U.S. v. Westside Bank
| Decision Date | 29 May 1984 |
| Docket Number | No. 83-1480,83-1480 |
| Citation | 732 F.2d 1258 |
| Parties | 38 UCC Rep.Serv. 705 UNITED STATES of America, Plaintiff-Appellee, v. WESTSIDE BANK, et al., Defendants-Appellees, v. O'SULLIVAN INDUSTRIES, INC., Defendant-Appellant, v. Howard HORTON, et al., Intervenors-Appellees. Summary Calendar. |
| Court | U.S. Court of Appeals — Fifth Circuit |
P. Otis Hibler, Richard H. Sommer, San Antonio, Tex., for defendant-appellant.
Edward C. Prado, U.S. Atty., Hugh P. Shovlin, Asst. U.S. Atty., San Antonio, Tex., for U.S.A.
Cox & Smith, R. Laurence Macon, Thomas Arthur Countryman, San Antonio, Tex., for Atari, Inc. and Franco USA.
Kampmann, Church & Burns, Harry J. Burns, San Antonio, Tex., for Westside Bank.
Pat Maloney, George LeGrand, San Antonio, Tex., for Howard Horton.
Joel H. Klein, San Antonio, Tex., for Concept Enterprises, Anixter Bros, Tenna Corp., Roadster Corp., and Aspen Ltd.
Appeal from the United States District Court for the Western District of Texas.
Before BROWN, TATE and HIGGINBOTHAM, Circuit Judges.
This statutory interpleader brought pursuant to 28 U.S.C. Sec. 1335 was filed by the Small Business Administration (SBA) to determine the proper distribution of proceeds from a foreclosure sale. The fund represents the remaining assets of Texas Electronics Mart, Inc. (TEMI). In distributing the fund, the District Court determined that Westside Bank of San Antonio (Westside) held the only priority claim. The Court thus denied the priority status asserted by O'Sullivan Industries, Inc. (O'Sullivan) based on its right to reclaim the proceeds from the sale of goods it delivered to TEMI just prior to the foreclosure. O'Sullivan duly perfected this appeal. We hold that a seller of goods (here, O'Sullivan) retains a priority status to the extent of traceable proceeds from the sale of those goods where he has complied with all the requirements of Texas Business and Commerce Code Annotated Sec. 2.702 (Vernon 1968) (the Texas UCC), and diligently pursued the right of reclamation created under that section. We therefore affirm in part, reverse in part, and remand for a determination of whether O'Sullivan diligently pursued its right to reclamation.
In April of 1976 TEMI executed a promissory note and security agreement in favor of Westside for the sum of $99,500. The note was guaranteed by the SBA. TEMI granted Westside a security interest in "all machinery, and equipment, fixtures, inventory and accounts receivable now owned, to be purchased with loan proceeds and hereafter acquired." The agreement included a future advance clause, a clause securing any legal fees incurred in enforcing the agreement, and a clause securing the interest due. Westside duly perfected its security interest. 1
In September of 1979, TEMI executed a second promissory note to Westside for the sum of $16,000. The note was collateralized with the 1976 security agreement through the future advance clause. 2 At the time of trial, Westside asserted an outstanding claim on this note in the amount of $12,471.52.
Pursuant to the SBA guarantee, Westside assigned its rights under the first note to the SBA sometime in December, 1979. 3 The SBA declared the note delinquent and accelerated its maturity on December 14, 1979. In accordance with the security agreement, the SBA conducted a foreclosure sale of all TEMI's assets on January 21, 1980. After deducting the loan balance and expenses of the sale, the SBA deposited the remaining proceeds ($50,750.95) with the District Court for proper distribution among TEMI's creditors.
The District Court awarded Westside the sum of $17,666.60, representing its claim on the second note plus interest and attorney's fees. The Court, however, denied the priority right of reclamation asserted by O'Sullivan under Texas UCC Sec. 2.702. The Court reasoned that any right of reclamation would be cut short by a prior secured lender's foreclosure. Because in this case the SBA had foreclosed, the Court found that O'Sullivan had no right to the proceeds from the sale of the goods. In disposing of the case on this basis, the District Court deemed it unnecessary to reach the issue whether O'Sullivan had complied with the statutory requirements for reclamation under Sec. 2.702. The Court therefore distributed the remaining funds pro rata among O'Sullivan and TEMI's other general unsecured creditors.
The right of reclamation is specifically created in favor of a credit seller by Texas UCC Sec. 2.702. 4 This right exists only in "specific and limited circumstances; it can be asserted only if an exacting procedure is followed; and the right can never be asserted to defeat the interest of certain third parties who have dealt with the defaulting buyer." Matter of Samuels & Co., Inc., 526 F.2d 1238 (5th Cir.1976) (en banc), cert. denied, 429 U.S. 834, 97 S.Ct. 98, 50 L.Ed.2d 99 (1976).
In order for the right to arise, certain conditions must be met. First, the buyer must have received the goods on credit. There is no dispute that TEMI received the goods shipped by O'Sullivan on credit. Second, the buyer must receive the goods while insolvent. The District Court made no finding as to when TEMI became insolvent, but it did find that O'Sullivan did not know of TEMI's insolvency when it shipped the goods. Finally, the seller must learn of the buyer's insolvency and make demand for return of the goods within ten days from the date of delivery. The District Court found that O'Sullivan shipped furniture accessories valued at $36,756.94 on November 19 and 21, 1979, and that the shipments were received by TEMI on November 21 and 23, respectively. The Court determined that O'Sullivan learned of TEMI's insolvency sometime between November 21 and November 30. It also found that O'Sullivan made written demand for payment of the entire amount of TEMI's open account ($50,727.07) on November 30. 5
In addition to the demand made upon TEMI, O'Sullivan also made written demand upon Westside 6 through O'Sullivan's parent corporation, Conroy, Inc. The letter from Conroy also demanded payment for the full amount of TEMI's open account. This letter, however, also specified that it was a demand pursuant to Sec. 2.702 of the Texas UCC. The goods were not returned, nor was payment made to O'Sullivan.
O'Sullivan filed suit against TEMI in state court on January 18, 1980 to enforce its right of reclamation. However, on January 21 the SBA foreclosure sale was conducted, and TEMI ceased to exist for all practical purposes as a business entity. This effectively terminated the state court litigation. 7 In order to further protect the reclamation right it was asserting, O'Sullivan repurchased 797 of the 1,000 pieces of furniture from the November shipment at the foreclosure sale for a price of $27,500. On appeal, O'Sullivan continues to urge its priority status as to the full sales proceeds of $36,756.94. Alternatively, it urges priority status as to $27,500--the traceable proceeds from the goods O'Sullivan has sought to reclaim.
In determining that O'Sullivan's right to reclaim was terminated by the SBA foreclosure and therefore could not attach to proceeds, the District Court relied on Matter of Samuels, supra. We believe the Court's reliance was misplaced.
In Samuels, a divided en banc Court adopted Judge Godbold's dissent from the panel opinion, which held that an unpaid cash seller's right of reclamation is subordinate to a preexisting perfected security interest in the buyer's after acquired property. Id. at 1245. In so holding, the Court emphasized several important factors which are not present in the case before us. At the outset, the Court recognized that the reclaiming seller was a cash seller. 8 Id. at 1244. Furthermore, he had not made a demand under Sec. 2.702 until a full year after the delivery. The Court refused to find that his reclamation right had been timely exercised. Id. at 1245. Disturbed by the fact that in recognizing the cash seller's right to reclaim courts had extended the Sec. 2.702 remedy, the Court refused to further extend the time within which the right could be exercised. 9
While the Samuels opinion expressed doubt as to whether a reclamation right would extend to proceeds, 10 the issue was not outcome-determinative. Rather, the Court assumed for the purpose of analysis that the reclamation right could attach to proceeds, and disposed of the case on other grounds. Samuels involved a priority contest between an unpaid cash seller and a prior secured lender with a perfected Article Nine security interest. Significantly, in the present case the only prior secured lenders (the SBA and Westside) have been fully satisfied. Thus, Samuels dealt with the right to reclamation in an entirely different priority context than the one before us today. Furthermore, in reaching its conclusion the Samuels Court relied upon the seller's failure to make a timely demand. Even if he had made such a demand, reasoned the Court, he would have taken subject to the prior lender's perfected Article Nine security interest because the holder of such an interest qualifies under the Texas UCC as a good faith purchaser for value. 11 Section 2.702 expressly mandates that a seller's reclamation right is "subject to" the rights of an Article Nine good faith purchaser for value.
Moreover, the meticulous analysis provided by Samuels regarding the interplay between Articles Two and Nine of the UCC is fully consistent with a finding in favor of O'Sullivan in the instant case. Turning first to the Texas UCC, Sec. 2.401(a), the Samuels Court determined that the seller's interest was in the nature of a security interest. Samuels, supra, 526 F.2d at 1246. The Court went on to recognize that the UCC makes security interests that arise by operation of law under Article Two (such as the right of reclamation) subject to Article Nine. Samuels, supra, 526 F.2d at 1247. The...
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