative defense or whether, to be so entitled, he must cross-complain, we need not determine since, in any event, defendants are entitled to judgment on the merits under the issues tendered by plaintiff's complaint.
Appellants' failure to seek third party claim remedies under former Code of Civil Procedure, section 519, is irrelevant. That section provided for third parties, not defendants, to claim interests in property.
The claim and delivery statutes were declared unconstitutional in Blair v. Pitchess (1971) 5 Cal.3d 258, 96 Cal.Rptr. 42, 486 P.2d 1242, and have since been repealed and replaced by new statutory provisions. (Stats.1972, ch. 855; Stats.1973, ch. 526.) At trial, appellants raised the constitutional issue as a defense citing Blair, supra, to the court. What Blair declared unconstitutional was the provisional remedy of claim and delivery. That remedy is to be distinguished from the substantive action seeking to recover specific possession of personal property, or its value if its return cannot be made (e.g., 2 Witkin, Cal.Proc.2d ed., Provisional Remedies, § 24, p. 1481). We need not now declare whether Blair is to be applied retroactively (compare EAC Credit Corp. v. Bass (1971) 21 Cal.App.3d 645, 655, 98 Cal.Rptr. 681, holding that it is not, with Ataka America, Inc. v. Crateo, Inc. (1973) 30 Cal.App.3d 315, 317–318, 106 Cal.Rptr. 280, holding that the comparable decision of Randone v. Appellate Department (1971) 5 Cal.3d 536, 96 Cal.Rptr. 709, 488 P.2d 13 which held the attachment statutes to be unconstitutional in part was to be applied to invalidate attachments existing prior to Randone). As in both EAC Credit Corp., supra , and Ataka America, supra, the substantive issues have been fully briefed and argued; it would serve no purpose to reverse simply because a now unconstitutional provisional remedy was used. Therefore, we proceed to the merits.
The California Uniform Commercial Code Does Not Apply
Citing Uniform Commercial Code, section 9201, for the proposition that ‘a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors,’ the trial court concluded that that code applies to create a security interest in personal property (Uniform Com.Code, § 9102, subsec. (1)(a)). The court also concluded that trade fixtures, bolted to the floor, are personal property and proper for use as collateral under a security agreement, citing EAC Credit Corp. v. Bass, supra, as authority for the latter proposition.
Those conclusions overlook the fact that, while the Uniform Commercial Code does apply to the transaction between Goldie and the Kermin corporation, it does not apply to the lien created by appellants' lease with the corporations. EAC Credit Corp. v. Bass, supra, itself points out that ‘When California enacted section 9–102 of the Uniform Commercial Code, in our Commercial Code, section 9102, it eliminated the words ‘or fixtures' in subsection (a) and added subdivision (1), subsection (c), as follows: [The subdivision states that division 9 of the Commercial Code applies] To any transaction (regardless of its form) which is intended to create a security interest in goods which are or later become ‘fixtures' under the law of this state, but as against third parties having or acquiring an interest in or a lien on the real property, the rights and duties of the parties to the secured transaction are governed by the law of this state relating to real properly and fixtures.” (21 Cal.App.3d 645, at p. 651, 98 Cal.Rptr. at p. 684.) (Emphasis by the court in EAC Credit Corp., supra.)
Further, in enacting the Uniform Commercial Code in California, our Legislature did not enact section 9–313 of the Uniform Commercial Code which would have established priorities of security interests in fixtures.6 The reason that California made these changes in the Uniform Commercial Code was precisely to avoid having security transactions in fixtures fall within the grasp of the code. The senate committee responsible for considering the adoption of the Uniform Commercial Code recommended that such transactions be excluded, stating: ‘The law of fixtures is in a confused state in California. To superimpose additional rules on the existing law would only add to the confusion. We feel that an exhaustive independent study should be made of the whole subject of fixtures before adopting any additional legislation concerning fixtures and in the meantime the status quo should be maintained.’ (Sixth Progress Report to the Legislature by the Senate Fact Finding Committee on Judiciary (1959–1961), Part 1, The Uniform Commercial Code, pp. 417–418.)
As stated by Professor William D. Warren, ‘. . . the code governs as between one with a security interest in a fixture and anyone other than a real property claimant. But the rights of parties with claims in the fixtures as against parties with claims in the real estate are left to real property law.’ (California Commercial Law, III, California Continuing Education of the Bar (1966), 11–12.) (Emphasis ours.)
It is thus clear that the Uniform Commercial Code does not apply to rights of a lessor of real property to a security interest in trade fixtures created by a lease. The trial court erred in relying upon the Uniform Commercial Code to regulate appellants' rights.7
The Rights of One Holding a Security Interest in a Lessee's Fixture, Created After the Lessee Has Given a Lien on the Fixture to the Lessor, Are No Greater than Those of the Lessee
We must then examine the underlying California law dealing with the competing rights of lessors, lessees and creditors of the latter, in fixtures found on the premises.
Seemingly conflicting statements may be found in the cases. Appellants place principal reliance upon Rinaldi v. Goller (1957) 48 Cal.2d 276, 309 P.2d 451. There lessees had built a building on the premises having borrowed from the defendant money to finance its construction. The defendant's loan was secured by a chattel mortgage. The lessees abandoned the premises. In a suit to quiet title brought by the lessors, the defendant contended that his chattel mortgage was valid. The court held that the building placed on the property was a fixture. It agreed with plaintiff's contention that even though the lease showed an intention to allow the lessees to remove the building at the end of the term, their default and the lessor's reentry forfeited any claim which the lessees might have under the lease. The defendant lender's rights as a chattel mortgagee were held to be subordinate to those of the lessors. Relying in particular on Glaser v. North's (1954) 201 Or. 118, 266 P.2d 680, and Donahue v. Hardman Estate (1916) 91 Wash. 125, 157 P. 478; and quoting extensively from Bush v. Havird (1906) 12 Idaho 352, 86 P. 529, the court in Rinaldi held that the chattel mortgagee could not assert a greater right against the lessor than could the lessees since the lessees' right to remove the fixtures had ended by their default. It followed that the right of the chattel mortgagee was similarly affected (48 Cal.2d at pp. 281–282, 309 P.2d 451).
In Bush v. Havird, supra, a case whose facts are close to those in the case at bench, the court had to consider competing interests of a landlord, who had regained possession of his property, on the one hand, and of a mortgagee of the tenants who sought to recover the fixtures attached to that property, on the other. The court said (12 Idaho 352, 86 P. at 530), in a quotation used by our Supreme Court in Rinaldi, supra, 48 Cal.2d at p. 281, 309 P.2d at p. 454:
‘. . . ‘Did the mortgagee or his assignees acquire any greater or superior rights to those of the tenant or mortgagor? We think there can be but one answer to that question. When the mortgagee took a mortgage on this property he took it subject to all the restrictions placed by law upon the tenant, who was the mortgagor, and he could acquire no rights greater than or superior to those of his mortgagor. . . . When the tenant abandoned his right of removing this property and lost the possession and right to re-enter, that disability extended to his mortgagee with equal force and effect. The law will neither impose upon the landlord a duty nor necessity of either housing or taking care of the fixtures which his tenant leaves behind after his term has expired. Neither will the law permit the tenant nor anyone claiming under him, to reenter the premises, for the reason that to do so would encourage breaches of the peace, and would in many cases hazard and impair the landlord's rights of leasing the premises to another tenant, and lessen the full and free enjoyment of those premises by such tenant.’'
The principle set forth in Rinaldi v. Goller, supra, was also applied in United Pacific Ins. Co. v. Cann (1954) 129 Cal.App.2d 272, 276 P.2d 858.
Despite these decisions, the trial court in holding for Goldie concluded that ‘. . . A lessor stands in the shoes of the lessee, and cannot prevail against a conditional vendor unless the lessee could have done so.’ The quoted conclusion, relied upon by Goldie, is based upon EAC Credit Corp. v. Bass, supra, 21 Cal.App.3d at p. 653, 98 Cal.Rptr. 681. That case, in turn, relied upon a decision of the Supreme Court, Hendy v. Dinkerhoff (1880) 57 Cal. 3, and upon cases which themselves relied upon Hendy. Hendy has been distinguished, however, on the grounds that there the plaintiff claiming a right to certain property knew nothing about an agreement made between the lessor and lessee that the machinery and tools in question should belong to the latter in the event of a default. (Brides v. Cal-Pacific Leasing Co. (1971) 16 Cal.App.3d 118, 128, 93 Cal.Rptr. 796; see, Oroville-Wyandott Irr. Dist. v. Ford (1941) 47 Cal.App.2d 531, 538, 118 P.2d 340, disapproved on another point in Kaiser Co. v. Reid (1947) 30 Cal.2d 610, 631, 184 P.2d 879.)
This brings us to the nub of the question in our case, namely, for the principle enunciated in Rinaldi v. Goller, supra, 48 Cal.2d 276, 309 P.2d 451, and like cases to come into play, must the party who enters into a security transaction with the lessee have either actual or constructive notice that the lessor claims some sort of interest in the property? The trial court thought so, citing Stewart v. Leasure (1936) 12 Cal.App.2d 652, 55 P.2d 917, for that proposition. We agree, but not on account of Stewart. Stewart was criticized in United Pacific Ins. Co. v. Cann, supra, 129 Cal.App.2d at p. 276, 276 P.2d 858. Stewart held that the landlord's interest in chattels located on the leased premises was, in effect, a chattel mortgage which, in the absence of actual notice by the lessee's mortgagee, had to be recorded to be effective. Distinguishing Stewart as ambiguous, the court in United Pacific Ins. Co. said, ‘It would fly in the face of logic to hold that a tenant can convey to another by way of grant, assignment, mortgage or otherwise greater rights than tenant himself has in the property.’ (129 Cal.App.2d at p. 276, 276 P.2d 858, 861.) United Pacific Ins. Co., itself, was cited in Rinaldi v. Goller, supra, in support of the proposition that one claiming by virtue of a security interest given by a lessee had no greater rights than the latter as against the lessor. Stewart has no proper application here.
Neither Rinaldi; Glaser v. North's, supra, 201 Or. 118, 266 P.2d 680; Bush v. Havird, supra, 12 Idaho 352, 86 P. 529; Donahue v. Hardman Estate, supra, 91 Wash. 125, 157 P. 478; nor United Pacific Ins. Co., discuss the question of notice. It cannot be definitely stated whether, in each of them, the one claiming the security interest derived from the tenant had actual notice of the lessor's claim, although in some of the cases (e. g., United Pacific Ins. Co.) the facts would seemingly indicate that he did.
Neither is it clear from the facts in EAC Credit Corp. v. Bass, supra, 21 Cal.App.3d 645, 98 Cal.Rptr. 681, whether the security interest claimant knew of the competing lessor's interest, although it is clear that the latter knew of the former's interest. We believe that the opinion in Bridges v. Cal-Pacific Leasing Co., supra, 16 Cal.App.3d 118, 93 Cal.Rptr. 796, properly reconciles the rule of Rinaldi v. Goller, supra, with that of Hendy v. Dinkerhoff, supra, and that EAC Credit Corp., supra, inadvertently failed to take the factor of notice into account.
The existence of notice may be inferred from the circumstances. Thus, in Bridges, supra, the trial court's finding that the security interest claimant knew or should have known of the lessor's interest in equipment was supported because the equipment was already installed on the premises when the former made its transaction with the tenant. The court pointed out that possession of land is notice to all the world of the possessor's potential rights. “Putting all persons on inquiry as to the nature of the occupant's claims.” (16 Cal.App.3d at 130, 93 Cal.Rptr. at 803 quoting Pacific Gas & Elec. Co. v. Minnette (1953) 115 Cal.App.2d 698, 705, 252 P.2d 642.) It stated that while the claimant in Bridges knew that the equipment in question was installed upon the leased premises he made no attempt to investigate the terms of the lease although he was also aware that ‘Parties to a lease could validly enter into a variety of arrangements for the disposition of property brought onto the premises.’ (16 Cal.App.3d at 131, 93 Cal.Rptr. at 803.)8
Appellants proposed findings that prior to making his loan Goldie had notice and knowledge of their ownership of the real property and rights under the lease. These findings were rejected by the trial court. Since the trial court made no finding at all concerning notice or knowledge we may not infer on appeal that it found in favor of Goldie on this issue. (Code of Civ.Proc., § 634.)
While the question whether one has notice of facts sufficient to put a prudent man on inquiry may be a question of fact, the existence of constructive notice is not a question of fact in each case. (36 Cal.Jur.2d, ‘Notice,’ § 8, p. 421.)
‘Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact.’ (Civ.Code, § 19.) As a matter of law in this case, Goldie had constructive notice of Bauchet Properties' interest in the packaging machine. In the first place, that machine was bolted to a concrete floor, being thus permanently attached thereto. It was a trade fixture, and as such was real property belonging to the owner of the premises absent lease provisions to the contrary. (Civ.Code, §§ 658, 660, 1013 and 1019.) Goldie, thus, loaned money secured by real property. (See Commercial Bank v. Pritchard (1899) 126 Cal. 600, 59 P. 130; Trabue Pittman Corp. v. County of Los Angeles (1946) 29 Cal.2d 385, 394, 398, 175 P.2d 512; Elliot v. Hudson (1912) 18 Cal.App. 642, 124 P. 103.)
In the second place, the Kermin corporations were in possession as tenants. ‘. . . It has been the law for many years that ‘the possession of the tenant is notice of his landlord's title; that is to say, such possession is sufficient to put a person dealing with the property upon inquiry; and the law will charge him with notice of all those facts which he might have ascertained, had he pursued the inquiry with proper diligence.’ (White v. Rosenstein, 8 Cal.App.2d 217, at page 233, 47 P.2d 358, at page 360, quoting with approval from O'Rourke v. O'Connor, 39 Cal. 442, at page 446; . . . It is equally well settled that where a person who is a stranger to the record title of the vendor is in possession, the purchaser is under a duty to make inquiry of such stranger's rights, and failure to do so deprives him of the status of bona fide purchaser. . . .' (Manig v. Bachman (1954) 127 Cal.App.2d 216 at pp. 221–222, 273 P.2d 596 at p. 600.) There is no reason that a similar rule should not prevail here. Goldie was lending money to a Kermin corporation. The corporation was a stranger to the record title and yet was in possession of the premises, including the packaging machine which Goldie relied upon to secure his loan. Under these circumstances a prudent man would have inquired as to the ownership of the realty and such inquiry would have given him notice of appellants' interest in the property.
The judgment is reversed with directions to the trial court to make new findings of fact and conclusions of law consistent with this opinion and to enter judgment for appellants.
1. As is true with many of the peripheral facts in this litigation, the record is not entirely clear on this point. The trial court found that one of the two Kermin corporations was the owner of the machine. Counsel merely established that Mr. Kermin had bought the machine.
2. The trial court found that the machine was a trade fixture, and appellants do not complain of this finding. It is supported by the evidence. The machine was bolted into a concrete floor and used for purposes of manufacture. (Civ.Code, § 1019; Beebe v. Richards (1953) 115 Cal.App.2d 589, 590–591, 252 P.2d 688.)
3. The lease provided, among other things, that as additional security for the lessees' performance ‘Lessee hereby grants to Lessor a security interest in all its fixtures, machinery, equipment . . . presently owned by Lessee and located at said demised premises . . .’ It also stated that ‘. . . while Lessee is not in default in the payment of rent or any of its obligations under this Lease, it may trade in or replace any of said items free of this security interest and the security interest shall then apply to the newly acquired items. . . .’ Another provision of the lease stated that ‘All trade fixtures, equipment and other like property which the Lessee has installed in or attached to the building . . . shall remain the property of the Lessee, subject to Lessor's security interest, and the Lessor agrees that the Lessee shall have the option at any time, and from time to time, provided the Lessee is not then in default in the performance of any of the obligations of the lease on its part to be performed to trade in or replace any and all of its trade fixtures, equipment, and other like property which it may have installed in the building or improvements, and upon the termination of the lease, to remove same, provided that . . . if Lessee be in default, it shall not then have any right of trading in, replacing or removing of such trade fixtures, equipment and other like property which it may have installed. . . .’
4. The Picks and Meslers, together with others, caused a limited partnership, Bauchet Properties, to be formed, and conveyed the property to it, together with an assignment of the lease. This conveyance was also recorded. Bauchet Properties is an appellant herein, as is David Pick.
5. The trial court found that Pick agreed in writing that Goldie ‘could lawfully repossess' the machine. This finding is seriously misleading if it is meant to imply any right in Goldie by virtue of Pick's consent to the amicable repossession. The writing signed by Goldie states that he shall be estopped from claiming in the action that he was in peaceful possession of the premises at the time of removal of the equipment.
6. A purpose of section 9–313 of the Uniform Commercial Code was ‘To state when a secured party claiming an interest in goods as fixtures under this Act is entitled to priority over a person claiming an interest in the same goods by reason of the law applicable to real estate.’ (Official Comments by Conference of Commissioners on Uniform State Laws and the American Law Institute.) In 1972 the Commissioners amended section 9–313 of the Uniform Commercial Code. In commenting on the amendments the Code's authors said: As the Code came to be widely enacted, the real estate bar came to realize the impact of the fixture provisions on real estate financing and real estate titles. They apparently had not fully appreciated the impact of these provisions of Article 9 on real estate matters during the enactment of the Code, because of the commonly-held assumption that Article 9 was concerned only with chattel security matters.‘The treatment of fixtures in pre-Code law had varied widely from state to state. The treatment in Article 9 was based generally on prior treatment in the Uniform Conditional Sales Act, which, however, had been enacted in only a dozen states. In other states the word ‘fixture’ had come to mean that a former chattel had become real estate for all purposes and that any chattel rights therein were lost. For lawyers trained in such states the Code provisions seemed to be extreme. Some sections of the real estate bar began attempting with some success to have Section 9–313 amended to bring it closer to the pre-Code law in their states. In some states, such as California and Iowa, Section 9–313 simply was not enacted.'
7. Because of this conclusion it is unnecessary for us to consider appellants' arguments that Goldie did not properly perfect his security interest, as required by the Uniform Commercial Code.
8. Goldie's counsel objected when counsel for appellants tried to pursue a line of inquiry suggested from the foregoing quotation from Bridges. The court erroneously sustained the objection.
COLE, Associate Justice.* FN* John L. Cole, Judge of the Superior Court of Los Angeles County, assigned by the Chairman of the Judicial Council.
JEFFERSON, Acting P. J., and DUNN, J., concur.