Shell Oil Co. v. Mills Oil Co., Inc.

• Decision Date: 17 October 1983
• Docket Number: No. 83-4136,83-4136
• Citation: 717 F.2d 208
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: 37 UCC Rep.Serv. 116 SHELL OIL COMPANY, Plaintiff-Appellant, v. MILLS OIL COMPANY, INC., et al., Defendants, Citizens Bank of Byhalia, Ms., Dudley R. Moore, Jr. & John Mark Crain, Defendants-Appellees, D.D. Mills, Defendant-Appellant. Summary Calendar.

Page 208

717 F.2d 208

37 UCC Rep.Serv. 116

SHELL OIL COMPANY, Plaintiff-Appellant, v. MILLS OIL COMPANY, INC., et al., Defendants Citizens Bank of Byhalia, Ms., Dudley R. Moore, Jr. & John Mark Crain, Defendants-Appellees D.D. Mills, Defendant-Appellant.

No. 83-4136

Summary Calendar.

United States Court of Appeals Fifth Circuit.

Oct. 17, 1983.

Freeland & Gafford, Deborah Hodges Bell, G.A. Gafford, Oxford, Miss., for Shell Oil.

Bonner & Birmingham, James L. Bonner, Olive Branch, Miss., for D.D. Mills.

D. Rook Moore, III, Holly Springs, Miss., Grady F. Tollison, Jr., Oxford, Miss., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Mississippi.

Before CLARK, Chief Judge, RUBIN and JOLLY, Circuit Judges.

CLARK, Chief Judge:

In this diversity action, Shell Oil Company and D.D. Mills appeal from the district court's order granting summary judgment in favor of Citizens Bank of Byhalia, Mississippi, and two of its officers, Dudley R. Moore, Jr., and J. Mark Crain. On appeal from the grant of summary judgment, Shell asserts that the bank lacked the good faith necessary for its security interest in Mills Oil Company's inventory to prevail over Shell's interest as an unpaid seller. We affirm.

Shell sold petroleum supplies and products to Mills Oil Company but was not paid. These supplies and products constituted a part of Mills Oil Company's inventory. D.D. Mills, James W. Conway, and Hartsell S. Conway, each of whom served in an executive capacity for Mills Oil Company during its existence, had guaranteed its obligations to Shell. Shell brought suit against Mills Oil Company and against Mills and the Conways based upon the guaranties. ¹ Pursuant to a perfected security interest Citizens Bank took possession of Mills Oil Company's inventory which included products supplied by Shell for which Mills Oil Company had not paid Shell. Citizens Bank sold part of the inventory to satisfy Mills Oil Company's indebtedness to the bank.

In an amended complaint, Shell sued Citizens Bank for unjust enrichment and conversion. D.D. Mills impleaded the Conways and Mills Oil Company and later filed an amended cross-claim against Citizens Bank and two of its officers, Moore and Crain, alleging that these parties breached their duty to Mills, acted negligently, and committed fraud. The district court sustained the summary judgment motions of Citizens Bank and its officers against Mills and the bank's summary judgment motion against Shell. Shell's motion for summary judgment against Mills was also granted. Mills dismissed his appeal from this judgment.

I

The record established the following facts without contradiction. D.D. Mills was a wholesale jobber for Shell Oil Company during the 1950s and part of the 1960s, doing business as Mills Oil Company in Byhalia, Mississippi. Mills Oil Company purchased products from Shell and sold them to service stations in the surrounding area. In the mid-1960s, Mills entered into an agreement with James W. Conway and Hartsell S. Conway under which the Conways would operate Mills Oil Company. Mr. and Mrs. Conway had been employees of Mills Oil Company. The Conways succeeded Mills as the company's principal shareholder in 1975. After 1975, Mills remained a director of the oil company and his personal accountant, Lawrence Curbo, continued to serve as the accountant for Mills Oil Company.

From 1975 to August 1981, the Conways continued the company's practice of selling supplies and products that it purchased from Shell. During this period, Mills Oil Company maintained all its checking accounts with Citizens Bank of Byhalia, Mississippi.

A line of credit for Mills Oil Company was established by Shell based on the guaranties executed by Mills and the Conways. Shell did not take a security interest in the products it sold to Mills Oil Company. Citizens Bank loaned Mills Oil Company operating capital and secured the loan by perfecting a security interest in the oil company's inventory and accounts receivable. From 1975 to August 1981, Citizens Bank routinely honored Shell's drafts on Mills Oil Company's account even though at times the latter's account was overdrawn when the draft was presented. The bank had adequate security to cover the overdrafts at the times they occurred. Shell has not asserted that the bank exceeded the legal limits for overdrafts when it allowed Mills Oil Company to overdraw its accounts.

During July and August 1981 Shell delivered supplies and products to Mills Oil Company having a value totalling $146,134.86. Shell presented drafts on Mills Oil Company's account totalling this amount at Citizens Bank. The bank refused payment on these drafts because Mills Oil Company's account contained insufficient funds. The bank had become insecure at this time about the loans to Mills Oil Company for several reasons. When the bank requested financial information from the Conways, who were the officers of Mills Oil Company, to facilitate obtaining a Small Business Administration loan, the response was unsatisfactory. A review of Mills Oil Company's financial situation revealed that the company was selling gasoline to certain retail outlets at only one cent over the wholesale price. Mills Oil Company also sold gasoline to D.D. Mills' outlet at a similar price. The overdrafts attributed to Mills Oil Company began increasing at this time as well. Citizens Bank decided to liquidate its security to satisfy Mills Oil Company's indebtedness.

The claims asserted in this appeal are centered on actions by the parties that occurred during the spring and summer of 1981 and in particular, during the week of August 10-14. On the afternoon of August 10, 1981, W.S. Robbins, a Shell credit supervisor who oversees the accounts of jobbers, including Mills Oil Company, was informed by another Shell department that a draft for $16,804.17 drawn on Mills Oil Company's account with Citizens Bank had been dishonored because of insufficient funds. This was the first draft drawn by Shell on Mills Oil Company's account that was dishonored by Citizens Bank. Robbins called Mills Oil Company and talked with Rita Hobbs, a secretary. He learned from Hobbs that the Conways were at a jobbers convention in Nashville, Tennessee. Hobbs assured Robbins the company had sufficient funds to cover the overdraft. Robbins requested that a certified check be sent to Shell to cover the overdraft. Hobbs responded that a certified check would be sent. Prior to talking with Robbins, Hobbs had called J. Mark Crain, Executive Vice-President of Citizens Bank, requesting that he call to assure Shell that the overdraft problem would be corrected. Crain did call but was unable to reach Robbins. Robbins returned Crain's call. Crain stated that the draft was good and that it should be resubmitted. Robbins replied that Shell's policy in this situation was to secure certified funds, which was being done through Hobbs. According to Robbins, he did not request certified funds from the bank. Also on August 10 Robbins reviewed the file on Mills Oil Company to determine whether its current operations should be maintained. Based upon the lack of prior returned drafts, the assurance by Hobbs that a certified check would be sent, and the statement by Crain that the overdraft was good at that time, Robbins decided not to halt Mills Oil Company's operations with Shell.

The following morning, August 11, Robbins called Hobbs to ascertain the status of the certified check. Hobbs stated that the check had not been mailed. That afternoon, Robbins learned that a second draft on Mills Oil Company's account had been returned. Robbins immediately notified Shell's West Memphis plant, where Mills Oil Company picked up supplies, to prevent any representative of Mills Oil Company from loading any supplies. Hobbs still maintained that a certified check would be sent.

Bank officers contacted the Conways in Nashville, requesting that they return to Mississippi to work out the problems with Mills Oil Company. On August 11, the bank decided to execute on its security agreement and sell Mills Oil Company's inventory to satisfy the company's indebtedness to the bank. At 7:00 a.m. on August 12, the Conways met with Moore and Crain at the bank's offices. The Conways, Moore, Crain, counsel for the bank, and Lawrence Curbo attended the meeting. The morning was spent discussing the financial situation of Mills Oil Company. In the afternoon, the Conways executed a "Surrender and Release" document, which enabled Citizens Bank to take possession of the inventory of Mills Oil Company. The Conways signed this document after reading it and upon the advice of counsel. The bank sold enough of the inventory to satisfy Mills Oil Company's indebtedness.

Robbins learned of the execution of the document the following day, August 13. A meeting between representatives of Shell, Citizens Bank, and Mills Oil Company was arranged for August 14. During the August 14 meeting at the bank's offices, Moore and Crain indicated that the liquidation of the inventory was being undertaken. Shell was represented at this meeting by Robbins and Mike Carpenter, whose position as jobber representative for Shell entailed working with jobbers on advertising, sales, sales promotion, and real estate acquisition. Neither Robbins nor Carpenter made an offer to purchase any of Mills Oil Company's inventory because they believed the bank had already disposed of it. Carpenter stated during the meeting that the bank should have informed Shell of its practice of honoring overdrafts by Mills Oil Company. After unsuccessfully demanding payment for the supplies, Shell filed suit.

II

This diversity case is controlled by Mississippi's version of the Uniform Commercial Code. Shell's remedies as an unpaid credit seller are set forth in Miss.Code Ann. Sec. 75-2-702 (1972). ² Shell bases its right to relief on the interaction between Sec. 75-2-702(3) and Miss.Code Ann....