In the Matter Of: Argo Financial, Inc., Debtor.advanta Auto Finance Corporation, Appellant, v. Sugarland Motor Company, Inc., Doing Business As Harvest Ford-lincoln-mercury, Doing Business As Harvest-sugarland, Appellee, 337 F.3d 516 (5th Cir. 2003)

Louisiana law gives a vendor the right to demand dissolution of a sale for nonpayment of the purchase price. In this case, an unpaid vendor sought to dissolve sales of movable property after the original purchaser had resold the movables to a third party in good faith. We hold, under these circumstances, that the vendor's exercising its right of dissolution could not impair the third party's rights in the movables. Accordingly, we reverse the district court's judgment and remand this case for further proceedings.

Sugarland Motor Company ("Sugarland") owns and operates motor vehicle dealerships in Plaquemine, Louisiana. Those dealerships originate retail installment contracts ("RICs") when they sell vehicles on credit. By executing an RIC, the buyer grants a security interest in his new vehicle to secure his obligation to pay the financed portion of the vehicle's purchase price. Thus, each contract includes the buyer's promise to pay the amount financed plus daily accruing finance charges and a security agreement creating a security interest in the vehicle in favor of Sugarland and its assignees. Immediately after a credit sale is complete, Sugarland assigns the RIC to a consumer finance company.¹  By this point the finance company has already verified the buyer's creditworthiness and agreed to pay Sugarland the financed portion of the price. The buyer then makes monthly payments to the finance company or its assignee.

Argo Financial, Inc. ("Argo"), was a finance company that Sugarland dealt with on a regular basis. When it sold an RIC to Argo, Sugarland would send the original contract to Argo by overnight delivery. Argo usually mailed a check to Sugarland for the full amount financed five to ten days after receiving the RIC. After receiving the payment from Argo, Sugarland would submit a copy of the RIC and a title application for the vehicle described in the RIC to the Louisiana Department of Public Safety and Corrections, Office of Motor Vehicles ("OMV" or "Louisiana OMV"). Under Louisiana law, a security interest in the vehicle would be perfected upon the OMV's receipt of the RIC.²  The OMV would then issue a certificate of title showing Argo as the vehicle's "first lienholder," and Sugarland would send the certificate to Argo. Argo, in turn, would resell the RIC to another finance company — in this case, Advanta Auto Finance Corporation ("Advanta"). When Argo received a title certificate for a vehicle associated with an RIC that it had sold to Advanta, Argo would forward the certificate to Advanta along with the documents necessary for Advanta to have a new certificate issued noting its security interest in the vehicle.

Two RICs originated by Sugarland are at issue here. Maudria Fox executed the first one on September 29, 1998; Susan and Stephen Kennard (collectively "Kennard") executed the second on October 2, 1998. In each instance, Sugarland sold and delivered the RIC to Argo. But Sugarland did not receive payment from Argo within the customary time frame. After giving several assurances that payment was forthcoming, Argo finally advised Sugarland that it had filed for bankruptcy, that it was therefore unable to fund the RICs, and that Sugarland needed either to get the vehicles back from Fox and Kennard or to finance the sales with another lender.³  In the meantime, however, Argo had sold and delivered the RICs to Advanta.⁴  Unaware that Sugarland had not received payment, Advanta promptly paid Argo the agreed-upon purchase price for each RIC.

After learning that Argo was in bankruptcy, Sugarland informed Fox and Kennard that they needed to switch lenders and convinced them to execute new RICs. Although Fox and Kennard had each made one payment to Advanta when they executed the new RICs, Sugarland claims it was unaware that Advanta had purchased the original contracts from Argo. Sugarland immediately sold the new contracts to Americredit Financial Services, Inc. ("Americredit"), and filed the appropriate documents with the Louisiana OMV. In due course, the OMV issued title certificates showing Americredit as the first lienholder of the Fox and Kennard vehicles. Fox and Kennard then quit making payments to Advanta under the terms of the original RICs and began paying Americredit instead.

Because it never received payment from Argo, Sugarland never filed with the OMV copies of the original RICs or title applications requesting that Argo's security interest be noted on each vehicle's title certificate. It follows that neither Argo nor Advanta ever received title certificates for the Fox and Kennard vehicles. Because Sugarland forwarded the title certificates it actually applied for and received to Americredit, Advanta was never able to obtain new certificates noting its security interests in the vehicles.⁵  Thus, although Advanta is still in possession of the original RICs, its security interests in the Fox and Kennard vehicles are unperfected.

In this adversary proceeding related to Argo's bankruptcy, Advanta brought a conversion claim against Sugarland, alleging that Sugarland interfered with or destroyed its right to payment under the original RICs by enticing Fox and Kennard to execute new contracts. Relying on Louisiana Civil Code articles 2561, 2013, and 2016, Sugarland answered that it was not liable to Advanta in tort or otherwise because Argo's failure to pay the purchase prices entitled it to regard the sales of the RICs to Argo as dissolved. The general effect of dissolution is to restore the seller and the buyer to the situation that existed before the sale; thus, Sugarland maintained that the rights in the RICs that Advanta acquired from Argo did not survive the dissolution of the initial sales. Advanta responded that its rights as the owner of the original RICs were governed by Chapter 9 of the Louisiana Commercial Laws ("Chapter 9"), Louisiana's version of U.C.C. Article 9,⁶  and were superior to any rights and remedies that Sugarland may have had under the Louisiana Civil Code as a result of Argo's nonpayment of the purchase prices.

This matter went to trial in the bankruptcy court on the stipulated facts appearing in the parties' pretrial order.⁷  In its "Proposed Findings of Fact and Conclusions of Law in a Non-Core Proceeding," the bankruptcy court recommended that the district court enter judgment in favor of Advanta. The bankruptcy court rejected Sugarland's argument that it was entitled to regard the sales of the RICs to Argo as dissolved, reasoning that "Advanta, as the holder of a security interest governed by [Chapter 9], has an interest in the RICs that is superior to any right Sugarland may have under the Civil Code." Despite this rejection of Sugarland's defense to Advanta's conversion claim, the bankruptcy court did not consider the merits of that claim. The court based its recommendation instead on a breach of warranty theory that it raised sua sponte. In the "Assignment by Seller" section of the RICs, Sugarland warranted that it would "perfect a security interest in the Property in favor of [Argo]." The court found that Sugarland breached this warranty by not submitting to the Louisiana OMV copies of the original RICs along with title applications requesting that Argo's security interests in the Fox and Kennard vehicles be noted on the respective title certificates. Further finding that Argo's rights vested in Advanta by subrogation, the court concluded that Sugarland was liable to Advanta for breach of warranty.

Sugarland filed objections to the bankruptcy court's proposed conclusions of law. The district court maintained those objections, reasoning that although Sugarland warranted that it would perfect security interests in the Fox and Kennard vehicles in favor of Argo, " [i]t did not ... warrant that it would do so prior to being paid." Contrary to the bankruptcy court's proposed conclusion, the district court determined that " [n]othing in Chapter 9 displaces the general principle of Louisiana law ... that a seller may deem a contract dissolved if the buyer fails to pay the agreed-upon purchase price." The court then found that Argo's nonpayment of the purchase prices entitled Sugarland to regard the sales of the RICs to Argo as dissolved and concluded that, as a consequence of dissolution, "any purported assignment of Argo's rights to Advanta was ineffectual." In accordance with this conclusion, the district court entered a final judgment dismissing Advanta's claim against Sugarland. This appeal followed.

Because the facts of this case are undisputed and the district court's decision rests solely on a conclusion of law, our review is de novo.⁸ 

In Louisiana, an unpaid vendor has the right to demand dissolution of a sale made on credit.⁹  Louisiana Civil Code article 2561 provides, in part, that " [i]f the buyer fails to pay the price, the seller may sue for dissolution of the sale."¹⁰  This substantive right of dissolution is clearly distinguishable from the privilege that the vendor has on the thing sold for the payment of the purchase price: "Exercise of the vendor's privilege involves an assertion of the sale; in contrast, exercise of the vendor's right of dissolution involves a repudiation of the sale and its consequences."¹¹ 

Although Article 2561 speaks only of judicial dissolution, the Civil Code specifies other means of dissolution that may be available to an unpaid vendor.¹²  In certain cases in which an obligor has failed to perform, Article 2013 of the Civil Code permits the obligee to regard the contract as dissolved instead of filing suit.¹³  Article 2016 describes the general circumstances under which the obligee can take such unilateral action without first serving the obligor with a notice to perform: "When a delayed performance would no longer be of value to the obligee or when it is evident that the obligor will not perform, the obligee may regard the contract as dissolved without any notice to the obligor."¹⁴  Applying these principles to the contract of sale, it becomes clear that extrajudicial dissolution is available in cases in which the buyer has advised the seller that he cannot or will not perform his obligation to pay the purchase price.

Because Argo had advised Sugarland that it was in bankruptcy and was therefore unable to pay the purchase prices for the Fox and Kennard RICs, the district court found that Sugarland was entitled to regard the sales of the RICs to Argo as dissolved. Although Advanta disputes this finding, its principal argument is that Chapter 9 of the Louisiana Commercial Laws, and not the Civil Code articles on dissolution, controls the outcome of this case.¹⁵  The ultimate merit of this argument hinges on whether Sugarland's right of dissolution conflicts with Advanta's rights under Chapter 9.¹⁶  Fortunately, we need not decide today whether such a conflict exists, for we agree with Advanta's alternative argument — grounded in the Louisiana Civil Code — that even if Sugarland was entitled to regard the sales of the RICs to Argo as dissolved, dissolution could not impair the rights that Advanta acquired from Argo in good faith.¹⁷ 

Because dissolution restores the parties to the situation that existed before they entered the contract of sale,¹⁸  problems arise when the property sold is no longer in the hands of the original purchaser. In such cases, the availability of dissolution and its effect on the rights that a third party has acquired has long depended on whether the sale involves movable or immovable property.¹⁹  In Robertson v. Buoni, the Louisiana Supreme Court reviewed over a century of jurisprudence and observed that the "right to dissolution of a sale of an immovable for nonpayment is not contingent on the absence of a third party purchaser. A vendor seeking dissolution of the sale may do so even after the property has left the hands of the original purchaser."²⁰  On the other hand, courts have held that the unpaid vendor of a movable can exercise the right of dissolution "only so long as the movable remains in the possession of the original vendee."²¹ 

According to Professor Yiannopoulos, the application of different rules to movables and immovables reflects that transactions involving the former are generally not protected by a system of public records:²²  "Immovable property has been protected by the law much more effectively than movable property; and, whereas security of acquisition of immovables is achieved by the system of public records, security of transaction and acquisition of movables is enhanced by the bona fide purchaser doctrine."²³  Thus, it is in the interest of security of transactions that the vendor's right of dissolution "becomes inoperative against third possessors of movables."²⁴ 

The Louisiana Legislature had this interest in mind when it enacted Civil Code article 2021 as part of the 1984 revision of the law of obligations. That article provides: "Dissolution of a contract does not impair the rights acquired through an onerous contract by a third party in good faith. If the contract involves immovable property, the principles of recordation apply."²⁵  Where credit sales of movables are concerned, Article 2021 is consistent with the earlier jurisprudential rule that the unpaid vendor cannot exercise his right of dissolution if the movables sold are no longer in the possession of the original purchaser.²⁶  Although the courts' focus was on whether the vendor could "exercise" his right of dissolution, and Article 2021 assumes the dissolution and addresses its consequences, the end result is the same: the third party retains the rights he has acquired. We therefore find it clearly established under Louisiana law that the exercise of the vendor's right of dissolution does not impair the rights in movable property that a third party has acquired through an onerous contract in good faith.

In this case, Advanta undoubtedly acquired its rights in the RICs through an onerous contract with Argo.²⁷  Furthermore, Sugarland does not dispute that Advanta acquired those rights in good faith. Because the record indicates that Advanta paid reasonable prices for the RICs and was not aware of Argo's nonpayment, we find that Advanta stands in the position of a good faith purchaser.²⁸  We therefore conclude that even if Sugarland was entitled to regard the sales of the RICs to Argo as dissolved, dissolution of the sales could not impair the rights that Advanta acquired from Argo, which include the right to receive payments under the terms of the RICs.

Accordingly, we hold that the district court's dismissal of Advanta's conversion claim on the basis of the vendor's right of dissolution was erroneous. Because the district court did not consider the merits of that claim, we find it appropriate to remand this case so that it may do so in the first instance.²⁹ 

For the foregoing reasons, we reverse the district court's judgment and remand this case for further proceedings consistent with this opinion.

REVERSED AND REMANDED.

EMILIO M. GARZA, Circuit Judge, specially concurring:

I agree with the majority opinion that the district court's dismissal of Advanta's conversion claim on the basis of the vendor's right of dissolution was erroneous. However, I cannot agree with the majority opinion that, to resolve this matter, we need only look to the Louisiana Civil Code (the "Civil Code"). On the contrary, Chapter 9 of the Louisiana Commercial Laws ("Chapter 9"), Louisiana's version of UCC Article 9, controls the outcome of this case. Accordingly, I concur in the judgment only.

The majority opinion attempts to avoid the question at hand — whether Sugarland's rights under Articles 2013, 2016, and 2549 of the Civil Code, providing that a seller may, on its own initiative and without judicial authorization, deem a contract dissolved if the buyer fails to pay the agreed-upon purchase price,¹  conflict with Advanta's rights as a good faith purchaser of chattel paper under the particular provisions of Chapter 9 dealing with sales of chattel paper and the priority of a chattel paper purchaser. To avoid answering this question, the majority opinion reasons that, under Article 2021 of the Civil Code, Advanta retains the rights in the RICs it acquired from Argo even if Sugarland was entitled to regard the assignment agreement between Sugarland and Argo as dissolved. The problem with this reasoning is that Article 2021 simply cannot apply where, as here, the contract at issue was never dissolved. Article 2021 provides that " [d]issolution of a contract does not impair the rights acquired through an onerous contract by a third party in good faith." La. Civ.Code Art.2021 (emphasis added). From its plain text it is clear that, for Article 2021 to apply, there must first be a dissolved contract.²  However, contrary to Sugarland's contention, the assignment agreement at issue in this case — a credit sale between Sugarland and Argo — was never dissolved. Even though Articles 2013, 2016, and 2549 of the Civil Code generally permit a seller (such as Sugarland), on its own initiative and without judicial authorization, to deem a contract dissolved if a buyer (such as Argo) fails to pay the agreed-upon purchase price, the specific provisions of Chapter 9 dealing with sales of chattel paper and the priority of a chattel paper purchaser (discussed below) precluded Sugarland from unilaterally and extrajudicially dissolving the assignment agreement between it and Argo once Advanta had already purchased the RICs from Argo in good faith.

In the context of this case, the specific provisions of Chapter 9 not only protect Advanta's ownership interest in the RICs against the competing claims of Argo's creditors, including Sugarland, but also displace the more general Civil Code provisions, found at Articles 2013, 2016, and 2549, addressing a seller's ability to unilaterally and extrajudicially deem a contract dissolved if the buyer fails to pay the agreed-upon purchase price. Under Chapter 9, the assignment agreement between Sugarland and Argo was a "true sale" of chattel paper, passing title in the RICs to Argo. See La. R.S. 10:9-109(e) (providing that the parties' characterization of a transaction as a sale of chattel paper is conclusive that the transaction is a "true sale" and that title has passed to the party characterized as the purchaser, regardless of any other term of the parties' agreement); La. R.S. 10:9-318(a) (providing that a seller of chattel paper retains no legal or equitable interest in the chattel paper sold).³  And, by paying for and taking possession of the RICs from Argo, Advanta perfected a Chapter 9 security interest in the RICs, thereby protecting its rights in the chattel paper from the competing rights of Argo's creditors, including Sugarland.⁴  Even assuming, arguendo, that Sugarland acquired a security interest in the RICs,⁵  Sugarland failed to perfect its security interest by retaining possession of the RICs pending Argo's payment or by filing a UCC-1 financing statement. See La. R.S. 10:9-313(a) ("possession" perfection of a security interest in chattel paper); La. R.S. 10:9-312(a) ("filing" perfection of a security interest in chattel paper). Thus, Advanta's perfected security interest in the RICs trumps any unperfected security interest Sugarland might have acquired. See La. R.S. 10:9-322(a) (2) (perfected security interest has priority over an unperfected security interest of a competing creditor).⁶  Because these particular provisions of Chapter 9 specifically address the sale of chattel paper and the priority of a good faith purchaser's rights in the purchased chattel paper over the competing claims of the seller's creditors, they displace — in this context — the more general provisions of the Civil Code, found at Articles 2013, 2016, and 2549, providing that a seller may, on its own initiative and without judicial authorization, deem a contract dissolved if the buyer fails to pay the agreed-upon purchase price. See La. R.S. 10:1-103 ("Unless displaced by the particular provisions of this Title, the other laws of Louisiana shall apply."); La. R.S. 9:3192 (providing that, " [i]n the case of conflict between the provisions of Title VII of Book III of the Civil Code, governing sales and any provisions of any special legislation, such as those contained in Titles 9 and 10 [the Louisiana UCC] of the Louisiana Revised Statutes of 1950 ... the latter shall prevail with regard to transactions subject thereto.").⁷  Thus, Sugarland can not now claim that, even though Advanta purchased the RICs from Argo in good faith, Sugarland was entitled to unilaterally and extrajudicially deem the assignment agreement between it and Argo to be dissolved simply because Argo failed to pay it the agreed-upon purchase price.⁸ 

For the foregoing reasons, I cannot agree with the majority opinion that, under Article 2021 of the Civil Code, Advanta retains the rights in the RICs that it acquired from Argo even if Sugarland was entitled to regard the assignment agreement between it and Argo as dissolved. Chapter 9 governs whether the assignment of RICs between Sugarland and Argo was effectual, and its specific provisions dealing with sales of chattel paper and the priority of a chattel paper purchaser precluded Sugarland from extrajudicially and unilaterally dissolving the assignment agreement between it and Argo once Advanta had already purchased the RICs from Argo in good faith.