Leon W. Fowler, Trustee in Bankruptcy, in the Matter of Jeff Martin, Jr., D/b/a Martin's Dx, Manly's Associates, Manly's and Martin's Tire & Appliance, Appellant, v. Pennsylvania Tire Company, Appellee, 326 F.2d 526 (5th Cir. 1964)

Leon W. Fowler, Tyler, Tex., for appellant.

LeRoy Neal, Gladewater, Tex., Shirley W. Peters, Denton, Tex., for appellee.

Before HUTCHESON and BROWN, Circuit Judges, and SIMPSON, District Judge.

SIMPSON, District Judge.

This is an appeal by the trustee in bankruptcy from a judgment¹  of the District Court reversing an Order²  of the referee in bankruptcy denying the petition for reclamation as filed by the appellee, Pennsylvania Tire Company. The question for decision is whether the agreement by which the appellee delivered its tires to the appellant-bankrupt for resale was a consignment for sale or an absolute sale with a right of return.

On May 27, 1960, Pennsylvania Tire Company and Jeff Martin, Jr. d/b/a Martin's DX, Manly's Associates, Manly's and Martin's Tire & Appliance Co., (hereinafter referred to as Bankrupt), entered into a contract,³  whereby the former agreed to deliver tires to the latter for resale at prices and terms fixed by the latter. This contract was termed a consignment with the title expressly being reserved with the appellee. While monthly inventory reports were required, there was no provision for any sort of segregating or earmarking of these tires.

On April 17, 1962, bankrupt filed a voluntary petition in bankruptcy, and on the following day, an order of adjudication was entered. On May 1st, Pennsylvania filed its petition for reclamation of these tires still in bankrupt's possession, asserting that this transaction was a consignment, and therefore, the title to the tires did not pass to the bankrupt and consequently could not pass to the trustee under Sec. 70, sub. c of The Bankruptcy Act (Title 11 U.S.C. § 110, sub. c).⁴  The outcome of this litigation depends on a determination of who had title to these tires. In addition to the express reservation of title in the contract, it is necessary for the Court to examine the transaction and, if possible, to ascertain the correct intent of the parties. Texas Farm Products Co. v. Burus Feed Mills, Inc., (C.A.Tex.), 337 S.W.2d 203; Garrett et al. v. International Milling Co., (C.A.Tex.), 223 S.W.2d 67.

First of all, the appellant contends that this agreement amounted to a sale and not a consignment and secondly, that if this was not an absolute sale, then it was at least a conditional sales contract. In support of this second contention, the appellant claims that the parties agreed to be bound by Ohio law, and Ohio law declares that conditional sales contracts are void as to subsequent creditors, unless they are properly recorded. The trustee claims to be in the shoes of a subsequent creditor by virtue of Sec. 70, sub. c, which position we agree with. However, we hold that this agreement created a consignment, and not a sale, so it is not necessary to discuss recordation under Ohio law.

Since this is a bankruptcy case in which the laws of both Texas and Ohio are relied on by the parties, it seems appropriate to discuss briefly the law that is applicable in order that the resulting confusion be obviated. Such a problem poses two questions. Whether the law of one state should control as opposed to that of another state, and whether the Bankruptcy Act should override the state law of the state in which the Court sits?

In the absence of a conflict between the state and bankruptcy laws, the former governs as to questions pertaining to the title to property and to related problems such as defining the nature of a particular transaction. Arnold v. Phillips, 5 Cir., 117 F.2d 497, cert. den. 313 U.S. 583, 61 S. Ct. 1102, 85 L. Ed. 1539; Jaffke v. Dunham, 352 U.S. 280, 77 S. Ct. 307, 1 L. Ed. 2d 314; Whitehouse Bros. v. Abbott & Son, (C.A.Tex.) 228 S.W. 599. In the case of In re Tansill, 4 Cir., 17 F.2d 413 at 415, the Court said:

"The nature of the transaction, that is to say, whether for instance, it amounts to a sale or bailment or pledge or mortgage or some other transfer of property, or whether sufficient delivery has been made to pass title, or whether recording or filing of an instrument, be required, and, if so, as to whom it will be void for lack of recording, etc., is to be determined by the state law, and the bankruptcy court will take it as so determined."

As to which state law applies, Kansas City Title Ins. Co. v. Butler (C.A. Tex.), 265 S.W.2d 154, held that in the absence of some specific pleading or invocation of Texas Rules of Civil Procedure, rule 184a, it will be presumed that the law of another state is similar to the law of Texas. In Frederick v. Burg, 148 F. Supp. 673, (W.D. Pa.), plaintiffs brought a damage suit in the Western District of Pennsylvania for injury to their land located in Ohio. When concerned with which state law to apply, the Court stated:

"Inasmuch as plaintiffs have been unable to cite any Ohio law or cases to support their position, and in fact no cases from any jurisdiction in support of their position, this Court will assume that the law of Ohio is the same as the law of Pennsylvania, the state in which this Court is sitting."

In the case at bar, appellants have failed to cite any cases or statutory law of Ohio which would necessitate a different result than arrived at under Texas law. Texas has a statutory provision for the recording of conditional sales contracts,⁵  but there is no corresponding requirement that consignments be likewise recorded. Therefore, it will be presumed that the law of Ohio does not require recording of consignment contracts, and consequently, it becomes immaterial which state law is applicable.

Turning to the controlling issue in this case of whether the transaction was a consignment for sale or a sale with the right of return, the trustee persistently contends that nowithstanding the express language in the contract — that the title is reserved with Pennsylvania Tire Company — the agreement is a sale with the right to return any of the tires which the bankrupt does not sell. The basis for this contention is that subsequent to the contract, the actions of the parties indicated that they were treating the tires as belonging outright to the bankrupt. The trustee takes the position that the conduct of the parties finally determines the position of the parties with reference to their intentions, citing Goodyear Tire & Rubber Co. v. Orebaugh, 6 Cir., 79 F.2d 738, to support his argument. But the facts there are distinguishable, which difference results in the application of another principle of law. In the above case, the manufacturer sold tires to the bankrupt, and having some doubt as to the latter's financial ability, attempted to take back title through the issuance of credit memoranda. The bankrupt never gave up possession of the tires and failed to earmark them as the property of Goodyear. The Court held that as to third parties, the transaction was ineffective to divest the bankrupt of his title to the tires. In the instant case, title never passed to the bankrupt by the terms of the agreement, so there is no need to decide whether there occurred sufficient later acts to divest the bankrupt of his title. There is language in the case of Matter of Klein, 2 Cir., 3 F.2d 375, to the effect that a test of the good faith of an agreement purporting to be a consignment for sale is to ascertain whether the parties adhered to the agreement and performed its terms or ignored it and, in violation of its terms, treated deliveries of goods as actual sales. The force of this language relates to discovering the intentions of the parties as to whether they actually intended to effect a consignment or whether the arrangement was only a cloak intended to conceal an actual sale. There is no question here of any bad faith or collusive dealings between the parties which could result in detriment to third parties.

As to determining the intent of the parties, the prevailing view is that it will be determined solely by the words employed in the written instrument, where the meaning of such instrument is clear and unambiguous. Garrett et al v. International Milling Co., (C.A.Tex.), 223 S.W.2d 67; Edgewood Shoe Factories, Division of General Shoe Corp. v. Stewart, 5 Cir., 107 F.2d 123; Samson Tire & Rubber Co. v. Eggleston, 5 Cir., 45 F.2d 502. But where the contract or agreement is unclear or of doubtful meaning, the Court in interpreting what the parties were called upon to do, may properly consider acts done by the parties in the course of performance. Ross & Sensibaugh v. McLelland, (C.A.Tex.), 262 S.W.2d 205 reh. den.; Samson Tire & Rubber Co. v. Eggleston, supra. The foundation for this latter principle is that a person's construction of his own language constitutes the highest evidence of his intentions. However, this rule is applicable only if the contract is ambiguous or of doubtful meaning; it does not apply to any agreement that is free of ambiguity. See generally, 13 Tex.Jur.2d, Contracts § 128.

Here the terms used and their meaning are clear. The agreement is complete and no dispute is present as to the meaning of any language used.

The prime distinguishing factor of a consignment as opposed to a sale is that after the goods have been delivered to the dealer, no obligation arises on the part of the dealer to pay for them. In the case of Edgewood Shoe Factories, supra, a petition for reclamation was filed with the trustee in bankruptcy. In the opinion which held that the petition for reclamation should have been granted, Judge Hutcheson said:

"All agree then, that if out of the agreement itself alone, if clear and unambiguous, or out of the acts and agreements of the parties, if the agreement is of doubtful purport, there arises an obligation on the part of the apparent consignee to buy and pay for the delivered goods, such that a suit can be maintained by the consignor as creditor, the transaction is one of sale, or agreement to sell, and not of consignment for sale. Whereas, if no binding obligation to buy or pay for the goods, on which consignor could sue, arises out of the agreement alone, or out of the agreement taken with the facts, but only an obligation to account to the consignor for the proceeds of the goods when sold, the relation must be held to be, not one of buyer and seller, but one of consignor and consignee for sale."

In the instant case, neither in the written agreement nor in the facts can there be found any reason to support a claim that the bankrupt was or could be obligated, at any time, to buy or pay for any unsold tires. In the same opinion, it was stated:

"The only obligation upon the consignee, as disclosed, by the plain and unambiguous terms of the contract and confirmed by the facts, was to turn over to the consignor, up to the invoice price, the proceeds of sales of the shoes made for it by the consignee."

Ludvigh v. American Woolen Co., 231 U.S. 522, 34 S. Ct. 161, 50 L. Ed. 345; In re Thomas, 231 F. 512 (S.D. Ga.) ; In re National Home & Hotel Supply Co., 226 F. 840 (E.D. Mich.) ; Whitehouse Bros. v. Abbott & Son (C.A.Tex.), 228 S.W. 599.

The Edgewood decision is in line with the weight of authority elsewhere. Even if it was not, it would bind us under the doctrine of stare decisis.

The judgment of the District Court was correct; it is

Affirmed.

JOHN R. BROWN, Circuit Judge (dissenting).

I agree that ultimately " [t]he outcome of this litigation depends on a determination of who had title to these tires," that is, whether the tires were the property of the bankrupt. I also agree that a different result obtains depending on whether the legal relation between the bankrupt and the Pennsylvania Tire Company is that of buyer and seller or consignee and consignor. I cannot agree, however, that in attempting to discover the nature of the relationship we are confined to the 4 corners of the instrument called "POC" Warehouse Agreement. Nor do I think that much is gained in discussing the case in terms of "title" or "consignment" versus "sale." These are not a statement of the reasons why. They are, rather, a statement of the problem, or, once it is decided, a statement of the conclusion. Because the broader inquiry which I believe is required yields a conclusion different from that reached by the majority, I respectfully dissent.

As I see it, whether title passed to the bankrupt on delivery of the tires or remained in the Tire Company until the tires were sold to a third-party user-customer depends on the agreement between the bankrupt and the Tire Company as evidenced by both the written "POC" Warehouse Agreement and the long-continued course of dealing. Admittedly several provisions of the Warehouse Agreement are consistent with a relationship of consignee and consignor. But the hard facts are that the bankrupt and the Tire Company did not operate in the manner called for by the Agreement.

The Agreement called for the bankrupt to keep the "merchandise separate and apart from similar merchandise owned by persons other than the [Tire] Company;" to make sure that the merchandise covered by the Agreement was not "mingled with any other merchandise;" and "to at all times maintain appropriate signs, labels or other identification clearly designating same as [Tire] Company's property." These requirements simply were not met by the bankrupt. He kept one common stock of tires on display for sale. Various other brands of tires were mixed with the Pennsylvania tires whose title is here in dispute. No signs or labels were maintained either on the premises or on the Pennsylvania tires which indicated that they were the property of the Tire Company rather than property of the bankrupt.

The Agreement required the bankrupt to forward to the Tire Company "immediately after the end of each month an actual physical inventory indicating the quantity, size and type of such consigned stock at the beginning and end of the month and a list of transfers to and from such stock." Acknowledgment receipts of all consigned stock received were required to "be furnished daily." Finally, the bankrupt was required to "render detailed reports daily reflecting the total amount of merchandise * * * withdrawn from the consigned stock." These reports were not made. The evidence is that the practice was for the bankrupt to fill out a statement of sale whenever, in his opinion, a sufficient number of tires had been sold to justify the making of a report.

Although it is apparent from the face of the Agreement that the Tire Company was attempting to set up an arrangement whereby the bankrupt would act as the agent of the Tire Company for the purposes of delivering merchandise to user-customers and collecting sales proceeds in trust for subsequent transmission to the Tire Company,¹  other provisions of the Agreement and certainly the course of dealing between the parties were inconsistent with an arrangement of this type. Under the Agreement, the bankrupt was responsible for any shortage in the stock whether caused by negligence, theft, fire²  or otherwise. The bankrupt was likewise liable ultimately for all taxes on the stock.³  In return for assuming all the risk of loss and for performing the storage and selling function for the Tire Company one would assume that the bankrupt would be allowed some compensation. He was, but it was measured — under the agreement — just as the compensation of retailers is universally measured. The bankrupt was allowed to retain an amount equal to the retail price of tires sold minus the wholesale price. Out of this amount the bankrupt was to pay the service charge of 1 and ½ per cent per month on the wholesale value of the tires not yet sold. This obviously was a charge for the financing of inventory. I need not determine the legal consequences of such arrangements if put into actual operation. The fact is that the bankrupt and the Tire Company never operated in the manner outlined. The tires were invoiced as "Sold To Martin Tire & Appliance, 105 Commerce, Gladewater, Texas," and the Tire Company charged Accounts Receivable when the tires were shipped. As noted above, the tires were not segregated, and the receipt and withdrawal reports were not made. The bankrupt dealt with the public as though the tires were his. He sold tires at prices and terms of his sole discretion. Rather than segregating the sales proceeds in trust in a bank account separate from his general bank account as apparently called for by the agreement,⁴  he deposited the receipts in his general bank account. When he made remittances, either in payment of amounts billed on the tires or in payment of the "service charge," he drew a check on his general account. Even the service charge was computed in a manner different from that provided in the agreement. Rather than being computed on the balance of inventory unsold and on hand, it was computed on the total value of tires shipped to the bankrupt during the month, whether sold or not. Finally, both under the contract and in actual practice, the bankrupt could return tires only with the consent of the Tire Company. In short, the relationship in actual practice had every earmark of that of buyer and seller, with inventory financing aid being supplied by the seller, Pennsylvania Tire Company.

I have not set forth this detail with the thought in mind that this alters or varies the terms of the written contract. We do not have that case before us. Whatever the legal consequences of its terms might be if adhered to, the fact is that neither party complied with them. Assuming it controlled absolutely the initial "consignment" of tires, the contract, if ignored as it was throughout all subsequent times, could not extinguish either the fact of actual conduct or the legal significance of it. Moreover, these actual operations in disregard or violation of the terms of the agreement were not concealed, unilateral, unknown actions. The Tire Company made regular inspections and frequent reports of these derelictions were made to the home office. Nevertheless the home office continued to ship and invoice tires to the bankrupt knowing that what the contract prescribed would never be complied with.

In that situation the legal relationship of the parties and to the merchandise should be determined by what was done, not by what they said they would do.

The consequences of this decision in terms of the Texas policy of protecting creditors is ominous. In the first place any contract couched in terms of a conditional sale or other reservation of title are expressly treated by Texas as a chattel mortgage requiring recordation to be valid against creditors. Tex.Civ.Stat. Ann. arts. 5489, 5490 (Vernon 1958).