Coast Trading Co., Inc., In re

• Decision Date: 03 October 1984
• Docket Number: No. 83-3997,83-3997
• Citation: 744 F.2d 686
• Parties: 11 Collier Bankr.Cas.2d 790, Bankr. L. Rep. P 70,328, 39 UCC Rep.Serv. 753 In re COAST TRADING COMPANY, INC., Debtor. COLLINGWOOD GRAIN, INC., Plaintiff-Appellant, v. COAST TRADING COMPANY, INC.; The Bank of Nova Scotia, Defendants-Appellees, and Oregon Bank; Cache National Bank; Pinal Feeding; Bogle Farms, Inc., and Hughes & Ganz Cattle, Inc., Defendants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 686

744 F.2d 686

11 Collier Bankr.Cas.2d 790, Bankr. L. Rep. P 70,328,

39 UCC Rep.Serv. 753

In re COAST TRADING COMPANY, INC., Debtor COLLINGWOOD GRAIN, INC., Plaintiff-Appellant, v. COAST TRADING COMPANY, INC.; The Bank of Nova Scotia Defendants-Appellees and Oregon Bank; Cache National Bank; Pinal Feeding; Bogle Farms, Inc., and Hughes & Ganz Cattle, Inc., Defendants.

No. 83-3997.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 8, 1984.

Decided Oct. 3, 1984.

Emil R. Berg, Hallmark, Griffith & Keating, Portland, Or., for plaintiff-appellant.

Leon Simson, Pamela J. Griffith, James Westwood, Miller, Nash, Wiener, Hager & Carlsen, Portland, Or., for defendants-appellees.

Appeal from the United States District Court for the District of Oregon.

Before KILKENNY, KENNEDY, and FERGUSON, Circuit Judges.

KENNEDY, Circuit Judge:

Coast Trading Co., a grain broker, ordered several carloads of grain from Collingwood Grain, Inc. to be shipped directly to stockyard clients of Coast. Collingwood shipped the grain but Coast's drafts were dishonored and Coast filed for bankruptcy. Faced with competing demands from Coast and Collingwood, the stockyards deposited the money owed for the grain with the bankruptcy court. The bankruptcy court awarded Coast the amounts due on six of the eight carloads involved. The district court adopted the bankruptcy court's findings as its own and affirmed. We conclude that Collingwood is entitled to the value of one of the six carloads of grain, and that the bankruptcy and district courts properly awarded the remainder of the cars to Coast.

I.

In February 1982, Coast contracted with three stockyards located in and around Phoenix, Arizona, to supply them with grain. To fulfill its obligations, Coast entered into two contracts to purchase a total of eight carloads of grain from Collingwood (contract numbers 1310 and 1397). Delivery was to be F.O.B. the stockyards. The eight carloads were shipped and delivered--"spotted" or shunted onto the railroad siding at the designated stockyard--as follows:

                  Car      Date      Date     Contract
                 Number   Shipped  Delivered   Number
                --------  -------  ---------  --------
                SSW74142  4/01/82   4/05/82     1310
                SSW77325  4/01/82   4/05/82     1310
                SSW78633  4/01/82   4/05/82     1310
                SSW77554  4/01/82   4/06/82     1310
                SSW78849  4/01/82   4/06/82     1310
                SSW77487  4/02/82   4/08/82     1397
                SSW77602  4/02/82   4/15/82     1397
                SSW77563  4/07/82   4/08/82     1397
                

The drafts Coast had given Collingwood in payment for the grain were dishonored On April 7, 1982, Coast filed a petition in bankruptcy. The next day Collingwood telephoned the stockyards to inform them that it was reclaiming the grain pursuant to Uniform Commercial Code (U.C.C.) section 2-702 and thereafter sent written demands for reclamation to Coast and the stockyards. Collingwood also stopped car 77602 in transit, allowing it to proceed only after the stockyard agreed to purchase the grain directly from Collingwood. Several days later, April 13, 1982, Collingwood procured Coast's agreement to cancel the contracts, and on May 10, 1982, Coast purported to reconvey the grain back to Collingwood.

upon presentation commencing April 5, 1982.

The bankruptcy court awarded Collingwood payment for car 77602; Coast does not challenge this award. The bankruptcy court also found that Collingwood had received payment for car 77487. Collingwood does not argue otherwise. Thus neither car is involved in this appeal. Collingwood does challenge the bankruptcy and district courts' award of the proceeds for the remaining six cars to Coast. We have jurisdiction pursuant to 28 U.S.C. sections 1291, 1471.

Collingwood argues that it is entitled to the value of the six cars of grain under U.C.C. section 2-702. It claims that its rights under U.C.C. section 2-702 are not defeated by the stockyards. In support of this contention, it notes that Coast had no right to convey any interest in the grain to the stockyards as Coast itself has never paid for the grain, never had possession of the grain, and affirmatively dishonored its payment drafts prior to delivery. Collingwood further contends that in any event it is entitled to recover the proceeds of Coast's resale of the grain to the stockyards or should be granted an administrative priority under section 546(c) of the Bankruptcy Act, 11 U.S.C. Sec. 546(c) (1982), for the amounts of its claims.

Alternatively, Collingwood asserts that Coast and itself have voided the sales in question, and that Coast has reconveyed the grain to Collingwood giving Collingwood the right to the value of the grain. Collingwood also contends that the grain was delivered under contracts which were executory when Coast filed for bankruptcy. Finally, both Coast and Collingwood seek attorneys' fees.

II.

Section 546(c) of the Bankruptcy Code, 11 U.S.C. Sec. 546(c) (1982), allows a seller of goods, with certain restrictions, to exercise any statutory or common law right he may have to reclaim the goods from a bankrupt buyer. Whether seller has a statutory or common law right to reclaim goods is a matter of state law. See H.R.Rep. No. 595, 95th Cong., 2d Sess. 371-72 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6327-28; Los Angeles Paper Bag Co. v. James Talcott, Inc., 604 F.2d 38, 39 (9th Cir.1979) (interpreting Sec. 546 rights in accord with Arizona U.C.C.); In re Landy Beef Co., 30 B.R. 19, 20 (Bankr.D.Mass.1983). It is unclear which state's law applies in this case. The contracts were entered into by the Colorado branch of an Oregon corporation (Coast) and a Kansas company (Collingwood) for performance (delivery of grain) in Arizona. As we could reach the same result under the law of any of the four states mentioned, we need not resolve a choice of law issue.

All four states have adopted the Uniform Commercial Code. See Ariz.Rev.Stat.Ann. Secs. 44-2201 to 44-3153 (1967); Col.Rev.Stat. Secs. 4-1-101 to 4-9-507 (1974); Kan.Stat.Ann. Secs. 84-1-101 to 84-9-507 (1983); Or.Rev.Stat. Secs. 71.1010 to 79.5070 (1973). U.C.C. section 2-702 allows a seller of goods on credit to reclaim goods delivered to an insolvent buyer if the seller demands reclamation within ten days of the receipt of the goods. U.C.C. Sec. 2-702(2) (1976); see also 11 U.S.C. Sec. 546(c)(1) (1982) (demand must be in writing to be given effect in bankruptcy). Section 2-702 is also applied to ostensible cash sales. See U.C.C. Sec. 2-507 official comment 3 (1976); In re Samuels & Co., 526 F.2d 1238, 1244 A seller's section 2-702 rights are subject to the rights of buyers in the ordinary course of business and good faith purchasers under section 2-403. Compare Ariz.Rev.Stat.Ann. Sec. 44-2381(c) (1967) and Or.Rev.Stat. Sec. 72.7020(3) (1973) (seller's right to reclaim also subject to rights of lien creditors) with Col.Rev.Stat. Sec. 4-2-702(3) (1974) and Kan.Stat.Ann. Sec. 84-2-702(3) (1983). Section 2-403 provides that a good faith purchaser for value obtains good title from one to whom the goods have been delivered even though the initial buyer had only voidable title. In particular an initial buyer has full power to convey good title even if it subsequently fails to honor its check or it fails to make the cash payment called for. U.C.C. Sec. 2-403(1)(b), (c) (1976).

(5th Cir.) (en banc), cert. denied, 429 U.S. 834, 97 S.Ct. 98, 50 L.Ed.2d 99 (1976); First National Bank of Arizona v. Carbajal, 132 Ariz. 263, 267, 645 P.2d 778, 782 (1982). By its own terms section 2-702 is the seller's exclusive remedy, preempting other U.C.C. and common law remedies. U.C.C. Sec. 2-702(3) (1976); see In re Deephouse Equipment Co., 22 B.R. 255, 258 (Bankr.D.Conn.1982).

The stockyards' purchase of the grain precludes Collingwood from exercising any right it may have had under section 2-702 to reclaim the grain, because the stockyards are good faith purchasers for value under the U.C.C. To act in good faith under article 2 of the U.C.C., a party must exhibit honesty in fact and fair dealing. See U.C.C. Sec. 2-103(1)(b) (1976). Collingwood bore the burden of proving the stockyards' lack of good faith. See In re Kentucky Flush Door Corp., 28 B.R. 808, 810 (Bankr.W.D.Ky.1983) (seller has burden of proving right to reclaim). There is no evidence that the stockyards acted in a dishonest or unfair manner. For example, while one car, car 77563, arrived at its destination after Coast filed its bankruptcy petition, Collingwood was unable to show that it had informed the stockyards of Coast's insolvency before the car's arrival.

Collingwood argues that the intervening purchase by the stockyards cannot defeat its rights under section 2-702 because Coast had no rights in the grain to transfer to the stockyards. This argument is directly contrary to the explicit command of section 2-403. Moreover, section 2-403 is consistent with those sections of the U.C.C. limiting a defaulting buyer's rights in goods, see U.C.C. Sec. 2-507(2) (1976) (buyer's right to retain and dispose of goods conditioned on making any payment due and demanded upon delivery); U.C.C. Sec. 2-511(3) (1976) (rights of buyer defeated if check is dishonored), as the scope of those sections expressly applies only to the determination of rights as between the original parties to the sale. See Brumley Estate v. Iowa Beef Processors, Inc., 704 F.2d 1351, 1362 (5th Cir.), modified, 715 F.2d 996 (1983), cert. denied, --- U.S. ----, 104 S.Ct. 1288, 79 L.Ed.2d 690 (1984); Evans Products Co. v. Jorgensen, 245 Or. 362, 370, 421 P.2d 978, 982 (1966).

The Fifth Circuit, en banc, rejected similar arguments in In re Samuels & Co., 526 F.2d at 1247 (5th Cir.1976); see J. White & R. Summers, The Uniform Commercial Code Sec. 24-9 at 1027 (2d ed. 1980). In Samuels cash sellers delivered goods to the debtor without being paid. The sellers' rights to recover the goods under either section 2-702 or section 2-507 were held subordinate to the rights of a bank...