Major's Furniture Mart, Inc. v. Castle Credit Corp.

• Decision Date: 11 January 1979
• Docket Number: No. 78-1912,78-1912
• Citation: 602 F.2d 538,26 UCC Rep.Serv. 1319
• Parties: 26 UCC Rep.Serv. 1319 MAJOR'S FURNITURE MART, INC. v. CASTLE CREDIT CORPORATION, INC., Canter Consumer Discount Company, andRobert's Furniture Company, Inc., Appeal of CASTLE CREDIT CORPORATION, INC. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 538

602 F.2d 538

26 UCC Rep.Serv. 1319

MAJOR'S FURNITURE MART, INC. v. CASTLE CREDIT CORPORATION, INC., Canter Consumer Discount Company, andRobert's Furniture Company, Inc. Appeal of CASTLE CREDIT CORPORATION, INC.

No. 78-1912.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6) Jan. 11, 1979.

Decided June 20, 1979.

Arthur Silverman, Michael M. Westerman, Ettinger, Silverman, Balka, Basch & Levy, Philadelphia, Pa., for appellant.

Robert W. Maris, Dilworth, Paxson, Kalish, Levy & Kauffman, Philadelphia, Pa., for appellee.

Before HUNTER, WEIS and GARTH, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge:

This appeal requires us to answer the question: "When is a sale not a sale, but rather a secured loan?" The district court held that despite the form of their Agreement, which purported to be, and hence was characterized as, a sale of accounts receivable, the parties' transactions did not constitute sales. Major's Furniture Mart, Inc. v. Castle Credit Corp., 449 F.Supp. 538 (E.D.Pa.1978). No facts are in dispute, ¹ and the issue presented on this appeal is purely a legal issue involving the interpretation of relevant sections of the Uniform Commercial Code as enacted in Pennsylvania, 12A P.S. § 1-101 Et seq. and their proper application to the undisputed facts presented here.

The district court granted plaintiff Major's motion for summary judgment. Castle Credit Corporation appeals from that order. ² We affirm.

I

Major's is engaged in the retail sale of furniture. Castle is in the business of financing furniture dealers such as Major's. Count I of Major's amended complaint alleged that Major's and Castle had entered into an Agreement dated June 18, 1973 for the financing of Major's accounts receivable; that a large number of transactions pursuant to the Agreement took place between June 1973 and May 1975; that in March and October 1975 Castle declared Major's in default under the Agreement; and that from and after June 1973 Castle was in possession of monies which constituted a surplus over the accounts receivable transferred under the Agreement. Among other relief sought, Major's asked for an accounting of the surplus and all sums received by Castle since June 1, 1976 which had been collected from the Major's accounts receivable transferred under the Agreement. (App. 64-65).

The provisions of the June 18, 1973 Agreement which are relevant to our discussion provide: that Major's shall from time to time "sell" accounts receivable to Castle (P 1), and that all accounts so "sold" shall be with full recourse against Major's (P 2). Major's was required to warrant that each account receivable was based upon a written order or contract fully performed by Major's. ³ Castle in its sole discretion could refuse to "purchase" any account (P 7). The amount paid by Castle to Major's on any particular account was the unpaid face amount of the account exclusive of interest ⁴ less a fifteen percent "discount" ⁵ and less another ten percent of the unpaid face amount as a reserve against bad debts (P 8). ⁶

Under the Agreement the reserve was to be held by Castle without interest and was to indemnify Castle against a customer's failure to pay the full amount of the account (which included interest and insurance premiums), as well as any other charges or losses sustained by Castle for any reason (P 9).

In addition, Major's was required to "repurchase" any account "sold" to Castle which was in default for more than 60 days. In such case Major's was obligated to pay to Castle

an amount equal to the balance due by the customer on said Account plus any other expenses incurred by CASTLE as a result of such default or breach of warranty, less a rebate of interest on the account under the "Rule of the 78's". . . . ⁷

App. at 22, P 10. Thus essentially, Major's was obligated to repurchase a defaulted account not for the discounted amount paid to it by Castle, but for a "repurchase" price based on the balance due by the customer, plus any costs incurred by Castle upon default.

As an example, applying the Agreement to a typical case, Major's in its brief on appeal summarized an account transaction of one of its customers (William Jones) as follows:

A customer (Jones) of Major's (later designated Account No. 15,915) purchased furniture from Major's worth $1700.00 (or more). * (H)e executed an installment payment agreement with Major's in the total face amount of $2549.88, including interest and insurance costs. . . . Using this piece of chattel paper, . . . Major's engaged in a financing transaction with Castle under the Agreement. . . . Major's delivered the Jones' chattel paper with a $2549.88 face amount of Castle together with an assignment of rights. Shortly thereafter, Castle delivered to Major's cash in the amount of $1224.00. The difference between this cash amount and the full face of the chattel paper in the amount of $2549.88, consisted of the following costs and deductions by Castle:

1. $180.00 discount credited to a "reserve" account of Major's.

2. $300.06 "discount" (actually a prepaid interest charge).

3. $30.85 for life insurance premium.

4. $77.77 for accident and health insurance premium.

5. $152.99 for property insurance premium.

6. $588.27 interest charged to Jones on the $1700 face of the note (App. 73a No. 15,915).

Thus, as to the Jones' account, Castle received and proceeded to collect a piece of chattel paper with a collectible face value of $2549.88. Major's received $1224.00 in cash.

Brief of Appellee at 5-6.

As we understand the Agreement, if Jones in the above example defaulted without having made any payments on account, the very least Major's would have been obliged to pay on repurchase would be $1,700 even though Major's had received only $1,224 in cash on transfer of the account and had been credited with a reserve of $180. The repurchase price was either charged fully to reserve or, as provided in the Agreement, 50% To reserve and 50% By cash payment from Major's (P 10). In the event of bankruptcy, default under the agreement or discontinuation of business, Major's was required to repurchase all outstanding accounts immediately (P 13). Finally, the Agreement provided that the law of Pennsylvania would govern and that the Agreement could not be modified except in writing signed by all the parties. (Apparently, no objection has ever been made to Castle's unilateral modification of the discount rate. See p. 546 Infra. That issue is not before us.)

Under the Agreement, over 600 accounts were transferred to Castle by Major's of which 73 became delinquent and subject to repurchase by Major's. On March 21, 1975, Castle notified Major's that Major's was in default in failing to repurchase delinquent accounts (App. 52). Apparently to remedy the default, Major's deposited an additional $10,000 into the reserve. ⁸ After June 30, 1975, Major's discontinued transferring accounts to Castle (App. 51). On October 7, 1975 Castle again declared Major's in default (App. 53).

Major's' action against Castle alleged that the transaction by which Major's transferred its accounts to Castle constituted a financing of accounts receivable and that Castle had collected a surplus of monies to which Major's was entitled. We are thus faced with the question which we posed at the outset of this opinion: did the June 18, 1973 Agreement create a Secured interest in the accounts, or did the transaction constitute a True sale of the accounts? The district court, contrary to Castle's contention, refused to construe the Agreement as one giving rise to the sales of accounts receivable. Rather, it interpreted the Agreement as creating a security interest in the accounts which accordingly was subject to all the provisions of Article 9 of the U.C.C., 12A P.S. § 9-101 Et seq. It thereupon entered its order of June 13, 1977 granting Major's' motion for summary judgment and denying Castle's motion for summary judgment. This order was ultimately incorporated into the court's final judgment entered May 5, 1978 which specified the amount of surplus owed by Castle to Major's. It was from this final judgment that Castle appealed.

Castle on appeal argues (1) that the express language of the Agreement indicates that it was an agreement for the sale of accounts and (2) that the parties' course of performance and course of dealing compel an interpretation of the Agreement as one for the sale of accounts. Castle also asserts that the district court erred in "reforming" the Agreement and in concluding that the transaction was a loan. In substance these contentions do no more than reflect Castle's overall position that the Agreement was for an absolute sale of accounts.

II

Our analysis starts with Article 9 of the Uniform Commercial Code which encompasses both Sales of accounts and Secured interests in accounts. Thus, the Pennsylvania counterpart of the Code "applies . . . (a) to any transaction (regardless of its form) which is intended to create a security interest in . . . accounts . . . ; and also (b) to any sale of accounts . . ." 12A P.S. § 9-102. ⁹ The official comments to that section make it evident that Article 9 is to govern All transactions in accounts. Comment 2 indicates that, because "(c)ommercial financing on the basis of accounts . . . is often so conducted that the distinction between a security transfer and a sale is blurred," that "sales" as well as transactions "intended to create a security interest" are subject to the provisions of Article 9. Moreover, a "security interest" is defined under the Act as "any interest of a buyer of accounts." 12A P.S. § 1-201(37). Thus even an outright buyer of accounts, such as Castle claims to be, by definition has a "security interest" in the accounts which it purchases.

Article 9 of the Pennsylvania Code is subdivided into five parts. Our examination of Parts 1-4, 12A P.S. §§ 9-101 to 9-410, reveals no distinction drawn between a...