Matter of Samuels & Co., Inc.

• Decision Date: 01 April 1976
• Docket Number: No. 73-1185.,73-1185.
• Citation: 526 F.2d 1238
• Parties: In the Matter of SAMUELS & CO., INC., Bankrupt. Curtis R. STOWERS et al., Appellants, v. James S. MAHON, Trustee, and C.I.T. Corporation, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

526 F.2d 1238

In the Matter of SAMUELS & CO., INC., Bankrupt.

Curtis R. STOWERS et al., Appellants, v. James S. MAHON, Trustee, and C.I.T. Corporation, Appellees.

No. 73-1185.

United States Court of Appeals, Fifth Circuit.

February 17, 1976.

Rehearing Denied April 1, 1976.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Lamar Holley, Dallas, Tex., for appellants.

J. Richard Gowan, Dallas, Tex., for appellees.

John A. Grambling, Dean Hester, El Paso, Tex., amicus curiae.

Before BROWN,^* Chief Judge, WISDOM, GEWIN, BELL, THORNBERRY, COLEMAN, GOLDBERG, AINSWORTH, GODBOLD, DYER, MORGAN, CLARK, INGRAHAM, RONEY and GEE, Circuit Judges.

PER CURIAM:

The action of the panel¹ is reversed and the judgment of the District Court is affirmed.

The court en banc adopts as its opinion the dissenting opinion of Judge Godbold² with the additional comments which we set out in the margin.³

The judgment of the District Court is affirmed.

APPENDIX

Opinion of Circuit Judge GODBOLD

(510 F.2d at 154)

I dissent.

This case raises one primary question: under the Uniform Commercial Code as adopted in Texas, is the interest of an unpaid cash seller in goods already delivered to a buyer superior or subordinate to the interest of a holder of a perfected security interest in those same goods? In my opinion, under Article Nine,¹ the perfected security interest is unquestionably superior to the interest of the seller. Moreover, the perfected lender is protected from the seller's claims by two independent and theoretically distinct Article Two provisions. My result is not the product of revealed truth, but rather of a meticulous and dispassionate reading of Articles Two and Nine and an understanding that the Code is an integrated statute whose Articles and Sections overlap and flow into one another in an effort to encourage specific types of commercial behavior. The Code's overall plan, which typically favors good faith purchasers,² and which encourages notice filing of nonpossessory security interests in personalty through the imposition of stringent penalties for nonfiling, compels a finding that the perfected secured party here should prevail.

My brothers have not concealed that their orientation in the case before us is to somehow reach a result in favor of the sellers of cattle, assumed by them to be "little fellows," and against a large corporate lender, because it seems the "fair" thing to do. We do not sit as federal chancellors confecting ways to escape the state law of commercial transactions when that law produces a result not to our tastes. Doing what seems fair is heady stuff. But the next seller may be a tremendous corporate conglomerate engaged in the cattle feeding business, and the next lender a small town Texas bank. Today's heady draught may give the majority a euphoric feeling, but it can produce tomorrow's hangover.

I. Rights under § 2.403

My analysis begins with an examination of the relative rights of seller and secured party under § 2.403(a).

Section 2.403 gives certain transferors power to pass greater title than they can themselves claim. Section 2.403(a) gives good faith purchasers of even fraudulent buyers-transferors greater rights than the defrauded seller can assert. This harsh rule is designed to promote the greatest range of freedom possible to commercial vendors and purchasers.

The provision anticipates a situation where (1) a cash seller has delivered goods to a buyer who has paid by a check which is subsequently dishonored, § 2.403(a)(2), (3), and where (2) the defaulting buyer transfers title to a Code-defined "good faith purchaser." The interest of the good faith purchaser is protected pro tanto against the claims of the aggrieved seller. §§ 2.403(a); 2.403, Comment 1. The Code expressly recognizes the power of the defaulting buyer to transfer good title to such a purchaser even though the transfer is wrongful as against the seller. The buyer is granted the power to transfer good title despite the fact that under § 2.507 he lacks the right to do so.

The Code definition of "purchaser" is broad, and includes not only one taking by sale but also covers persons taking by gift or by voluntary mortgage, pledge or lien. § 1.201(32), (33). It is therefore broad enough to include an Article Nine secured party. §§ 1.201(37); 9.101, Comment; 9.102(a), (b). Thus, if C.I.T. holds a valid Article Nine security interest, it is by virtue of that status also a purchaser under § 2.403(a). See First Citizens Bank and Trust Co. v. Academic Archives, Inc., 10 N.C.App. 619, 179 S.E.2d 850 (1971); Stumbo v. Paul B. Hult Lumber Co., 251 Or. 20, 444 P.2d 564 (1968); In re Hayward Woolen Co., 3 U.C.C. Rep. 1107 (D.Mass., 1967).

While I shall discuss in detail infra, the implications of C.I.T.'s security interest under Article Nine and under other Article Two provisions, I here note that C.I.T. is the holder of a perfected Article Nine interest which extends to the goods claimed by the seller Stowers.

Attachment of an Article Nine interest takes place when (1) there is agreement that the interest attach to the collateral; (2) the secured party has given value; and (3) the debtor has rights in the collateral sufficient to permit attachment. § 9.204(a).

(1) The agreement: In 1963, Samuels initially authorized C.I.T.'s lien in its after-acquired inventory. The agreement between these parties remained in effect throughout the period of delivery of Stowers' cattle to Samuels.

(2) Value: At the time of Stowers' delivery, Samuels' indebtedness to C.I.T. exceeded $1.8 million. This pre-existing indebtedness to the lender constituted "value" under the Code. § 1.201(44).

(3) Rights in the collateral: Finally, upon delivery, Samuels acquired rights in the cattle sufficient to allow attachment of C.I.T.'s lien. The fact that the holder of a voluntary lien—including

an Article Nine interest—is a "purchaser" under the Code is of great significance to a proper understanding and resolution of this case under Article Two and Article Nine. The Code establishes that purchasers can take from a defaulting cash buyer, § 2.403(a). Lien creditors are included in the definition of purchasers, § 1.201(32), (33). A lien is an Article Nine interest, §§ 9.101, Comment; 9.102(b); 9.102, Comment. The existence of an Article Nine interest presupposes the debtor's having rights in the collateral sufficient to permit attachment, § 9.204(a). Therefore, since a defaulting cash buyer has the power to transfer a security interest to a lien creditor, including an Article Nine secured party, the buyer's rights in the property, however marginal, must be sufficient to allow attachment of a lien. And this is true even if, arguendo, I were to agree that the cash seller is granted reclamation rights under Article Two. See First National Bank of Elkhart Cty. v. Smoker, 11 U.C.C.Rept.Serv. 10, 19 (Ind.Ct.App., 1972); Evans Products Co. v. Jorgensen, 245 Or. 362, 421 P.2d 978 (1966).

If the Article Nine secured party acted in good faith, it is prior under § 2.403(a) to an aggrieved seller. Under the facts before us, I think that C.I.T. acted in good faith. The Code good faith provision requires "honesty in fact", § 1.201(19), which, for Article Two purposes, is "expressly defined as . . reasonable commercial standards of fair dealing." §§ 1.201, Comment 19; 2.103(a)(2). There is no evidence that C.I.T. acted in bad faith in its dealings with Samuels, or that Stowers' loss resulted from any breach of obligation by C.I.T. There is no claim that the 1963 security agreement was the product of bad faith. The lender's interest had been perfected and was of record for six years when Stowers' delivery to Samuels occurred. There is no suggestion that the $1.8 million debt owing from Samuels to C.I.T. was the result of bad faith or of a desire to defeat Stowers' $50,000 claim. There is no claim that C.I.T. exercised or was able to exercise control over Samuels' business operations. There is no evidence that C.I.T. authorized or ordered or suggested that Samuels dishonor Stowers' check. There is no contention that C.I.T.'s refusal to extend credit on May 23, the date Samuels filed a voluntary petition on bankruptcy at a time when it owed C.I.T. more than $1.8 million, was violative of an obligatory future advance clause. The Code's good faith provision requires "honesty in fact", § 1.201(19); it hardly requires a secured party to continue financing a doomed business enterprise.

The majority deny that C.I.T. acted in good faith because, they claim, the lender had "intimate" knowledge of Samuels' business operations. The majority's source of information on the scope of C.I.T.'s knowledge is a little puzzling. The Referee in Bankruptcy found only that "C.I.T. knew or should have known of the manner by which the bankrupt bought livestock . . . on a grade and yield basis." In the Matter of Samuels & Co., Inc., No. BK 3-1314 (N.D.Tex., order of Jan. 19, 1972). This factual finding was affirmed by the District Court which reversed the Referee and upheld C.I.T.'s propriety over Stowers. Id., orders of Nov. 24, 1972, and Jan. 16, 1973. Neither the Referee nor the District Court found, nor have the parties alleged, that C.I.T.'s knowledge of Samuels' business extended to knowledge of the debtor's obligations to third party creditors.

However, even if evidence had established that C.I.T. knew of Samuels' nonpayment and of Stowers' claim, C.I.T.'s status as an Article Two good faith purchaser would be unaffected. Lack of knowledge of outstanding claims is necessary to the common law BFP, and is similarly expressly required in many Code BFP and priority provisions. See e. g., §§ 3.302; 6.110; 8.301, 8.302; 9.301(a)(2). But the Code's definition of an Article Two good faith purchaser does not expressly or impliedly include lack of knowledge of third-party claims as an element. The detailed definition of the Article's counterpart of the common law BFP requires only...