Samuels & Co., Inc., In re
| Decision Date | 20 March 1975 |
| Docket Number | No. 73--1185,73--1185 |
| Citation | 510 F.2d 139 |
| Parties | 16 UCC Rep.Serv. 577 In the Matter of SAMUELS & CO., INC., Bankrupt. Curtis R. STOWERS et al., Appellants, v. James S. MAHON, Trustee, and C.I.T. Corporation, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Lamar Holley, Dallas, Tex., for appellants.
J. Richard Gowan, Dallas, Tex., for appellees.
Appeal from the United States District Court for the Northern District of Texas.
Before AINSWORTH, GODBOLD and INGRAHAM, Circuit Judges.
On April 15, 1974, the Supreme Court in Mahon v. Stowers, 416 U.S. 100, 94 S.Ct. 1626, 40 L.Ed.2d 79 (1974), reversed the decision of this court, 1 concluding that the Packers and Stockyards Act 2 and the regulations promulgated under the Act do not preclude the application of the Uniform Commercial Code as adopted by the State of Texas. Near the end of the opinion, the Court noted that 'we do not mean to say that a course of conduct mandated by the Act or the regulations might not, just as any other course of conduct, be relevant or even dispositive under state law . . . To the extent that respondents in appealing to the Court of Appeals challenged (the district court's contrary) determination, it will of course be open for adjudication in the Court of Appeals on remand.' 416 U.S. at 113--14, 94 S.Ct. at 1633. Pursuant to this order, we again review the case 3 in an attempt to define and resolve the rights of the litigants, and based on the applicable provisions of Texas law governing this commercial transaction, we conclude that the sellers are entitled to relief and reverse the judgment of the district court.
To briefly reiterate, the relevant facts are as follows. Samuels & Co., Inc., is a Texas meatpacking firm that purchases processes and packages meat and sells the meat within and without the State of Texas. Since 1963 Samuels' operations, including its cattle purchases, have been financed on a weekly basis by C.I.T. Corporation. To secure its financing, C.I.T. has properly perfected a lien on Samuels' assets, inventory and all after-acquired property, including livestock that is from time to time purchased for slaughter and processing.
From May 12 through May 23, 1969, the appellants, fifteen cattle farmers, delivered their cattle to Samuels. Although the sellers did not receive payment for the sale simultaneously with delivery of the cattle, checks were subsequently issued to the sellers. On May 23, 1969, before these checks had been paid, C.I.T., believing itself to be insecure, refused to advance any more funds to Samuels for the operation of the packing plant. On that same day Samuels filed a petition in bankruptcy. Since C.I.T. refused to advance more funds, although apparently aware that there were unpaid checks outstanding, the appellants' checks issued in payment for cattle were dishonored by the drawee bank.
Because of the fungible nature of the cattle, the beef has long since been butchered and processed and sold through the normal course of business. The proceeds from the cattle sales have been deposited with the trustee in bankruptcy pending the outcome of this litigation. The issues in this case concern the priority of interest in these proceeds between a creditor of the debtor, which holds a perfected security interest in the debtor's after-acquired property, and a seller of goods to the debtor. Since the sellers have not been paid, they claim a superior right to the deposited proceeds and argue that they are now entitled to payment out of these proceeds. The finance corporation, on the other hand, contends that the sellers are merely unsecured creditors of the bankrupt and are not entitled to a prior claim to the funds, and alternately that the finance corporation qualifies as a good faith purchaser of the cattle and is therefore immune to the sellers' claims of non-payment. For the reasons that follow, we conclude that the sellers should prevail.
In order to determine which provisions of the Texas Business & Commerce Code govern the relationships among the parties, the first question that must be resolved is whether this commercial venture was a cash or credit transaction. The significance of classifying a sale as a cash or credit transaction relates back to the common law and the historical passing of title concept. Under the common law, a sale for cash, as opposed to a sale on credit, meant that the seller of goods implicitly reserved the incidents of ownership or title to the goods until payment was made in full. If the buyer failed to make payment, the seller could regain possession of the goods by instituting an action in replevin. Additionally, since the buyer of goods for cash did not obtain title to the goods until the seller was paid, the defaulting buyer was incapable of passing title to a third party. Based on the cash sale doctrine, an unpaid seller could even reclaim goods sold by an intermediary to one who otherwise qualified as a bona fide purchaser.
When the owner of goods sold them on credit, however, all the incidents of ownership, including title, passed to the buyer. If the buyer subsequently failed to make payment, the seller's rights were only those of a creditor for the purchase price, and he had no right against the merchandise. Since in a sale on credit the buyer obtained all the incidents of ownership in the goods, including title, he was able to convey his interest in the goods, absolute ownership, to a third party without recourse on behalf of the seller. Corman, Cash Sales, Worthless Checks and the Bona Fide Purchaser, 10 Vanderbilt Law Review 55 (1956); Gilmore, The Commercial Doctrine of Good Faith Purchaser, 63 Yale L.J. 1057, 1060 & n. 10 (1954).
Underlying the different characteristics and consequences of cash and credit sales are the expectations and intentions of the three parties concerned. When goods are sold for cash, the seller is assuming virtually no risk of loss because he believes that he has full payment for the goods in his hands. When the sale is for credit, however, the seller assumes a far more substantial risk and voluntarily relinquishes the incidents of ownership to the buyer. The buyer, possessed of these incidents of ownership, is capable of conveying title to a bona fide purchaser, completely terminating the rights of the seller in the goods. The credit seller recognizes that he will receive full payment for his merchandise only if the business of the buyer progresses normally and sales are made to third parties in the normal course of business. Note, The Owner's Intent and the Negotiability of Chattels: A Critique of Section 2--403 of the Uniform Commercial Code, 72 Yale L.J. 1205, 1220 (1963). Although commercial transactions and the law governing such relationships has developed significantly since the conception of these doctrines, this reasoning with respect to the different risks assumed by the different sellers underlie and differentiate the two concepts and is as valid a distinction today as it was when the doctrines were originally conceived.
The Uniform Commercial Code as adopted by the State of Texas has to some extent modified the common law doctrines of cash and credit sales. It is clear that the historical concept of passing title to goods is not emphasized in the Code, and the location of title generally is not regarded as being determinative of the rights of adverse parties. Helstad, Deemphasis of Title Under the Uniform Commercial Code, 1964, Wisconsin L.R. 362. Instead of implementing the fictional concept of title, the countervailing interests of the parties are sometimes defined in terms of various rights, privileges, powers and immunities.
But even though the title concept is so reduced in significance, the Code recognizes and adopts the fundamental distinctions of the common law between cash and credit sales, at least with respect to the rights of the unpaid seller against the defaulting buyer. The Code deals with a sale on credit in provisions separate from those dealing with cash sales. Section 2.702 specifically sets forth the credit seller's remedy and provides that when 'the seller discovers that the buyer has received goods on credit while insolvent, he may reclaim the goods upon demand made within ten days after receipt . . ..' Texas Business and Commerce Code, § 2.702(b), V.T.C.A. (1968). This provision goes on to define the seller's priority rights against other specific parties, providing that '(t)he seller's right to reclaim under Subsection (b) is subject to the rights of a buyer in the ordinary course or other good faith purchaser or lien creditor under this chapter (Section 2.403).' Id. § 2.702(c). Although this section authorizes a limited right against the goods, it generally recognizes that when the sale is on a credit basis, all the incidents of ownership pass to the buyer who may then convey this interest to certain third parties. The seller stands merely as a general creditor for the purchase price.
With respect to cash sales, however, § 2.507 of the Code explicitly recognizes that 'unless otherwise agreed,' '(w)here payment is due and demanded on the delivery to the buyer of goods . . ., (the buyer's) right as against the seller to retain or dispose of them is conditional upon his making payment due.' Texas Business and Commerce Code, § 2.507(b) (1968). Like the cash sale doctrine at common law, § 2.507 provides that when the buyer is to pay cash for the goods, the validity of the transaction is dependent upon his making payment, and when the buyer fails to pay, he does not even have the right to possess the goods. Absolute ownership does not pass to the buyer until payment is complete.
The limited interest conveyed to the buyer prior to payment under § 2.507(b) is reemphasized in § 2.511(c), which deals specifically with the situation where payment for goods is made by check that is later dishonored. Section...
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