Archie Wayne Courtney v. Merchants & Manuf Bk ( 1992 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 92-CA-00760-SCT
ARCHIE WAYNE COURTNEY, INDIVIDUALLY AND COURTNEY PLUMBING, INC.
v.
MERCHANTS AND MANUFACTURERS BANK AND HOLIFIELD AND SONS WRECKER
SERVICE
DATE OF JUDGMENT: 07/20/92
TRIAL JUDGE: HON. BILLY JOE LANDRUM
COURT FROM WHICH JONES COUNTY CIRCUIT COURT
APPEALED:
ATTORNEY FOR THOMAS J. LOWE, JR.
APPELLANTS:
ATTORNEY FOR DANNY HENSON
APPELLEES:
NATURE OF THE CASE: CIVIL - OTHER
DISPOSITION: REVERSED AND RENDERED IN PART; REVERSED AND
REMANDED IN PART - 9/19/96
MOTION FOR REHEARING
FILED:
MANDATE ISSUED: 10/10/96
BEFORE PRATHER, P.J., BANKS AND SMITH, JJ.
PRATHER, PRESIDING JUSTICE, FOR THE COURT:
I. INTRODUCTION
¶1. The present case calls upon this Court to review the ruling of a trial judge that a creditor bank
held a proper security interest in a backhoe owned by a debtor even though the promissory note from
which this security interest supposedly arose did not originally list said backhoe as security. The bank
asserts that the failure to originally list the backhoe as security on the note resulted from a clerical
error on its part, and that, upon noticing said error, it merely added the backhoe to the note without
securing consent from or even informing the customer. On these facts, this Court concludes that the
bank does not possess a valid security interest in the backhoe, even though the parties may have
originally intended for the backhoe to serve as security for said note. Accordingly, we reverse.
II. SUMMARY OF THE FACTS AND CASE
¶2. Merchants and Manufacturers Bank, regularly provided loans to Archie Courtney, owner of
Courtney Plumbing, Inc., in connection with Courtney's plumbing and septic tank business. These
loans typically took the form of promissory notes, which were secured by both purchase money and
non-purchase money security interests in Courtney's heavy equipment used in his business. Over a
period of time, these separate promissory notes would typically be combined or consolidated into
one.
¶3. Courtney experienced severe financial problems, and he filed for Chapter 13 Bankruptcy on
February 18, 1992. On April 14, 1992, the Bank filed suit against Courtney, alleging that he was in
default on two of the promissory notes. The Bank requested that Courtney, who was serving as his
own attorney, be required to pay the balance on the notes and to surrender possession of various
collateral which he had pledged as security on the notes. Courtney does not dispute the monies owed
to the Bank; he only contests whether the Bank holds a proper security interest in one piece of
equipment which it seized.
¶4. At the hearing on the Bank's complaint on May 7, 1992, the primary dispute centered around a
1986 Case 580E Super E backhoe, which was listed as security on the Bank's copy of one of the
promissory notes, but not on Courtney's copy thereof. When asked about this discrepancy, Tommy
Stroud, vice-president of the Bank, testified that his secretary had originally forgotten to type the
backhoe on the note and, realizing her mistake at a later date, had added the backhoe to the
instrument. The Bank did not seek Courtney's ratification of the addition of the backhoe, however,
nor did they inform him that the note had been altered.
¶5. Following a hearing, the trial judge entered an order of possession in favor of the Bank with
regard to the equipment listed as security on the promissory note, including the backhoe. Courtney
subsequently filed a complaint against the Bank for allegedly seizing property in addition to that
which they were entitled to pursuant to the order of possession, to which the Bank responded with a
motion for summary judgment. The trial court granted the summary judgment motion, and Courtney
timely filed an appeal from said ruling as well as from the order of possession entered in favor of the
Bank with regard to the backhoe.
III. ANALYSIS OF THE LAW
A. DID THE TRIAL COURT ERR AS A MATTER OF LAW IN DETERMINING
THAT MERCHANTS AND FARMERS BANK GAINED A SECURITY INTEREST IN
A BACKHOE AS A RESULT OF THE ADDITION OF SAID BACKHOE TO A
PROMISSORY NOTE AFTER IT HAD BEEN SIGNED BY COURTNEY?
¶6. Given that the present appeal involves a negotiable instrument, the facts of this appeal are
properly considered in the context of Article 3 of the Uniform Commercial Code, which is
incorporated into Mississippi Code Annotated § 75-3-101 et seq. A revised version of Article 3
became effective in this State beginning on January 1, 1993, but, given that the events surrounding
this case and the hearing at the lower court all occurred prior to 1993, this Court should properly
consider the pre-revision version of Article 3 with regard to the present appeal. There is no indication
in the record that the trial judge considered the present issues in the context of Article 3, nor that he
made a specific finding with regard to the issues on appeal, and it is thus appropriate for this Court to
conduct a de novo review of the case. The pertinent facts of the case are not in dispute among the
parties, and it is thus proper for this Court to decide the case as a matter of law.
¶7. The applicable code section is Miss. Code Ann. §75-3-407 (1972), dealing with the alteration of
instruments. This section provided pre-revision that:
(2) As against any person other than a subsequent holder in due course
(a) alteration by the holder which is both fraudulent and material discharges any party whose
contract is thereby changed unless that party assents or is precluded from asserting the defense;
(b) no other alteration discharges any party and the instrument may be enforced according to its
original tenor, or as to incomplete instruments according to the authority given.
¶8. Applying Miss. Code Ann. §75-3-407(2) to the facts of the present case, the Bank's alteration of
the note does not serve to discharge Courtney from his obligations under the note, given that the
Bank did not act in a fraudulent manner in adding the backhoe to the note. Nevertheless, the Code
provided that the note may be enforced "according to its original tenor," which courts have
interpreted as meaning according to the original terms of the note before it was altered. See:
Bluffestone v. Abrahams, 607 P.2d 25 (Ariz. App. 1979). Indeed, the revised version of § 75-3-407
explicitly changes the phrase "original tenor" to "original terms", and this Court considers said
interpretation to be the most logical one.
¶9. Unsurprisingly, a review of the history of §75-3-407 reveals no Mississippi cases interpreting this
section of the Code. However, persuasive authority is found in Abrahams, in which the Court of
Appeals of Arizona was faced with a very similar fact pattern to that in the present case. In
Abrahams, a provision providing for the payment of attorney's fees was added to a note, but
Abrahams' copy of the note bore no such provision, and he was not informed of the alteration prior
to signing it. Abrahams, 607 P.2d at 26. The Arizona court held that, while the alteration of the note
may not have been fraudulent, Abrahams did not consent to the addition of the attorney's fees clause
and, as such, the note should be enforced, but without the attorney's fees clause. With regard to the
issue of consent, the court stated:
Consent to the alteration of an instrument may be implied by the acts of the parties. (citation
omitted). In order to be binding, however, an implication of consent arising from the
circumstances must be plain and ambiguous.
Id. at 28. In the present case, Courtney was not even informed of the alteration made to the note, and
he was allowed to operate under the assumption that his copy of the note represented the final terms.
Under these circumstances, this Court can not conclude that Courtney authorized or consented to the
alteration of the terms of the note.
¶10. It is noteworthy that Am Jur Legal Forms 2d, "Alteration of Instruments" § 18:5 and § 18:6
provide two suggested provisions dealing with clerical mistakes in drafting instruments. Both forms
require that a party either request that the mistake be corrected or to otherwise secure consent for the
alteration. Section 18:5, for example, provides, in part, that:
any clerical errors or mistakes contained in the (instrument) may be corrected by any of the
parties, with the consent of all of the parties evidenced by each party initialing any such
correction.
These legal forms obviously provide very little in the way of legal authority, but they do underscore
the point that, while clerical errors do occur in the drafting of instruments, corrections or alterations
of the instruments are properly made with the knowledge and consent of the parties involved. It
would have been a simple matter for the Bank to request that Courtney initial the correction to the
note, and, failing such consent, the Bank could have taken other legal steps to protect its rights, such
as a suit for reformation.
¶11. The financing statement was clearly executed in conjunction with the promissory note and,
except for the omission of the backhoe in the note, the two documents are largely identical with
regard to the property described as security. Thus, the logical inference from the terms of these two
documents is that the parties originally intended that the backhoe be used as security for the note, and
the Bank would appear to have had a good case for reformation of the promissory note if Courtney
had refused to consent to the alteration. Reformation of an instrument is not specifically dealt with in
the context of Article 3, but according to 4 AmJur 2d "Alteration of Instruments" § 66:
The general rule is that a court of equity, or a court of general jurisdiction in the exercise of its
equitable powers, may reform an instrument that has been fraudulently altered. . . . Principles of
equity generally apply to instruments subject to the Uniform Commercial Code as well.
¶12. Taking the aforementioned steps would have doubtlessly required more time and effort on the
part of the Bank than merely adding the backhoe to the note, but making said efforts was incumbent
upon the Bank, given that the error was its alone. The law offers a mistaken party protection when a
clerical or other such error causes a document to not reflect the intent of the parties, but the law will
not provide such protection if the party in error merely uses self-help remedies without even notifying
the innocent party. The Bank did not follow the proper procedures, and, as such, should properly
bear the responsibility for its own error. Accordingly, this Court must reverse the order granting
possession of the backhoe to the Bank and render judgment that the Bank holds no proper security
interest in the backhoe.
B. DID THE TRIAL COURT ERR AS A MATTER OF LAW IN RULING THAT
MERCHANTS & MANUFACTURERS BANK HAD NOT WRONGFULLY
CONVERTED CERTAIN ITEMS OF EQUIPMENT FROM COURTNEY?
¶13. Courtney asserts a second assignment of error which the Bank claims has been rendered moot
since the filing of the present appeal. The Bank was granted summary judgment with regard to
Courtney's claim that they had wrongfully seized property of his beyond that permitted by the order
of possession entered in the initial hearing. It is represented to this Court in the Bank's brief that they
have returned to Courtney the equipment which he alleges the Bank wrongfully seized, and that
"there is now no live issue remaining between the parties herein." This allegation is unverified by
Courtney, and this case is therefore remanded to the Circuit Court of the Second Judicial District of
Jones County in order that said Court may confirm that the Bank's assurances are accurate.
¶14. In the event that Courtney represents to the circuit court in writing or in person that the dispute
has in fact been resolved and that the equipment not subject to the Bank's security interest has in fact
been returned to his possession, then no further proceedings need be held in this regard. Based on the
Bank's admission that they erroneously seized property beyond that permitted under the order of
possession, this Court reverses the summary judgment ruling in favor of the Bank and remands for
proceedings consistent with this opinion.
¶15. REVERSED AND RENDERED IN PART; REVERSED AND REMANDED IN PART.
LEE, C.J., SULLIVAN, P.J., PITTMAN, BANKS, ROBERTS, SMITH AND MILLS, JJ.,
CONCUR. McRAE, J., CONCURS IN RESULT ONLY.