Dixie Bonded Warehouse v. ALLSTATE FINANCIAL CORP., 755 F. Supp. 1543 (M.D. Ga. 1991)
February 5, 1991
v.
ALLSTATE FINANCIAL CORP., Defendant.
United States District Court, M.D. Georgia, Macon Division.
*1544 E. Kendrick Smith, Atlanta, Ga., for plaintiff.
Cater S. Clay, Macon, Ga., for defendant.
ORDER
OWENS, Chief Judge.
On September 5, 1984, plaintiff Graniteville Company ("Graniteville") filed its complaint for interpleader against Bleckley Lumber Company, Inc., doing business as Bleckley Cotton Company ("Bleckley"), Dixie Bonded Warehouse & Grain Company, Inc. ("Dixie"), and Allstate Financial Corporation ("Allstate") stating that: (1) pursuant to Graniteville's purchase order, Bleckley, on April 13, 1984, shipped 77 bales of raw cotton to Graniteville's Augusta, Georgia fibers division for which Graniteville owes $30,160.11; (2) Bleckley originally purchased the cotton from, but never made payment to, Dixie for resale to Graniteville; (3) prior to shipment, Allstate notified Graniteville that Bleckley had assigned all accounts receivable to Allstate, and that Graniteville should make payment directly to Allstate for the subject cotton; (4) Graniteville is unable to resolve the dispute between Dixie and Allstate with regard to whom payment is due; and (5) Graniteville has paid the $30,160.11 into the registry of the court to be disbursed as the court directs after determining to whom it is due. This is the issue for the court's resolution.
PROCEDURAL HISTORY
Allstate filed its response and claim in interpleader asserting that in June of 1983, Bleckley and its principal, William Carlton Lawson ("Lawson"), entered into an agreement with Allstate ("the Agreement"). (Exhibit A). By virtue of the Agreement, Allstate alleges, Allstate acquired a perfected security interest in all of Bleckley's present and thereafter-created accounts receivable, including Graniteville's subject $30,160.11. Bleckley and Lawson are, therefore, indebted to Allstate for more than $1,000,000.00 for advances by Allstate to Bleckley for accounts receivable which proved worthless. Pursuant to Georgia's Uniform Commercial Code §§ 11-9-318, et seq., Allstate claimed to be a good faith purchaser with a security interest entitling Allstate to the entire $30,160.11.
Dixie answered that it is entitled to $29,776.39 of the funds in the court registry. Dixie alleged that: (a) "Dixie delivered said cotton to Bleckley and Bleckley accepted same with the understanding that Bleckley would have only temporary custody of the cotton until Dixie received credit for the check given by Bleckley in payment thereof;" and (b) Allstate, who through its employee working in Bleckley's office was monitoring all of Bleckley's checks, and Bleckley together made the decision not to pay Dixie for the cotton by dishonoring Bleckley's check. Allstate, Dixie argues, is not entitled to good faith purchaser protection under O.C.G.A. §§ 11-2-507 and 11-2-702, and, therefore, failed to obtain a perfected security interest in Bleckley's accounts receivable as they pertain to the cotton delivered Bleckley by Dixie.
On August 30, 1985, Dixie, with leave of the court, filed an amended answer and cross-claim alleging that on April 11, 1984, Bleckley improperly shipped Dixie's 77 bales of cotton to Avondale Mills in Sylacauga, Alabama. Dixie asserted that on April 19, 1984, pursuant to O.C.G.A. §§ 11-2-507 *1545 and 11-2-702, Dixie served upon Avondale Mills, with knowledge of same by Bleckley and Allstate, a written demand that the cotton be returned to Dixie. By virtue of this transaction, Dixie alleges, Allstate owes Dixie $28,344.37.
With leave of the court, Dixie filed a second amendment to its cross-claim and asserted that Blount's Bonded Warehouse ("Blount") on April 12 and 13, 1984, sold to Bleckley cotton which Bleckley shipped, without paying Blount, to Dundee Mills and Henderson Mills. Dundee and Henderson paid Allstate for these shipments; Blount remained unpaid. Blount assigned its claims to Dixie, who also asserts that Allstate's failure to act in good faith precludes Allstate's assertion of secured creditor/good faith purchaser status as a shield against claims seeking payment for these additional improper shipments of cotton: $26,419.48 and $24,544.32 respectively.
In its final amendment to its cross-claim, on November 20, 1986, Dixie alleged, in an additional count against Allstate, that:
The sale of cotton by Dixie Bonded Warehouse to Bleckley ... was obtained by Allstate through actual fraud and misrepresentations in that Allstate's agents and employees directed that a [Bleckley] check be written to [Dixie] for the purchase of cotton while Allstate had knowledge at the time these checks were written that there were insufficient funds in Bleckley's checking account to cover these checks and that these checks would not be honored.
(Fourth Amended Cross-claim, Count Four). Dixie further alleged that Allstate agents intentionally and with the purpose of inducing Dixie to sell cotton to Bleckley misrepresented that the checks would be honored. This fraud, Dixie argued, precluded Allstate from enjoying good faith purchaser status in these transactions and entitled Dixie to recovery of the outstanding sums, expenses and attorneys fees from Allstate.
Dixie premised these charges of fraud upon circumstances surrounding Allstate's employment of Ms. Betty Snoop ("Snoop"). Dixie stated the following:
At the time that [Dixie] sold cotton to Bleckley and obtained "bad checks," [Allstate] was factoring or financing Bleckley's accounts receivable. An employee of Allstate, Betty Snoop, was working at Bleckley's office in Cochran, Georgia and she was monitoring on behalf of Allstate transactions entered into by Bleckley. She directed that the "bad checks" be written to [Dixie]. At the time these checks were written, Allstate had knowledge through its employees, Betty Snoop and Larry Winkler, that there were insufficient funds in Bleckley's checking account to cover these checks. Further, Allstate had knowledge through Winkler that any checks written on Bleckley's account would not be honored by the bank.
(Brief in Support of Motion to Amend).
Allstate, in response to Dixie's several claims and cross-claims, has continuously and vigorously asserted that it holds a perfected security interest in each account receivable that resulted from Bleckley's deliveries of cotton to third party buyers, and that Allstate owes Dixie nothing. Allstate has also argued that Dixie's correspondence in support of its numerous motions to amend contains many misrepresentations of law and fact. (Motion for Reconsideration ..., Tab 83).
Following submission of a proposed pretrial order on February 18, 1987, and a pretrial conference, this court considered Allstate's motion for summary judgment and denied the same on June 14, 1988. The court stated:
Not wishing to open a wide avenue upon which aggrieved sellers may attack the validity of security interests, this court has considered carefully the materials presented by the parties in support of their respective positions. This court concludes that defendant Dixie, through affidavits and depositions, has presented sufficient evidence to indicate that there remains for jury consideration genuine issue of material fact. The good faith of a secured party is "obviously a material fact." Shell Oil Co. v. Mills Oil Co., Inc., 717 F.2d 208, 213 (5th Cir. 1983). *1546 The validity of Allstate's secured interest, and thus its priority over Dixie, depends upon its having conducted itself in good faith. Dixie has placed Allstate's good faith in doubt. Dixie has raised questions regarding the relationship of Bleckley, Betty Snoop, and Allstate, the extent to which Allstate may have influenced certain purchasing and payment decisions, and the degree of control which Allstate asserted over the balance in Bleckley's checking account. These factual disputes preclude this court from granting defendant Allstate's motion for summary judgment.
Graniteville Co. v. Bleckley Lumber Co., 687 F. Supp. 589, 593 (M.D.Ga.1988).
Following an unsuccessful mediation effort the case was placed on the January 14, 1991, civil trial calendar. Upon an additional review of the entire file, including all depositions, affidavits and exhibits, the court concluded that it had been under the misapprehension that certain material facts were yet in dispute in the case sub judice. Accordingly, counsel were advised that the court would take a fresh look at defendant's motion for summary judgment. Having afforded counsel an additional opportunity to address themselves to the court with regard to the facts in the present case, the court now finds the undisputed material facts to be as hereinafter set forth and makes the following conclusions of law.
UNDISPUTED MATERIAL FACTS
Bleckley Lumber Company, Inc. was a Georgia corporation that was owned and operated by William Carlton Lawson ("Lawson"). Its principal place of business was Cochran, Bleckley County, Georgia. Doing business as Bleckley Cotton Company ("Bleckley"), Bleckley bought raw baled cotton and sold it to various cotton mills. Lawson was at all times the "hands on" manager of all operations at Bleckley.
Dixie is a Georgia corporation which has its principal place of business in Hawkinsville, Georgia, approximately 11 miles from Cochran. Dixie is owned by Wendell Dunaway ("Dunaway"), president, and by Douglas M. Watson ("Watson"). Dixie had, in 1983, been selling cotton to Bleckley and other enterprises owned by Lawson for some 15 years.
Dixie had always taken Bleckley's checks and, until the present dispute arose, had never had problems collecting on Bleckley checks. Dunaway had been Dixie's president for the last two years and had, himself, sold Bleckley approximately 1,500 bales of cotton valued at approximately $400,000.00. While Dixie and Blount, pursuant to § 9-312 of Georgia's Uniform Commercial Code (O.C.G.A. § 11-9-312), could have filed a security interest in the cotton sold to Bleckley, they took no such action and made no such filing.
Dunaway had known Lawson for approximately 25 years and was aware, through what he had heard and read, that Mr. Lawson had had financial problems with William Iselin & Company, Inc. ("Iselin"). Dunaway neither investigated those problems nor inquired directly about them with Mr. Lawson. It was a matter of public record that Mr. Lawson's problems had resulted in a lawsuit, a civil suit alleging fraud and seeking monies owed under an accounts receivable agreement, filed in this United States District Court on January 25, 1980, by Iselin against Mr. Lawson, two Lawson corporations, and other individuals. Iselin obtained judgments totaling $9,426,513.00 against Lawson and his corporations for which fi. fa. issued. (Civil Action 80-14, Macon Division).
Allstate is a Virginia corporation engaged, in this case, in the business of factoring accounts receivable. That is, Allstate buys accounts receivable from sellers, such as Bleckley, who have purchased goods from a producer or other seller, such as Dixie, and have sold and shipped those goods to a manufacturer or mill, such as Graniteville. In June of 1983, Allstate and Bleckley agreed (Exhibit A) that Allstate would factor Bleckley's accounts receivable and that Allstate would have a security interest in Bleckley's after acquired accounts receivable. Allstate complied with the relevant filing requirements under Georgia's Uniform Commercial Code.
Lawrence M. Winkler ("Winkler"), Allstate's Second Vice President, formerly employed *1547 as a certified public accountant, had primary responsibility with regard to operations between Allstate and Bleckley. Some five months after the Agreement was signed in June, to assist Winkler and Allstate in overseeing Bleckley's accounts receivable, one of Bleckley's in house bookkeepers, Ms. Betty Snoop ("Snoop"), was placed on Allstate's payroll as a "bonded field employee," under the following terms:[1]
EMPLOYMENT AGREEMENT WITH BONDED FIELD EMPLOYEES
This Agreement is entered into this 14th day of Nov., 1983, between Betty Snoop ("Employee") and Allstate Financial Corporation, a Virginia Corporation ("Allstate").
1. Allstate hereby employs Employee as a bonded field employee and Employee hereby accepts said employment under the conditions herein recited and attached hereto. In consideration for the compensation set forth and agreed upon between the parties, the Employee hereby holds herself bound by any and all instructions that shall from time to time be furnished to her by Allstate. Attached hereto as Exhibit A, B & C, is a list of preliminary instructions which Employee shall initial and which shall be supplemented and/or modified by Allstate from time to time.
2. In addition to the attached instructions, Employee agrees to accurately advise Allstate as to the location and quantities of cotton subject to invoices held by Allstate. Employee will call the warehouse to determine the existence of cotton and to verify its purchase and shall thereafter verify the shipping of said cotton to the mills, Allstate's obligor.
Employee agrees to diligently and accuratel advise Allstate as to the location and quantities of cotton subject to the invoices held by Allstate; to obtain information in connection therewith from reliable sources; to immediately advise Allstate if she has any reason to disbelieve the accuracy of any information received by her in connection with Allstate's interest, and to otherwise diligently and faithfully represent and protect the interests of Allstate. Employee understands and agrees that information provided by her will be relied upon by Allstate.
3. Employee holds herself responsible to Allstate for any loss which Allstate may sustain by reason of any and all unlawful acts on her part or by reason of her failure to fully comply with such instructions.
4. The Employee understands that compensation paid by Allstate will include overtime compensation due, if any, under the Fair Labor Standards Act and amendments thereto. Employee agrees to notify Allstate, in writing, within a reasonable time after receipt of a paycheck, if errors or omissions of any kind should appear on her check. The Employee understands that Allstate, recognizing the need for accurate records as required by the Fair Labor Standards Act and designed to comply with its provisions, requires a report of all hours worked even though they may be in excess of the regular number of hours assigned. Accordingly, Employee agrees to submit time sheets regularly each pay period indicating the actual number of hours worked each day and the total of all hours worked during the week for Allstate.
5. This Agreement, and the employment hereunder, may be terminated by Allstate at any time, for any reason, with or without cause and with or without advance notice.
Employees may terminate this Agreement upon 30 days written notice but no termination noted shall affect any obligation of Employee hereunder except the actual continuance of employment. Employee agrees that employer shall not be liable for any damages sustained by Employee by virtue of said termination.
6. In the event of a breach of this Agreement by Employee, Employee agrees that in addition to such other damages as she may be legally liable to pay, she will reimburse Allstate for all reasonable attorney's fees.
*1548 IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first hereinabove written./s/Betty Snoop Bonded Field Employee ALLSTATE FINANCIAL CORPORATION 4660 Kenmore Avenue Alexandria, Virginia 22304 (703) 370-7550 By (illegible)
Exhibit A Attached to Employment Agreement with Bonded Field Employees.
Instructions:
1. Daily prepare Purchase summary Exhibit B and purolate to Allstate's offices in Alexandria, Virginia.
2. Daily prepare sales summary Exhibit C, and purolate to Allstate's office in Alexandria, Virginia./s/BS
In Essence, under this contract ("the Employment Agreement") Snoop was to advise Allstate as to locations and quantities of cotton subject to invoices, to determine the existence of the cotton, verify its purchase, and verify that it was shipped to the mills, Allstate's obligors. Snoop, as an Allstate field employee, was covered by an employee dishonesty policy issued to Allstate by Fidelity and Deposit Company of Maryland.
Snoop's employment with Allstate was unrelated to her duties as Bleckley's bookkeeper. Snoop continued to receive and follow daily instructions from Lawson. Snoop continued in her full duties as one of Bleckley's bookkeepers, carrying out those duties subject to Lawson's daily supervision. These duties included signing checks drawn on Bleckley's Capital Bank account.[2] Snoop continued, pursuant to her bookkeeping responsibilities, to sign checks drawn upon this account until April 6, 1984, the date of the last check signed by Snoop, when, according to Snoop's deposition testimony, Allstate instructed her to stop signing checks drawn by Bleckley. As Bleckley's bookkeeper, Snoop had continuous access to the account checkbook, which kept a running account balance, throughout the term of her part-time employment with Allstate.
Under the Agreement, Bleckley would verbally agree to purchase cotton from sellers such as Dixie; sell the subject cotton to mills such as Dundee Mills; pick up the cotton and at that time deliver a check to the seller; immediately ship the cotton to the purchasing mill and prepare a sale invoice which on its face assigned the amounts payable to Allstate; mail a copy of the assigned invoice to the mill; and, send the original assigned invoice and verified sales reports to Allstate in Virginia.
After Allstate received one or more assigned invoices/accounts receivable and was satisfied of their authenticity, a percentage of the face value of the invoice/account receivable was advanced to Bleckley pursuant to the Agreement. The advances were made either by checks drawn on Allstate's account at the Capital Bank of Washington, D.C. ("Capital Bank") and deposited into Bleckley's independent checking account at Capital Bank or by wire transfer directly to Bleckley's Cochran, Georgia bank account ("the Cochran account"). Allstate advances accounted for about 60% of the credits to Bleckley's Capital Bank account; Bleckley deposited about 40% of the funds from sources independent of Allstate. All of the money deposited by Allstate into the Capital Bank account came from advances on assigned invoices/accounts receivable.
Initially, the amount advanced by Allstate was equal to the total amount shown on the invoice(s)/account(s) receivable less a reserve of the selling price of ten pounds of cotton per bale and a fee to Allstate of one cent per pound of invoiced cotton. The reserve was held as an allowance for possible shortages which might result from differences between the weight of the cotton *1549 when shipped and when received, possible rejections of shipments, and other potential valid adjustments to the assigned invoice(s). In the fall of 1983, October or November, Allstate decreased the invoice advance amount to 92% of the levels previously agreed upon. The decrease was implemented in response to variances and shortages greater than originally anticipated.
Bleckley used its Capital Bank account as a vehicle for transferring advances on assigned accounts receivable money to itself. As a result, the account regularly showed an overdraft balance. The evidence does not show why Capital Bank permitted Bleckley's account to show a constant overdraft balance. The record does show that Capital Bank rediscounted Bleckley's Capital Bank account to Walter E. Heller & Company ("Heller").
Winkler made monthly inspection visits to Bleckley's Cochran, Georgia office. During these visits, Winkler examined Bleckley's books and records, including Bleckley's Capital Bank account statements, cash receipts, cancelled checks, bank deposits, invoice copies, and disbursements ledger. Allstate, through Winkler, was thus familiar with Bleckley's Capital Bank account and was well aware of its characteristic overdraft status. Allstate, however, exercised neither dominion nor control over Bleckley's Capital Bank account.
Under the Agreement, Allstate and Bleckley originally contemplated assignments of at least $300,000.00 per month. By March of 1984, however, according to Allstate's summary of its losses (Exhibit F), the assigned accounts receivable volume was greatly in excess of the anticipated figure. Advances for March 8 through March 30 alone reached $1,051,166.00.
In late March or early April, 1984, Heller, through their verification system, detected questionable Bleckley accounts receivable assigned to Allstate and rediscounted to Heller. (See Heller internal memos, April 23 and 26, 1984: Exhibits G, H). Heller notified Allstate of these questionable accounts. In response to Heller's notification, on Friday evening, April 13, or Saturday morning, April 14, 1984, Winkler telephoned Snoop at her home. He asked her "if all of the cotton on the receivables was, in fact, paid for." The following Monday, Snoop reported to Winkler that she had checked on the receivables and only then discovered receivables resulting from the sale of cotton for which Bleckley had not made payment.
Winkler immediately (on Monday, April 16, 1984) initiated an audit, which revealed that between March 6 and April 13, 1984, Bleckley had assigned approximately $1,500,000.00 in accounts receivable to Allstate. Approximately $1,300,000.00 of this amount represented invoices for cotton never delivered to the purchasing cotton mills: uncollectible accounts receivable. (See Heller internal memo, April 26, 1984: Exhibit H). Allstate ceased advancing money on Bleckley accounts receivable, the last advance being made on April 13, 1984, for a Bleckley invoice dated April 11, 1984. The checks given Dixie and Blount by Bleckley, dated April 13, 1984, were drawn on Bleckley's Capital Bank account and were returned by Capital Bank without payment because they were drawn on insufficient funds.
Upon learning that the checks were dishonored, Dixie made written demand for the return of the cotton. Blount made no such written return demand at any time. The cotton for which these checks written to Dixie and Blount were drawn, however, had already been resold and delivered by Bleckley to third party mills.
Snoop later admitted that she knew that fictitious or false invoices had been submitted to Allstate; in response to this information, Allstate terminated her employment. (See Deposition of Fishman, p. 27). Allstate later sued Fidelity and Deposit Company of Maryland in the United States District Court for the Northern District of Georgia under the employee dishonesty account. Allstate alleged that Bleckley, through Snoop's dishonest conduct, had caused Allstate to lose more than $750,000.00; Allstate by settlement recovered $625,000.00.
Lawson was indicted by a grand jury of this court on June 20 and August 2, 1984, *1550 in three indictments charging him with: preparation of fraudulent documents to obtain money; fraud by wire; submission of false and fraudulent statements to the United States Department of Agriculture; disposal of property pledged to the Farmers Home Administration as security for a loan; submission of false statements to the Farmers Home Administration; theft and conversion of property pledged to a United States agency; and, submission of false statements to a United States agency to obtain money. (Criminal Action Nos. 84-19, 84-20, & 84-21, Macon Division). On September 11, 1984, Lawson entered a plea of guilty to three of these charges and was thereafter sentenced.
CONCLUSIONS OF LAW
An experienced, informed seller such as Dixie, who has sold goods in exchange for a check and who then files a security interest in the check under Georgia's Uniform Commercial Code, O.C.G.A. § 11-9-312, will enjoy priority over even subsequent good faith purchasers. Since neither Dixie nor its assignors filed a security interest in the checks around which the present litigation revolves, resolution of the case sub judice turns upon whether Allstate, under the present facts, has acted in bad faith. While bad faith alone does not itself give rise to a cause of action under the UCC, Dixie correctly argues that failure to act in good faith will, in some instances, infect the otherwise sterile transactions of a secured party. Dixie alleges that just such an instance is before this court today. Allstate, it is alleged, has acted in bad faith and should not enjoy the protection afforded good faith purchasers under the UCC.
As bad faith alone does not give rise to a cause of action, Dixie must first find an avenue upon which it may proceed toward recovery before this court may even consider the respective arguments with regard to any alleged deleterious conduct on the part of Allstate.
I. Reclamation.
Dixie might first seek to proceed under an alleged right of reclamation. Stated simply, Georgia's UCC reclamation provision, O.C.G.A. § 11-2-702(2), provides that if a seller discovers that a buyer has received goods on credit while insolvent, the seller may reclaim the goods upon demand served upon the buyer within ten days of buyer's receipt of the goods. This restatement of the basics of reclamation suggests some of the obstacles which present themselves to sellers wishing to proceed under this provision.
The first and often most dispositive barrier to recovery is the strict requirement that demand be made in writing within ten (10) days of the buyer's receipt of the goods. Courts have strictly adhered to the requirement that demand be made within ten days of receipt or else be lost. In re Samuels & Co., Inc., 526 F.2d 1238, 1245 (5th Cir.1976) (en banc) cert. den. sub nom. Stowers v. Mahon, 429 U.S. 834, 97 S. Ct. 98, 50 L. Ed. 2d 99 (1977) ("The Code's ten day requirement is an absolute requirement. There is no exception in the Code Sections or Comments, express or implied, to the statutory period."). Under the present facts, Dixie would be precluded from asserting the rights assigned Dixie by Blount, who completely failed to make any written demand upon anyone, under a right of reclamation.[3] Dixie apparently complied with the ten day requirement when it made a written demand for the return of the goods.
Most troubling to Dixie with regard to its right of reclamation is the fact that the subject goods (the cotton) had already been sold and shipped to third party purchasers. Reclamation of goods is primarily a right between a seller and a purchaser; a right subject to the paramount *1551 rights of third party good faith purchasers. B & P Lumber Co. v. First National Bank, 147 Ga.App. 762, 250 S.E.2d 505 (1978). In essence, then, a seller such as Dixie, who has foregone the available option of perfecting its own interests under the UCC, enjoys a remedy under O.C.G.A. § 11-2-702, only to the extent that the provision grants such a seller a right to reclaim the goods from the buyer or purchasers who have proceeded other than in good faith; the UCC creates no reclamation rights which extend to proceeds. Id., 250 S.E.2d at 508 (emphasis added). It is undisputed in the case sub judice that the goods, cotton, have long since been processed. Therefore, even if Dixie succeeded in establishing bad faith on the part of Allstate, any arguably available reclamation rights would not extend to the proceeds of a sale of the cotton, even if such a sale was made in bad faith.[4]
II. Seller v. Secured Purchaser/Dixie v. Allstate.[5]
Dixie's claim, however, survives to the extent that O.C.G.A. § 11-2-401 applies to the present facts. In Samuels, the court specifically found that while the UCC's reclamation provision does not reach the proceeds of a sale of goods otherwise subject to reclamation, an aggrieved seller may yet under Article Two have an interest superior to a subsequent purchaser of the goods. Samuels, 526 F.2d at 1246-47.
Judge Godbold, writing for the en banc majority, after "a meticulous and dispassionate reading of Articles Two and Nine," concluded that "[t]he Code's overall plan ... typically favors good faith purchasers, and typically encourages notice filing of nonpossessory security interests." Id. at 1241. Consistent with this "overall plan," the Code recognizes the power of a defaulting buyer to pass good title to a good faith purchaser even though the transfer is wrongful as against the original seller.[6] "The buyer is granted the power to transfer good title despite the fact that under § 2.507 [See O.C.G.A. § 11-2-507] he lacks the right to do so." Id. at 1242 (emphasis in original).
The claim of a seller such as Dixie that its interest is superior to a party such as Allstate is traceable to principles that predate the promulgation and adoption of the UCC. At common law, a seller for cash implicitly reserved the incidents of ownership or title to the goods until payment was made in full. Failing payment, the seller could institute an action in replevin to regain possession of the goods. Furthermore, because a buyer did not obtain title to the goods until payment was made to the seller in full, an aggrieved seller could even reclaim goods sold by an intermediary who would today qualify as a bona fide purchaser; a defaulting buyer was unable to pass title to any third party.
In Samuels, Judge Godbold reasoned that the UCC specifically limits a seller's ability to reserve title once possession is voluntarily surrendered to a buyer. Id. at 1246 ("Any retention or reservation by the seller of the title in goods shipped or delivered to the buyer is limited in effect to a security interest") (citations omitted). The interest of a seller upon delivery prior to payment in full is, then, a security interest subject to Article Nine. Id. at 1247.[7] In essence, a buyer holds the power to transfer good title "even though ... the delivery was in exchange for a check which is later dishonored," so long as the goods are transferred to "a good faith purchaser for value." Matter of Smith, 51 B.R. 904, 909 (Bkrtcy.1985) (citing O.C.G.A. *1552 § 11-2-403(1) (b) (Michie 1982)); Accord Samuels, 526 F.2d at 1242.
Resolution of the dispute between an aggrieved seller (such as Dixie) and an Article Nine secured purchaser (such as Allstate) is, then, dependent upon analysis of the validity of Article Nine purchaser's interest. If the Article Nine purchaser's interest can be characterized as a good faith purchaser's perfected security interest, that interest will be prior under Article Two, O.C.G.A. § 11-2-403(1) (a), to the aggrieved seller's interest.[8] While this analysis appears to, and arguably does, favor the Article Nine purchaser, it nonetheless leaves open the possibility of an unpaid seller's unperfected security interest prevailing over a purchaser's otherwise superior perfected Article Nine interest.
The touchstone: Good Faith. Should the court determine that the secured party (here Allstate) has in fact acted in bad faith, the aggrieved seller (here Dixie) could assert a superior, though unperfected, interest.
GOOD FAITH
It is first important to note that, under the present facts, any knowledge of outstanding third party claims, while relevant in some bona fide purchaser contexts, is not relevant to the analysis of Allstate's Article Two good faith purchaser's status. As one court has noted:
The assumed existence of third party claims is the principal reason for perfecting nonpossessory article nine security interests. The basis for such interests certainly cannot establish their invalidity.
Genesee Merchants Bank & Trust Co. v. Tucker Motor Sales, 143 Mich.App. 339, 372 N.W.2d 546 (1985). The Article Two definition requires only honesty in fact, reasonable commercial behavior, and fair dealing.
Neither does Allstate's knowledge of the characteristically overdrawn status of Bleckley's Capital Bank account compromise its good faith status. Nothing in the Code requires a party such as Allstate to avoid or limit purchases of accounts receivable from a buyer such as Bleckley in order to protect the interests of unsecured sellers such as Dixie. So long as Allstate never exercised any special control over Bleckley's Capital Bank account, its knowledge of the typically overdrawn status of the account is not grounds to question Allstate's honesty in fact or fair dealing. Allstate exercised no such control over Bleckley's independent Capital Bank account. Allstate did not arrange for Capital Bank to honor Bleckley's overdrafts; nor did Allstate guarantee to pay Bleckley's overdrafts. This was not an arrangement in which Allstate supplied money as needed by Bleckley to cover checks drafted by Bleckley on insufficient funds. Allstate exercised no independent control over Bleckley's Capital Bank account, but merely deposited funds into the account in response to submitted invoices.[9]
Similarly, Allstate's decision, upon discovery of the fraud being perpetuated by Bleckley through Snoop and others, to cease making advances on Bleckley invoices cannot be seen as bad faith. See Samuels, 526 F.2d at 1244 (nothing in the Code mandates that a secured party need continue to finance a "doomed enterprise"). Absent some written misrepresentation of Bleckley's solvency by Allstate, no argument can be made that Allstate's conduct either led Dixie to mistake the vitality of Bleckley's operations or amounted to Allstate's endorsement of Dixie's decision to *1553 conduct business with Bleckley. Allstate neither owed nor undertook any duty to notify Dixie of the character of Bleckley's independent Capital Bank account.
This court, previously under a misapprehension of the facts with regard to: (a) the amount of control exercised by Allstate over the daily transactions at Bleckley's Cochran, Georgia facility; (b) the extent to which Allstate influenced certain purchasing and payment decisions at Bleckley; and, (c) the degree of control which Allstate exerted over the balance in Bleckley's Capital Bank account, previously found the case sub judice to be similar in composition to those cases which have questioned a financier's good faith status based upon the amount of continuous daily control exercised by those financiers over the accounts of delinquent, insolvent buyers. These cases predicated their analyses upon such control and suspicious circumstances, not merely upon a party's knowledge of deficits in the delinquent buyer's bank account. See, e.g., Central Bank of Alabama v. American Charms, Inc., 149 Ga. App. 218, 253 S.E.2d 857, 858 (1979) (court denies summary judgment motion not because defendant was aware of previous deficits in account, but because of concern with regard to defendant bank's decision to wait for eighteen days before dishonoring the delinquent buyer's check). Upon closer re-evaluation of the facts, Allstate's actual involvement in operations at Bleckley can be labelled nothing other than reasonable business conduct carried out to protect Allstate's interests under the Agreement.
Merely positioning the statements that Snoop was monitoring Bleckley's transactions on behalf of Allstate and that Snoop signed Bleckley's bad checks next to one another does not create a relationship between the statements themselves or between the duties and responsibilities underlying those statements. The facts and documentary evidence in the case sub judice do not support Dixie's arguments calling on this court to attribute to Allstate the fraud engaged in by their disloyal parttime agent, Snoop. Snoop's monitoring responsibilities under the Employment Agreement extended only to the validity of invoices/accounts receivable submitted by Bleckley to Allstate. (See Employment Agreement ¶ 2: "... [Snoop] agrees to diligently and accurately advise Allstate as to the location and quantities of cotton subject to the invoices held by Allstate").
While this court may attribute to Allstate the knowledge obtained by its corporate employees, see Steere Tank Lines, Inc. v. United States, 330 F.2d 719, 722 (5th Cir.1964), including employees like Snoop, the acts of such an employee are attributable to a corporation only to the extent that such an employee was operating within the scope of her employment. See United States v. Bank of New England, N.A., 821 F.2d 844, 856 (1st Cir.1987) (emphasis added). A corporation such as Allstate is responsible for the acts of its employees committed within the scope of their employment. See United States v. Richmond, 700 F.2d 1183, 1195, n. 7 (8th Cir.1983) (emphasis added); see also Jones v. Dixie Ohio Express, Inc., 116 Ga.App. 155, 156 S.E.2d 388 (1967) ("The test is not that the act of the servant was done during the existence of the employment, that is to say, during the time covered by the employment, but whether it is done in the prosecution of the master's business ...") (citations omitted); Accord Wittig v. Spa Lady, Inc. of Marietta, 182 Ga.App. 689, 356 S.E.2d 665 (1987). To extend Allstate's responsibility any further under the present facts would be inconsistent with agency principles.
Allstate's knowledge of the characteristically overdrawn status of Bleckley's Capital Bank account is undisputed. Snoop's knowledge in this regard is cumulative and does nothing to change Allstate's good faith purchaser status. Any attempt to connect the fact that Snoop, on behalf of Bleckley, signed checks which were knowingly drawn upon insufficient funds with her role as Allstate's "bonded field employee" ignores the limited scope of Snoop's responsibilities as Allstate's agent under the Employment Agreement. Snoop's authorization to sign Bleckley checks fell under her responsibilities as a Bleckley employee; nowhere in the Employment Agreement is Snoop, as Allstate's "bonded field employee," authorized to sign checks *1554 drawn on Bleckley's Capital Bank account. Any control exercised by Snoop over the funds in Bleckley's Capital Bank account was wholly unrelated to her agency relationship with Allstate.
Upon first discovery of the fictitious and fraudulent invoices, a discovery made pursuant to Allstate's audit, Winkler terminated Allstate's relationship with Bleckley. To find that Snoop's fraudulent activities or her authorization that Bleckley checks drawn on insufficient funds somehow amount to misrepresentation by Allstate would be to ignore the facts in this case and would amount to nothing more than an effort to tap a liquid source of funds without regard to actual fault.
The essence of fraud and misrepresentation is reliance. Upon the present facts, Dixie cannot be heard to claim that it relied upon any representation made by anyone acting in their capacity as Allstate's agent. In fact, up until the checks, which are the subject of the present litigation, were dishonored by Capital Bank, Dixie and Allstate were at best merely aware of one another's existence as parties transacting business with Bleckley. It is precisely these kinds of multiple party transactions, in which the involved parties rarely, if ever, deal directly with one another, that make utilization of the UCC's available protective filings crucial. Failure to utilize to full potential all the protection that the UCC affords leaves unsecured parties' interests inferior to those of parties who wisely follow UCC directives. Allstate secured its position not through fraud or misrepresentation, but through the detached act of filing.
All that can be said in reference to the UCC with regard to Allstate's conduct is that Allstate followed UCC directives by complying with the UCC's filing requirements. When Allstate, through Winkler, learned of the fraud being perpetuated by Bleckley and Snoop, Allstate immediately ceased their business relationship with Bleckley, Lawson, and Snoop. This cannot be said to mar Allstate's good faith status; Dixie mistakes for bad faith what is best termed commercial vigilance.
There remain no factual disputes as to the actual control exercised by Allstate or Snoop, in her capacity as Allstate's "bonded field employee," over Bleckley's Capital Bank account. Allstate's actions with respect to Dixie or any other involved interest can be characterized as nothing other than honesty in fact, good faith under Article Two. Allstate's interest, as that of a good faith purchaser of Bleckley's accounts receivable, is, therefore, superior to those asserted by Dixie and Blount as unsecured aggrieved sellers. Accordingly, Allstate's motion for summary judgment is hereby GRANTED.
SO ORDERED.
EXHIBIT A
*1555
*1556
*1557
*1558 EXHIBIT B
*1559 EXHIBIT C
*1560
*1561
*1562
*1563 EXHIBIT D
*1564 EXHIBIT E
*1565
*1566 EXHIBIT F
SUMMARY OF ALLSTATE
FINANCIAL CORPORATION'S LOSS
ALLSTATE'S AMOUNT ADVANCED DATE OF AMOUNT COLLECTED ALLSTATE'S
SCHEDULE TO BLECKLEY ADVANCE BY ALLSTATE LOSS
NUMBERS
--------------------------------------------------------------------------------------
2648 119,786.08 03/08/84 78,848.30 40,937.78
2654 68,767.45 03/09/84 0 68,767.45
2659 147,350.75 03/12/84 122,416.84 24,933.91
2667 71,778.33 03/13/84 23,962.74 47,815.59
2681 71,414.03 03/16/84 51,978.72 19,435.31
2690 95,845.28 03/19/84 52,327.63 43,517.65
2705 95,454.98 03/21/84 24,629.49 70,825.49
2709 126,538.96 03/22/84 99,508.70 27,030.26
2734 179,232.54 03/27/84 57,707.26 121,525.28
2748 75,002.73 03/30/84 52,755.56 22,247.17
2756 23,370.99 04/02/84 0 23,370.99
2764 134,602.99 04/03/84 0 134,602.99
2777 78,904.66 04/05/84 0 78,904.66
2785 77,827.18 04/06/84 24,660.64 53,166.54
2789 73,413.58 04/09.84 0 73,413.58
2801 83,782.70 04/10/84 33,797.96 49,984.74
2802 47,269.49 04/11/84 0 47,269.49
2808 64,245.47 04/12/84 0 64,245.47
2815 152,002.34 04/13/84 0 152,002.34
TOTAL LOSS 1,163,996.69
Recovery on rejected
cotton (110,394.94)
Recovery on holdback
reserve (134,535.65)
______________
ALLSTATE'S NET LOSS $ 919,066.10
*1567 EXHIBIT G
*1568
*1569 EXHIBIT H
*1570
NOTES[1] Snoop, at the time the Agreement was executed, served as Bleckley's corporate secretary and in that capacity attested to Lawson's signature on the Agreement.
[2] The Employment Agreement is silent as to Snoop's bookkeeping responsibility to sign checks drawn on Bleckley's Capital Bank account; this was part of Snoop's duties in her capacity as a Bleckley employee.
[3] The court is well aware of the exception, set out in O.C.G.A. § 11-2-702, to the ten day requirement where a misrepresentation of solvency has been made to the particular seller in writing within three months before delivery of the goods. In the case sub judice it appears that the only representations made by anyone with regard to Lawson were news stories and rumors of Lawson's impending financial demise. Finally, Blount should not be heard to rely upon the checks written by Bleckley themselves as "written misrepresentations of solvency." See Theo. Hamm Brewing Co. v. First Trust & Savings Bank of Kankakee, 103 Ill.App.2d 190, 242 N.E.2d 911 (1968) (checks themselves do not amount to representations of solvency).
[4] Even if, for the sake of argument, reclamation rights were to extend to proceeds, a result in favor of Dixie would still be contingent upon an analysis of the alleged bad faith of Allstate. This analysis is provided, infra.
[5] An informative academic treatment of the type of conflict before the court has been written by Kamp & Solove in "Seller v. Secured Party: Searching for an Intangible Something," 28 Mercer L.Rev. 625 (1978).
[6] This arguably harsh result does not obtain under the Code against seller's who perfect their interest upon receipt of a buyer's check.
[7] Judge Godbold recognized that while many of the interests governed by Article Nine are consensual, an interest such as that of an unpaid seller may arise by operation of law and nonetheless be subject to Article Nine treatment. Id.
[8] Analysis of whether the Article Nine purchaser has acted in good faith is properly governed by Article Two's detailed definition which requires honesty in fact, reasonable commercial behavior, and fair dealing.
[9] The court notes Dixie's argument that Snoop, as one empowered to sign checks for Bleckley, acted as an agent for Allstate with control over the funds in Bleckley's Capital Bank account. The court addresses arguments with regard to the propriety of attributing the acts of Snoop to Allstate infra. Initially, however, the court would point out that Snoop's duties with regard to Bleckley's Capital Bank account, predated the Employment Agreement, were not addressed under the Employment Agreement as duties of Allstate's "bonded field employee," and continued after the execution of the Employment Agreement only pursuant to Snoop's status as Bleckley's bookkeeper.
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