International Harvester Credit Corp. v. Hill

• Decision Date: 01 November 1980
• Docket Number: No. 79-2017-NE-CV.,79-2017-NE-CV.
• Citation: 496 F. Supp. 329
• Parties: INTERNATIONAL HARVESTER CREDIT CORPORATION v. James E. HILL and Vernon D. Houston.
• Court: U.S. District Court — Middle District of Tennessee

496 F. Supp. 329

INTERNATIONAL HARVESTER CREDIT CORPORATION v. James E. HILL and Vernon D. Houston.

No. 79-2017-NE-CV.

United States District Court, M. D. Tennessee, Northeastern Division.

October 15, 1979.

As Amended November 1, 1980.

COPYRIGHT MATERIAL OMITTED

James A. Ridley, III of Kramer, Johnson, Rayson, McVeigh & Leake, Knoxville, Tenn., Craig J. Donaldson, Memphis, Tenn., for plaintiff.

Joe M. Looney of Looney, Looney & Conner, Crossville, Tenn., for defendants.

MEMORANDUM

MORTON, Chief Judge.

This replevin suit seeking possession of an International tractor and disc was instituted by International Harvester Credit Corporation, a Delaware corporation with its principal place of business in Illinois, against James E. Hill and Vernon R. Houston, citizens and residents of Cumberland County, Tennessee. The value of the equipment is in excess of $10,000.00. This court has jurisdiction pursuant to 28 U.S.C. § 1332.

The facts of this case as hereinafter found by the court reflect the willfully fraudulent acts of an insolvent franchise dealer of International Harvester Company, aided and abetted by his brother and others.

In 1977, International Harvester Company granted a franchise for the sale of its products to John Hatfield (hereinafter referred to as John), an individual proprietorship operating under the name of Hatfield International. The inventory was floor planned (financed) by plaintiff International Harvester Credit Corporation (IHCC), a wholly-owned subsidiary of International Harvester Company. On January 1, 1978, James Hatfield (James), brother of John, became general manager but with no ownership in the business. Apart from the business of Hatfield International, John and James Hatfield operated a farming enterprise. Although the record is not clear as to the role of James, there is strong evidence that he was an employee of John's in this enterprise. This fact is not critical since it is clear that John was the predominant figure in the farming operation.

By early March 1978, Hatfield was out of trust in the floor plan arrangement¹ as to one item, but the equipment, the subject of this case, was present on the sales lot for sale to the public until April 18, 1978. Prior to March 21, 1978, John decided to sell the equipment in question to Professional Leasing, Inc., and lease it back allegedly for the purpose of using it in the farm enterprise. Due to his large financial commitments of other indebtedness, at the suggestion of Professional, the title was transferred to Professional and leased back to James. The funds were paid to Hatfield International, and the equipment was leased by lease purchase arrangement to James by instrument of March 21, 1978. The address of the lessee was the same as Hatfield International, although the location of the equipment was stated to be Route 1, Jamestown, Tennessee (a farm of John's). The equipment remained on the sales lot of Hatfield International from March 21, 1978, until April 18, 1978, except for one occasion of 1 to 3 hours when the tractor was transported to the Jamestown farm for the sole purpose of setting a plow for sale to a customer of Hatfield International. The equipment was never operated in the farm enterprise. Professional Leasing, through its employees, were aware of the above facts, except for the plow setting incident. Around April 1 or shortly thereafter, the employee of Professional who participated in the lease back to James began working for John at Hatfield International.

On April 18, 1978, defendants purchased the equipment in question from the sales lot of Hatfield International with John making the sale and James being aware thereof. The former employee of Professional prepared the sales documents. The defendants were bona fide purchasers who gave valuable consideration for the equipment, executed a purchase contract and agreed to make installment payments totaling (including finance charges) $60,837.64, the first payment being due December 1, 1978. This sales contract was for value assigned and delivered to the plaintiff on April 19, 1978. The equipment was delivered to defendants.

The financing statement covering the floor plan of Hatfield International's inventory in favor of plaintiff was filed with the Secretary of State of the State of Tennessee on November 17, 1977. The financing statement specifying the lease to James by Professional was filed with the Secretary of State of the State of Tennessee on April 11, 1978. A Uniform Commercial Code financing statement specifying the sale to defendants and the purchase money debt due Hatfield International (passing to plaintiffs by assignment) was filed with the Register of Deeds in Cumberland County, Tennessee, on April 20, 1978. Plaintiffs had no knowledge of the sale to Professional.

In November 1978, defendants were informed by John and James that the equipment had been sold twice. Thereafter defendants with full notice of the claims of plaintiff and Professional, after consultation with their attorney, elected to atone to and pay Professional. They assert that they do not owe plaintiff any sum. Thus this suit.

Under the Erie doctrine, the federal court in a diversity action will apply the law of the state in which it sits including that state's choice of law rule. MacPherson v. MacPherson, 377 F.Supp. 794, 796 (M.D.Tenn.1973), rev'd on other grounds, 496 F.2d 258 (6th Cir. 1974). The Tennessee rule is that, subject to the qualification that a contrary intent will control, the law of the place of the making of the contract will prevail. "A contract is presumed to be made with reference to the law of the place where it was entered into unless it appears that it was entered into in good faith with reference to the law of some other state." First American National Bank v. Automobile Insurance Co., 252 F.2d 62, 64 (6th Cir. 1958). The contract in the case at bar was entered into in the State of Tennessee, no intention of the parties that the law of any other state should be looked to in that regard appears, and Tennessee law will therefore govern. See Deaton v. Vise, 186 Tenn. 364, 210 S.W.2d 665, 668 (1948). Where there is no controlling authority in Tennessee, relevant cases from other jurisdictions will be examined.

It is regretful that this case "concerns, in its essence, the question of which of two basically innocent parties shall be made to bear a loss occasioned by the wrongful conduct of a third party who, because of financial incapacity, is unable to respond in damages." Chemical Bank v. Penny Plate, Inc., 144 N.J.Super. 390, 365 A.2d 945, 951 (1976).

The defendants in this action first seek to avoid the replevin by asserting that there was a total want or failure of consideration. The defendants maintain that, inasmuch as the seller did not have good title to the equipment when they purchased it, the contract is invalid ab initio.

The defendants further assert that IHCC can stand in no better position than the seller in this action and that a "waiver of defenses clause" contained in the contract is invalid as to them. The clause in question appears at the top of the reverse side of the contract and reads as follows:

ASSIGNMENT: As used herein "holder" shall mean seller, or if this contract is assigned, assignee of the seller. In the event seller assigns this contract, upon notice of such assignment, purchaser agrees to make all payments hereunder directly to such assignee and the original seller shall not be the agent of the holder for transmission of payments or otherwise. Assignee shall be entitled to all rights of the seller free from any defense, set-off or counterclaim by the purchaser.

Immediately below the above appears a separate paragraph employing the "anti-holder in due course" language of the Federal Trade Commission's ruling reserving defenses and claims in consumer transactions promulgated as 16 C.F.R. § 433 (1979). It reads:

In the event the equipment covered by this contract is used for personal, family or household purposes, the above waiver of defense clause is of no effect and the following notice shall apply:

NOTICE

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

(Emphasis in the original.)

The defendants' attacks upon the validity of the waiver of defenses clause and the question of a lack of consideration will be taken seriatim. The defendants first claim that personal defenses may be raised against the plaintiff because the plaintiff is not a holder in due course of a negotiable instrument. The court agrees that the installment sales contract here does not meet the requirements of negotiability, and the plaintiff is, therefore, not a holder in due course. However, under T.C.A. § 47-9-206, where the buyer waives as to an assignee any claims or defenses he may have against the seller or lessor, that is "enforceable by an assignee who takes his assignment for value, in good faith without notice of a claim or defense, except as to defenses of a type which may be asserted against a holder in due course of a negotiable instrument under the chapter on commercial paper (chapter 3 of this title)." T.C.A. § 47-9-206(1). This provision clearly expresses the intention, in non-consumer purchases, to give the creditor-assignee the protection of a holder in due course if the instrument is taken for value, in good faith, and without notice that it is overdue, has been dishonored, or of any defense or claim to it on the part of any person as required by T.C.A. § 47-3-302(1). See Note, Finance Company as Holder in Due Course, 51 Ky.L.J. 134, 139-40 (1962). The same result was reached in ITT-Industrial Corp. v. Milo Concrete Co., 31 N.C.App. 450, 229 S.E.2d 814 (1976) in discussion of an identical provision enacted...