Dayka & Hackett, LLC v. Del Monte Fresh Produce N.A., Inc. – 1/25/2012

January 30, 2012

Arizona Court of Appeals Division Two Holds That for Purposes of Determining the Priority of Security Interests in Collateral Under A.R.S. § 47-9307(B)-(C), a Debtor Is Located in Washington, D.C. if the Debtor Resides in a Jurisdiction That Does Not Generally Require the Recording of Security Interests in Order to Obtain Priority over Lien Creditors.

In January 2007, Plaintiff entered into marketing and security agreements with two growers based in Mexico to finance and sell the growers’ 2007 grape crop.  Plaintiff filed a financing statement pursuant to A.R.S. § 47-9307(C) in Washington, D.C. to perfect its interest.  The security agreement granted Plaintiff an interest in both the 2007 and future crops, together with any proceeds generated by sales of those crops.  The 2007 crop was not profitable and the growers defaulted.  Defendant, unaware of Plaintiff’s relationship with the growers, entered into its own marketing and security agreement with the growers under which it agreed to finance their 2008 crop and pay them a portion of the sales proceeds.  Defendant received a security interest in the 2008 crop, and any proceeds from its sale.  Defendant registered its security interest with the public registry in Mexico rather than in Washington, D.C.

In 2008, Plaintiff informed Defendant of its security interest in the 2008 crop.  Defendant marketed the 2008 crop, however, and collected and retained all the sales proceeds.  Plaintiff filed suit and the trial court awarded Plaintiff summary judgment.  Defendant timely appealed.

The Arizona Appeals Court affirmed.  The Court first held that Plaintiff’s security interest in the 2008 crop was superior to Defendant’s security interest.  The UCC states that the local law of the jurisdiction in which the debtor is located governs the perfection and priority of a security interest in collateral.  See A.R.S. §§ 47-9301(1).  A debtor is located at its principal residence, unless the debtor resides in a jurisdiction that does not “generally require[]” the recording of a notice of a nonpossessory security interest in order to obtain priority over the rights of a lien creditor with respect to the collateral; in that case, the debtor is considered to be located in Washington, D.C.  See A.R.S. § 47-9307(B)-(C).  Based on Plaintiff’s experts’ testimony, and other sources, the Court held that Mexican law does not generally require the recording of a nonpossessory security interest to establish priority.  Accordingly, the growers were located in Washington, D.C. and Plaintiff properly recorded its security interest in that jurisdiction.  The Court rejected Defendant’s argument that a jurisdiction’s registration system should be examined with regard to the specific collateral at issue rather than for nonpossessory secured interests as a whole, explaining that A.R.S. § 47-9307(C) refers to a jurisdiction’s “general” requirements.

The Court next held that A.R.S. §§ 47-9610 and 47-9615, which allow a secured party to dispose of collateral and cash proceeds upon default, did not insulate Defendant from liability to Plaintiff for conversion.  Under U.C.C. § 9-609 cmt 5 (2001), non-UCC law applies when a junior party refuses to relinquish possession of collateral to a party holding a superior interest and is liable for conversion.  Under the facts of this case, the Court held that Defendant’s interference with Plaintiff’s rights to the 2008 crop and the proceeds therefrom constituted conversion.  See Case Corp. v. Gehrke, 208 Ariz. 140 ¶ 11, 91 P.3d 362, 365 (App. 2004).     

The Court rejected Defendant’s argument that it was entitled under A.R.S. § 47-9404 to a right of recoupment under its marketing agreement with the growers.  That statute states that the rights of an assignee are subject to “[a]ll terms of the agreement between the account debtor and assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract.”  Citing United States v. Handy & Harman, 750 F.2d 777, 786 (9th Cir. 1984), the Court held that A.R.S. § 47-9404 does not apply to conversion claims like Plaintiff’s claim because Plaintiff asserted a superior security interest in the 2008 crop and its sales proceeds, and did not assert an interest in the growers’ account with Defendant. 

Judge Brammer authored the opinion; Judges Eckerstrom and Howard concurred.