Michigan Nat. Bank v. Michigan Livestock Exchange, 81932

• Decision Date: 01 November 1988
• Docket Number: No. 81932,81932
• Citation: 432 Mich. 277,439 N.W.2d 884
• Parties: , 9 UCC Rep.Serv.2d 366 MICHIGAN NATIONAL BANK, successor by merger to Michigan National Bank of Detroit, a national banking association, Plaintiff-Appellant, v. MICHIGAN LIVESTOCK EXCHANGE, a Michigan corporation, Defendant-Appellee. ,
• Court: Michigan Supreme Court

Page 884

439 N.W.2d 884

432 Mich. 277, 9 UCC Rep.Serv.2d 366

MICHIGAN NATIONAL BANK, successor by merger to Michigan National Bank of Detroit, a national banking association, Plaintiff-Appellant, v. MICHIGAN LIVESTOCK EXCHANGE, a Michigan corporation Defendant-Appellee.

No. 81932, Nov. Term, 1988.

Supreme Court of Michigan.

Argued Nov. 2, 1988.

Decided May 1, 1989.

David J. Vigna, Farmington Hills, for plaintiff-appellant.

E. Lawrence Oldfield, Oak Brook, Ill., Joseph T. Collison, Saginaw, Mich., James T. Malysiak, Chicago, Ill., for defendant-appellee.

Michigan Bankers Ass'n as amicus curiae in support of appellant Mich. Nat. Bank.

Warner, Norcross & Judd by James H. Breay, Grand Rapids, Mich., for Michigan Bankers Ass'n.

BRICKLEY, Justice.

In this action for conversion, defendant claims that as a matter of law it is shielded from liability by UCC Sec. 7-404 ¹ or, in the alternative, by UCC Sec. 9-307 ² when read in conjunction with 1 Restatement of Torts, 2d, Sec. 233(1). The Court of Appeals entered summary judgment in defendant's favor on the basis of UCC Sec. 7-404.

We hold that Sec. 7-404 does not apply to the defendant, and we reject the latter defense as it is based upon a misapplication of the Restatement provision. We therefore reverse the decision of the Court of Appeals.

I

In 1978 and 1981, plaintiff, Michigan National Bank, made loans to farmers William and Rosemary Christacopulos and their co-partnership, Trojan Farms. The collateral for these loans included "all livestock and increase" of the farmers. The bank filed its security interest with the county, but not with the Secretary of State.

In 1982, the farmers had the defendant Livestock Exchange auction some of the cattle which it had pledged to the bank as collateral. Defendant made no attempt to search the county or state records for a UCC filing. The payment for the cattle, less sales commission, was made solely to the farmers.

Plaintiff filed a complaint for conversion against the exchange on January 24, 1983. Defendant filed its answer on March 17, 1983. Plaintiff filed a motion for summary judgment under GCR 1963, 117.2(2) and (3) (now MCR 2.116[C] and , on the grounds that defendant had failed to state a valid defense and that there was no genuine issue of material fact. After a hearing on the matter, the trial court granted summary judgment on the ground that the exchange had failed to state a valid defense.

Defendant appealed and the Court of Appeals remanded to the trial court

"for consideration of the applicability and effect of Sec. 7-404 of the Uniform Commercial Code to and upon this case, and such amendments to the pleadings as may be necessary to raise and consider this issue.... See United States v. Hext, 444 F2d 804; 9 UCC Rep 321 (CA 5, 1971)." Order of the Court of Appeals, entered on October 1, 1984 (Docket No. 78496).

On remand, the trial judge concluded that UCC Sec. 7-404 did not apply in this case, and he reentered summary judgment in plaintiff's favor. The case was again appealed, and this time the Court of Appeals reversed and entered summary judgment in favor of defendant, holding that Sec. 7-404 shielded the defendant from liability. Many cases cited and discussed by the defendant in its Court of Appeals brief addressed not Sec. 7-404, but UCC Sec. 9-307. It is likely that defendant saw fit to do so since the Court of Appeals, in its remand order, had cited United States v. Hext which, although it addressed Sec. 7-404, relied upon Sec. 9-307. In a footnote, the Court of Appeals noted this and stated:

"The order of summary disposition in the bank's favor was entered solely on the basis of UCC Sec. 7-404. For that reason and because we find that the exchange is entitled to the immunity afforded by that section, it is unnecessary to address issues involving UCC Sec. 9-307 and other code provisions." 165 Mich.App. 243, 250, n. 2, 418 N.W.2d 663 (1987).

Plaintiff appealed from the Court of Appeals decision, and this Court granted leave to determine "whether the trial court erred in granting the plaintiff's motion for summary disposition." 430 Mich. 858-859 (1988).

II

Michigan common law has long held that "where an auctioneer receives and takes ... property into his possession, and sells it, paying over the proceeds, less his commission, he is liable, although he has no knowledge of want of title in the party for whom he sells, and acts in good faith." Kearney v. Clutton, 101 Mich. 106, 111, 59 N.W. 419 (1894). See alsoSunlin v. Skutt, 133 Mich. 208, 211, 94 N.W. 733 (1903); cf. Trail Clinic v. Bloch, 114 Mich.App. 700, 319 N.W.2d 638 (1982); Willis v. Ed Hudson Towing, 109 Mich.App. 344, 311 N.W.2d 776 (1981) (good faith is not a defense in a suit for conversion). This common-law rule is also followed in the great majority of jurisdictions. ³ Defendant has not requested that we revise this common-law approach, nor for reasons which will be discussed below, n 18, would we choose to do so in this case.

Defendant and the Court of Appeals accordingly rely on Sec. 7-404 of the Uniform Commercial Code for the view that plaintiff has no claim against the defendant. This provision provides bailees with immunity from liability for conversion where certain conditions are met. The section provides:

"A bailee who in good faith including observance of reasonable commercial standards has received goods and delivered or otherwise disposed of them according to the terms of the document of title or pursuant to this article is not liable therefor. This rule applies even though the person from whom he received the goods had no authority to procure the document or to dispose of the goods and even though the person to whom he delivered the goods had no authority to receive them."

The parties agree that this provision can shield the defendant only if three conditions are met:

1) The defendant is a bailee for purpose of Article 7;

2) The defendant disposed of the cattle pursuant to a document of title; ⁴

3) The defendant acted in good faith, including the observation of reasonable commercial standards.

Because we conclude that defendant does not meet the first two of these requirements for Sec. 7-404 protection, we do not reach the question whether defendant acted in good faith and followed reasonable commercial standards.

A

"Bailee" as it is used in Article 7 is defined in Sec. 7-102(1)(a), which provides:

" 'Bailee' means the person who by a warehouse receipt, bill of lading or other document of title acknowledges possession of goods and contracts to deliver them."

Thus, in order to fall within this definition, the bailee must:

1) by a warehouse receipt or other document of title

2) acknowledge possession of goods and

3) contract to deliver them.

"Goods," according to Sec. 7-102(1)(f), means:

"all things which are treated as movable for the purposes of a contract of storage or transportation."

Therefore, for the cattle to be considered "goods" for purposes of Article 7, they must be dealt with pursuant to "a contract for storage or transportation." This is consistent with the requirement that the bailee "contracts to deliver " the "goods," as well as with Article 7's definition of warehouseman in Sec. 7-102(1)(h), which provides:

" 'Warehouseman' is a person engaged in the business of storing goods for hire."

The essential determination which we must make is whether the defendants and the farmers entered into a contract for storage or transportation. If not, the cattle are not "goods," and thus the defendant is not a bailee. Defendant argues that it did enter into a contract for storage and transportation, claiming that it earns its commission not only by auctioning cattle, but also by holding, feeding, and watering them before and after auction.

It is uncontested that defendant provides storage and transportation as a part of its service. However, these activities are incidental to the primary service provided by the defendant--that of an auction or commission merchant. It would strain the meaning and scope of Article 7 to include in it all parties who engage in some element of storage or transportation as required to carry out their primary task. Similarly, while the cattle were stored in the course of the execution of the contract for commission sale, it is inaccurate to say that they were treated pursuant to "a contract of storage or transportation."

In their UCC treatise, Professors White and Summers have observed:

"Article Seven is unlike Article Two on sales and Article Nine on secured transactions where freedom of contract is the rule rather than the exception. The paucity of free contract under Article Seven can be readily explained. The Article deals with two ancient common callings, namely storage and transport." 2 White & Summers, Uniform Commercial Code (3d ed), Sec. 21-2, p 135 (emphasis added).

The defendant's activities as a commission merchant sometimes require it to store and deliver livestock. However, that is not to say that such activities are the "calling" of a business whose essential work is to act as a commission sales agent.

Speaking directly about Sec. 7-404, White and Summers have also written:

"In a batch of cases, courts have considered whether 7-404 immunizes auctioneers, brokers, and the like who unknowingly assume control of stolen goods or goods subject to security interest, all in the course of participating in their resale. We do not think 7-404 was meant to apply here to immunize such persons from conversion liability." 2 White & Summers, Uniform Commercial Code (3d ed), p 148, n 50 (citations omitted). ⁵

Defendant has not suggested that it is generally in the business of storing goods or that it would provide such storage absent a contract for auction. We recognize that there is a common-law category of "bailment for sale." ⁶ However, such activities have been governed by the laws of agency rather than bailment. ⁷ In no auction cases decided under...