Present: Hassell, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ., and Carrico, S.J. 1
JOHN W. AINSLIE, SR., ET AL.
OPINION BY
v. Record No. 020595 SENIOR JUSTICE HARRY L. CARRICO
February 28, 2003
MICHAEL A. INMAN, RECEIVER, ETC., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF CHESAPEAKE
S. Bernard Goodwyn, Judge
This is an appeal from a final order in a declaratory
judgment proceeding involving the application of provisions of
the Uniform Commercial Code (the UCC) 2 and the Uniform
Partnership Act (the UPA). 3 The proceeding began when John W.
Ainslie, Sr., John W. Ainslie, Jr., and Jeffrey W. Ainslie
(collectively, the Ainslies), filed a petition for declaratory
judgment against Robert M. Buchanan, Jr. (Buchanan), and Robert
L. Byrd (Byrd), equal owners of a Virginia general partnership
known as B & B Partnership (the partnership). In the petition,
the Ainslies sought a declaration that their security interest
in the 50% interest of Buchanan in the partnership had priority
1
Chief Justice Carrico presided and participated in the
hearing and decision of this case prior to the effective date of
his retirement on January 31, 2003.
2
The UCC was revised effective July 1, 2001. 2000 Va. Acts
ch. 1007. Because the events in this case occurred prior to July
1, 2001, we will refer to the pre-revision version of the UCC in
determining the rights of the parties.
3
The present version of the Virginia Uniform Partnership
Act became effective July 1, 1997. 1996 Va. Acts ch. 292.
Section 50-73.149 of the new act provides that "[t]his chapter
does not affect an action or proceeding commenced or right
accrued before July 1, 1997." This proceeding was commenced
over any other claim to Buchanan's interest. 4 Also named as
defendants were Michael A. Inman, Receiver for the interest of
Buchanan in the partnership, and Kevin B. Rack, Trustee under
the Will of Robert M. Buchanan, Sr. (Rack), the holder of a
judgment against Buchanan.
The Ainslies and Rack both moved for summary judgment. The
trial court denied the Ainslies' motion and granted Rack's,
holding in a final order that Rack had first lien priority to
any distributions of income and profits due to Buchanan from the
partnership. We awarded the Ainslies this appeal.
The record, consisting mainly of stipulations of fact by
the parties, shows that in addition to owning a 50% interest in
the partnership, Buchanan was president of Festive Foods, Inc.
In 1995, the Ainslies loaned Festive Foods $100,000.00, and on
January 24, 1995, Festive Foods executed two promissory notes,
each in the amount of $50,000.00, payable to the Ainslies.
Buchanan personally guaranteed each note, and on January 24,
1995, signed a security agreement pledging his interest in the
partnership as collateral for the notes. On January 26, 1995,
the Ainslies duly filed financing statements listing the
collateral with the clerks of the State Corporation Commission,
prior to July 1, 1997, so we will refer to the previous
provisions relating to general partnerships.
4
The partnership's only asset consisted of a "significant"
undeveloped tract of land in the City of Chesapeake.
2
the Circuit Court of the City of Chesapeake, and the Circuit
Court of the City of Virginia Beach. 5
On May 8, 1997, Rack obtained a judgment against Buchanan
in the Circuit Court of the City of Chesapeake in the amount of
$512,735.81. The judgment also allowed Rack interest and
attorney's fees.
On June 3, 1997, Festive Foods executed a note payable to
the Ainslies in the principal amount of $150,000.00, apparently
replacing the two notes executed on January 24, 1995. Buchanan
guaranteed payment of the new note, and it was secured pursuant
to the security agreement he executed on January 24, 1995.
On April 15, 1998, Rack filed a petition in the trial court
for the entry of an order pursuant to Code § 50-28, 6 part of the
UPA, charging Buchanan's interest in the partnership with the
judgment Rack had obtained against Buchanan on May 8, 1997. At
the time of the hearing on the petition, payment of the
$150,000.00 note executed by Festive Foods on June 3, 1997, was
not in default. The Ainslies moved to intervene in the
proceeding, but the trial court denied their motion, holding
5
A filed financing statement is effective for a period of
five years from the date of filing. The effectiveness of a
filed financing statement lapses on the expiration date of the
five-year period unless a continuation statement is filed prior
to the lapse. Code § 8.9-403(2).
6
Code § 50-28 provided that upon application by a judgment
creditor of a partner, the court may charge the interest of the
debtor partner with payment of the unsatisfied amount of such
judgment debt and may appoint a receiver of the debtor partner's
3
they were not judgment creditors within the meaning of Code
§ 50-28. On May 18, 1998, the court granted Rack an order
charging Buchanan's interest in the partnership with Rack's
judgment and appointing Inman as a receiver for Buchanan's share
of the profits from the partnership and any other money due or
to fall due to him in respect of the partnership.
In early June 1998, Buchanan defaulted in payment of the
$150,000.00 note. In a letter dated June 4, 1998, counsel for
the Ainslies notified Buchanan and Byrd, the owner of the other
50% of the partnership, that the letter would "serve as notice
that pursuant to the default of the underlying promissory note,
[the Ainslies were] taking possession of and foreclosing upon
the partnership interests of [Buchanan in the partnership]."
This letter also instructed "the partnership to transfer the
name of ownership of the former interest of [Buchanan] to [the
Ainslies]." The Ainslies received no response from Buchanan or
his partner to the June 4 letter or any evidence that the
partnership had transferred the name of the ownership of
Buchanan's interest in the partnership to the Ainslies.
On August 6, 1998, the Circuit Court of the City of
Chesapeake entered a consent judgment order in favor of the
Ainslies against Buchanan in the amount of $150,000.00, with
interest. This judgment remained of record with no amendments
share of the profits and of any other money due or to fall due
to the debtor partner in respect of the partnership.
4
or notations at the time the present proceeding was pending in
the trial court. Further, from the date the Ainslies received
their judgment in 1998 until their filing of the present
petition for declaratory judgment on August 25, 2000, the
Ainslies "took no collection actions against Buchanan through
the courts (i.e., a summons to answer debtor's interrogatories,
a summons in garnishment, a levy, etc.)."
January 26, 2000, marked the five-year anniversary of the
filing of the Ainslies' financing statement. The five years
elapsed without the filing of a continuation statement as
provided by Code § 8.9-403(2).
In mid-2000, counsel for the partnership disbursed two
checks totaling approximately $200,000.00 to Inman, as receiver,
representing what the partnership claimed was Buchanan's share
of the partnership's profits from the sale of a portion of the
partnership's land. Inman still holds the funds in his capacity
of receiver. On July 28, 2000, Inman filed a petition with the
Circuit Court of the City of Chesapeake asking the court to
determine the priority of claims between Rack and the Ainslies
to Buchanan's interest in the partnership.
On August 25, 2000, the Ainslies filed the present
declaratory judgment proceeding asking the trial court to
declare that their security interest had priority over Rack's
judgment. On May 2, 2001, the Ainslies filed a motion asking
for the entry of a charging order on their judgment against
5
Buchanan. In its final order entered December 5, 2001, the
trial court granted the Ainslies a charging order but declared
that it was junior in priority to Rack's charging order entered
May 18, 1998.
The Ainslies have assigned three errors. The first two
involve the interpretation of several statutes. The Ainslies
maintain, and Rack agrees, that the interpretation of statutes
presents a pure question of law subject to de novo review by
this Court. See Cain v. Rea, 159 Va. 446, 450, 166 S.E. 478,
479 (1932). The third assignment of error involves the legal
effect of the letter that the Ainslies' counsel directed to
Buchanan and his partner on June 4, 1998. The Ainslies
maintain, and Rack agrees, that the legal effect of a writing is
also a question of law. Baker Matthews Lumber Co. v. Lincoln
Furniture Mfg. Co., 148 Va. 413, 421, 139 S.E. 254, 257 (1927).
Yet, as Rack states, although we review the matters involved in
the case de novo, the trial court's judgment is presumed to be
correct and stands until error has been pointed out. See
Lavenstein v. Plummer, 179 Va. 469, 471, 19 S.E.2d 696, 697
(1942).
The Ainslies' first two assignments of error focus upon
Code § 8.9-501(5). That subsection provides that "[w]hen a
secured party has reduced his claim to judgment the lien of any
levy which may be made upon his collateral by virtue of any
6
execution based upon the judgment shall relate back to the date
of the perfection of the security interest in such collateral."
The Ainslies state that a levy on a partnership interest is
effected by obtaining a charging order, see O.C. Partnership v.
Owrutsky & Associates, P.A., 596 A.2d 76, 78 (Md. 1991), and
that a charging order is a type of levy of execution pursuant to
a judgment within the contemplation of Code § 8.9-501(5). The
Ainslies say that a secured creditor who reduces a claim to
judgment prior to the expiration of his perfected security
interest "is entitled to the relation back provision for a
subsequent execution on the judgment, even if that execution
occurs after the lapse of the [financing statement] filing."
The Ainslies maintain that they reduced their claim to
judgment on August 6, 1998, before the expiration of their
financing statement and when they had a perfected security
interest in Buchanan's partnership interest. Hence, the
Ainslies conclude, the execution on their judgment in the form
of the charging order they obtained on December 5, 2001, related
back to January 26, 1995, the date the security interest was
perfected, making their charging order of first priority over
Rack's charging order.
We disagree with the Ainslies. As Rack states, it is a
familiar rule of statutory construction that when a given
controversy involves a number of related statutes, they should
be read and construed together in order to give full meaning,
7
force, and effect to each. See Kole v. City of Chesapeake, 247
Va. 51, 56, 439 S.E.2d 405, 408 (1994). Pursuant to this rule,
we think it is necessary to read and construe Code § 8.9-501(5)
together with Code § 8.9-403(2). In pertinent part, Code § 8.9-
403(2) provides as follows:
[A] filed financing statement is effective for a period of
five years from the date of filing. The effectiveness of a
filed financing statement lapses on the expiration of the
five-year period unless a continuation statement is filed
prior to the lapse. . . . If the security interest becomes
unperfected upon lapse, it is deemed to have been
unperfected as against a person who became a purchaser or
lien creditor before lapse.
(Emphasis added.) Hence, the Ainslies' financing statement
lapsed five years from the date of its filing, and, without the
filing of a continuation statement prior to the lapse, their
security interest in Buchanan's partnership interest is deemed
to have been unperfected against Rack, who became a lien
creditor before the lapse. 7 And since the security interest
7
The Ainslies argue that they were not required to file a
continuation statement, and they cite the unreported case of
Chrysler Credit Corp. v. United States, 1978 U.S. Dist. LEXIS
19263, 24 UCC Rep. Serv. 794 (E.D. Va. 1978), in support of
their argument. However, the case is inapposite. In the first
place, Code § 8.9-501(5) was not involved in that case and was
not even mentioned in the opinion. Furthermore, the creditor's
financing statement lapsed during the pendency of the
litigation, and, therefore, the court ruled there was no
necessity for the creditor to continue filing financing
statements.
The Ainslies also cite Hanley Implement Co. v. Riesterer
Equipment, Inc., 441 N.W.2d 304 (Wis. Ct. App. 1989), but that
decision actually supports Rack's position in the present case.
There, the creditor's financing statement lapsed after the date
the collateral was purchased by a third party and before the
8
remained unperfected at the time the trial court awarded the
Ainslies a charging order on December 5, 2001, they were not
entitled to the benefit of the relation back provision of Code
§ 8.9-501(5). This view of the matter is confirmed by Note 6 of
the Official Comment to Code § 8.9-501(5), which states that
subsection (5) makes clear that any judgment lien which the
secured party may acquire against the collateral is, so to
say, a continuation of his original interest (if perfected)
and not the acquisition of a new interest or a transfer of
property to satisfy an antecedent debt.
(Emphasis added.) The trial court did not err, therefore, in
holding that the Ainslies' charging order was junior in priority
to Rack's charging order.
The Ainslies argue, however, pursuant to their third
assignment of error, that despite Rack's charging order, they
had the right to repossess and foreclose upon Buchanan's
partnership interest, which they did with a "strict foreclosure"
under Code § 8.9-505(2). This subsection provides in pertinent
part as follows:
In any other case involving consumer goods or any
other collateral a secured party in possession may, after
default, propose to retain the collateral in satisfaction
of the obligation. Written notice of such proposal shall
be sent to the debtor if he has not signed after default a
statement renouncing or modifying his rights under this
subsection. . . . If the secured party receives objection
in writing from a person entitled to receive notification
within twenty-one days after the notice was sent, the
creditor filed suit against the purchaser. The court held that
the creditor's security interest was deemed to have been
unperfected when the third party purchased the collateral and
hence the buyer took the property free and clear of the
creditor's security interest.
9
secured party must dispose of the collateral under § 8.9-
504. In the absence of such written objection the secured
party may retain the collateral in satisfaction of the
debtor's obligation.
Hence, as the Ainslies acknowledge, in order to meet the
requirements of a strict foreclosure, the secured party must
show (1) that a default exists, (2) that the secured party is in
possession of the collateral, (3) that the secured party has
given written notice to the debtor that the secured party
proposes to retain the collateral in full satisfaction of the
debt, and (4) that a period of twenty-one days has been allowed
the debtor to object to the proposal.
There is no question that Buchanan defaulted in his payment
of the promissory note in question, and we will assume, without
deciding, that the Ainslies were in possession of the
collateral. They failed, however, to satisfy the third
requirement, i.e., that they proposed to retain the collateral
in full satisfaction of the debt. The nature of the proposal
that the secured party is required to make is expressed in Note
1 of the Official Comment to Code § 8.9-505 as follows: "In
lieu of resale or other disposition, the secured party may
propose under subsection (2) that he keep the collateral as his
own, thus discharging the obligation and abandoning any claim
for a deficiency."
And, as Ronald A. Anderson states in his treatise on the
UCC:
10
The notice required by UCC § 9-505 must clearly state
the creditor's intention to retain the collateral in
satisfaction of the secured debt.
A notice will be held as a matter of law to not comply
with UCC § 9-505 when it does not clearly and explicitly
inform the debtor that the creditor was retaining the
collateral in full satisfaction of the debt.
10 Ronald A. Anderson, Anderson on the Uniform Commercial Code
§ 9-505:84, 907 (3rd ed. 1999).
As noted previously, in the June 4, 1998 letter, the
Ainslies notified Buchanan and his partner that the Ainslies
were "taking possession of and foreclosing upon the partnership
interests of [Buchanan in the partnership]," and the letter
instructed "the partnership to transfer the name of ownership of
the former interest of [Buchanan] to [the Ainslies]." Nothing
in this language would lead a reasonable person to believe that
the creditor intended to retain the collateral in full
satisfaction of the debt. The language does not "clearly and
explicitly inform the debtor that the creditor was retaining the
collateral in full satisfaction of the debt." Id. Hence, the
notice, as a matter of law, does not comply with Code § 8.9-
505(2). 8
Finally, the Ainslies argue that if we find they did not
perform a strict foreclosure on Buchanan's partnership interest
pursuant to Code § 8.9-505(2), then we should find that they
8
This holding renders moot the question whether the
Ainslies satisfied the fourth requirement for strict
11
foreclosed on the partnership interest pursuant to Code § 8.9-
504. The Ainslies say that § 8.9-504 only requires the creditor
to dispose of the collateral in a commercially reasonable
manner. Once Buchanan defaulted, the Ainslies assert, they had
a right to sell or dispose of the collateral, in the language of
Code § 8.9-504(3), "at any time and place and on any terms but
every aspect of the disposition including the method, manner,
time, place and terms must be commercially reasonable."
The difficulty with this argument is that it is not
cognizable in this proceeding. "A court cannot enter a decree
or judgment on a right which has not been pled or claimed."
Smith v. Sink, 247 Va. 423, 425, 442 S.E.2d 646, 647 (1994).
The Ainslies premised their petition for declaratory judgment
solely upon the contention that they had performed a strict
foreclosure of their security interest in the collateral. Code
§ 8.9-504 is not mentioned in the petition, and the petition
contains no allegation that the Ainslies foreclosed pursuant to
that Code section. On the other hand, Code § 8.9-505(2), the
strict foreclosure statute, is quoted in full and the allegation
is made that because no person objected within twenty-one days
of notice, a provision unique to § 8.9-505(2), the Ainslies were
the legal owners of Buchanan's partnership interest. Hence, we
foreclosure, namely, that the debtor be allowed a twenty-one day
period to object.
12
will not consider the Ainslies' argument based upon Code § 8.9-
504.
For the reasons assigned, we will affirm the judgment of
the trial court.
Affirmed.
13