Appeal from the May 12, 1982, judgment of the United States District Court for the District of Connecticut (M. Joseph Blumenfeld, Judge) denying plaintiff's motion for summary judgment in a scire facias action for failure to pay over a garnished debt and granting defendant's motion for summary judgment. Reversed and remanded.
Waterman, Kaufman, and Newman, Circuit Judges.
This diversity case presents questions concerning Connecticut's law of garnishment, see Conn. Gen. Stat. Ann. § 52-381 (West 1960), and the future advance clause of the Uniform Commercial Code, see N.Y.U.C.C. § 9-301(4) (McKinney Supp. 1982). In this case, a judgment creditor from Virginia attempted to garnish an account held as collateral in Connecticut under a security agreement governed by New York law. The District Court (M. Joseph Blumenfeld, Judge) ruled, 538 F. Supp. 1049, that the garnishment was invalid under Connecticut law. We reverse because we conclude that Connecticut law is to be interpreted to permit the garnishment in order to effectuate the future advance clause of the Uniform Commercial Code. Whether the garnishor is now or will ever be entitled to collect its claim from the garnished account, however, must await further proceedings on remand and perhaps future events.
Best Banana Co. Inc. is a banana importer. To finance purchases from Ecuador, Best Banana entered into a General Loan and Security Agreement, including several supplementary riders, with appellee Aetna Business Credit, Inc. ("Aetna") on April 10, 1979. Under the Agreement, Aetna promised to lend money to Best Banana and to obtain letters of credit that would enable Best Banana to purchase produce from a Latin American supplier. To cover its obligations under the Agreement, Best Banana granted Aetna security interests in many of the company's assets, including then-owned and after-acquired inventory and accounts receivable and proceeds thereof. The Aetna-Best Banana Agreement called for Best Banana to forward all collections on its accounts receivable to an account maintained by Aetna. Under the Agreement, Aetna was authorized to use funds in this account to discharge specified obligations owed by Best Banana to Aetna. These obligations included principal and interest due on loans made under the Agreement, liabilities, losses, and expenses arising out of Aetna's application for letters of credit for Best Banana, and attorney's fees and expenses arising out of legal proceedings brought by or against Aetna because of its Agreement with Best Banana. Aetna's security interests were perfected in April 1979.
With its financing arranged, Best Banana began to import bananas. The company arranged for appellant Dick Warner Cargo Handling Corporation ("Warner") to unload two boatloads of bananas at Portsmouth, Virginia, in June and July 1979. Warner unloaded the cargo, but Best Banana failed to pay $80,651.86 of the amount it owed Warner for the work. Warner then brought suit against Best Banana in a Virginia state court. In November 1979, Warner was awarded judgment against Best Banana for the entire claim. After obtaining its Virginia judgment, Warner came to Connecticut seeking to collect its money from funds held by Aetna for the account of Best Banana.
Connecticut law permits the assertion of quasi-in-rem jurisdiction by process of garnishment, which is also known in Connecticut as foreign attachment. See Conn. Gen. Stat. Ann. § 52-329 (West Supp. 1981). Under Connecticut's procedure the creditor institutes an action against its debtor by garnishing the debtor's funds in the hands of a third party. If the debtor challenges the garnishment, the state court in the creditor-debtor action tests the garnishment only to the extent of determining whether there is probable cause to sustain the validity of the creditor's claim. William M. Raveis & Associates v. Kimball, 186 Conn. 329, 441 A.2d 200, 203 (1982); Conn. Gen. Stat. Ann. § 52-278d(a) (West Supp. 1981). If probable cause exists, the court then adjudicates the creditor's claim against the debtor and, if the creditor prevails, enters judgment for the creditor. The creditor then makes demand upon the garnishee for payment of the funds subject to the garnishment. If the garnishee refuses payment, the creditor may then proceed by a scire facias action, see Conn. Gen. Stat. Ann. § 52-381 (West 1960), or a declaratory judgment action, see id. § 235a, to secure an adjudication that the garnishee holds assets of the debtor that are subject to garnishment. See Clime v. Gregor, 145 Conn. 74, 138 A.2d 794 (1958). If the creditor secures judgment in the scire facias or declaratory judgment action, it is then entitled to have execution upon the garnishee, up to the amount of the garnished funds, to satisfy the judgment obtained against the debtor. See generally 1 E. Stephenson, Connecticut Civil Procedure §§ 56-74 (2d ed. 1970).
On January 3, 1980, the Connecticut Superior Court granted Warner an ex parte, pre-judgment remedy that allowed Warner to garnish $90,000 of Best Banana assets in the possession of Aetna Business Credit. When Warner served process on Aetna on January 11, 1980, at which time Warner's garnishment took effect, there was $45,789.11 in the account in which Aetna held the proceeds of Best Banana's accounts receivable. Up to that date, Aetna had received $399,366.02 into Best Banana's account and had used $353,576.91 of those receipts to discharge obligations incurred by Best Banana, as permitted by the Agreement. As of January 11, 1980, Best Banana had no outstanding obligations to Aetna.
Shortly after process was served, Best Banana moved in the Connecticut Superior Court to dissolve the garnishment. That motion was denied after the state court found probable cause to sustain Warner's claim against Best Banana. The state court then ruled on June 25, 1980, that in view of the Virginia judgment Warner was entitled to a Connecticut judgment for $80,651.86. After unsuccessfully demanding payment from Aetna, as garnishee, Warner brought this scire facias action against Aetna in the Connecticut Superior Court. Aetna removed the action to the District Court on the basis of diversity jurisdiction. 28 U.S.C. § 1441 (1976).
Ruling on cross-motions for summary judgment, the District Court granted judgment in favor of Aetna. While the parties had assumed that the case would be decided under the "future advance" clause of the Uniform Commercial Code, N.Y.U.C.C. § 9-301(4) (McKinney Supp. 1982), the District Court ruled that section 9-201 governed the case. See id. § 9-201 (McKinney 1964). Section 9-201 provides: "Except as otherwise provided by this Act a security agreement is effective according to its terms between the parties, against purchasers of collateral and against creditors." The District Court reasoned that the Agreement coupled with applicable Connecticut law protected Aetna against creditors like Warner. Under the Agreement, Aetna had the authority to hold the funds in Best Banana's account as security for liabilities incurred by Best Banana. Aetna was not obliged to return the funds until it was clear that no more obligations would arise under the Agreement. The District Court therefore concluded that Best Banana had only a contingent interest in its account with Aetna. Under Connecticut law, contingent interests cannot be garnished. See Wilber v. New Haven Water Co., 37 Conn. Supp. 877, 880, 441 A.2d 863, 865 (1982); accord Cibro Petroleum Products v. Fowler Co., 92 Misc. 2d 450, 400 N.Y.S.2d 322 (Sup. Ct. 1977). Believing that Warner's garnishment was invalid, the District Court ruled that Warner could not obtain payment from Aetna in a scire facias action. See Burdett v. Roncari, 181 Conn. 125, 434 A.2d 941 (1981).
The District Court had ample basis for predicting that Best Banana would incur additional obligations to Aetna under the Agreement. In October 1980, the Ecuadorian firm that had supplied Best Banana brought suit against Aetna, along with Best Banana and a bank, on the ground that the letter of credit for which Aetna had applied on Best Banana's behalf had been dishonored. Under the Agreement, Best Banana was bound to reimburse Aetna for attorneys' fees expended in the defense of the Ecuadorian suit. Moreover, should Aetna ultimately be found liable to the Ecuadorian firm under the letter of credit, Best Banana would have to compensate Aetna for that liability. Under the Agreement, Aetna could use the funds in Best Banana's account to cover either or both of these obligations. The District Court concluded that this contractual arrangement left Best Banana with only a contingent interest in the account. However, by focusing on the contingency of Best Banana's claim, the District Court resolved the dispute between Warner and Aetna without reckoning with Uniform Commercial Code section 9-301(4), a provision added to the Code to determine the priority of future advances made by secured parties.
The problem raised by this appeal is reconciling section 9-301(4) of the Uniform Commercial Code with the District Court's admittedly plausible reading of Connecticut garnishment law. Section 9-301(4) provides, in relevant part, "A person who becomes a lien creditor while a security interest is perfected takes subject to the security interest only to the extent that it secures advances made . . . . pursuant to a commitment entered into without knowledge of the lien."*fn1 Elsewhere, the Code states, "An advance is made 'pursuant to commitment' if the secured party has bound himself to make it, whether or not a ...