Mahon v. Stowers 8212 1131

Decision Date15 April 1974
Docket NumberNo. 73,73
Citation40 L.Ed.2d 79,94 S.Ct. 1626,416 U.S. 100
PartiesJames S. MAHON, Trustee, and C.I.T. Corporation v. Curtis R. STOWERS et al. —1131
CourtU.S. Supreme Court

[Syllabus from pages 100-101 intentionally omitted]

PER CURIAM.

This litigation arose out of the bankruptcy of Samuels & Co. a large meat packing concern with plants in various parts of Texas. Respondents had sold cattle to Samuels, for which they received checks in payment, but bankruptcy ensued before the checks had been paid by the drawee bank. With the consent of all parties the receiver and the trustee of the bankrupt estate continued to sell meat from the cattle that had been slaughtered and packaged by Samuels and held the proceeds of such sales subject to disposition by the referee. Respondents sought reclamation of the cattle which they had sold to Samuels, and asserted a concomitant right to the proceeds from sale of the packaged meat. C.I.T. Corporation, which held a perfected lien on the bankrupt's inventory and other property, and the trustee in bankruptcy opposed the respondents' claim.

The referee made findings of fact and conclusions of law which sustained the respondents' position. The District Court upheld the referee's findings of fact, but reversed the judgment on the grounds that under the applicable provisions of the Texas Business and Commercial Code the claims of the trustee and C.I.T. were superior to that of respondents. The Court of Appeals for the Fifth Circuit, however, agreed with the referee and reversed the District Court judgment because it read the Packers and Stockyards Act, 42 Stat. 159, 7 U.S.C. § 181 et seq., and certain regulations issued by the Secretary of Agriculture thereunder, as establishing the superiority of respondents' claim notwithstanding Texas law. We disagree with this reading of the applicable provisions of the Packers and Stockyards Act, and therefore grant certiorari and reverse the judgment of the Court of Appeals.

I

The uncontested facts in this case are contained in the findings of the bankruptcy referee. The referee found that respondents, for a period of some ten days before Samuels filed a Chapter XI petition under the Bankruptcy Act, had been selling live cattle to Samuels for slaughter on a 'grade and yield' basis, and that this was a recognized custom and usage in the trade. Under this usage the contract price is left open at the time of delivery to the purchaser, who slaughters the livestock and allows the carcasses to chill for approximately 24 hours. At that time they are graded by the United States Department of Agriculture and the price is determined. The purchaser then gives the seller a check for the established amount. The referee further found that Samuels was subject to the regulations of the Packers and Stockyards Act, and that all of the livestock in question had been delivered to Samuels at its plant in Mount Pleasant, Texas, where it was slaughtered and then graded by the Department of Agriculture.

Until the livestock is actually graded and the yield determined, the sellers can identify their particular livestock, but once the carcasses are processed and the meat packaged, identification is no longer possible. When the petition for bankruptcy was filed in this case, none of the respondents was able to identify his own particular livestock, but the referee found that at least some of the carcasses sold by respondents were on Samuels' premises at that time. The referee also determined that no proceeds from sale of packaged meat could be identified as realized from carcasses delivered by respondents.

Examining the competing claims, the referee found that at all times material to the action C.I.T. was the holder of a duly perfected security interest in all livestock, animal carcasses, packaged and unpackaged meat, packing materials, and other inventory owned by Samuels or in which Samuels may have had an interest. At the time the bankruptcy petition was filed Samuels was indebted to C.I.T. in an amount in excess of $1,800,000. C.I.T. had been advancing large sums weekly to Samuels, and the bankruptcy was precipitated on May 23, 1969, when C.I.T., deeming itself to be insecure, refused to make a weekly advance of approximately $184,000 which Samuels needed to continue its operations. The referee found that C.I.T. 'knew or should have known' of the method by which Samuels bought livestock from respondents on a grade-and-yield basis. He further found that no respondent held a security agreement with Samuels, and that none had filed a financing statement reflecting the transactions with Samuels.

The referee reasoned from these facts that respondents and Samuels had intended to transact their sales business on a cash, rather than a credit, basis, and that title to the livestock 'did not pass from plaintiff to bankrupt until payment was made to plaintiff.' Therefore, he concluded, C.I.T.'s perfected lien could not attach to the livestock in Samuels' inventory until the checks issued in payment were subsequently honored. Any other decision would, he said, make the cattle sellers 'a species of involuntary creditor against their wishes and intent,' although they had complied with normal selling arrangements under the Packers and Stockyards Act. He found it unnecessary for the respondents to identify proceeds from the sale of specific carcasses which they had delivered, and placed the duty on C.I.T. to show that the funds to which it laid claim had not been received from the sale of carcasses furnished by respondents.

The District Court accepted the referee's findings of fact but reversed on the law. Turning to the provisions of the Texas Business and Commercial Code, which are largely counterparts of the Uniform Commercial Code, the court found that the respondents by their delivery of the cattle had retained only a security interest in those animals and the proceeds therefrom.1 It further found that the respondents had taken no action to perfect their security interest2 nor attempted to utilize any right of reclamation they might have had under Texas law.3 Delivery of the cattle to Samuels on this basis enabled it to transfer good title to a good-faith purchaser for value, a category of persons which included both C.I.T. and the trustee in bankruptcy. 4 The District Court also found that respondents were unable to 'establish their right to possession by ownership . . . (by) identify(ing) positively the property sought to be reclaimed in either its original or substituted form.'

The District Court was in turn reversed by a divided Court of Appeals for the Fifth Circuit. Although that court conceded that C.I.T. would have a superior right to the sales proceeds were the transaction governed solely by the provisions of the Texas Business and Commercial Code, it found that the Packers and Stockyards Act, 7 U.S.C. § 181 et seq., along with the regulations promulgated thereunder and the relevant usages of trade, made Samuels a trustee of the proceeds received from the sale of cattle delivered by respondents. The court stated:

'The reasoning of these cases and the impact of the Packers and Stockyards Act convinces this court that more than an unperfected security interest subject to reclamation is reserved for the cattle seller. Not by contract but by statute and regulation a packer lacks full dominion over the carcasses until the seller has been paid. Where the packer defaults by the issuance of a bad check (and destroys the identity of the security by processing the carcasses into fungible meat products), the seller is the beneficiary of a trust imposed by remedial statute.'5

The right of the cattle sellers to funds thus found to be specifically held in trust for their benefit was deemed superior to the general perfected lien of C.I.T. on the Samuels' inventory.

II

This Court has previously held that an ordinary debtor-creditor relationship requires more than the post-bankruptcy disappointment of the creditor to convert it into a trust relationship. See McKee v. Paradise, 299 U.S. 119, 57 S.Ct. 124, 81 L.Ed. 75 (1936). Examining a claim by employees that funds held for their general benefit by an employee asso- ciation were funds held in trust, the Court in McKee stated:

'The bankrupt was a debtor which had failed to pay its debt. We know of no principle upon which that failure can be treated as a conversion of property held in trust. At no time throughout the whole period was there a trust fund or res. No fund was segregated or set up by special deposit or in any manner. When the wages became due, there was no such fund but only the general assets of the employer and its obligation to pay a debt. . . . The fact that the failure to pay the association was an acute disappointment and was expecially regrettable as the claimant was an association of employees, cannot avail to change the debtor into a trustee or enable the creditor to obtain a preference over other claims against a bankrupt estate.' Id., at 122—123, 57 S.Ct., at 125.

The Court therefore held that the employees were entitled to share in the bankrupt's assets only in the position of a general unsecured creditor.

Similarly, we believe that the Court of Appeals, in concluding that in this case a trust relationship existed between Samuels and respondents, placed more weight on the Packers and Stockyards Act, and corresponding regulations and practices, than they will properly bear. For although the Act does regulate methods of payment and record-keeping procedures for persons defined as 'packers' by the Act, we must remember that the 'chief evil' at which it was aimed was 'the monopoly of the packers, enabling them unduly and arbitrarily to lower prices to the shipper who sells, and unduly and arbitrarily to increase the price to the consumer who buys.' Stafford v. Wallace, 258 U.S. 495, 514—515, 42 S.Ct. 397, 401, 66 L.Ed. 735 (1922). We find no evidence in either the Act or the regulations that packers are to hold cattle or...

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