Unpublished Disposition, 887 F.2d 1089 (9th Cir. 1986)

MEMORANDUM^* 

Appellant Apricot Producers of California ("APC") is a non-profit cooperative agricultural association which markets apricots on behalf of its grower members. Appellee Sacramento Foods, Inc. ("SFI") was a processor of agricultural products, and is now a debtor in possession under Chapter 11 of the Bankruptcy Code. Appellee Rheem Manufacturing Co. ("Rheem") manufactures and sells large drums to be used for storing processed agricultural products. APC appeals from the district court's affirmance of two orders issued by the bankruptcy court. One order required APC to pay $72,680 to Rheem. The second order denied the APC's motion for relief from stay to offset.

STANDARD OF REVIEW

Rule 8013 of the Rules of Bankruptcy Procedure specifies that the bankruptcy courts's findings of fact shall be accepted on appellate review unless clearly erroneous, but conclusions of law are reviewed de novo. This standard of review does not change if a trial court relies, as in this case, solely on a written record as it determines the facts upon which judgment is ultimately entered. Nicholson v. Board of Education of Torrance Unified School District, 682 F.2d 858, 864 (9th Cir. 1982). However, because the bankruptcy court "engaged in the regrettable practice of adopting the findings of the prevailing party wholesale, we review its findings with special scrutiny." Sealy, Inc. v. Easy Living, Inc., 743 F.2d 1378, 1385 n. 3 (9th Cir. 1984) (internal quote omitted).

The interpretation of a contract is a mixed question of law and fact. When the lower court's decision is based on an analysis of the contractual language and an application of the principles of contract interpretation, the decision is reviewed de novo. Miller v. Safeco Title Ins. Co., 758 F.2d 364, 367 (9th Cir. 1985).

The parties agree that the issues presented should be resolved under California law.

STATEMENT OF FACTS

This case arises from the bankruptcy of debtor/appellee SFI, a processor of agricultural products which filed for Chapter 11 on May 14, 1986. Prior to that date, SFI had entered into several contracts with apricot growers, both individually and through APC, the growers' non-profit agricultural cooperative, to process apricots for sale. Pursuant to a contract signed by APC, SFI purchased and processed apricots from the 1984 harvest ("the 1984 contract"), but defaulted on its financial obligations, failing to pay for all of the apricots delivered by the growers. An "Agreement Between Signatories of Joint Bank Account Respecting Release and Use of Proceeds Therein" signed on February 5, 1986 attempted to resolve the conflicting financial interests of both SFI and the growers.

As part of this agreement, and "in consideration of certain concessions from SFI", APC agreed to pay the amount of $72,680 owed by SFI to Rheem, a manufacturer of drums for the storage and processing of apricots, from the funds received from the sale of the 1985 "custom pack" product.¹  Rheem had sold drums to SFI for storing processed agricultural products and the "custom pack" product was stored and sold in drums supplied by Rheem. The parties do not dispute that Rheem sold its drums to SFI while retaining a security interest in them to secure the purchase price, nor that SFI perfected Rheem's security interest by executing UCC-1 statements in July of 1985.

During the post-petition period, SFI sought and obtained an order of the bankruptcy court directing APC to pay the debt owed to Rheem. APC opposed the order and sought a setoff of the $72,680 debt to Rheem against the $400,000 which SFI still owed APC under the 1985 contract. The bankruptcy court concluded that setoff was not available because (1) there was no mutuality between SFI and APC with respect to the debt; (2) APC held the proceeds from the sale of the product processed under the custom pack agreement in trust for Rheem; (3) APC was estopped from denying that it held the proceeds in trust; and (4) when the custom pack growers purchased from SFI the drums supplied by Rheem, the drums remained subject to Rheem's security interest. Thus, the bankruptcy court denied APC's motion and ordered APC to pay Rheem. APC appealed to the district court, which affirmed the order of the bankruptcy court. APC again appealed.

DISCUSSION

APC argues that the bankruptcy court erred on each of the four grounds it gave for denying appellant growers' motion for setoff. As the district court correctly noted, the bankruptcy court's order denying setoff must be affirmed if any one of these issues is resolved in favor of SFI.²  We will consider each in turn.

I. Was there mutuality of debt between SFI and APC, so that a setoff of debts would be available?

The Bankruptcy Code allows, with certain exceptions, a creditor of a Title 11 debtor to offset a mutual debt to the extent allowable under state law. 11 U.S.C. § 553. The allowance or disallowance of a setoff is a decision which is generally left to the sound discretion of the bankruptcy court. In Re Bacigalupi, Inc., 60 Bank. 442, 445 (Bankr. 9th Cir. 1986). However, if the requirements of 11 U.S.C. § 553 are met, the remedy of setoff should be allowed "unless the court finds after due reflection that allowance would not be consistent with the provisions and purposes of the Bankruptcy Code as a whole." Id. No such finding was made in this case, nor, we believe, would one be warranted

Mutuality requires that the debts and credits be owed between the same parties acting in the same capacities. In Re Visiting Home Services, Inc., 643 F.2d 1356, 1360 (9th Cir. 1981).³  "Only claims to and from the same creditor and in the same capacity may be setoff" under the terms of 11 U.S.C. § 553 (former Sec. 108). In the Matter of Vehm Engineering Corp., 521 F.2d 186, 190 (9th Cir. 1975) (emphasis in original).

APC assumed a debt owed by SFI to Rheem under the terms of a contract signed February 5, 1986. There is no dispute that APC assumed this obligation on behalf of or as agent for its member growers (among whom are "the 1985 co-pack growers"), and accordingly that debt is owed by the growers to SFI. The dispute in this case centers on whether the debt owed by SFI on the 1984 contract is owed to APC or to the growers. This depends on whether APC, in entering into the 1984 contract with SFI, acted as an independent corporation or rather as agent for its member growers.

SFI argues that nothing in the 1984 contract indicated that the individual growers who sold through APC had a right to individually enforce the 1984 contract against SFI or that SFI could enforce the contract against the individual growers. The bankruptcy court agreed with SFI and concluded that there was no mutuality between these parties because APC acted in different capacities on the two occasions: on its own behalf in 1984, and as agent for the growers in 1986.

Appellant APC argues that mutuality of debt did exist between the debtor-processor and the growers, because the distinction between the corporate entity and the growers is of no consequence. APC contends that under the terms of the 1984 contract between APC and SFI, APC was acting merely as the agent for the individual growers, who were thus entitled to enforce the contract. We agree.⁴ 

The question before us is resolved by construing the language of the two contracts involved. The preamble to the 1984 contract explicitly stated that APC was the exclusive sales agent for the processing of apricots by the growers. The contract also recited that APC did not first purchase the apricots from its member growers for resale. Moreover, the contract required SFI to account for apricot deliveries on an individual grower basis. Thus, the terms of the 1984 contract establish that it was between the growers and SFI, with APC acting merely as agent for the growers. Moreover, the express language of the 1984 contract shows that APC's purpose in executing the agreement was merely to act as an intermediary between the growers as individuals and the processing and marketing industries, and "to save [to the Processor] the labor and expense of soliciting orders or contracts from the individual growers of apricots." Although APC did not explicitly sign the 1984 contract as agent for the growers, the language of the contract clearly establishes that that was indeed its role.⁵ 

In summary, the district court and the bankruptcy court failed to give full effect to the terms of the 1984 contract. Because there is no dispute that APC acted as agent for the growers in signing the 1986 contract, there is mutuality of debt between APC and SFI. Accordingly, setoff could be available under 11 U.S.C. § 553.

II. Did APC take the proceeds of the 1985 custom pack sales subject to a trust and become a creditor holding a fund subject to a fiduciary duty, thus forfeiting its right to offset such fund against SFI's obligation?

Notwithstanding our conclusion that mutuality of debt exists between APC and SFI, setoff will not be available to SFI if APC took the proceeds of the 1985 custom pack sales subject to a trust in favor of Rheem. Although California courts have been very reluctant "to superimpose fiduciary duties upon parties engaged in purely commercial dealings," under California law a contract will give rise to a fiduciary relationship where a party to the contract undertakes to make payments out of a fund (a) specially segregated (b) for a specified purpose. Teledyne Industries, Inc. v. Eon Corporation, 373 F. Supp. 191, 201 (S.D.N.Y. 1974) (applying California law); see, e.g., Gonsalves v. Hodgson, 38 Cal. 2d 91, 237 P.2d 656 (1951); Downey v. Humphreys, 102 Cal. App. 2d 323, 227 P.2d 484 (1951). The bankruptcy court found that "APC was a fiduciary with respect to funds received by the APC in payment for product processed under the custom pack agreement, which funds the APC agreed, on its own behalf and as agent for its member growers, to pay Rheem," and thus concluded that APC was a fiduciary with respect to funds received in payment for product processed under the 1985 custom pack agreement. We disagree.

The bankruptcy court did not make a finding that the 1986 contract required that the proceeds from the 1985 sale be segregated or that the proceeds could be used for but one specified purpose. Moreover, our review of the contract establishes that it contains no provision requiring either of these two essential elements. While the contract did specify that part of the funds from the sale of the custom pack be used to pay Rheem, it did not require either that the funds from that sale be segregated or the establishment of a separate account. Compare Teledyne, 373 F. Supp. at 199, 202 (trust could be found where all funds segregated and special account established); Sutro v. Paramount Plastering, Inc., 216 Cal. App. 2d 433, 31 Cal. Rptr. 174, 175-76 (1963) (trust found where entire proceeds of a separate line of credit were required to be used exclusively to pay claimants). Given the failure of the contract to require expressly both segregation and "sole use" of all of the funds and the reluctance of California courts to impose fiduciary obligations on what would otherwise be an ordinary contractual debt, we hold that the bankruptcy court erred in concluding that the 1986 contract created a fiduciary relationship between APC and Rheem. Thus, APC did not hold the funds from the sale of the 1985 co-pack harvest in trust for Rheem.

III. Is APC estopped from asserting a right of offset because of an agreement accepting assignment of SFI's debt and because it received benefits under that agreement?

A. ESTOPPEL DUE TO "BENEFITS RECEIVED"

The bankruptcy court concluded that because APC took benefits under the February 5, 1986 agreement, it was estopped to deny it received as a fiduciary the funds owed by the custom pack growers and assigned to Rheem. The bankruptcy court relied on Matter of Texas Mortgage Services Corp., 761 F.2d 1068, 1076 (5th Cir. 1985), where the court stated that

Where one having the right to accept or reject a transaction takes and retains benefits thereunder, he ordinarily ratifies the transaction, is bound by it, and cannot avoid its obligation or effect by taking a position inconsistent with it at a later time.

We believe this reliance was misplaced. In Texas Mortgage Services, the bankruptcy court found that the creditor had promised to treat the funds received as trust funds and was thus estopped from rejecting its promise. Id. Here, there was no such promise that APC would hold the funds in trust. Equally important, there was no promise by APC to relinquish any defenses it might have to the payment of the $72,680, nor any promise to waive its right to offset; nor were any such agreements implicit in the terms of the agreement. Accordingly, the bankruptcy court erred when it held that APC was estopped from seeking offset because it received benefits under the February 5, 1986 agreement.

Rheem also claims that, if it had known that APC would attempt to offset the debt it assumed in Term 5 of the February 5, 1986 agreement, it would, immediately upon SFI's filing of its bankruptcy petition, have exercised its rights as a secured creditor against SFI. Thus, Rheem asserts that it detrimentally relied on APC's assumption of SFI's debt by failing to exercise its secured interest in the processing and storage drums and that APC is estopped to assert offset.⁶ 

We do not believe that the elements of equitable estoppel have been established in this case. The elements of equitable estoppel under California law are the following:

(1) The party to be estopped must be apprised of the facts;

(2) He must intend that his conduct be acted upon, or must so act that the party asserting estoppel had a right to believe he so intended;

(3) The other party must be ignorant of the true state of facts; and

(4) He must rely upon the conduct to his injury.

City of Long Beach v. Mansell, 3 Cal. 3d 468, 490, 91 Cal. Rptr. 23, 476 P.2d 423 (1970). Here, as we have already noted, Rheem has not contended that APC promised not to exercise its right of offset or not to assert any defense it would ordinarily have. Thus, Rheem has not shown that APC has misled it in any way. Rheem was entitled to rely on APC's promise to pay only to the extent that any other promisee could have so relied; APC's promise was thus subject to its right to assert any and all of its lawful defenses, including the right to offset.⁷  Accordingly, Rheem's detrimental reliance claim must fail.

IV. Whether the bankruptcy court erred in determining that neither APC nor the individual growers could avoid Rheem's security interest in the food processing and storage drums Rheem sold to SFI because, when the apricot growers purchased the drums from SFI, the drums remained subject to Rheem's security interest?

The bankruptcy court concluded that "when the custom pack growers purchased from SFI the drums supplied by Rheem, the drums remained subject to Rheem's perfected security interest."⁸  Accordingly, that court concluded that the custom pack growers could not avoid Rheem's security interest in the drums and could not offset the debt against the money owed it by SFI.

APC contends that the bankruptcy court erred when it concluded that the custom pack growers presently owe a debt to Rheem as the result of purchasing the drums subject to Rheem's security interest. We agree.

The UCC-1 financing statements evidencing Rheem's security interests state that Rheem is asserting a security interest in the drums and any proceeds of their sale. There seems little question from this that Rheem authorized SFI to sell the drums in the course of its business. The result of this authorization is clear:

A security interest continues in collateral notwithstanding sale, exchange or disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.

American National Bank v. Cloud, 201 Cal. App. 3d 766, 774, 247 Cal. Rptr. 325, 329 (1988) (quoting California Uniform Commercial Code Sec. 9306). Because Rheem authorized the sale of the drums, Rheem's security interest in the drums was extinguished when the custom pack growers purchased them from SFI.⁹ 

However, Rheem still retained a security interest in the proceeds of the sale of the drums.¹⁰  See id.; see also Cal.Comm.Code Sec. 9306. Accordingly, if any of the money owed to Rheem by APC, on behalf of the custom pack growers under the February 5, 1986 agreement constitutes "proceeds" within the meaning of California Commercial Code Section 9306, then Rheem would have a valid security interest in those monies and APC would be unable to offset the debt owed it by SFI.

California Commercial Code Section 9306 defines "proceeds" as "whatever is received upon the sale, exchange, collection or other disposition of collateral." Accordingly, we must determine what SFI was to receive upon the sale of Rheem's collateral, i.e., the drums. Unfortunately, and contrary to Rheem's assertion, the bankruptcy court did not make a finding on this issue. However, because the answer to the question turns on an analysis of contract language and the application of principles of contract interpretation, we are in as good a position as that court to provide it. Cf. Miller, 758 F.2d at 367 (lower court's interpretation of a contract based on contract language and application of principles of contract interpretation is subject to de novo review).

The processing contract between SFI and APC requires APC to pay a total of $112.00 per barrel for SFI's services, including the cost of the barrels supplied by SFI. In exchange, SFI processed the apricots, placed the finished product in the drums, and delivered the goods to the ultimate purchaser. The contract divides the $112.00 amount that SFI received for its services into two categories. The contract plainly states that upon payment by APC of a $72.00 per drum processing fee, due by Thursday of the week after production, "full title to the drums of Apricot concentrate will be passed to the grower on an individual basis." The contract also provides that, after the product is sold, SFI will be paid an additional fee of $40.00 per drum to cover plant overhead and administrative costs. As the language of the contract makes clear, only the $72.00 per drum fee relates to the purchase of the drums, Rheem's collateral.¹¹  Accordingly, the $72.00 per drum processing fee, which the custom pack growers have already paid to SFI, constitutes the only "proceeds" which were the result of "the sale ... of [Rheem's] collateral". The $40.00 per drum fee for administrative and overhead costs which APC still owes to SFI, and which APC is seeking to offset against the debt owed it by SFI, does not constitute a part of the purchase price for Rheem's collateral, and thus does not constitute proceeds.¹² 

We now must determine the effect of our conclusion that Rheem does not have a security interest in the drums. Rheem is an assignee from SFI of SFI's right to receive payment from APC. Thus, Rheem's rights against APC are derivative of those of its assignor, SFI, and those rights are subject to any defense that APC has against SFI, including the right to offset. See Berrington v. Williams, 244 Cal. App. 2d 130, 135 52 Cal. Rptr. 7729 (1966); B. Witkin, 1 Summary of Cal.Law Contracts Sec. 948. (9th ed. 1988).

Here, SFI merely had an unsecured contractual right to receive payment from APC as agent of the growers; that right is subject to APC's right to offset any debts owed it by SFI. Thus, Rheem has at most that same unsecured right, and APC's right to offset is not vitiated by the 1986 agreement.

CONCLUSION

For the reasons discussed above, we conclude that the district court erred when it affirmed the decision of the bankruptcy court granting SFI's motion for an order directing APC to pay $72,680 to Rheem and denying APC's motion for relief from the automatic stay of setoff and for setoff. Accordingly, we reverse the decision of the district court with directions to grant APC's motion for relief from the automatic stay of offset and for setoff.¹³ 

REVERSED AND REMANDED.