In re Phippens
| Decision Date | 28 April 1980 |
| Docket Number | Bankruptcy No. 79-30899. |
| Citation | 4 BR 155 |
| Parties | In re Blanks George PHIPPENS, Jr. d/b/a Buddy's Auto Sales, Bankrupt. T. Larry EDMONDSON, Trustee, Plaintiff, v. Charles CALDWELL, Ind. and d/b/a Caldwell Motors, and Caldwell Motors, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — Middle District of Tennessee |
T. Larry Edmondson, Nashville, Tenn., for plaintiff.
G. Rhea Bucy, Nashville, Tenn., for defendant.
The captioned adversary proceeding was commenced by the Trustee's complaint against Charles Caldwell, individually and allegedly doing business as Caldwell Motors, to avoid under § 67(d)(3) of the Bankruptcy Act a repossession of 14 automobiles from the bankrupt which occurred fifteen days before the filing of the bankrupt's voluntary petition. The complaint was later amended to allege invalidity of the repossession under sections 60 and 67(a) of the act as well as § 67(d)(3).
At the trial on the matter the Trustee moved to add Caldwell Cars, Inc., a Kentucky corporation, as a defendant and to proceed with trial of the complaint as so amended. Charles Caldwell, the president of Caldwell Cars, Inc., was present in court and through his attorney consented to the motion, Caldwell Cars, Inc. being deemed to have answered and denied all allegations of the complaint, as amended. Thereupon, the complaint, as amended, was tried as against the original defendant and Caldwell Cars, Inc. The debtor was not present.
The following shall constitute findings of fact and conclusions of law pursuant to F.R.B.P. 752.
The bankrupt, doing business as Buddy's Auto Sales in Dover, Tennessee, began buying automobiles owned by Caldwell Cars, Inc. at dealer auctions. Later, in 1975, the bankrupt bought directly from Caldwell Cars, Inc. (hereinafter Caldwell). Early in 1978 Caldwell and the bankrupt changed the manner in which they had been doing business. The new procedure operated as follows. The two would agree on the vehicles and the price, the bankrupt would execute and deliver to Caldwell a draft drawn on a bank in Dover for each automobile. Caldwell would hold each draft along with the title documents until advised by the bankrupt that he had sold a particular vehicle. At that point Caldwell would deposit the draft and forward the title and bill of sale.
Except for the drafts, neither Caldwell nor the bankrupt signed any other written document of any kind relative to the transactions. There was no security agreement signed, no financing statement filed nor lien recorded. There was no written contract.
The debtor placed the vehicles obtained from Caldwell on the lot with those obtained from other sources. There was no physical evidence that cars on the lot belonged to anyone other than the bankrupt. He had complete control over the purchase price assigned to each auto. Any amount received in excess of the amount of the draft given Caldwell was retained as profit. The bankrupt had the right to return any automobile but would be required to make up the difference between the price originally agreed upon and the price obtained by Caldwell upon resale. The vehicles shipped to the debtor were carried on the Caldwell books as inventory; they were not shown as sales or accounts receivable.
Beginning January, 1979, the bankrupt paid $125.00 weekly to Caldwell. This amount was not credited to the purchase price of any automobile and was on one occasion characterized as "interest".1
On May 14, 1979, the bankrupt telephoned Mr. Caldwell and advised him to pick up the automobiles on which Caldwell held drafts. He stated that he would be responsible for the difference between the amount of the draft given for each auto and the amount Caldwell could obtain upon resale. He further stated that he was considering going into bankruptcy. Caldwell removed from the lot that day 14 automobiles. The debtor filed his voluntary petition on May 29, 1979. Caldwell filed a proof of claim for the difference between the amounts of the drafts he held and the amount realized upon subsequent resale as well as costs of cleanup of each vehicle, and an amount representing a dishonored draft and another draft.
The court must decide first whether the arrangement between the bankrupt and Caldwell was a true consignment. If so, it is above attack by the Trustee; if not, it must be examined further to determine if the transfer constituted a preference which can be avoided by the Trustee.
Case law has suggested a number of factors to be considered in determining the intention of the parties to an arrangement such as that at bar. The most obvious difference between a conditional sale and a consignment is that the vendee in the former undertakes an absolute obligation to pay for goods. First National Bank v. Phillips, 261 F.2d 588 (C.A. 5th, 1958). Kemp-Booth v. Calvin, 84 F.2d 377 (9th Cir. 1936); In re Sachs, 31 F.2d 799 (D.Md.1929). In some instances the consignee may be required to keep proceeds in a separate account, In re Fabers, Inc., 12 UCC Rep. 126 (D.Conn.1972), or may not be allowed to commingle consigned goods with goods owned by the consignee, Matter of Jon-el Shoe Corp., 9 CBC 388 (D.N.J.1976); In re Gross Mfg. & Importing Co., Inc., 9 UCC Rep. 355 (D.N.J.1971).
A consignment may be used to effectuate retail price control. Where the consignor fixes the prices at which goods in the hands of the dealer must be sold with the dealer receiving a set percentage of the invoice price as commission, the arrangement reflects a true consignment and not a security device. Columbia International Corp. v. Kempler, 7 UCC Rep. 651 (Wis. 1970).
The Uniform Commercial Code clearly addresses the question of treatment of consigned goods vis-a-vis creditors of the consignee. Consigned goods in the hands of a dealer are treated as goods subject to "sale or return" and thus subject to claims of the dealer's creditors unless certain precautions are taken by the consignor. T.C.A. § 47-2-326(3).2 As pointed out by Official Comment No. 2:
. . . subsection (3) resolves all reasonable doubts as to the nature of the transaction in favor of the general creditors of the buyer. As against such creditors words such as "on consignment" or "on memorandum", with or without words of reservation of title in the seller, are disregarded when the buyer has a place of business at which he deals in goods of the kind involved.
Thus, the intent of the parties is no longer determinative of the nature of the transaction. Bufkor, Inc. v. Star Jewelry Co., Inc., 22 UCC Rep. 388 (Tex.Civ.App.1977); Collier v. B & B Parts Sales, Inc., 9 UCC Rep. 151 (Tex.Civ.App.1971). Unless the consignor takes the required precautionary steps, the transaction will be deemed a sale or return with respect to the creditors of the person conducting the business.
In the instant case the bankrupt assumed an absolute obligation to pay for the automobiles. The return of the automobiles was accompanied by a requirement that he pay any difference between the amount of the draft held by Caldwell and the amount realized from the subsequent sale. Indeed the proof of claim filed by Caldwell reflects this requirement. In essence he was absolutely obligated to pay the purchase price. The bankrupt freely commingled his own automobiles with those on which Caldwell held notes. The bankrupt had complete control over the prices assigned to any vehicle. Additionally the debtor paid Caldwell $125 a week for a period of time, money which was not credited to the purchase price of any auto.
Caldwell did not comply with any of the precautionary measures outlined in the Uniform Commercial Code § 2-326. There was nothing filed which would indicate his ownership, no notice on the premises and no showing that the debtor was generally known by his creditors to deal in consigned goods. Accordingly this court finds that the arrangement between the bankrupt and Caldwell reflects a conditional sales (sale or return) with retention of title to the automobiles by Caldwell as a security interest. As such, the vehicles were subject to the claims of the bankrupt. Defendant's claim of consignment is rejected.
The court must then determine if the repossession of the 14 automobiles 15 days before bankruptcy is a preference under § 60 of the Bankruptcy Act.3 The Trustee must allege and prove every essential element resulting in the voidable preference, that is, he must show (1) a transfer by the debtor of his property, (2) to a creditor, (3) for an antecedent debt, (4) while insolvent, (5) within four months of bankruptcy, (6) resulting in that creditor obtaining a greater percentage of his debt than some other creditor of the same class. Further, in order to avoid the transfer, the trustee must show, (7) that the creditor receiving the preference had reasonable cause to believe that the debtor was insolvent. Allender v. Southeast Tractor & Equipment Company, 178 F.Supp. 413 (M.D. Tenn.1959); Tumarkin v. Gallay, 127 F.Supp. 94 (S.D.N.Y.1954); In re Shaw, 7 F.2d 381 (D.N.J.1925); Doyle Dry Goods Co. v. Lewis, 5 F.2d 918 (8th Cir. 1925); 3 (Part 2) Collier on Bankruptcy (14th ed.) ¶ 60.02, ¶ 60.62.
In the instant case the court concludes that the Trustee has not carried his burden of proof in showing insolvency of the debtor at the time of the repossession. As in the other elements of a preference, the burden of proof is on the Trustee to show insolvency at the time of the transfer, Bumb v. Paulin Motor...
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