Bill Voorhees Co., Inc. v. R & S Camper Sales of Birmingham, Inc.

• Decision Date: 01 November 1979
• Docket Number: No. 77-2340,77-2340
• Citation: 27 U.C.C.Rep.Serv. 789,605 F.2d 888
• Parties: 27 UCC Rep.Serv. 789 BILL VOORHEES COMPANY, INC., Plaintiff-Appellant, v. R & S CAMPER SALES OF BIRMINGHAM, INC. and R & S Camper Sales, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 888

605 F.2d 888

27 UCC Rep.Serv. 789

BILL VOORHEES COMPANY, INC., Plaintiff-Appellant, v. R & S CAMPER SALES OF BIRMINGHAM, INC. and R & S Camper

Sales, Inc., Defendants-Appellees.

No. 77-2340.

United States Court of Appeals, Fifth Circuit.

Nov. 1, 1979.

John M. Heacock, Jr., Huntsville, Ala., for plaintiff-appellant.

Aubrey O. Lammons, Huntsville, Ala., for R & S Camper Sales, Inc.

Appeal from the United States District Court for the Northern District of Alabama.

Before COLEMAN, RONEY and FAY, Circuit Judges.

FAY, Circuit Judge:

This diversity action concerns the personal liability of a transferee under the Alabama enactment of article 6 of the Uniform Commercial Code, the Alabama Bulk Transfers Act, Ala.Code tit. 7, §§ 7-6-101 to -111 (1975). The district court held that a transferee who fails to give notice to creditors as required under section 7-6-105 is not personally liable to the transferor's unpaid and unnotified creditors for the value of transfer property no longer held by the transferee. From this judgment, the plaintiff-creditor appeals. We affirm.

R & S Camper Sales of Birmingham, Inc. (the Birmingham corporation) and R & S Camper Sales, Inc. (the Huntsville corporation) are separate entities. In oral argument, counsel for appellee stated that after problems arose within the original R & S corporation, the Birmingham group split off from the Huntsville corporation. The corporations share the same officers and directors, though they serve in different capacities.

Bill Voorhees Company, Inc. (Voorhees), plaintiff-appellant, sold trailers and campers to the Birmingham corporation on unsecured credit. Most of the Birmingham corporation's inventory and equipment, including that sold by Voorhees, constituted collateral under a blanket security agreement covering a debt of over $100,000 with Central Bank of Alabama. In 1976, the bank discovered that the Birmingham corporation had violated its security agreement by failing to forward proceeds to the bank after selling campers. After meeting with the bank's vice-president, the Birmingham corporation agreed to go out of business. Without giving notice to creditors or otherwise complying with article 6, the Birmingham corporation transferred all its inventory to the Huntsville corporation. Subsequently Huntsville sold all but eight units of the inventory to third parties at prices that approximated market value, deducted a ten percent commission, and directly paid off the bank's secured claim. Appellant does not contest the bank's superior right to this $100,000. The Huntsville corporation, however, also realized an additional $36,000 from the sales, which it turned over to the Birmingham corporation. The Birmingham corporation paid other creditors with the $36,000, leaving appellant Voorhees' claim unsatisfied. Voorhees sued, alleging violations of the Bulk Transfers Act. ¹ The district court held that the Birmingham corporation owed Voorhees $31,158.40, that the bulk sale did not comply with article 6, that Voorhees could levy upon approximately eight items still in the hands of the Huntsville corporation, and that Voorhees could recover property from any third-party purchasers who paid no value or who bought with notice of the noncompliance. Neither party contests these decisions. The district court also held, however, that the Huntsville corporation is not personally liable for the value of the trailers that it has already sold to good faith purchasers.

Appellant Voorhees argues that when a transferor and transferee do not comply with the notice provisions of article 6, the creditor should have recourse against the transferee personally for the value of the dissipated property, in addition to the creditor's right to levy on remaining property.

Under Erie, our duty is to determine how the Supreme Court of Alabama would rule on transferee liability. Before turning to what little law exists on the subject, it may be helpful to outline the possible bases for such liability. Theoretically, a money judgment against a transferee when bulk transfer property has been resold might take four forms: the transferee could be liable (1) on the transferor's debt, (2) for conversion, (3) for traceable funds, or (4) for the value of the dissipated property. As to the first possibility, all agree that the transferee's noncompliance with article 6 does not impose liability for the transferor's original debt. E. g., Get It Kwik of America v. First Alabama Bank, Ala.App., 361 So.2d 568 (1978); Cornelius v. J & R Motor Supply Corp., 468 S.W.2d 781 (Ky.App.1971). See J. White & R. Summers, Handbook of the Law Under the Uniform Commercial Code 655 (1972). To sue for conversion, a creditor must have a right to possession. E. g., Charles S. Martin Distributing Co. v. Indon Industries, Inc., 134 Ga.App. 179, 213 S.E.2d 900 (1975), Rev'd on other grounds, 234 Ga. 845, 218 S.E.2d 562 (1975). Voorhees was not a secured creditor and has no claim for possession, so conversion is not at issue here. The third theory can involve two types of traceable funds: the initial purchase price the transferee pays the transferor, or the receipts the transferor collects upon resale of the property to third parties. Here, for the most part, both funds are the same because the Huntsville corporation paid the Birmingham corporation only after resale to consumers. Evidently all monies paid to the Birmingham corporation have been dispensed to other creditors and are not traceable. The ten percent commission the Huntsville corporation retained is, therefore, the only fund that might be recoverable, but the record does not reflect whether these funds are actually traceable and appellant has not pursued this issue on appeal. The final theory for imposing a money judgment is, therefore, Voorhees' only possible theory for recovering a money judgment against the Huntsville corporation. The transferee would have to be held liable for the value of the property which it has resold and for which proceeds are not traceable.

Unfortunately, article 6 does not detail remedies for its breach, and the comments supply little evidence of the drafters' intentions. A noncomplying transfer is "ineffective." U.C.C. §§ 6-104, -105. The Official Comments only mention actions against the property as possible remedies: levy or appointment of a receiver to take the goods under local procedures. U.C.C. § 6-104, comment 2; § 6-111, comment 2. Actions against the transferee personally are conspicuous by their absence. The drafters' concern that the sections created a "trap for the unwary" and "unusual obligations" on even a good faith transferee might indicate a desire to limit the drastic remedies of article 6 to in rem actions against the property and proceeds.

Despite the lack of direction from the code, most of the few courts deciding whether to impose money judgments have held transferees liable for the value of dissipated or commingled bulk transfer property. Darby v. Ewings Home Furnishings, 278 F.Supp. 917 (W.D.Okl.1967); Moskowitz v. Michaels Artists and Engineering Supplies, Inc., 29 Colo.App. 44, 477 P.2d 465 (1970); Cornelius v. J & R Motor Supply Corp., 468 S.W.2d 781 (Ky.App.1971); Starman v. John Wolfe, Inc., 490 S.W.2d 377 (Mo.App.1973). See Bomanzi of Lexington, Inc. v. Tafel, 415 S.W.2d 627, 631 (Ky.App.1967); National Bank of Royal Oak v. Frydlewicz, 67 Mich.App. 417, 241 N.W.2d 471 (1976). See generally Commentary, Article 6: Rights of an Aggrieved Creditor of a Bulk Transferor, 10 B.C.Indus. & Com.L.Rev. 281 (1969); Annot., 47 A.L.R.3d 1114, 1142 (1973). In essence, the transferee is treated like a trustee who must account for the bulk property or be held accountable for the proceeds of its sale.

Some courts have decided to hold the transferee accountable because of the legislature's adoption of optional section 6-106. E. g., Darby v. Ewings Home Furnishings, 278 F.Supp. 917 (W.D.Okl.1967). That section directs the transferee to assure that the bulk sale proceeds are first applied to pay the transferor's debts, ² but it does not really address this situation, in which the parties totally failed to comply with the Act. It does, however, evidence a legislative intention to treat the transferee like a trustee for some purposes. See U.C.C. § 6-101, comment 3.

Section 6-106 was not, however, adopted in Alabama. Prior to Alabama's adoption of the Uniform Commercial Code, transferees held the proceeds of bulk transfers in trust for creditors. 1911 Ala.Acts 94, 1949 Ala.Acts 447 (repealed 1966). See Roberts v. Norrell, 212 F.Supp. 897 (N.D.Ala.1963). ³ A transferee of a fraudulent conveyance held the property in constructive trust and was liable to creditors for the value of disposed property. E. g., First National Bank of Birmingham v. Love, 232 Ala. 327, 167 So. 703 (1936); Dickinson v. National Bank of Republic, 98 Ala. 546, 14 So. 550 (1893). This earlier law, however, was repealed with the adoption of the Uniform Commercial Code. Ala.Code tit. 7, § 7-10-103 (1975). We must look, therefore, to more recent Alabama case law on whether money judgments can be imposed on transferees.

Two Alabama court decisions have touched on the issue of money judgments against transferees, although neither expressly decided whether a transferee is liable for the value of dissipated bulk property. In Get It Kwik of America v. First Alabama Bank, Ala.App., 361 So.2d 568 (1978), the Alabama Court of Civil Appeals considered the three other theories of liability in deciding a bank's right to set off a transferee's bank account against the transferor's debt after a partially noncomplying bulk sale. The court held that a transferee is not liable on the debt, but can be liable to a secured creditor for conversion. Under its definition of "proceeds," it also held that a secured party did not have a security interest in the funds received from sale of the collateral by the transferee. It did not discuss liability...