Howell Enterprises, Inc., In re, 90-1785

• Decision Date: 31 July 1991
• Docket Number: No. 90-1785,90-1785
• Citation: 934 F.2d 969
• Parties: 14 UCC Rep.Serv.2d 1236 In re HOWELL ENTERPRISES, INC., Debtor. TRADAX AMERICA, INC., Appellant, v. FIRST NATIONAL BANK IN STUTTGART, ARKANSAS and Howell Enterprises, Inc., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 969

934 F.2d 969

14 UCC Rep.Serv.2d 1236

In re HOWELL ENTERPRISES, INC., Debtor TRADAX AMERICA, INC., Appellant, v. FIRST NATIONAL BANK IN STUTTGART, ARKANSAS and Howell Enterprises, Inc., Appellees.

No. 90-1785.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 14, 1990.

Decided June 4, 1991.

Rehearing and Rehearing En Banc Denied

July 31, 1991.

Gary Rogers, Little Rock, Ark., for appellant.

Baker Kurrus, Little Rock, Ark., for appellees.

Before McMILLIAN and BEAM, Circuit Judges, and ROSENBAUM, ^* District Judge.

ROSENBAUM, District Judge.

It all started simply enough. Howell Enterprises, Inc., (Howell) and Tradax America, Inc., (Tradax) both sell rice. A customer, Bar Schwartz Limited (Bar Schwartz), wanted to buy some rice and pay for it with a commercial letter of credit. But Bar Schwartz could not buy rice from Howell because Howell would not accept the commercial letter of credit as payment. This means of payment was acceptable to Tradax, but Bar Schwartz refused to buy rice from Tradax for reasons of its own. So, Howell and Tradax came up with a plan--Tradax would sell its rice to Bar Schwartz under Howell's name. This seemingly simple solution created the complex legal problem now before the Court, a problem the parties clearly did not contemplate when the transaction took place.

I. BACKGROUND

Howell is an Arkansas corporation engaged in the business of buying, selling, storing, and milling rice. On June 20, 1986, Howell borrowed $2,100,000 from the First National Bank of Stuttgart, Arkansas, (First National) and granted the bank a security interest in all accounts receivable.

Tradax is a New York corporation engaged in the business of buying and selling rice in the United States and abroad. ¹ Tradax transacted business with Howell on a regular basis in 1987. One of those transactions engendered this lawsuit.

On February 25, 1987, a contract was signed in the name of Howell, under which rice would be sold by Tradax to Bar Schwartz. Payment was to be accomplished by a one-year commercial letter of credit. Names were used interchangeably throughout the transaction: Tradax was listed as the owner on some shipping documents and on one bill of lading; Howell was listed on another bill of lading and on the certificate of origin; Tradax prepared the shipper's export declaration, but identified the shipper as Howell; Tradax paid the shipping and loading expenses and the brokerage fees, but sometimes did so under Howell's name.

Critical to this controversy, Howell listed the Bar Schwartz transaction as an account receivable on its books, with a corresponding and equivalent account payable to Tradax. Tradax documented the transaction on its books as a sale to Howell, but did not invoice Howell for a sale.

The rice was successfully, but not uneventfully, delivered to Bar Schwartz. ² In due course, Howell sent an invoice to Bar Schwartz for the purchase price of the rice. On April 29, 1987, Bar Schwartz arranged for the letter of credit to be issued, naming Howell as beneficiary. ³

On June 18, 1987, Howell presented the letter of credit and the necessary supporting documents to First National. It was understood that Howell would transfer the proceeds to Tradax when the letter of credit matured, in May, 1988. But on April 4, 1988, before the maturity date, Howell filed for Chapter 11 bankruptcy. Upon the filing of the bankruptcy, First National came forward to claim its perfected security interest in Howell's accounts receivable. The Bar Schwartz letter of credit was swept into the bankruptcy.

Tradax brought this complaint before the bankruptcy court on May 9, 1988, asserting that Bar Schwartz's letter of credit was not one of Howell's accounts receivable and therefore was not subject to First National's security interest. Tradax alternatively argued that the letter of credit was subject to a constructive trust in favor of Tradax.

In an order, entered September 8, 1989, the bankruptcy court ruled that Tradax did have an equitable interest in the letter of credit and its proceeds as beneficiary of a constructive trust. The bankruptcy court then looked to the UCC as adopted in Arkansas to define First National's security interest in "all accounts receivable." Section Sec. 4-9-106 of the Arkansas Statutes defines "account" as "any right to payment for goods sold." The bankruptcy court ruled that because the letter of credit could be characterized as a "right to payment," First National had a perfected security interest in the letter of credit. The bankruptcy court, faced with two competing claims to the letter of credit, found that First National qualified as a bona fide purchaser for value and held an interest superior to Tradax's equitable interest.

Tradax appealed to the district court, which affirmed on April 16, 1990. On appeal, Tradax argues that the district court erred in ruling that the Bar Schwartz letter of credit was an "account" or evidence of a right to payment to Howell, that First National had a security interest in the letter of credit and that First National was entitled to prevail on general equitable principles.

II. DISCUSSION

As the second reviewing court, we review the bankruptcy court's legal conclusions de novo and its factual findings under the clearly erroneous standard. Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987). The parties, in this case, do not dispute the factual findings of the bankruptcy court. This case turns, instead, on the legal characterization of the Bar Schwartz letter of credit. As such, our review is de novo.

Both parties acknowledge that First National had a perfected security interest in Howell's accounts receivable. As the parties would frame the issue, if the letter of credit is an account receivable, First National is entitled to its proceeds; if not an account receivable, the asset goes to Tradax.

The Court eschews the parties' categorical inquiry. A letter of credit is an instrument of commerce, which is sui generis. ⁴ Its unique character is reflected in the fact that Article 5 of the UCC is devoted to letters of credit. The Court is disinclined to go beyond the UCC and decide this case on unnecessarily broad grounds. Analysis reveals that the Court need not answer whether a letter of credit can ever constitute an account. It is clear that this particular letter of credit was never intended to be an account and was listed as such purely by happenstance. ⁵

In this Court's view, the primary and relevant inquiry is whether or not First National's undisputed security interest can reach that particular line item in Howell's accounts receivable identified as the Bar Schwartz account. With this inquiry in mind, the Court turns to the specific facts of this case.

Arkansas has adopted the UCC secured transactions and letters of credit...