In re Mel Golde Shoes, Inc.

• Decision Date: 03 December 1968
• Docket Number: No. 18212.,18212.
• Citation: 403 F.2d 658
• Parties: In the Matter of MEL GOLDE SHOES, INC., Debtor. JOHNSTON & MURPHY SHOES, INC., Appellant, v. MEINHARD COMMERCIAL CORPORATION, William Iselin & Company, Wallstreeter Shoe Company and Leverenz Shoe Company, Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

403 F.2d 658 (1968)

In the Matter of MEL GOLDE SHOES, INC., Debtor JOHNSTON & MURPHY SHOES, INC., Appellant, v. MEINHARD COMMERCIAL CORPORATION, William Iselin & Company, Wallstreeter Shoe Company and Leverenz Shoe Company, Appellees.

No. 18212.

United States Court of Appeals Sixth Circuit.

December 3, 1968.

Mark Davis, Jr., of Payne & Davis, Louisville, Ky., for appellant.

Jerry A. Lloyd, of Goldberg & Lloyd, Louisville, Ky., for appellees.

Before WEICK, Chief Judge, and O'SULLIVAN and McCREE, Circuit Judges.

O'SULLIVAN, Circuit Judge.

We consider the appeal of Johnston & Murphy Shoes, Inc., from a judgment of the District Court for the Western District of Kentucky holding that such company's right to reclaim a shipment of shoes from an insolvent purchaser — Mel Golde Shoes, Inc. — under the Uniform Commercial Code of Kentucky, K.R.S. § 355.2-702(2),¹ was subordinate to attachments levied thereon by creditors of such debtor-purchaser. The judgment of the District Court vacated a contrary holding by the Bankruptcy Referee.

On January 23, 1967, Johnston & Murphy Shoes, Inc., delivered a shipment of shoes to Mel Golde Shoes, Inc., at Louisville, Kentucky. The following day appellees, Meinhard Commercial Corporation and William Iselin & Company, levied attachments against the entire inventory of Golde. On February 2, Golde filed a petition in the United States District Court seeking relief under Chapter XI of the Bankruptcy Act. The petition's averment that Golde was "unable to pay its unsecured debts as they mature" disclosed Golde's insolvency within the meaning of Kentucky's Uniform Commercial Code² and the Referee so found. On February 1, 1967, the day before the Chapter XI petition was filed, Johnston & Murphy, exercising the right given by above K.R.S. § 355.2-702(2), made timely demand for the return of the shoes. This was followed by a reclamation petition in the bankruptcy court. The referee held that Johnston & Murphy's right of reclamation was superior to any lien rights of the attaching creditors. He was of the view, however, that the Chapter XI proceeding would be unworkable if the shoes were returned and granted appellant the status of a secured creditor in lieu of return of the shoes. The propriety of this procedure is not challenged if Johnston & Murphy's reclamation right is superior to any rights of the attaching creditors. In the District Court, the referee's order was overruled in an Opinion and Order which concluded as follows:

"It is Therefore Ordered that the Referee\'s order dated April 7, 1967, is hereby overruled and that Johnston & Murphy Shoes, Inc., having failed to establish its statutory right to reclamation before certain other creditors became lien creditors, is to be treated as a creditor with an unperfected security interest."

We reverse.

Under K.R.S. § 355.2-702(2), supra, Johnston & Murphy had the right to reclaim the shoes shipped to the insolvent Mel Golde unless such right is taken away by subparagraph (3) of § 355.2-702, which reads:

"(3) The seller\'s right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser or lien creditor under this article (KRS 355.2-403). * * *." (Emphasis supplied.)

It is, and was, the contention of the appellee creditors that they became "lien creditors" by virtue of their attachments, pursuant to K.R.S. § 355.9-301(3).³ We must, accordingly, look to K.R.S. § 355.2-403 for delineation of the "rights" of lien creditors. The caption of K.R.S. § 355.2-403 advises that it deals with "Power to transfer; good faith purchase of goods; `entrusting'" and provides no help to a solution of the problem here, but concludes in its final subsection (4) that,

"(4) the rights of other purchasers of goods and of lien creditors are governed by the Articles on Secured Transactions (Article 9), Bulk Transfers (Article 6) and Documents of Title (Article 7)."

Inasmuch as Bulk Transfers and Documents of Title have no relevance here, we move on to Article 9, which in its first section, K.R.S. § 355.9-101, states, "This article shall be known and may be cited as Uniform Commercial Code — Secured Transactions." (Emphasis supplied.) The District Judge and the appellee creditors assume that the section of Article 9 that has relevance here is in its Part 3 which bears the catchline "Rights of Third Parties; Perfected and Unperfected Security Interest; Rules of Priority." They rely specifically on K.R.S. § 355.9-301 entitled, "Persons who take priority over unperfected security interests; `lien creditor'" and providing, in relevant part:

"(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of * * *

"(b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected;"

Basically, appellees' position, upheld by the District Judge, is that Johnston & Murphy's status is "to be treated as a creditor with an unperfected security interest." We do not read the quoted section of the statute as defining or throwing any light upon the "rights" of a "lien creditor" vis-a-vis the right of reclamation of a defrauded seller under § 355.2-702(2). This latter right is not a "security interest" in the goods sold and Johnston & Murphy are not attempting to assert a "security interest" to support their position. Thus, at the end of this circuitous statutory journey, we arrive at the conclusion that Kentucky's Commercial Code does not contain any provision defining the relative priorities of a creditor as against a reclaiming seller. Such being the situation, we must turn to relevant common law of Kentucky for the needed answer. The Commercial Code in K.R.S. § 355.1-103 provides:

"355.1-103 Supplementary general principles of law applicable. Unless displaced by the particular provisions of this chapter, the principles of law and equity * * * shall supplement its provisions."

We consider that the early decision of Lane & Bartlett v. Robinson, 57 Ky.Rep. 496 (1857) announced Kentucky's agreement with the general rule that a defrauded seller's right to reclaim his goods is superior to any right of attaching creditors. The Court said:

"And no reason exists why, as between attaching creditors and vendors

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