Sony Corp. of America v. Bank One, West Virginia, Huntington NA

• Decision Date: 16 July 1996
• Docket Number: Nos. 94-2230,94-2334,s. 94-2230
• Citation: 85 F.3d 131
• Parties: 29 UCC Rep.Serv.2d 657 SONY CORPORATION OF AMERICA, now known as Sony Electronics, Inc., Plaintiff-Appellee, v. BANK ONE, WEST VIRGINIA, HUNTINGTON NA, formerly known as First Huntington National Bank, N.A., Defendant-Appellant, v. THE STEREO FACTORY, INCORPORATED, Defendant-Appellee. SONY CORPORATION OF AMERICA, now known as Sony Electronics, Inc., Plaintiff-Appellant, v. THE STEREO FACTORY, INCORPORATED; Bank One, West Virginia, Huntington NA, formerly known as First Huntington National Bank, N.A., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 131

85 F.3d 131

29 UCC Rep.Serv.2d 657

SONY CORPORATION OF AMERICA, now known as Sony Electronics, Inc., Plaintiff-Appellee, v. BANK ONE, WEST VIRGINIA, HUNTINGTON NA, formerly known as

First Huntington National Bank, N.A., Defendant-Appellant, v. THE STEREO FACTORY, INCORPORATED, Defendant-Appellee.

SONY CORPORATION OF AMERICA, now known as Sony Electronics, Inc., Plaintiff-Appellant, v. THE STEREO FACTORY, INCORPORATED; Bank One, West Virginia,

Huntington NA, formerly known as First Huntington

National Bank, N.A., Defendants-Appellees.

Nos. 94-2230, 94-2334.

United States Court of Appeals, Fourth Circuit.

Argued July 10, 1995.

Decided May 30, 1996.

Order Denying Rehearing and Rehearing En Banc July 16, 1996.

ARGUED: Daniel Joseph Konrad, Huddleston, Bolen, Beatty, Porter & Copen, Huntington, West Virginia, for Appellant. Bonnie Irvin O'Neil, Thompson, Hine & Flory, Columbus, Ohio, for Appellees. ON BRIEF: Thomas R. Allen, Thompson, Hine & Flory, Columbus, Ohio; Richard M. Francis, Bowles, Rice, McDavid, Graff & Love, Charleston, West Virginia, for Appellee Sony Corp.

Before DONALD S. RUSSELL, WIDENER, and HALL, Circuit Judges.

Affirmed as modified by published opinion. Judge DONALD S. RUSSELL wrote the majority opinion, in which Judge K.K. HALL joined. Judge WIDENER wrote a dissenting opinion.

OPINION

DONALD S. RUSSELL, Circuit Judge:

This case involves a dispute between two secured creditors with competing claims to the proceeds from the sale of inventory. The main issue before this court is whether Sony Corporation of America ("Sony"), the holder of a purchase money secured interest in the inventory, had a first-priority claim in the proceeds even though the seller received payment for the inventory on the day after the delivery of the goods to the buyer. We must decide just how strictly we should read § 9-312 of the Uniform Commercial Code, which gives the holder of a purchase money secured interest in inventory "priority in identifiable cash proceeds received on or before the delivery of the inventory to a buyer ...." W.Va.Code § 46-9-312(3) (emphasis added). The district court concluded that Sony had a first priority claim in the proceeds, notwithstanding the fact that payment was received on the day after the delivery of the goods. We agree.

This case also presents a second issue regarding the identifiability of cash proceeds that are deposited in the seller's checking account and comingled with other funds in that account. We must decide whether the district court could presume that the seller had transferred a portion of the proceeds to a savings account even though the seller had clearly earmarked those funds as having originated from another source. We conclude that the district court correctly determined that the funds transferred to the savings account constituted identifiable proceeds from the sale of the inventory. We therefore affirm the decision of the district court, although we make a slight modification to the judgment regarding the calculation of damages.

I.

Stereo Factory, Inc., one of the defendants, is a West Virginia corporation, primarily located in Huntington, West Virginia. On August 23, 1988, the First Huntington National Bank ¹ (the "Bank"), the other defendant, loaned $200,000 to Stereo Factory. The loan was secured by a blanket security agreement granting the Bank a security interest in virtually all of Stereo Factory's personal property, including its inventory. On July 13, 1989, the Bank made a second loan in the amount of $550,000 and secured by a second security agreement. The Bank perfected its security interests by filing the appropriate financing statements with the proper authorities.

On August 16, 1990, Sony entered into a purchase money security agreement with Stereo Factory. Sony agreed to extend credit to Stereo Factory for the purchase of Sony merchandise. In return, Stereo Factory granted Sony a purchase money security interest in all goods and inventory sold to it by Sony, as well as the proceeds of those goods and inventory. Sony perfected its security interest and notified the holders of conflicting security interests, including the Bank, that Sony held a purchase money security interest in the inventory.

On August 19, 1992, Stereo Factory submitted to Sony a purchase order for 1,150,000 audio cassette tapes at the price of $.55 per tape. Stereo Factory made a down payment of $160,000 on the following day. On August 21, 1992, Sony sent a shipment of 227,860 tapes to Stereo Factory for a total invoice price of $125,323. Upon receiving the shipment, Stereo Factory sent the tapes to H.K. Tronics, one of its customers. H.K. Tronics received the first shipment on August 27, and on that day paid for the shipment by a cashier's check in the amount of $120,765.80 payable to Stereo Factory. ² On August 31, Stereo Factory deposited the check into a checking account that it maintained with the Bank.

Also on August 21, 1992, Sony sent a second shipment of 422,140 audio cassette tapes to Stereo Factory for a total invoice price of $232,177. Upon receiving the shipment, Stereo Factory immediately sent the tapes to Delinda Camera & Art Supply ("Delinda Camera"), another one of its customers. Delinda Camera received the shipment on August 24, and issued a check that same day for $221,655, payable to Stereo Factory. Delinda Camera gave the check to the driver of the truck that delivered the shipment. Stereo Factory deposited the check into its checking account on August 25.

In this case, we are most concerned with the third and final shipment of tapes. On August 31, 1992, Sony shipped the remaining 500,000 audio cassette tapes to Stereo Factory for the total invoice price of $275,000. Upon receiving the shipment, Stereo Factory immediately sent the tapes to Delinda Camera, which received the shipment on September 3. Delinda Camera had agreed to pay $262,500 for the shipment, subject to a $20,000 discount if it paid for the tapes in cash within three days of receipt. On September 4, Delinda Camera issued a check payable to Stereo Factory for $242,468.50. ³ Delinda Camera either gave the check directly to the truck driver or mailed it to Stereo Factory by overnight mail. The Stereo Factory invoice documenting this transaction confirms a delivery date of September 3 and a payment date of September 4. Stereo Factory deposited the check into its checking account on September 8.

Although Stereo Factory received full payment from its customers for the three shipments of tapes, it did not make any payments to Sony except for the $160,000 down payment. After deducting various credits, Stereo Factory owes Sony a total of $468,720.51 for the three shipments.

While Stereo Factory was not paying its debt to Sony, on September 9, 1992, Stereo Factory sold its Parkersburg operation to T.D.S., Inc. ("T.D.S.") for $250,000. T.D.S. obtained a loan from the Bank, which issued a cashiers check to T.D.S. The cashiers check, No. 246208, contained the words "Loan proceeds." Upon receiving the cashiers check from T.D.S., Stereo Factory deposited it into its checking account. Also on September 9, Stereo Factory opened a savings account, which was pledged to the Bank to secure Stereo Factory's outstanding loans. In opening the savings account, Stereo Factory deposited a check in the amount of $78,266.64 drawn from its checking account. Stereo Factory indicated in two ways that it intended the $78,266.64 amount to come from the $250,000 it had just deposited into the Checking Account. First, the check issued by Stereo Factory contained the words "Loan Proceeds Receipt." Second, the savings account deposit slip contained the words "Proceed of Cashiers Check 246208."

Stereo Factory also maintained a sweep account with the Bank. The funds in this account were used to purchase part of the Bank's investment portfolio. This account was aptly named because Stereo Factory would periodically "sweep" funds from the checking account into the sweep account so that Stereo Factory could earn a return on those funds. On September 15, 1992, Stereo Factory transferred the entire balance of the checking account, $221,419.80, into the sweep account. Over the next few days, some of those funds were transferred back to the checking account to pay off various creditors. On September 17, when the Bank took action against Stereo Factory to collect on its outstanding loans, $123,912.94 remained in the sweep account.

Without giving Stereo Factory prior notice, the Bank set off $123,912.94 from the sweep account and $78,266.64 from the savings account, for a total of $202,179.58. The funds were applied toward the principal that Stereo Factory owed to the Bank. The Bank also liquidated additional collateral in order to further reduce Stereo Factory's indebtedness.

On December 2, 1992, Sony brought this action against Stereo Factory to recover on Stereo Factory's debt in the amount of $468,720.51, which represents the unpaid portion of the cost of the three shipments of tapes. On March 5, 1993, Sony added the Bank as a defendant and sought from the Bank the recovery of the $202,179.58 set off from Stereo Factory's bank accounts. Sony claimed that the moneys in Stereo Factory's bank accounts, which the Bank seized and converted, constituted identifiable proceeds of Sony's purchase money collateral, to which Sony had a first priority claim.

The parties jointly filed stipulations of fact, and no factual dispute having remained, Sony and the Bank filed cross-motions for summary judgment. On August 30, 1994, the district court granted summary judgment in favor of Sony against the Bank in the amount of $202,179.58. The district court also granted summary judgment in favor of Sony against Stereo Factory in the amount of $266,540.93, which constitutes the difference between the amount due to Sony from Stereo Factory and Sony's judgment from the Bank.

The Bank has appealed the decision of the district court....