Fico, Inc. v. Ghingher

• Decision Date: 21 February 1980
• Docket Number: No. 29,29
• Parties: , 18 A.L.R.4th 1077, 28 UCC Rep.Serv. 498 FICO, INC. v. John J. GHINGHER, III.
• Court: Maryland Court of Appeals

Page 150

287 Md. 150

411 A.2d 430, 18 A.L.R.4th 1077, 28

UCC Rep.Serv. 498

FICO, INC. v. John J. GHINGHER, III.

No. 29.

Court of Appeals of Maryland.

Feb. 21, 1980.

R. Richard Donadio, Towson, for appellant.

Richard C. Burch, Towson (Weinberg & Green, Towson, on the brief), for appellee.

Argued before MURPHY, C. J., and SMITH, DIGGES, ELDRIDGE, ORTH, ^* COLE and DAVIDSON, JJ.

DAVIDSON, Judge.

This case involves an application of Maryland Uniform Commercial Code Bulk Transfers, Md.Code (1975), §§ 6-101 6-111 of the Commercial Law Article (Bulk Transfer Act). This Act applies to enterprises whose business is the sale of merchandise from inventory. Macke Co. v. Pizza of Gaithersburg, Inc., 259 Md. 479, 492-93, 270 A.2d 645, 652 (1970); § 6-102(3). Its principal purpose is to protect creditors from commercial fraud which may occur when a merchant disposes of a major part of his inventory in a single transaction leaving his creditors unpaid. This purpose is achieved by requiring that creditors be given notice of all impending bulk transfers so that they can take appropriate action, and by imposing on the buyer an obligation to ensure that the money that he agrees to pay to the seller is applied to pay the seller's debts. § 6-101 and § 6-102. ¹

Section 6-102(1) and (3) provide in pertinent part:

"(1) A 'Bulk transfer ' is any transfer in bulk and not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise or other inventory . . . of an enterprise subject to this title.

(3) The enterprises subject to this title are all those whose principal business is the sale of merchandise from stock . . . ."

Section 6-104(1)(a), (2), and (3) provide in pertinent part:

"(1) (A) bulk transfer subject to this title is ineffective against any creditor of the transferor unless:

(a) The transferee requires the transferor to furnish a list of his existing creditors . . . .

(2) The list of creditors must be signed and sworn to or affirmed by the transferor or his agent. It must contain the names and business addresses of all creditors of the transferor, with the amounts when known, and also the names of all persons who are known to the transferor to assert claims against him even though such claims are disputed. . . .

(3) Responsibility for the completeness and accuracy of the list of creditors rests on the transferor, and the transfer is not rendered ineffective by errors or omissions therein unless the transferee is shown to have had knowledge." ²

Section 6-105 provides in pertinent part:

"In addition to the requirements of the preceding section any bulk transfer subject to this title . . . is ineffective against any creditor of the transferor unless at least ten days before he takes possession of the goods or pays for them, whichever happens first, the transferee gives notice of the transfer . . . ."

Section 6-106(1) and (2) provide in pertinent part:

"In addition to the requirements of the two preceding sections:

(1) Upon every bulk transfer subject to this title for which new consideration becomes payable . . . it is the duty of the transferee to assure that such consideration is applied so far as necessary to pay those debts of the transferor which are either shown on the list furnished by the transferor (§ 6-104) or filed in writing in the place stated in the notice (§ 6-107) within thirty days after the mailing of such notice. . . .

(2) If any of said debts are in dispute the necessary sum may be withheld from distribution until the dispute is settled or adjudicated." ³

The question here is whether an escrow fund, established under § 6-106(1) and held by a garnishee for the payment of creditors who were listed and given notice or who filed claims as required by § 6-104(1)(a) and § 6-105, may be attached by a judgment creditor who was not listed or given notice, and who did not file a claim.

On 7 March 1977, Ungar Olds, Inc. (seller), agreed to sell its business and assets to Metro Olds, Inc. (buyer), a transaction which constituted a bulk transfer. § 6-102(1) and § 6-102(3). On 23 March 1977, in the District Court of Maryland, sitting in Baltimore County, (District Court), the appellant, Fico, Inc. (judgment creditor), one of the seller's business creditors, obtained a default judgment against the seller.

The buyer requested the seller to furnish a sworn list of all known creditors. The judgment creditor was omitted from the list supplied by the seller. The buyer sent notice of the impending transfer to all listed creditors, as well as all other creditors known to hold or assert claims against the seller. Because the buyer was unaware of the judgment creditor's claim, the judgment creditor was not notified. Finally, the buyer placed two notices of the impending transfer in the Daily Record, a newspaper published in Baltimore. The judgment creditor did not file a claim.

At settlement, on 7 June 1977, the buyer applied the proceeds of the transfer to the payment of all listed and known creditors whose claims were not disputed by the seller. An escrow fund was established containing an amount sufficient to pay all listed and known creditors whose claims were disputed, but an amount representing the judgment creditor's claim was not included. The appellee John J. Ghingher, III (garnishee), was designated as the escrow agent. Thereafter, the judgment creditor was not paid.

On 28 October 1977, in the District Court, the omitted judgment creditor filed an "Order for Attachment on Judgment" which was served upon the garnishee. The garnishee then filed a plea and a "Confession of Assets" in which he asserted that the omitted judgment creditor, who was neither listed nor had filed a claim, should not have recourse to the escrow fund which was established for the sole purpose of paying listed and known creditors whose claims were disputed.

The District Court determined that the escrow fund was "subject to seizure" by the omitted judgment creditor and refused to enter an order quashing the attachment. It did not, however, enter a judgment of condemnation absolute. The Circuit Court for Baltimore County reversed and entered an order quashing the attachment. The omitted judgment creditor sought and was granted a writ of certiorari by this Court. We shall reverse the Circuit Court.

The omitted judgment creditor contends that because it was not included in the list of creditors and did not receive notice of the impending transfer there was not compliance with § 6-104 and § 6-105. The omitted judgment creditor asserts, therefore, that the transfer is ineffective and that it is entitled to satisfy its judgment from the escrow fund. Finally, it concludes that because it reduced its claim to judgment before any of the listed or known creditors, its attachment acquired priority over their claims. We do not agree.

Sections 6-104 and 6-105 require, among other things, that in order to have an effective bulk transfer, the buyer must request a list of the seller's existing creditors, the seller must supply such a list, and the buyer must send notice of the impending transfer to all listed creditors and all other creditors known to him. Parties who fail to carry out these basic requirements have not complied with §§ 6-104 and 6-105 of the statute. Johanna Farms, Inc. v.Elliott Equipment Co., 278 Md. 137, 148-49, 360 A.2d 436, 441-42 (1976). See Sakelos v. Hutchinson Bros., 129 Md. 300, 304, 99 A. 357, 359 (1916).

Section 6-104(3) establishes, however, that unless the buyer has actual knowledge that the list is incomplete, a transfer remains effective. Thus, parties who have carried out the basic requirements of § 6-104 and § 6-105 have complied with the statute even though there are inaccuracies or omissions in the list. See Federal Ins. Co. v. Pipeco Steel Corp., 125 N.J.Super. 563, 564, 566, 312 A.2d 510, 511 (1973); Adrian Tabin Corp. v. Climax Boutique, 40 A.D.2d 146, 148, 338 N.Y.S.2d 59, 62 (1972). See also Highway Signs & Servicing Co. v. Scott, 134 Kan. 658, 660, 8 P.2d 391, 392 (1932) (decided before the promulgation of the Uniform Commercial Code in 1951).

The sanction for noncompliance, established by the Bulk Transfer Act, is that the transfer is ineffective against the seller's creditors who may levy, attach or garnish the goods transferred to a buyer. § 6-104 and § 6-105; See § 6-111, Official Comment 2. ⁴ Where there is compliance, however, that sanction is unavailable. Consequently, an omitted creditor may not levy, attach or garnish the goods transferred to a buyer who has no actual knowledge that the list is incomplete. An omitted creditor, however, has various remedies against the seller, who is responsible for the completeness and accuracy of the list. § 6-104(3). Although the applicable provisions are silent as to the remedies available to an omitted creditor, such a creditor may resort to any of the remedies otherwise provided by state law. McClain v. Laurens Glass Co., 127 Ga.App. 316, 317, 193 S.E.2d 194, 195 (1972). See Hawkland, Remedies of Bulk Transfer Creditors Where There Has Been Compliance with Article 6, 74 Commercial Law Journal 257 (1969). In Maryland, the available remedies against a seller include a criminal action for false swearing which may be brought against the seller, § 6-104, Official Comment 3; ⁵ Md.Code (1957, 1976 Repl.Vol.), Art. 27, § 435, and a claim under application of proceeds principles. § 6-106. In addition, an omitted creditor may, in a proper case, attach, be protected by temporary restraining orders, injunctions, and receiverships, invoke the fraudulent conveyance and bankruptcy laws, and claim under third party beneficiary principles. See Hawkland, 74 Commercial Law Journal 257 at 262.

Here the record shows that the buyer requested the seller to furnish a sworn list of all known creditors. The buyer was unaware of the fact that the judgment creditor was omitted from the list supplied by the seller....