General Electric Credit Corporation v. Grubbs

• Decision Date: 14 May 1973
• Docket Number: No. 29961.,29961.
• Parties: GENERAL ELECTRIC CREDIT CORPORATION, Plaintiff-Appellant, v. T. R. GRUBBS, d/b/a T. R. Grubbs Tire & Appliance, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

478 F.2d 53 (1973)

GENERAL ELECTRIC CREDIT CORPORATION, Plaintiff-Appellant, v. T. R. GRUBBS, d/b/a T. R. Grubbs Tire & Appliance, Defendant-Appellee.

No. 29961.

United States Court of Appeals, Fifth Circuit.

April 13, 1973.

Rehearing Denied May 14, 1973.

Hubert D. Johnson, Dallas, Tex., for plaintiff-appellant.

J. R. Cornelius, Bill J. Cornelius, Jefferson, Tex., for defendant-appellee.

B. A. Britt, Jr., Texarkana, Tex., for Goodyear Tire & Rubber Co.

Roby Hadden, U. S. Atty., Tyler, Tex., for United States.

Before GEWIN, THORNBERRY and CLARK, Circuit Judges.

THORNBERRY, Circuit Judge:

General Electric Credit Corporation (GECC), plaintiff below, appeals from a judgment denying it recovery on a note and awarding defendant-appellee Grubbs a $20,000 recovery on his counterclaim. We reverse the judgment below.

Grubbs operated an appliance store in Jefferson, Texas, and sold General Electric products. He financed his purchases of inventory by means of two distinct arrangements with GECC, a whollyowned subsidiary of General Electric Corporation. Pursuant to the first of these arrangements, known as trust receipts financing or "floor planning," he paid ten percent of the price of inventory purchased from General Electric, and borrowed the balance from appellant. Merchandise purchased under this arrangement was held by Grubbs in trust, and he was to pay GECC the balance of the purchase price promptly upon sale of the merchandise to a customer.¹ Should Grubbs fail to pay the balance promptly upon sale to the customer, the sale was referred to as a "sale out of trust."

Under the second financing arrangement—the one giving rise to the note upon which appellant brought suit— Grubbs sold to GECC chattel mortgages, notes, and other accounts generated by his sales to customers. The 1955 agreement governing these sales of "chattel paper" obligated GECC to purchase only those accounts that it deemed "acceptable." If a customer defaulted on two or more installments under an account sold to GECC, Grubbs was required, upon demand by GECC, to repurchase that account for cash. If, thirty days after GECC had demanded the repurchase of a defaulted account, Grubbs had not repurchased it, then Grubbs became obligated to repurchase all of the accounts he had sold to GECC, whether they were in default or not.

By March 1964, ninety-four of the accounts that Grubbs had sold to GECC, amounting to roughly $67,000, were in default by two or more installments, and Grubbs had not repurchased them as required by the 1955 agreement. Rather than forcing Grubbs to repurchase all of the outstanding accounts sold to GECC (which by this time numbered 671 and amounted to roughly $270,000, exclusive of the ninety-four defaulted accounts), or suing him on his repurchase obligation, GECC proposed that Grubbs execute a note representing the amount due in cash under the repurchase obligation ($67,000) payable in monthly $1500 installments beginning on April 11, 1964.² Grubbs and his wife signed the note, telling GECC representatives that they "owed it and had to pay it anyway." Grubbs and his wife testified that appellant induced them to sign the note by assuring them that they would have the sole right to make collections and repossessions under the ninety-four accounts, and by promising to continue purchasing Grubbs' customers' accounts "as before," which Grubbs understood to mean that appellant would purchase substantially all of the chattel paper he tendered. GECC officials, however, testified that Grubbs' obligation to pay the note was not contingent upon GECC's continued purchase of chattel paper. It is clear, nonetheless, that even if appellant did undertake to "continue" purchasing chattel paper from Grubbs "as before," this would obligate appellant to purchase only the accounts it considered "acceptable": appellant promised to do nothing more than it was required to do under the 1955 agreement, and that agreement was not materially modified by the March 1964 note.

After paying the first $1500 installment on April 11, 1964, Grubbs refused to make further payments; and GECC sued to recover the balance on September 3, 1964. In October 1966 Grubbs amended his answer in several material respects.³ First, he asserted that the note was unenforceable because of fraudulent inducement and total failure of consideration. Secondly, he asserted a "cross-action" (actually, a counterclaim against appellant and a third-party action against General Electric Corporation) alleging that appellant and General Electric had violated federal and Texas antitrust laws and that they had embarked upon a scheme resulting in the total destruction of Grubbs' business.⁴ The trial judge, sitting without a jury, heard testimony for two days, and then declared the note unenforceable for fraud and failure of consideration, awarded Grubbs a $20,000 recovery against GECC alone on his claim of "destruction of his business," and denied all other claims for relief (including the alleged antitrust violations).

The Note

On appeal, Grubbs reiterates three theories advanced in the court below in support of his claim that the note was unenforceable because of total failure of consideration. First, he argues that he was required to pay the note only if appellant continued to purchase and pay him for chattel paper tendered to it, and that GECC breached this obligation while the note was still current. As mentioned earlier, it is not at all clear what appellant promised in return for Grubbs' signing the note,⁵ but in no event did it undertake more than to continue purchasing only "acceptable" paper, as it had done under the 1955 agreement. In any event, after Grubbs had made the first payment on April 11, 1964, he tendered approximately $2600 in accounts to GECC, who at first refused to accept them because they were unacceptable credit risks, but who later accepted accounts worth approximately $1530. Rather than sending Grubbs the cash, however, appellant credited this amount to reserve accounts (established to insure Grubbs' performance of his obligations under the financing arrangements) to cover some $1700 in worthless checks (drawn by Grubbs and by his customers) that Grubbs had tendered as customer payments on accounts sold to GECC and as remittances from Grubbs in payment for trust receipt merchandise.⁶ Since the financing arrangements required Grubbs to cover any worthless checks he sent to GECC, there was no practical difference between sending Grubbs the cash and crediting his account to cover the checks. This incident, therefore, was not a failure of consideration. Likewise untenable is the claim that the note was induced by a fraudulent promise to continue purchasing Grubbs' chattel paper. In refusing to accept some accounts, and in crediting the proceeds of others to the reserve accounts, GECC did no more than it had a right to do under the original agreements with Grubbs.

The second alleged instance of failure of consideration was appellant's sending "direct pay" notices to Grubbs' customers, instructing them to make remittances directly to GECC. Appellant was authorized to make collections on accounts that it had purchased; but Grubbs argued that in some cases a notice was sent to a customer, one of whose accounts had been purchased by GECC but whose other account either had not been sold to GECC or had been charged back to Grubbs pursuant to the March 1964 note. These customers, unable to distinguish between accounts owed to GECC and accounts owed to Grubbs, simply stopped paying Grubbs altogether, although Grubbs allegedly was to have the sole right to make collections and repossessions on the ninety-four defaulted accounts represented by the March note. As of August 1964, when the direct pay notices were sent, however, Grubbs was in default on the note, having repudiated it in May or June; and Grubbs will not be heard to justify that repudiation by events occurring months later. It is even possible that sending the direct pay notices to the ninety-four defaulted accounts was not in violation of the March agreement, because GECC officials testified that Grubbs was to have a right to make collections on those accounts only if he continued paying the note.

Thirdly, Grubbs contends that termination of trust receipts financing before his franchise expired was a failure of consideration. But there is...