Tetra Applied Technologies, Inc. v. H. O. E., Inc.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

03-1523

TETRA APPLIED TECHNOLOGIES, INC.

VERSUS

H. O. E., INC.

**********

APPEAL FROM THE
FIFTEENTH JUDICIAL DISTRICT COURT
PARISH OF LAFAYETTE, NUMBER 2002-2481
HONORABLE DURWOOD WAYNE CONQUE, DISTRICT JUDGE

**********

BILLIE COLOMBARO WOODARD
JUDGE

**********

Court composed of Billie Colombaro Woodard, Jimmie C. Peters, and Michael G.
Sullivan, Judges.

REVERSED.

Matthew Douglas McConnell John William Kolwe
Christopher Leonard Zaunbrecher Perret, Doise, Professional Law
Briney & Foret Corporation
Post Office Box 51367 Post Office Drawer 3408
Lafayette, Louisiana 70527-1367 Lafayette, Louisiana 70502-3408
(337) 237-4070 (337) 261-1200
Counsel for Plaintiff/Appellee: Counsel for Defendant/Appellant:
Tetra Applied Technologies, Inc. Hibernia National Bank

Kay A. Theunissen Charles C. Culotta, Jr.
Stephen P. Skiles Post Office Box 2300
Mahtook & Lafleur, L.L.C. Patterson, Louisiana 70392
Post Office Box 3089 (985) 395-3504
Lafayette, Louisiana 70502 Counsel for: Defendant/Appellee:
(337) 266-2189 Kyle Machine & Tool Co., Inc.
Counsel for Defendant/Appellee:
Wood Group Logging Services, Inc.

1

Philip A. Gattuso
Post Office Box 1190
Gretna, Louisiana 70054
(504) 368-4141
Counsel for Defendant/Appellee:
Hose Speciality & Supply Company
of Lafayette, Inc.

J. Kevin Stockstill
117 Caillouette Place
Lafayette, La 70501
(337) 262-0203
Counsel for Defendant/Appellee:
Cummins Mid-South, L.L.C.

Jennifer Ziegenhorn
Husch & Eppenberger, L.L.C.
200 Jefferson Avenue, Suite 1450
Memphis, Tennessee 38103
(901) 523-1123
Counsel for Defendant/Appellee:
Cummins Mid-South, L.L.C.

WOODARD, Judge.

On appeal, Hibernia National Bank (Hibernia) asserts that, when the trial court
granted the Trade Creditors’ motions for summary judgment, it failed to recognize
Hibernia’s perfected security interest in the funds deposited in the registry of the trial
court. We reverse the trial court’s determination.

*****

On June 24, 1999, Hibernia and H.O.E., Inc. (HOE) executed a Factoring
Agreement. Under the terms of this agreement, HOE granted Hibernia a security
interest in all of its accounts and contracts. In addition, HOE assigned to Hibernia
each invoice representing an account receivable to HOE. Specifically, section 11 of
the Factoring Agreement provides, in part:

8. Invoicing. All invoices for merchandise sold or services
rendered shall be prepared by [HOE] and shall bear a notification that
they have been assigned to, are owned by and are payable directly and
only to Hibernia. . . . Each invoice shall bear the terms stated in the
approved order or customer credit line and no change from the original
terms of sale shall be made without Hibernia’s prior written consent. .
..

....

11. Security Agreement; Setoff. As security for all obligations
and indebtedness of [HOE] to Hibernia, now existing or hereafter
incurred, direct or indirect, absolute or contingent, whether created under
this Agreement or otherwise, including without limitation, obligations
owed by [HOE] to others which Hibernia obtains by assignment, [HOE]
assigns to Hibernia and grants to Hibernia a security interest in (a) all of
[HOE’s] present and future accounts, accounts receivable and books and
records relating thereto, contract rights, instruments, chattel paper,
general intangibles, returned or repossessed goods arising out of or
relating to the sale or other disposition of goods at any time or from time
to time, all proceeds thereof and merchandise represented thereby . . . .

On June 28, 1999, Hibernia filed a UCC-1 Financing Statement to perfect its
security interest in HOE’s accounts receivable.
On May 29, 2001, Tetra Applied Technologies, Inc. (Tetra), which is “in the
business of providing . . . services . . . to the hydrocarbon exploration and production

1

industry,” and HOE executed an Equipment Manufacturing Contract (Manufacturing
Contract), in which HOE agreed to construct four wireline skid units and two spare
cable drums for Tetra. As HOE constructed these items, it issued invoices for
payment to Tetra. HOE previously assigned these invoices, representing the amounts
Tetra owed, to Hibernia.
To complete this project, HOE purchased various supplies and equipment from
Kyle Machine & Tool, Inc, Cummins Mid-South, L.L.C., Hose Specialty & Supply
Company of Lafayette, Inc., and Wood Group Logging Service, Inc. (collectively
referred to hereinafter as the “Trade Creditors”). Tetra and HOE specifically outlined
in the Manufacturing Contract that if any subcontractors filed liens or claims against
Tetra or its property, it could withhold from HOE payments in an amount sufficient
to offset any such liens or claims.
On May 13, 2002, due to HOE’s breach of the Manufacturing Contract, Tetra
filed a petition for writ of sequestration seeking possession of the incomplete skid
units and spare cable drums that HOE was building at the time. Thereafter, Tetra
obtained an order allowing it to seize these items.
On August 21, 2002, Tetra amended its writ of sequestration converting it to a
concursus proceeding when it discovered that many of HOE’s subcontractors
(including the Trade Creditors), who provided HOE with the equipment and supplies
it needed to complete this project, did not get paid.
Because HOE owed it $189,996.57, Hibernia filed a motion for summary
judgment claiming that it held a prior perfected security interest in and was entitled
to the funds Tetra deposited in the registry of the trial court. Similarly, the Trade
Creditors filed motions for summary judgment seeking, collectively, $38,042.06 for
the equipment and services they provided in connection with this project. The trial
court found the Trade Creditors’ claims superior and, as such, granted their motions
for summary judgment and denied Hibernia’s.
On appeal, Hibernia asserts that the trial court erred when it granted the Trade
Creditors’ motions for summary judgment: (1) by failing to give effect to Hibernia’s
perfected security interest in the funds in the registry of the trial court; (2) by finding
that the Trade Creditors each held a vendor’s privilege over these funds; (3) by finding
that the Trade Creditors had a consensual lien or privilege under the terms of the

2

Manufacturing Contract, and (4) by finding that the Trade Creditors were third party
beneficiaries of this contract.

*****

SUMMARY JUDGMENT

We will grant a motion for summary judgment “if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue as to material fact, and that mover is entitled to
judgment as a matter of law.”1 We must review summary judgments de novo under
the same criteria that govern the trial court’s consideration of whether summary
judgment is appropriate.2 When confronted with legal issues raised in a motion for
summary judgment, we give no special weight to the findings of the trial court and
render a judgment on the record.3

HIBERNIA’S PRIOR PERFECTED SECURITY INTEREST

Hibernia, as the only party with a valid security interest encumbering the funds
in the registry of the trial court, claims that it has the rights to these funds. On the
other hand, the trial court concluded that a provision in the Manufacturing Contract,
between Tetra and HOE, allowed Tetra to withhold these funds owed to HOE. Thus,
according to the trial court, when Tetra exercised its right to withhold payment and
later deposited these funds in the registry of the court, Tetra took the place of HOE for
any amounts owed to the Trade Creditors, which, in turn, gave the Trade Creditors a
right that was superior to Hibernia’s since these deposited funds never actually
belonged to HOE. Specifically, the trial court held:

I think what the contract does, in effect, . . . is that Tetra takes the place
of HOE as to monies owed to the Trade Creditors, if HOE defaults in its
payment to them, so that contractually Tetra would stand in the shoes of
HOE [and] would become a depository or keeper of the funds that would

1
La.Code Civ.P. art. 966(B).
2
See Costello v. Hardy, 03-1146 (La. 1/21/04), 864 So.2d 129.
3
See Campbell v. Markel Am. Ins. Co., 00-1448 (La.App. 1 Cir. 9/21/01), 822
So.2d 617, writ denied, 01-2813 (La. 1/4/02), 805 So.2d 204.

3

have been due to them had the funds been paid over to HOE. But that
effectively, contractually, these monies do not belong to HOE, nor does
HOE have any claim to them. And I think the only people to whom
these monies are due at this point would be the Trade Creditors, and
that’s my decision.

Louisiana enacted Article 9 of the Uniform Commercial Code (UCC) as
Chapter 9 of the Louisiana Commercial Laws, effective January 1, 1990. This
Chapter regulates the creation of conventional real security in most movables and
supplants the law of pledge and chattel mortgage with a single device called a security
interest.4 By separating the consequences of possession from the privilege or priority
given by the security, Chapter 9 permits possession to be gained or lost according to
agreement of the parties without otherwise affecting the rights of the secured party.5

Louisiana Revised Statutes 10:9-109 provides in pertinent part:

(a) General scope of Chapter. Except as otherwise provided in
subsections (c) and (d), this Chapter applies to:

....

(3) a sale of accounts, chattel paper, payment intangibles, or
promissory notes;

....

(d) Inapplicability of Chapter. This Chapter does not apply to:

....

(2) a lien, other than an agricultural lien, given by statute for
services or materials, but R.S. 10:9-322(h) and 9-333 apply with respect
to priority of the lien;

....

(e) Certain sales. The application of this Chapter to the sale of
accounts, chattel paper, payment intangibles, or promissory notes is not
intended and shall not be used to recharacterize that sale as a transaction
to secure indebtedness, but is intended to protect purchasers of those

4
Thomas A. Harrell, A Guide to the Provisions of Chapter Nine of Louisiana’s
Commercial Code, 50 LA. L. REV. 711 (1990).
5
Id.
4

assets by providing a notice filing system. For all purposes, in the
absence of fraud or intentional misrepresentation, the parties’
characterization of a transaction as a sale of accounts, chattel paper,
payment intangibles, or promissory notes shall be conclusive that the
transaction is a true sale and is not a secured transaction and that title has
passed to the party characterized as the purchaser, regardless of
whether the purchaser (secured party) has any recourse against the
seller (debtor), whether the seller is entitled to any surplus, whether the
purchaser has possession of the note, contract, account agreement,
invoice, or other evidence of indebtedness, or any other term of the
parties’ agreement.

(Emphasis added.) Louisiana Revised Statutes 10:1-201(37) defines a “security
interest” as:

[A]n interest in personal property or fixtures, created by contract, which
secures payment or performance of an obligation. . . . The term also
includes any interest of . . . a buyer of accounts, chattel paper, payment
intangible, or a promissory note in a transaction that is subject to Chapter
9. A lien or privilege created by operation of law is not a “security
interest.”

(Emphasis added.) In addition, the attachment of a security interest in collateral gives
the secured party the rights to “proceeds” of the collateral, which includes the rights
to a supporting obligation for the collateral.6 In “A Guide to the Provisions of Chapter
Nine of Louisiana’s Commercial Code,” Thomas A. Harrell explains:

The concept of proceeds includes not only fruits, revenues, and products
derived from the collateral, but also amounts received from insurance
covering it as well as what is received from its sale, exchange,
expropriation, or other voluntary or involuntary disposition whether or
not the security interest continues in the collateral in the hands of the
transferee. Furthermore, things that are acquired with proceeds or are
received from or with respect to them are also proceeds of the collateral.
The security interest thus acts in the manner of a general mortgage or
privilege, attaching to proceeds without further action, although in some
cases additional perfection as to the proceeds may be required. The
security in proceeds is also generally deemed to be a continuation of the
security in the collateral as though the proceeds were merely a divided
part of the collateral.[7]

6
La.R.S. 10:9-203(f).
7
Harrell, supra note 3, at 758 (footnotes omitted).
5

Furthermore, La.R.S. 10:9-201 declares that a security agreement (whether or
not it is perfected) is generally effective when it attaches according to its terms not
only between the parties, but also as to purchasers of the collateral and other creditors
of the debtor, including those having privileges.8 However, there are many
exceptions, particularly in the case of unperfected security, where our legislature
chose to protect persons who deal with the collateral without knowledge or fair notice
of the security interest.9
Under the Factoring Agreement, HOE granted a security interest in, and
assigned, its accounts receivable to Hibernia. On June 28, 1999, Hibernia perfected
its security interest in HOE’s accounts receivable by filing a UCC-1 Financing
Statement.
To make a security interest fully effective against third persons a secured party
must perfect their security interest.10 Thomas A. Harrell describes, in detail, the
benefits of obtaining perfected status:

Perfection by filing is ordinarily accomplished by filing a
financing statement. . . . The financing statement is neither intended nor
designed to permit one to determine from the public records whether or
to what extent particular collateral may actually be encumbered. The
filing merely serves as a warning to the public that a security interest
may exist. The statement is required only to identify the debtor, a
secured party, and the collateral that may be subject to its terms. . . .
Provision is then made for interested persons to obtain from the secured
party, through the debtor, verification of the nature and extent of the
security and the obligations it secures in the manner previously
discussed.

....

. . . A financing statement thus serves as something in the nature of a
warrant for the named secured party to thereafter extend credit to the
debtor at will with the assurance that he will have priority over others to
whom the debtor incurs similar obligations, although such priority is not
absolute.

Filing a financing statement gives priority to any security interest
granted by the debtor to the secured party in the property (or type of

8
Id.
9
Id.
10
Id.
6

property) it describes as long as it is effective. This permits persons
contemplating financing to file their statements before “closing” and
having reasonable assurance that their claims will not be outranked by
the claims of others who may have acquired some right or interest in the
collateral shortly before closing.[11]

In this instance, Hibernia (the secured party), by perfecting its security interest
in HOE’s (the debtor’s) accounts receivable (the collateral described in the financing
statement), warned the public that it had a security interest in this collateral; thus,
Hibernia was confident that its claim to HOE’s accounts receivable would outrank the
claims of others who later acquired some right or interest in this collateral.
Because Hibernia took these measures, the public records clearly evidenced its
claim to all of HOE’s accounts receivable when Tetra and the Trade Creditors did
business with HOE approximately two years later. To provide an additional warning
of Hibernia’s ownership interest in this collateral, HOE stamped on each invoice it
sent to its customers:

The account receivable evidenced by this invoice has been
assigned to, sold to, is owned by and payable only to Hibernia National
Bank. Please remit payments to:

Hibernia National Bank
P.O. Box 54349
New Orleans, LA 70154-4349

Therefore, the recorded UCC Financing Statement and the stamped invoices clearly
put Tetra, the Trade Creditors, and all other parties on notice of Hibernia’s secured
interest in and ownership of HOE’s accounts receivable.
Generally, Chapter 9 only protects “innocent transferees for value”—those who
take the collateral without knowledge of a prior unperfected security interest, before
they give value for their interest.12 Nevertheless, the Trade Creditors claim that the
following provision in the Manufacturing Contract, executed by Tetra and HOE, made
their claims superior to Hibernia’s:

11
Id. at 738-39 (footnotes omitted).
12
Id. at 747.
7

Liens and Claims: [HOE] shall pay all Project amounts to its
suppliers, materialmen and mechanics when due, and further shall keep
all [Tetra’s] property including the Project, free and clear of all liens,
claims, and encumbrances arising out of this Agreement. In the event a
lien or claim arising out of [HOE’s] performance of this Agreement is
filed against [Tetra] or its property, [Tetra] shall have the right to
withhold from payments due [HOE] an amount sufficient to offset such
lien or claim. Such amounts shall be held until proof of payment of the
lien is received, a lien release is received, [HOE] provides a sufficient
bond to offset the lien amount, or [Tetra] is directed to pay the lien by
[HOE] or a court of competent jurisdiction. Such amounts shall be held
without interest.

According to the Trade Creditors, the fact that Tetra decided to withhold its payments
to HOE made their claims enforceable, since HOE never had a right to the funds
withheld; consequently, these funds cannot be considered accounts receivable of
HOE. In other words, the Trade Creditors are asserting that, under the terms of the
Manufacturing Contract, the funds deposited in the registry of the trial court are not
HOE’s accounts receivable; thus, Hibernia’s security interest did not attach to these
funds. We disagree.
Under Chapter 9, an “account” is defined, in part, as any “right (written or oral)
to payment of a monetary obligation not evidenced by an instrument or chattel paper,
whether or not earned by performance,” for: (1) property that has been or is to be
sold, leased, licensed, assigned, or otherwise disposed of; or (2) services rendered or
to be rendered.13 Louisiana Revised Statutes 10:9-318 further provides:

(a) Seller retains no interest. A debtor that has sold an account,
chattel paper, payment intangible, or promissory note does not retain an
ownership interest in the collateral sold.

(Emphasis added.) The UCC Comments to Section 10:9-318 state in part:

4. Effect of Perfection. If the security interest of a buyer of
accounts . . . is perfected the usual result would take effect: transferees
from and creditors of the seller could not acquire an interest in the sold
accounts . . . .

13
La.R.S. 10:9-102(a)(2).
8

(Emphasis added.) Accordingly, to protect against the seller’s creditors, the buyer of
accounts must perfect their security interest in the accounts, as Hibernia did.
On June 24, 1999, when HOE (the debtor or seller) assigned its accounts to
Hibernia (the buyer), HOE lost an ownership interest in this collateral on June 28,
1999—the day Hibernia perfected its interest.14 Therefore, no provision in the
Manufacturing Contract could grant the Trade Creditors (creditors of the debtor or
seller) an interest in the accounts HOE sold to Hibernia due to the fact that HOE had
no ownership interest in its accounts receivable when Tetra and HOE executed this
contract on May 13, 2002.
“There are no exceptions by which a transferee of accounts in which a security
interest has been perfected may take free of the interest.”15 (Emphasis added.)
Consequently, the trial court should have granted Hibernia’s motion for summary
judgment because it was the only party with a perfected security interest in the funds
that Tetra withheld. This conclusion pretermits our need to address Hibernia’s other
assignments of error.
The policy, which has prevailed in Louisiana, is to deny the benefits of security
to a creditor who does not take the steps the law declares are necessary to give
publicity to his interest.16 Furthermore, our holding in the instant case does not leave
creditors, like the Trade Creditors, without a means to protect their interests.17 Their
claims could have possibly had “superpriority status” if they had obtained a “purchase
money security interest” (PMSI) in the goods they provided to HOE.18 Generally, a
perfected PMSI in goods and its identifiable proceeds has priority over a conflicting
security interest in the same goods, if the PMSI is perfected when the debtor receives
possession of the collateral or within twenty days thereafter.19
Thus, we hold that Hibernia, as the only claimant with a perfected security
interest in HOE’s accounts, has a priority interest in the funds deposited in the registry

14
See La.R.S. 10:9-318.
15
Harrell, supra note 3, at 754.
16
Id.
17
See First Nat’l Bank v. Beckwith Mach. Co., 94-2065 (La. 2/20/95), 650 So.2d
1148.
18
See Id.
19
La.R.S. 10:9-324.
9

of the trial court. We reverse the trial court’s decision to grant the Trade Creditors’
motions for summary judgment, and grant Hibernia’s motion for summary judgment.

CONCLUSION

We reverse the granting of a summary judgment to the Trade Creditors, and
grant Hibernia a summary judgment on its claim to the funds deposited in the registry
of the trial court. We assess all costs of this appeal to the Trade Creditors/Appellees.

REVERSED.

10