NORTHERN COUNTIES BANK v. EARL HIMOVITZ SONS LIVESTOCK CO (1963)

Jack Rose was an independent cattle buyer and feeder. During 1959–1960 his operations were financed by Earl Himovitz and Sons Livestock Company. Rose would select cattle and agree to buy them in his own name. Himovitz would advance the funds. Rose and Himovitz would then sign a so-called ‘sale and repurchase agreement.’ According to this agreement Himovitz would ‘purchase’ the cattle; Rose would pay Himovitz a deposit of $20 per head and agree to ‘repurchase’ the cattle at the end of the feeding period. During the feeding period risk of loss was borne by Rose and the cattle bore his brand. The ‘repurchase’ price would be calculated to pay Himovitz the remainder of his advance, plus interest and a ‘commission’ of $2.50 per head. The agreement required that Himovitz receive payment before the cattle were shipped from the feed lot. In actual practice this requirement was relaxed. For some months Himovitz permitted Rose to deliver cattle to his customers, who then remitted to Himovitz. Later, Himovitz permitted Rose to receive direct payment from his own customers. Rose then would pay Himovitz. The ‘sale and repurchase’ agreements were not recorded.

Diamond Meat Company was one of the packers to whom Rose sold cattle. In November 1960 Himovitz learned that Rose was in financial difficulty. In order to bolster his own security Himovitz decided to withdraw his consent to the arrangement by which Rose received sales proceeds directly from his customers. About November 16, 1960, Himovitz notified Rose's customers, including Diamond Meat Company, of his interest under the ‘sale and repurchase agreement’ and demanded that future remittances of sales proceeds be paid directly to him rather than to Rose.

On November 18, 1960, Himovitz and Rose called personally upon Diamond Meat Company. At that time Diamond owed Rose for certain cattle. Diamond drew several drafts payable to Himovitz alone or payable to Rose and Himovitz jointly. At that time Rose also had certain cattle in Diamond's hands on a consignment basis. At the November 18 meeting, Diamond issued a draft bearing date of November 30, 1960, payable to the order of Himovitz alone, in the sum of $15,263.27, representing the full purchase price of the cattle then under consignment from Rose.

Plaintiff Northern Counties Bank, a creditor of Rose, brought suit against him. It sought attachment of the cattle in the hands of Diamond. On November 22, 1960, a constable delivered a notice of levy and a copy of attachment writ to Diamond. The constable's return shows that he levied on, and Diamond stated that it had in its possession, two truckloads of cattle. The constable did not take the cattle into his possession. Apparently Diamond then butchered or sold the cattle—which event occurred is not clear—and on November 29 presented a written statement to the constable that it was ‘holding, per writ of attachment #14924 served November 22, 1960, payment for cattle owned by Jack Rose and Earl Himovitz’ the sum of $15,263.27.

Through banking channels Himovitz presented the November 30 draft, but payment was refused. Himovitz then filed a third party claim alleging that at the time of the levy Diamond had purchased the cattle and demanding that the money held by Diamond be paid to it. After a hearing the court below upheld the third party claim of Himovitz, rejecting that of plaintiff, the attaching creditor. Plaintiff appeals.

An attaching creditor acquires only the interest his debtor possesses. (Kinnison v. Guaranty Liquidating Corp., 18 Cal.2d 256, 263, 115 P.2d 450.) If the thing sought by the November 22 levy—whether cattle, debt or money—belonged to Himovitz, then the levy was ineffectual. Plaintiff argues that the November 18 transaction was only an attempt to assign orally to Himovitz an expectancy of money which might be owing at a later date; that on November 22 Rose was owner of the cattle in Diamond's hands; that the attachment levy was a garnishment of cattle, not money; that the subsequent (unauthorized) sale by Diamond did not defeat the lien of attachment which came into being on November 22; that even if an assignment occurred, it violated the statutes (Civ.Code, secs. 3017, 3018) requiring recordation of assignments of accounts receivable. Finally, plaintiff contends that the original ‘sale and repurchase’ agreement between Himovitz and Rose was either an unrecorded chattel mortgage or an unrecorded conditional sale of cattle, void as to Rose's creditors under Civil Code, section 2957 or section 2980.5.

The trial court held that the November 18 transaction created an equitable assignment to Himovitz, hence that the third party claim must be sustained (citing McIntyre v. Hauser, 131 Cal. 11, 63 P. 69; Smith v. Harris, 127 Cal.App.2d 311, 273 P.2d 835).

One of the recurrent ironies of adjudication is the necessity of fitting business transactions into the pigeonholes of standardized legal concepts, when the actors were actually thinking only of money. From such characterizations, conceived after the fact by lawyers and judges, flow secondary consequences hardly foreseen by the actors themselves. We have concluded that the activities of November 18, 1960, resulted in a legal relationship other than that debated by counsel or envisaged by the trial court. The judgment must be affirmed, but for reasons other than those which moved the trial court and have been debated by counsel. We have no hesitance in adopting a new theory as the basis for decision on appeal since the question is purely one of law, and the facts, in our view, can result only in affirmance. (Panopulos v. Maderis, 47 Cal.2d 337, 340–341, 303 P.2d 738; Gillespie v. Ormsby, 126 Cal.App.2d 513, 526–527, 272 P.2d 949.)

An assignment, equitable or otherwise, required only a bipartite transaction between Rose as assignor and Himovitz as assignee. Such a transfer might occur with or without consent of Diamond, the third party obligor. It would not create a new contract or discharge an existing one. In fact, the November 18 transaction was a tripartite agreement, which effected a complete substitution of obligations, or novation. (Civ.Code, sec. 1530.) A novation may consist of the substitution of a new debtor in place of the old one, with intent to release the latter; or the substitution of a new creditor in place of the old one, with intent to transfer the rights of the latter to the former. (Civ.Code, sec. 1531.) A novation may be ‘compound,’ that is, it may involve simultaneous substitution of creditors and debtors (6 Williston on Contracts (rev. ed.) sec. 1867); and it may substitute an absolute agreement for one that was conditional (ibid., sec. 1873). Ultimately, the question of novation turns on the parties' intention to discharge the old contract and substitute a new one. (Alexander v. Angel, 37 Cal.2d 856, 862, 236 P.2d 561; San Gabriel Valley Ready-Mixt v. Casillas, 142 Cal.App.2d 137, 140, 298 P.2d 76; see Annotation, 61 A.L.R.2d 755, 759.)

Two obligations were involved here: (a) Rose's original debt to Himovitz, and (b) Diamond's conditional obligation to pay Rose when the consigned cattle in its hands were sold or butchered. Himovitz testified that when he and Rose went to Diamond Meat Company on November 18 he specifically told the representatives of Diamond ‘that these cattle were under contract to me and that the proceeds must and should come to me.’ Rose too testified that he directed Diamond to pay Himovitz. Diamond's response was to hand Himovitz a negotiable draft, in form payable immediately but postdated to November 30, 1960, covering the price of the cattle. Thus Rose dropped out of the picture as debtor of Himovitz and as potential creditor of Diamond, and there was substituted for both obligations the direct obligation of Diamond to Himovitz as evidenced by the negotiable draft.

Execution of a new note or similar instrument has particular significance in demonstrating a novation, especially when the obligor of the instrument is a third party. (See Farmers National Gold Bank v. Stover, 60 Cal. 387, 395; 66 C.J.S. Novation § 15, p. 697, note 94.) In some instances a creditor who takes the note or other instrument from a third party finds difficulty in collecting it. In such cases, for the former's protection, the courts infer or even ‘presume’ an intent to accept the new obligation conditionally, rather than in complete discharge of the original debtor. (6 Williston, op. cit., sec. 1875; but compare, 6 Corbin on Contracts, sec. 1298.) Of especial significance here is the fact that on November 18 Diamond was only a consignee of the cattle and its obligation to pay Rose was only conditional. The upshot of the three-way discussion of November 18 was Diamond's execution of an unconditional obligation, evidenced by a negotiable draft payable directly to Himovitz. The latter could have negotiated the draft to a third person. Diamond would have direct and unconditional liability to any holder in due course. In putting this negotiable paper into the channels of commerce Diamond could only have intended to complete its transaction with Rose and totally discharge its obligation to him. The circumstances demonstrate an intent to create a complete substitution of obligations or novation.

To be sure, in its November 29 response to the attachment levy Diamond indicated that it was holding ‘payment for cattle owned by Jack Rose and Earl Himovitz.’ While the parties, as laymen, could not be expected to describe their acts in legal terms, it seems fair to infer that Diamond, by handing a negotiable draft for the cattle price to Himovitz on November 18, intended to take title to the cattle then and there.

Discharge of the two original obligations furnished ample consideration for the novation. (Manfre v. Sharp, 210 Cal. 479, 481, 292 P. 465.) The evidence indicates that Himovitz was acting in legitimate protection of the purchase money obligation owed him by Rose. No formal findings are required in third party claim proceedings. Implicit in the judgment of the trial court is a finding of good faith on the part of Himovitz. (Embree Uranium Co. v. Liebel, 169 Cal.App.2d 256, 261, 337 P.2d 159.)

Civil Code, sections 3017, 3018 invalidate unrecorded assignments of accounts receivable at the behest of either a subsequent assignee or of a creditor of the assignor. Basic purpose of these provisions is protection of lenders who engage in non-notification financing secured by assignments of accounts receivable. (H. S. Mann Corp. v. Moody, 144 Cal.App.2d 310, 301 P.2d 28; Costello v. Bank of America, D.C., 141 F.Supp. 225.) These statutes have no application to the present transaction, a novation accomplished by the common agreement of three parties who effect a complete substitution of new contractual obligations for old.

We may assume, with appellant, that the original ‘sale and repurchase agreement’ between Rose and Himovitz was a thinly disguised security instrument; if an unrecorded chattel mortgage of cattle, it was void as against plaintiff, a creditor of the mortgagor (Civ.Code, sec. 2957); if a conditional sale of livestock, recordation was required on pain of avoidance at the creditor's hands (Civ.Code, sec. 2980.5). Lack of recordation, however, did not impair validity of the principal debt which Rose owed Himovitz. On November 18 Rose was not making a pledge for security purposes; rather he was making an absolute transfer of cattle to Diamond in complete discharge of his debt to Himovitz. (Kinnison v. Guaranty Liquidating Corp., supra, 18 Cal.2d at 264, 115 P.2d at 454.) He divested himself of both cattle and his right to receive cattle proceeds. Thereafter plaintiff, his attaching creditor, could capture nothing more than Rose owned, which was nothing.

Judgment affirmed.

FRIEDMAN, Justice.

PIERCE, P. J., and SCHOTTKY, J., concur.