Glenshaw v. Ontario Grape

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
9-29-1995
Glenshaw v Ontario Grape
Precedential or Non-Precedential:
Docket 94-3722
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Recommended Citation
"Glenshaw v Ontario Grape" (1995). 1995 Decisions. Paper 260.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/260
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-3722
GLENSHAW GLASS COMPANY, a Pennsylvania Corporation
V.
ONTARIO GRAPE GROWERS' MARKETING BOARD;
AGRICULTURAL PRODUCTS BOARD OF AGRICULTURE CANADA,
Appellants
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 91-00941)
Argued July 28, 1995
Before: NYGAARD and McKEE, Circuit Judges and
FULLAM, District Judge*
(Opinion Filed September 29, 1995)
GEFF BLAKE, ESQUIRE (Argued)
HENRY F. SIEDZIKOWSKI, ESQUIRE
Elliott, Reihner, Siedzikowski, North & Egan
400 Spruce Street
300 Mellon Bank Building
Scranton, PA 18503
Attorney for Appellants
RICHARD F. RINALDO, ESQUIRE (Argued)
Meyer, Unkovic & Scott
1300 Oliver Building
Pittsburgh, PA 15222
Attorney for Appellee
AMY J. GREER, ESQUIRE
Eckert Seamans Cherin & Mellott
42nd Floor, 600 Grant Street
Pittsburgh, PA 15219
Attorney for Appellee
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* Honorable John P. Fullam, Senior United States District Judge
for the Eastern District of Pennsylvania, sitting by designation.
OPINION OF THE COURT
NYGAARD, Circuit Judge.
This case arises from the Chapter 11 bankruptcy of
Keystone Foods, Inc. of North East, Pennsylvania. The Ontario
Grape Growers' Marketing Board and the Agricultural Products
Board of Agriculture Canada appeal from the district court's
order awarding Glenshaw Glass Corporation the sale proceeds of
certain grape products processed and stored by Keystone on behalf
of appellants. We will reverse.
I.
A. The Parties
Keystone was a farm cooperative that processed and sold
food products, including grapes, for its member farmers. Keystone
had three main divisions: 1) an industrial sales division, which
processed and sold bulk fruit juice; 2) a retail sales division,
which bottled and packaged fruit juice, provided either by its
members or purchased on the open market; and, 3) a division that
processed, such as pressing grapes and concentrating the juice,
and packed them for third parties. Pursuant to packing and
processing agreements, food products on Keystone's premises were
not included in Keystone's inventory unless and until Keystone
actually purchased them.
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For several years, Keystone had borrowed money from the
Baltimore Bank for Cooperatives, now called the National Bank of
Cooperatives. The Bank held a perfected first priority security
interest in Keystone's present and future accounts, inventory,
equipment, contract rights, goods, general intangibles and other
property, and a first mortgage on Keystone's real property. It
is undisputed that the Bank had first priority with respect to
these items.
Glenshaw, the plaintiff below, sold glass containers to
Keystone for use in bottling juice. After the Bank perfected its
security interest, Glenshaw obtained and perfected a similar all-
encompassing security interest in Keystone's present and future
assets, including its inventory.
The defendant/appellants, whom we shall collectively
call the Grape Growers, are Ontario Grape Growers' Marketing
Board, which acts as an agent for co-appellant/co-defendant
Agricultural Products Board of Agriculture Canada, which
purchases, processes, stores, ships and sells surplus Canadian
agricultural products, including surplus Canadian-grown grapes.
Each annual grape harvest represents an individual "Surplus Grape
Program."
B. The Contracts Between Keystone and the Grape Growers
On September 15, 1988, the Grape Growers and Keystone
entered into two agreements important to this litigation. At the
time, Keystone owed the Grape Growers more than $450,000 for
Keystone's purchases pursuant to the 1987 Canadian Surplus Grape
Program. When the Grape Growers needed processing and storage
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services for the 1988 Surplus Grape Program, it allowed Keystone
to work off its debt by processing 1988 surplus grapes and
storing the juice and concentrate.
The primary contract was the "Processing and Storage
Agreement," under which the Grape Growers shipped grapes to
Keystone for custom processing, juice concentrating and storage.
Keystone agreed ultimately "to return to the Board juice or
concentrate" resulting from the processing. As for grapes in
processing or storage at Keystone's facilities, the agreement
clearly stated:
Title to all grapes processed by Keystone
under this Agreement, and to all juice or
concentrate resulting from such processing,
shall be in the Board [i.e. the Grape
Growers], and nothing contained herein, and
no act of Keystone or the Board, shall cause
Board title to vest in Keystone, except by a
bill of sale or other title of transfer
instrument being executed by the Board.
Nothing in the Agreement gave Keystone authority to use or sell
the appellants' grapes or grape product.
The second agreement, executed on the same day, was the
"Purchase Agreement." This contract gave Keystone an option,
until October 1989, to purchase certain amounts of the grapes
delivered to it for processing and storage by the Grape Growers.
Keystone agreed "[n]ot to use or sell any of the grapes, juice or
concentrate without receiving the prior written consent of the
Board in the form of a stock release issued by the Board."
C. Course of Dealing Under the Contracts
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Pursuant to the Processing and Storage Agreement, the
Grape Growers shipped 1988 surplus Canadian-grown grapes to
Keystone. When the grapes were delivered, Keystone did not pay
for the grapes, nor were they included in Keystone's inventory.
Rather, Keystone regularly sent invoices to the Grape Growers
reflecting Keystone's charges for processing, concentrating,
storing and loading the grapes. Those charges were deducted from
Keystone's debt to the Grape Growers from the 1987 Surplus Grape
Program. In total, the Grape Growers delivered nearly 7,000 tons
of grapes to Keystone pursuant to the Processing and Storage
Agreement.
In November 1988, without prejudice to the Grape
Growers' ownership rights in the grapes delivered under the
Processing and Storage Agreement, the parties amended the
agreement to give the Grape Growers a security interest in the
grapes in the event the Grape Growers were deemed not to own
them. In December 1988, the Grape Growers perfected this
security interest by filing the proper financing statement, which
indicated that it was being filed without prejudice to the Grape
Growers' claim to ownership of the grape product.
The Grape Growers assert that the decision to obtain a
security interest in the grapes was made in October 1988 after
they discovered that Keystone had converted some of the Grape
Growers' grapes, contravening the parties' agreement that the
grapes only be processed and stored for the Grape Growers. The
district court, however, found that the Grape Growers discovered
this violation in May 1989 rather than in October 1988. Because
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it does not affect our decision, we will accept the district
court's finding. Upon discovering the unauthorized use of its
grape product, the Grape Growers, after the fact, formally
released the product to Keystone, which paid the Grape Growers
the sales price and a sales commission.
In a separate transaction in February 1989, Keystone
made one purchase pursuant to the Purchase Agreement, in the
amount of $93,325.00. The Grape Growers issued a formal, written
release of the product to Keystone in accordance with the
Purchase Agreement. The Grape Growers also received a commission
on the sale.
D. The Keystone Bankruptcy and the Grape Growers'
Removal of the Grape Product from the Bankruptcy
Estate
On June 9, 1989, Keystone filed a voluntary Chapter 11
petition in Bankruptcy. Keystone's largest creditors were the
Bank, to which it owed approximately $1.8 million, and Glenshaw,
to which it owed approximately $1.6 million.
On June 28, 1989, the bankruptcy court held a hearing
to discuss preliminary matters. In re Keystone Foods, Inc., No.
89-00318E (Bankr. W.D. Pa. June 28, 1989). Counsel for the
Grape Growers attended the hearing, at which the parties
discussed the Grape Growers' claim to the grapes delivered to
Keystone under the Processing and Storage Agreement and the
resulting grape product. The bankruptcy court noted that the
Grape Growers' contingent security interest created an ambiguity
as to which party had priority in the grape product. Although
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sale of the grape product at issue was discussed, the court did
not authorize the Grape Growers or any other party to make a
sale.
Despite the bankruptcy, and without informing the
bankruptcy court or Keystone's creditors, the Grape Growers sold
the grape product to third parties and removed it from Keystone's
premises. The Grape Growers made a series of sales beginning
immediately after the June 28, 1989 bankruptcy hearing and
continuing at least until November 1989. Neither the Bank nor
Glenshaw became aware of the sales or removal of product from
Keystone's premises until after November 1989. Keystone itself
remained in business after its bankruptcy filing until May or
June 1990, following a liquidation of its assets in February
1990.
E. Assignment of Claims to Glenshaw
The Bank, Glenshaw and Keystone entered into a
settlement agreement, which was approved by order of the
bankruptcy court. In Re Keystone Foods, Inc., No. 89-00318E
(Bankr. W.D. Pa. 1991) (unpublished order). The settlement
authorized Glenshaw to pursue any claims of the Bank, Keystone
and Glenshaw, against the Grape Growers, which arose out of the
Processing and Storage Agreement, the Purchase Agreement, and the
Grape Growers' post-petition removal of the grape product from
the Keystone bankruptcy estate.
F. Proceedings in the District Court
On June 7, 1991, two days after the bankruptcy court
approved the settlement agreement, Glenshaw sued the Grape
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Growers, seeking damages for breach of contract, conversion and
willful violation of the automatic stay. The district court
found in Glenshaw's favor on its claims for conversion and
willful violation of the automatic stay. It held that, in
addition to processing and storage, the grapes were also
delivered to Keystone for sale, and thus should be treated as
consigned goods under 13 Pa. Cons. Stat. § 2326, (c) which
states:
Consignment sales -- Where goods are
delivered to a person for sale and such
person maintains a place of business at which
he deals in goods of the kind involved, under
a name other than the name of the person
making delivery, then with respect to claims
of creditors of the person conducting the
business the goods are deemed to be on sale
or return. The provisions of this subsection
are applicable even though an agreement
purports to reserve title to the person
making delivery until payment or resale or
uses such words as "on consignment" or "on
memorandum." However, this subsection is not
applicable if the person making delivery:
(1) complies with an applicable law providing
for the interest of a consignor or the like
to be evidenced by a sign;
(2) establishes that the person conducting
the business is generally known by his
creditors to be substantially engaged in
selling the goods of others; or
(3) complies with the filing provisions of
Division 9 (relating to secured
transactions).
In addition, subsection (b) provides that goods held on
sale or return are subject to claims of creditors of the buyer
while it holds them. Thus, the district court held that, even
though the Grape Growers purported to reserve title to the
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grapes, section 2326 required that the grape deliveries be deemed
consignments, making them part of the bankruptcy estate pursuant
to subsection (b). The court then found that the Bank and
Keystone each had priority to the grape product over the Grape
Growers because the Grape Growers had failed to establish that
any of the exceptions in subsections (c)(1)-(3) applied. The
district court held that, because the Grape Growers failed to
give notice to Keystone's creditors or file its financing
statement covering the grapes and grape product before delivering
the grapes to Keystone, as required by 13 Pa. Cons. Stat.
§9114(a)(1), the Grape Growers failed to satisfy the
notice/filing exception set forth in section 2326(c)(3).
Therefore, the Bank's security interest in Keystone's property
gave it priority over the Grape Growers as to the grapes and
grape product at issue. In turn, Glenshaw, by virtue of its
assignment of claims from the Bank, also had priority over the
Grape Growers. In addition, the district court held that the
Grape Growers' removal of the grape product from Keystone's
premises constituted a violation of the automatic stay provision
of the Bankruptcy Code, 11 U.S.C. §362.
The district court awarded damages to Glenshaw, as
assignee of the claims of the Bank and Keystone, in the amount of
the total sale proceeds the Grape Growers realized in post-
petition sales of the grape product -- $1,365,452 plus interest
from the date of the conversion.
On appeal, the Grape Growers argue that the district
court erred in five respects: (1) by treating the grapes the
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Grape Growers delivered to Keystone merely for processing and
storage as goods on consignment under section 2326, thus
subjecting the resulting grape product to the claims of
Keystone's creditors; (2) by holding that Glenshaw took priority
over the Grape Growers as to the grape product even if it was
properly deemed to be on consignment; (3) by holding that the
Grape Growers violated the automatic stay; (4) by admitting into
evidence a handwritten memorandum by an attorney for the Grape
Growers that suggested that the Grape Growers intentionally
failed to notify Keystone's creditors of the Grape Growers'
interest in the grape product; and (5) in calculating damages.
II.
The central issue is whether section 2326 subjects the
grapes delivered by the Grape Growers to Keystone for processing
and storage to the claims of Keystone's creditors. Two sub-
issues emerge: (1) was this a consignment transaction? and (2)
if not, does section 2326 apply to bailment transactions not
involving a consignment?
A. Was this a Consignment?
Generally, there are two types of consignments -- true
consignments and security consignments. Armor All Products v.
Amoco Oil Co., 533 N.W.2d 720, 725 (Wis. 1995). A true
consignment creates an agency pursuant to which goods are
delivered to a dealer for the purpose of resale; the consignor
usually requires the consignee to charge a certain price for the
goods. Id. A security consignment, on the other hand, occurs
10
when the delivering party agrees to take the goods back in lieu
of payment by the receiving party if the latter fails to sell
them; to provide security to the consignor, title to the goods
remains in the consignor's name. Id. In both situations, goods
are delivered for sale -- that is, for sale by the receiving
party.
In contrast, a bailment occurs when property is
entrusted to a party temporarily for some purpose; upon the
fulfillment of that purpose the property is "redelivered to the
person who delivered it, otherwise dealt with according to his
directions or kept until he reclaims it." Smalich v. Westfall,
269 A.2d 476, 480 (Pa. 1970). Although every consignment
involves a bailment of sorts because the goods are entrusted for
the purpose of sale, not every bailment is a consignment. Armor
All Products, 533 N.W.2d at 727 (a bailment without more does not
create a consignment).
We conclude that the transaction was a bailment, but
not a consignment. Neither the Processing and Storage Agreement
nor the Purchase Agreement, whether read individually or
collectively, gives Keystone the right to sell the Grape Growers'
product. The grapes were delivered to Keystone only for
processing and storage. Afterwards, the grapes were to be
redelivered to the Grape Growers or otherwise dealt with
according to the Grape Growers' directions.
Furthermore, the fact that the grape product would
ultimately be sold to other parties by the Grape Growers does not
alter the foregoing analysis because the Grape Growers, the
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bailor, would both conduct and control the eventual sale. In re
Zwagerman, 125 B.R. 486, 491 (W.D. Mich. 1991) (no consignment
when holder of the goods would process them and return them for
later sale by the owner). The fact that Keystone held an option
to purchase some of the grapes pursuant to the Purchase Agreement
does not make the transaction a consignment; indeed, that fact
militates against such a result. E.g., In re Sitkin, 639 F.2d
1213, 1217 (1st Cir. 1981) (citations omitted), ("A bailment may
still exist where the bailee has a continuing option to purchase
or to sell."). As to those grapes that Keystone did opt to
purchase, the Grape Growers made the sale, received a sales
commission, and exercised no control over the grapes or their
resale pricing thereafter.
Therefore, to the extent that the district court found
that the Grape Growers delivered the grapes to Keystone for sale,
this finding was clearly erroneous. The record demonstrates
that, consistent with the contracts and the parties' course of
dealing, the grapes were delivered to Keystone merely for
processing and storage.
B. Does Section 2326 Apply?
Having determined that the Grape Growers' delivery of
grapes to Keystone for processing and storage constituted a
bailment, but not a consignment or bailment for sale, the
question is whether section 2326 applies to bailments in which
the bailee has no authority to sell the bailor's goods.
Emphasizing that, by its plain language, section 2326
applies when goods are "delivered for sale," the majority of
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courts have held that goods not delivered to a party for sale do
not come within the scope of section 2326. See, e.g., Evergreen
Marine Corp. v. Six Consignments of Frozen Scallops, 4 F.3d 90
(1st Cir. 1993) (following In re Sitkin) ("[T]emporary
entrustments of possession by a bailee, without more, are not
'sales on consignment,' within the meaning of UCC § 2-326.");
Walter F. Heller & Co. v. Riviana Foods, Inc., 648 F.2d 1059 (5th
Cir. 1981) (By its terms, section 2326 applies only when goods
are delivered "for sale."); In re Key Book Service, Inc., 103
B.R. 39 (Bankr. D. Conn. 1989) (delivery of books, merely for
shipping, billing and warehousing, is not a "delivery for sale"
under section 2326).
We too conclude that section 2326 does not apply to
bailments under which, as here, the bailee is merely entrusted
with temporary possession of the bailor's goods and has no
authority to sell them. First, and most importantly, the plain
language of the statute requires that the goods have been
"delivered for sale." It is a mistake to require the bailee to
invoke one of the exceptions set forth in subsections (c)(1)-(3)
when the bailor's creditors have failed, as here, to demonstrate
that the language in the main body of the statute is applicable.
Second, even the language in the statute regarding
reservation of title indicates that the statute was intended to
apply to consignments: "[Section 2326(c) is] applicable even
though an agreement purports to reserve title to the person
making delivery until payment or resale or uses such words as 'on
consignment' or 'on memorandum.'" 13 Pa. Con. Stat. §2326(c).
13
Thus, the section clearly contemplates sales to ("payment") or by
("resale") the receiver of the goods.
Third, the official comment to section 2326 reveals
that the section was intended to apply to consignments:
The type of "sale on approval," "on trial" or
"on satisfaction" dealt with involves a
contract under which the seller undertakes a
particular business risk to satisfy his
prospective buyer with the appearance or
performance of the goods in question. The
goods are delivered to the proposed purchaser
but they remain the property of the seller
until the buyer accepts them....The type of
"sale or return" involved herein is a sale to
a merchant whose unwillingness to buy is
overcome only by the seller's engagement to
take back the goods...in lieu of payment if
they fail to be resold.
Official UCC Comment 1, section 2326. Thus, section 2326 is
concerned with eliminating, as to the rights of a consignee's
creditors, the difference between true consignments and security
consignments. Armor All Products, 533 N.W.2d at 726; see also
Official Comment 2, section 2326 (As against creditors of the
"buyer..., words such as 'on consignment' or 'on memorandum,'
with or without words of reservation of title in the seller, are
disregarded when a buyer has a place of business at which he
deals in goods of the kind involved....") (emphasis added).
There is no indication that the section was intended to eliminate
the distinction between consignments and situations where a party
is merely entrusted with temporary possession of goods and has no
authority to sell them. Armor All Products, 533 N.W.2d at 726.
Finally, that the bailee's creditors think an
14
entrustment of goods looks like a consignment does not persuade
us that section 2326 should encompass both situations. As the In
re Zwagerman Court opined, there are a number of circumstances in
which goods may be on the premises of the bankrupt party and not
be subject to the interests of creditors. 125 B.R. at 491
(citing In re Groff, 898 F.2d 1475 (10th Cir. 1990) (cattle owned
as part of a joint venture between debtor and another were not
subject to claims of creditors of debtor in his individual
capacity)). Thus, we agree that section 2326 "is not a cure-all
for all hidden ownership interests." Id. Moreover, modern
commercial lenders do not extend credit based on a debtor's
"ostensible ownership of merchandise. Today creditors either
investigate that appearance or do not rely on it at all." Armor
All Products, 533 N.W.2d at 729 (quoting John Dolan, The UCC's
Consignment Rule Needs an Exception for Consumers, 44 Ohio St.
L.J. 21, 29 (1983)).
We conclude that the court erred by applying section
2326 to this transaction, and the grape product in question
neither became part of the Keystone bankruptcy estate, nor
subject to the claims of Keystone's creditors.
III.
Finally, Glenshaw argues that, even if the grapes were
not delivered to Keystone for sale pursuant to a consignment
transaction, it is nonetheless entitled to recover damages
because the Grape Growers violated the automatic stay provision
of the Bankruptcy Code, 11 U.S.C. § 362.
15
Under § 362(a), a voluntary Chapter 11 bankruptcy
filing operates as a stay of "any act to obtain possession of
property of the estate or of property from the estate or to
exercise control over property of the estate...[and] any act to
collect, assess, or recover a claim against the debtor that arose
before the commencement of [the case]...." Parties injured by a
willful violation of the automatic stay are entitled to seek
actual damages, costs and attorneys' fees, and punitive damages.
11 U.S.C. § 362(h).
The district court determined that the Grape Growers
violated the stay by selling and then removing the grape product
from Keystone's premises. We need not decide whether that
determination was proper. Although Glenshaw's complaint
requested both actual and punitive damages, the district court
awarded only actual damages -- the $1,365,452 in sale proceeds
realized by the Grape Growers from the post-petition sale of the
product -- for both conversion of estate property and violation
of the automatic stay. We have already determined that Glenshaw
is not entitled to recover the sale proceeds because the grape
product never became part of the bankruptcy estate. Inasmuch as
Glenshaw is unable to support a basis for recovering actual
damages, we need go no further.
IV.
We conclude that the district court erred by
determining that section 2326 applied to the grape product in
question. The grapes were delivered under bailment to Keystone
and thus never became part of the bankruptcy estate under section
16
2326. Accordingly, we will vacate the award of damages to
Glenshaw.
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