FIRST-CITIZENS BANK & T. CO. v. Academic Archives, Inc.

179 S.E.2d 850 (1971)

10 N.C. App. 619

FIRST-CITIZENS BANK AND TRUST COMPANY v. ACADEMIC ARCHIVES, INC.

No. 7110SC218.

Court of Appeals of North Carolina.

March 31, 1971.

*852 Hatch, Little, Bunn, Jones & Liggett by William P. Few, Raleigh, for plaintiff-appellee.

Allen, Steed & Pullen by Arch T. Allen, III, Raleigh, for claimant-intervenors.

BRITT, Judge.

The rights of the respective parties are determined by the provisions of the Uniform Commercial Code, Chapter 25 of the General Statutes of North Carolina.

Appellants contend that under G.S. § 25-2-703(f) they could cancel their agreement with Archives and reclaim their bound volumes and that it was error for the court to conclude that G.S. § 25-2-702 was the applicable Code section. G.S. § 25-2-703(f) is entitled "Seller's Remedies in General" and states that:

"Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (§ 25-2-612), then also with respect to the whole undelivered balance, the aggrieved seller may * * * * * * (f) cancel."

G.S. § 25-2-702(2) entitled "Seller's Remedies on Discovery of Buyer's Insolvency" states that:

"(2) Where 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 the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten-day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay."

Official Comment 2, G.S. § 25-1-106(2) states that "any right or obligation described in this Act is enforceable by court action, even though no remedy may be expressly provided, unless a particular provision specifies a different and limited effect. Whether specific performance or *853 other equitable relief is available is determined not by this section but by specific provisions and by supplementary principles." (Emphasis added.)

Hawkland, a leading authority on the UCC, aids in the determination of the situation in which a seller who has already made delivery of the goods to the buyer seeks to recover the goods delivered.

"Normally, after the seller has delivered the goods to an accepting buyer, the remedy is an action for the price, and it is too late to retrieve the goods. The remedy of reclamation is an exception to this rule. * * * Subsection 2-702(2) provides a remedy of reclamation for cases of fraud based on misrepresentation of solvency." 1 Hawkland, A Transactional Guide to the Uniform Commercial Code, § 1.60 at 299.

The exclusiveness of G.S. § 25-2-702(2) is very clear when the last sentence of that section is read. "Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay."

Appellants' contention is that Archives received their books at a time when it was insolvent and that Archives made written representations of solvency within three months prior to delivery of the books. Appellants are bound by the Code section under which their factual situation belongs and in this case that section is G.S. § 25-2-702(2). A determination of whether the written proposals of exchange made by Archives to the various appellants was a misrepresentation of solvency is not necessary for the reason that even if the conditions to bring appellants within G.S. § 25-2-702(2) were present, it is clear that the rights of third parties have intervened to cut off their right to reclaim the property. G.S. § 25-2-702(3) states that:

"(3) The seller's right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this article (§ 25-2-403). Successful reclamation of goods excludes all other remedies with respect to them."

It is evident from a reading of Sections (2) and (3) that the rights of certain people can intervene and cut off those of a seller who desires to reclaim his former property. It must be considered whether plaintiff's after acquired property clause in its security agreement results in its having priority over the seller of the goods in question. The favored category that plaintiff best fits is that of a "good faith purchaser." The good faith of plaintiff is not questioned by appellants; the Code describes "good faith" as "honesty in fact." G.S. § 25-1-201(19). A "purchaser" is one who takes by purchase, and a "purchase" includes "taking by sale, discount, negotiation, mortgage, pledge, lien, issue or re-issue, gift or any other voluntary transaction creating an interest in property." G.S. § 25-1-201(33) (32). To the extent that "value" is important as a concept necessary to determine whether one is a "good faith purchaser", it is clear that one gives value for rights if he acquires them "as security for or in total or partial satisfaction of a pre-existing claim" or for "any consideration sufficient to support a simple contract." G.S. § 25-1-201(44) (b) (d). Therefore, the holder of a perfected security interest in after acquired property qualifies as a "good faith purchaser" so far as the definitions go.

Appellants' contention that plaintiff's security interest could not have attached because Archives did not have "rights in the collateral" is without merit. It is true that Archives might have had a voidable title, if it had made fraudulent representations of solvency, but one with voidable title can transfer better title than he had. G.S. § 25-2-403(1) (d). Several commentators have also concluded that the holder of a perfected security interest in after acquired property was a "good faith purchaser" whose rights were superior to a seller of the after acquired goods under *854 G.S. § 25-2-702(2). The Marriage Of Sales To Chattel Security In The Uniform Commercial Code: Massachusetts Variety, 38 B.U. Law Review 571, 580-581; Hawkland, A Transactional Guide To The Uniform Commercial Code, p. 304; Selected Priority Problems In Secured Financing Under The Uniform Commercial Code, 68 Yale L.J. 751, 758.

Appellants' contention that the court erred in its conclusion that the bound volumes in question were "inventory" rather than "equipment" is also without merit. According to G.S. § 25-9-109(4) goods are "`inventory' if they are held by a person who holds them for sale or lease * * * or if they are raw materials, work in process or materials used or consumed in a business. Inventory of a person is not to be classified as his equipment." Official Comment 3, G.S. § 25-9-109 states that the principal test to be used to determine whether goods are "inventory" is whether or not they are held for immediate or ultimate sale. The parties to this action stipulated that Archives "engaged in the business of microfilming books, journals, records, and other like material and in buying and selling both microfilm records and printed material." It is manifestly clear that the bound volumes appellants sold to Archives are "inventory" in the hands of Archives.

Appellants contend that they are "buyers" of the microfilm equivalents offered to be exchanged by Archives for the bound volumes and that as such they are entitled to recover any microfilm which was intended for them but which is now being held by the receiver. G.S. § 25-2-502(1) is the applicable section and states that:

"(1) Subject to subsection (2) and even though the goods have not been shipped a buyer who has paid a part or all of the price of goods in which he has a special property under the provisions of the immediately preceding section may on making and keeping good a tender of any unpaid portion of their price recover them from the seller if the seller becomes insolvent within ten days after receipt of the first installment on their price."

In order for the buyer to be able to recover the goods which remain in the possession of the seller after the seller has become insolvent, the several elements of G. S. § 25-2-502 must be present. One of these is that the seller must become insolvent within ten days after receipt of the first installment of the purchase price.

"Presumably, the seller cannot become insolvent prior to the receipt of the first installment of the purchase price or eleven days after receipt of the first installment of the purchase price or on the very date of its receipt. He has to become insolvent within the given ten day period. * * * The language of Section 2-502 is rather explicit on this point and does not leave much room for interpretation. This is why * * * this right is rather illusory as far as practical application is concerned." 3 Benders Uniform Commercial Code Service, Sec. 14.03(2) at 14-34.

In the case at bar the insolvency of the defendant occurred prior to the appellants' deliveries and not within ten days after delivery of the bound volumes; therefore, appellants cannot take advantage of the provisions of this section.

For the reasons stated the order and judgment appealed from is

Affirmed.

CAMPBELL and HEDRICK, JJ., concur.