In re Automated Bookbinding Services, Inc.

• Decision Date: 27 December 1972
• Docket Number: No. 72-1331.,72-1331.
• Parties: In the Matter of AUTOMATED BOOKBINDING SERVICES, INC., Bankrupt. FINANCE COMPANY OF AMERICA, Appellant, v. HANS MUELLER CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

471 F.2d 546 (1972)

In the Matter of AUTOMATED BOOKBINDING SERVICES, INC., Bankrupt.

FINANCE COMPANY OF AMERICA, Appellant, v. HANS MUELLER CORPORATION, Appellee.

No. 72-1331.

United States Court of Appeals, Fourth Circuit.

Argued September 13, 1972.

Decided December 27, 1972.

COPYRIGHT MATERIAL OMITTED

Alfred H. Moses, Washington, D.C. (David N. Brown and Covington & Burling, Washington, D.C., Louis J. Sagner, and Sagner, Stevan & Harris, Baltimore, Md., on brief), for appellant.

Charles G. Page, Baltimore, Md. (Clarke Murphy, Jr., and White, Page & Lentz, Baltimore, Md., on brief), for appellee.

Before SOBELOFF, Senior Circuit Judge, and WINTER and BUTZNER, Circuit Judges.

SOBELOFF, Senior Circuit Judge:

Finance Company of America (FCA) and Hans Mueller Corporation (HMC) had conflicting security interests in a bookbinding machine sold by HMC to Automated Bookbinding Services, Inc., a Maryland corporation who later became bankrupt. This litigation was instituted to determine which secured party had priority in the binder after the debtor's bankruptcy, and is to be decided under Article 9 of the Uniform Commercial Code and Article 95B of the Ann.Code of Md. (1957 as amended), § 9-101 et seq.

The referee in bankruptcy ruled in favor of FCA's claim. On a petition for review of the referee's order, the District Court awarded the right to possession of the binder to HMC. For the reasons set forth in this opinion we reverse and reinstate the referee's original order.

I FACTS

The technical intricacies of the Uniform Commercial Code necessitate a rather particularized recital of the facts that gave birth to the present controversy. This is required for a proper perspective of the issues.

On November 20, 1968, Automated Bookbinding Services, Inc., for brevity hereafter called the bankrupt, executed an installment note payable to the order of FCA in the amount of $151,267.75. A chattel mortgage security agreement was entered into to secure the obligation, which covered all the bankrupt's equipment that was listed in the agreement. FCA properly filed a financing statement on November 21, 1968, in Anne Arundel County, Maryland, which covered the bankrupt's after-acquired property as well as its present equipment, § 9-204(3),¹ thereby perfecting its security interest in the collateral, §§ 9-302(1), 9-303(1).²

The bankrupt contracted with HMC on January 30, 1970, to purchase a new bookbinder. A valid security agreement was entered into and HMC retained a valid purchase money security interest in the machine, § 9-107(a).³

The cash price under the contract was $84,265 with an installation charge of $2,160, making a total price of $86,425. Additional terms of the contract provided for a cash down payment at the time of the order of $6,442.50, cash before delivery of $6,442.50, and a trade-in allowance on an old binder of $22,000. This left a balance of $51,540, which was secured by HMC's purchase money security interest.

Fifteen cases of component parts for the binder were sent from Europe, under a negotiable bill of lading, to the order of Rohner, Gehrig & Co., HMC's shipping agents. The shipment arrived in New York on May 18, 1970. On May 22, 1970, after receiving the bankrupt's second payment of $6,442.50, HMC mailed an invoice to the bankrupt identifying the binder's parts by particular description and serial numbers and providing for payment of the balance of $51,562.50 in cash upon completion of the installation.

The shipper, Rohner, Gehrig & Co., upon HMC's instructions, directed Hemingway Transport, Inc., a common carrier, to pick up the 15 crates from dockside in New York and to deliver them, together with two additional crates of component parts, to the bankrupt in Maryland. All these crates arrived at bankrupt's plant in Maryland on several dates between May 26, 1970, and June 2, 1970.

Pursuant to its January 30 agreement with the bankrupt, HMC sent two employees to the bankrupt's plant to install the binder. The installation began on May 27, 1970. It is not clear from the record when installation was completed, but it was finished not earlier than June 13 nor later than June 19. The bankrupt acknowledged delivery and satisfactory completion of installation on June 18.

HMC filed a financing statement in Anne Arundel County, Maryland, to perfect its purchase money security interest in the binder on June 15. The bankruptcy filing occurred on February 24, 1971.

II OPINIONS BELOW

This case presents the single issue of which of the two secured creditors, FCA or the purchase money security interest holder HMC, is entitled to the binder. Under § 9-312(4),⁴ purchase money security interest holders are generally given priority in cases such as this. The referee held that the bankrupt received possession of the binder on June 2, when the last crates were delivered, and since HMC's June 15 filing came more than 10 days after the debtor received possession, HMC lost its § 9-312(4) priority. The volume of adjudication in this special area is scanty. Disposition of the case therefore requires a close analysis of the Code and its provisions.

The District Court ruled in favor of HMC's claim on two alternative grounds. First, the court held that the debtor did not receive possession on June 2, when the delivery was completed, but rather some time between June 13 and 19, when HMC completed its installation. Possession did not occur, according to the District Court, until the tender of delivery terms the bankrupt bargained for with HMC were completed (§§ 2-503, 507).⁵ The District Court's reasoning continued that, since installation was a tender of delivery term and occurred June 13, at the earliest, HMC's June 15 filing perfected its purchase money security interest within 10 days after the debtor received possession of the collateral. Therefore, the District Court concluded, HMC's purchase money security interest retained its § 9-312(4) priority.

In its alternative holding the District Court ruled in favor of HMC's claim based upon the third sentence of § 9-103(3).⁶ The court was of the view that HMC had perfected its security interest while the goods were still in New York, not through filing but through taking possession of the crates, §§ 9-303(1),⁷ 305.⁸ Under § 9-103(3) HMC's already perfected security interest continued perfected in Maryland until September, 1970, and the June 15 filing was well within the allotted time for filing.

We think the District Court erred in both alternative holdings. The bankrupt received possession on June 2, when the crates arrived, and completion of tender of delivery terms is irrelevant to when possession occurs under the Code.

Additionally, the comity provisions of § 9-103(3) were not intended to allow a perfection in one state to continue in another when the parties knew and agreed to transfer the collateral to the second state within 30 days.

III POSSESSION UNDER ARTICLE 9

HMC's claim of priority under § 9-312(4), as a purchase money security interest holder, depends on how the word "possession," used in that section, is to be defined. Because assuming HMC's interest was not perfected when the bankrupt received possession, perfection would have to occur within 10 days after the bankrupt obtained possession in order for HMC's interest to take priority.

We reject the District Court's holding that possession was received by the bankrupt when the tender of delivery terms of HMC and the bankrupt were completed, between June 13 and 19. Such an approach confuses the Article 2 tender of delivery concept with the Article 9 notion of possession.

"Possession" is one of the few terms employed by the Code for which it provides no definition. The Code's general purpose is to create a precise guide for commercial transactions under which businessmen may predict with confidence the results of their dealings. In defining "possession" we must be guided by these considerations as well as by the underlying theories unique to Article 9.

Under pre-code law, a security interest became invalid if the debtor was allowed uncontrolled dominion over the collateral.⁹ Exercise of such ostensible ownership could perpetrate fraud on potential creditors who, not being able to know of the creditor's security interest, would think the collateral belonged to the debtor.

In contrast, creditors today can learn of pre-existing security interests through the filing provisions of the Code and a debtor's use of the collateral is no longer considered fraudulent, § 9-205.¹⁰ Filing is required, with certain exceptions,¹¹ to perfect the security interest, so that creditors may learn of the pre-existing interest. "Possession" is used throughout Article 9 in establishing the filing scheme, in permitting debtors to retain use of collateral, and in providing perfection through means other than filing, such as through the secured party's taking possession. The ostensible ownership exercised through possession is demonstrated through simple physical control. One who controls the collateral possesses it, and leads others to believe it is his. Gilmore, a draftsman of Article 9, explains:

"Receives possession" is evidently meant to refer to the moment when the goods are physically delivered at the debtor\'s place of business — not to the possibility of the debtor\'s acquiring rights in the goods at an earlier point by identification or appropriation to the contract or by shipment under a term under which the debtor bears the risk.

2 Gilmore, Security Interests in Personal Property 787 (1965).

Pre-code security law defined possession as meaning physical control.¹²

Tender of delivery is a sales concept, employed by Article 2,¹³ which binds a buyer and seller to contractual conditions. It affects their rights against each other. It would be a serious error to allow those private conditions to affect the carefully defined rights of creditors under Article 9.

Secured parties are required, in most cases, to...