Bank of California v. Leone

Opinion

CHRISTIAN, J.

Defendants (members of the Leone family doing business as “Sherbo Distributing Company”) appeal from a judgment establishing their indebtedness to respondent The Bank of California National Association on three promissory notes executed by Anthony J. Leone, Sr. Two of the notes were executed in September 1968 and the third in October 1969.

The proceeds of the first two notes, each in the amount of $4,933.92,

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were credited to the Sherbo Distributing Company. As security the bank took assignments from Leone of the lessor’s interest in the leases of two vending machines. The machines continued under lease to Purity Stores, but monthly rentals were collected by respondent bank. Respondent filed financing statements with the Secretary of State under provisions of the Uniform Commercial Code (see Cal.U. Com. Code, § 9401 et seq.).

Respondent received monthly payments from Purity Stores until February 1970, when Purity Stores indicated it would make no more payinents. Respondent then attempted to take possession of the machines in order to exercise its security interest, but the machines could not be found. Several similar machines were in use at the stores, but examination of the serial numbers established that they were not the same machines as had been identified in the financing statements. There was evidence that machines were frequently replaced as they broke down. Respondent had not been advised or consented to any substitutions. Respondent thereupon brought suit to recover under the two notes.

Meanwhile, on December 19, 1968, Leone gave the bank an unsecured note for $13,500 due on March 19, 1969. After the note had matured, Leone assigned to the bank as collateral security, to induce forbearance in the collection of the note, a $17,600 note executed by Jack P. Shaffer and payable to Leone. The Shaffer note was secured by a fourth deed of trust on land owned by Shaffer in Solano County. Leone also executed a “General Security Agreement” permitting the bank to protect its interests by making extension agreements with respect to the collateral.

In October 1969, Leone executed a successor note in which he promised to pay respondent $13,000 principal on November 28, 1969. The proceeds of that note, in addition to other money paid by Leone, were used to pay the principal and interest due on the $13,500 note held by respondent. Respondent retained the Shaffer note and deed of trust as collateral. Leone defaulted; respondent agreed to extensions in the Shaffer note and participated in refinancing some senior obligations in order to improve the position of the Shaffer-Leone note and fourth deed of trust which had been assigned to respondent as collateral. Respondent later brought this suit to collect Leone’s $13,000 note without first seeking recourse against the collateral.