DocketNumber： 73--1185
Judges： Ainsworth, Godbold, Ingraham, Brown, Wisdom, Gewin, Bell, Thornberry, Coleman, Goldberg, Dyer, Simpson, Morgan, Clark, Roney, Gee
Filed Date： 5/19/1975
Status： Precedential
Modified Date： 11/4/2024
On April 15, 1974, the Supreme Court in Mahon v. Stowers, 416 U.S. 100, 94 S.Ct. 1626, 40 L.Ed.2d 79 (1974), reversed the decision of this court,
To briefly reiterate, the relevant facts are as follows. Samuels & Co., Inc., is a Texas meatpacking firm that purchases,
From May 12 through May 23, 1969, the appellants, fifteen cattle farmers, delivered their cattle to Samuels. Although the sellers did not receive payment for the sale simultaneously with delivery of the cattle, checks were subsequently issued to the sellers. On May 23, 1969, before these checks had been paid, C.I.T., believing itself to be insecure, refused to advance any more funds to Samuels for the operation of the packing plant. On that same day Samuels filed a petition in bankruptcy. Since C.I.T. refused to advance more funds, although apparently aware that there were unpaid checks outstanding, the appellants’ checks issued in payment for cattle were dishonored by the drawee bank.
Because of the fungible nature of the cattle, the beef has long since been butchered and processed and sold through the normal course of business. The proceeds from the cattle sales have been deposited with the trustee in bankruptcy pending the outcome of this litigation. The issues in this case concern the priority of interest in these proceeds between a creditor of the debtor, which holds a perfected security interest in the debtor’s after-acquired property, and a seller of goods to the debtor. Since the sellers have not been paid, they claim a superior right to the deposited proceeds and argue that they are now entitled to payment out of these proceeds. The finance corporation, on the other hand, contends that the sellers are merely unsecured creditors of the bankrupt and are not entitled to a prior claim to the funds, and alternately that the finance corporation qualified as a good faith purchaser of the cattle and is therefore immune to the sellers’ claims of non-payment. For the reasons that follow, we conclude that the sellers should prevail.
I.
In order to determine which provisions of the Texas Business & Commerce Code govern the relationships among the parties, the first question that must be resolved is whether this commercial venture was a. cash or credit transaction. The significance of classifying a sale as a cash or credit transaction relates back to the common law and the historical passing of title concept. Under the common law, a sale for cash, as opposed to a sale on credit, meant that the seller of goods implicitly reserved the incidents of ownership or title to the goods until payment was made in full. If the buyer failed to make payment, the seller could regain possession of the goods by instituting an action in replevin. Additionally, since the buyer of goods for cash did not obtain title to the goods until the seller was paid, the defaulting buyer was incapable of passing title to a third party. Based on the cash sale doctrine, an unpaid seller could even reclaim goods sold by an intermediary to one who otherwise qualified as a bona fide purchaser.
When the owner of goods sold them on credit, however, all the incidents of ownership, including title, passed to the buyer. If the buyer subsequently failed to make payment, the seller’s rights were only those of a creditor for the purchase price, and he had no right against the merchandise. Since in a sale on credit the buyer obtained all the incidents of ownership in the goods, including title, he was able to convey his interest in the goods, absolute ownership, to a third party without recourse on behalf of the seller. Corman, Cash Sales, Worthless Checks and the Bona Fide Purchaser, 10 Vanderbilt Law Review 55 (1956); Gilmore, The Commercial Doctrine of Good Faith Purchaser, 63 Yale L.J. 1057, 1060 & n. 10 (1954).
Underlying the different characteristics and consequences of cash and credit sales are the expectations and intentions
The Uniform Commercial Code as adopted by the State of Texas has to some extent modified the common law doctrines of cash and credit sales. It is clear that the historical concept of passing title to goods is not emphasized in the Code, and the location of title generally is not regarded as being determinative of the rights of adverse parties. Helstad, Deemphasis of Title Under the Uniform Commercial Code, 1964, Wisconsin L.R. 362. Instead of implementing the fictional concept of title, the countervailing interests of the parties are sometimes defined in terms of various rights, privileges, powers and immunities.
But even though the title concept is so reduced in significance, the Code recognizes and adopts the fundamental distinctions of the common law between cash and credit sales, at least with respect to the rights of the unpaid seller against the defaulting buyer. The Code deals with a sale on credit in provisions separate from those dealing with cash sales. Section 2.702 specifically sets forth the credit seller’s remedy and provides that when “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 receipt . . ..” Texas Business and Commerce Code, § 2.702(b), V.T.C.A. (1968). This provision goes on to define the seller’s priority rights against other specific parties, providing that “[t]he seller’s right to reclaim under Subsection (b) is subject to the rights of a buyer in the ordinary course or other good faith purchaser or lien creditor under this chapter (Section 2.403).” Id. § 2.702(c). Although this section authorizes a limited right against the goods, it generally recognizes that when the sale is on a credit basis, all the incidents of ownership pass to the buyer who may then convey this interest to certain third parties. The seller stands merely as a general creditor for the purchase price.
With respect to cash sales, however, § 2.507 of the Code explicitly recognizes that “unless otherwise agreed,” “[w]here payment is due and demanded on the delivery to the buyer of goods ., [the buyer’s] right as against the seller to retain or dispose of them is conditional upon his making payment due.” Texas Business and Commerce Code, § 2.507(b) (1968). Like the cash sale doctrine at common law, § 2.507 provides that when the buyer is to pay cash for the goods, the validity of the transaction is dependent upon his making payment, and when the buyer fails to pay, he does not even have the right to possess the goods. Absolute ownership does not pass to the buyer until payment is complete.
The limited interest conveyed to the buyer prior to payment under § 2.507(b) is reemphasized in § 2.511(c), which deals specifically with the situation where payment for goods is made by check that is later dishonored. Section 2.511(c) provides that payment by
Even though the Code deemphasizes the title concept of the common law, these two provisions strongly suggest that the underlying philosophy of the common law cash sale doctrine has been embodied here. Like the traditional cash sale doctrine, the existence of a valid contractual relationship between the buyer and seller is dependent upon the buyer’s completing his part of the bargain and paying for the merchandise. When the buyer fails to pay,, he no longer has even the right to possess the goods.
Mindful of these principles we turn to the facts of the instant case to determine whether the sale of the cattle to the packing house was on a cash or credit basis. This sale of goods must be regarded as a cash transaction rather than a credit transaction because of the established course of dealing between the buyer and sellers. A course of dealing, as defined by the Texas Commercial Code, is a “sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.” Texas Business and Commercial Code, § 1.205(a) (1968). As suggested by the Supreme Court in Stowers, supra, the Packers and Stockyards Act and the regulations issued thereunder so outline the course of conduct to be followed as between the cattle seller and the purchasing meat packer.
According to the Act and regulations, when a cattle grower sells his livestock on what is termed a “grade and yield” basis, the contract price to be paid is left open because it has yet to be determined. Before the purchase price can be determined, the cattle must be slaughtered and the carcasses chilled for twenty-four hours. After the meat is chilled, the Department of Agriculture grades it and determines the yield, and at that time the contract price can be set. When the price is set, a point sometime after delivery, a check is issued to the seller. 9 CFR §§ 201.43(b), — .99.
While a lapse of time occurring between delivery of the cattle and payment, even if only a day, might be considered an extension of credit, the course of dealing between the parties establishes that this was a sale for cash. The delay between delivery and payment was not credit, but rather was the result of a procedure mandated by the Act and regulations that governed the relationship between the buyer and seller when cattle are sold on a grade and yield basis. This procedure apparently had been followed since the inception of the regulations requiring such conduct. Moreover, not only do the Act and regulations prescribe such a course of conduct, all the cattle sellers regarded this commercial venture as a cash transaction, and there is nothing in the record to suggest that the buyer regarded the delay in issuing the check as credit. The course of conduct prescribed by the Act and regulations, coupled with the undisputed. intent of the cattle sellers, compels the conclusion that this was a cash and not a credit affair. Engstrom v. Wiley, 191 F.2d 684 (9th Cir., 1951); In re Helms Veneer Corp., 287 F.Supp. 840 (W.D.Va., 1968).
Having so concluded, we turn to §§ 2.507 and 2.511 in order to define the cash seller’s rights and remedies. Although § 2.702, dealing solely with credit sales, specifically outlines the seller’s right to reclaim the property and sets forth priorities as to certain third parties, neither §§ 2.507 or 2.511 explicitly define the cash seller’s rights or priorities. The only indication of the seller’s rights is in the comment following § 2.507, which implicitly authorizes the
While armed with a right to reclaim the cattle, the sellers failed to comply with the ten day limitation on that right. The record shows that the sellers did not file a petition for reclamation for almost a year. The Code does not arbitrarily impose this limitation on the seller’s rights, but does so in order to conform with the fundamental policies of the Code and the Bankruptcy Act. By imposing this limitation, a creditor is required to promptly disclose and identify his claim to property in the bankrupt’s estate so that other creditors will not prejudice themselves. Otherwise, a creditor might extend credit to the bankrupt subsequent to its filing a petition on the basis of a misapprehension that the bankrupt possesses unencumbered assets. Additionally, when all the claims are promptly disclosed, the objective of the Bankruptcy Act, equitable distribution of the bankrupt’s assets among its creditors, is more fully assured. See J. White and R. Summers, The Uniform Commercial Code 872 (1972).
Although the sellers did not reclaim the property until sometime after the filing of Samuels’ petition for bankruptcy, the purposes for imposing the limitation had been fulfilled. C.I.T. in its own behalf filed a reclamation petition on or before July 23, 1969, only about two weeks after the petition in bankruptcy was filed. A hearing was held, and on August 13,' 1969, the referee in bankruptcy entered an order generally outlining C.I.T.’s claims to the assets and inventory of the bankrupt. In demonstrating its claim to Samuels’ assets, there apparently was extensive disclosure of Samuels’ financial affairs, all of which, as noted later, C.I.T. was intimately aware. At the end of the order, the referee noted that “the asserted lien rights other than the debtor, C.I.T. Corporation and the receiver, are in no way prejudiced hereby and the court reserves for further consideration any question pertaining to conflicting claims of liens or lien priorities.”
While all the claims were not particularized in the referee’s order, the hearing and order disclosed many claims against the estate and demonstrated to the parties involved the great likelihood of other claims being asserted against the assets. The record does not disclose that any creditors prejudiced themselves by extending credit on what they believed to be unencumbered assets. Indeed, because C.I.T. had such an in depth knowledge of Samuels’ financial affairs, it was well aware of the claims of the cattle sellers that were unpaid as a result of its refusal to advance more money. Recognizing the many conflicting claims against the estate, the referee wisely preserved the current state of affairs and specifically refrained from adjudicating any additional disputes until a later date.
Nor does the seller’s ultimate reclamation of the cattle, or rather proceeds from sale of the cattle, prejudice the rights of any creditors. When a sale is made on credit, the purchased merchandise belongs to the estate of the bankrupt and all the seller has is a security interest in the property. If the seller failed to perfect his interest, he stands as a general creditor with the rest of the unsecured creditors and is entitled only to his proportionate share of the bankrupt’s estate. To allow him to recover his loss in full from the estate would prejudice the rights of the other creditors. In re Colacci’s of America, Inc., Bar Control of Colorado v. Gifford, 13 U.C.C.Rep. 1023 (10th Cir., 1973); Engstrom v. Wiley, supra, 191 F.2d at 689; Engelkes v. Farmers Co-op Co., 194 F.Supp. 319 (N.D.Iowa, 1961).
Also, C.I.T.’s initiation of the reclamation proceeding assisted in identifying the various creditors and thereby insured a more equitable distribution of the bankrupt’s estate. When the various creditors and their claims are revealed at an early stage, all the parties involved are able to assess the current financial status of the bankrupt and the probability of obtaining some return on the credit extended to the bankrupt. Early identification of the claims, plus the referee’s preserving all creditors’ rights until a later time, insured an equitable distribution of the estate.
Besides the underlying purpose of the ten day rule being satisfied, the facts show that the sellers made a faithful attempt to comply with the provisions of the Code. As pointed out by appellees, due to the sellers’ misapprehension of the events culminating in Samuels’ bankruptcy, the sellers’ reclamation petition was not filed until almost a year after the filing of Samuels’ bankruptcy petition. The sellers apparently believed that after Samuels filed the petition in bankruptcy on May 23, 1969, the packing house conducted normal operations. Only shortly after Samuels was adjudicated bankrupt on May 6, 1970, did the sellers file their petition for reclamation. Apparently the sellers thought that there was no need for them to assert their rights under the Code until after the adjudication of straight bankruptcy.
To add to the confusion, it is not clear from the Code that the sellers had any remedy to seek at all. While the Code sets forth the sellers’ right to reclaim, under the peculiar facts of this case assertion of that right would seem futile. As pointed out earlier, the Packers and Stockyards Act and regulations issued thereunder require that when livestock is sold on a grade and yield basis, it must be slaughtered almost immediately and the carcasses chilled so that the purchase price can be determined. Through the normal processing thereafter the carcasses are butchered and packaged and the identity of the cattle is lost. Since each owner’s property could not be identified, it would seem to have been futile . to assert the right to reclaim. A conclusion requiring such an exercise in futility certainly would not conform with reason. Additionally, the sellers never even had the opportunity to protect their property by reclamation because the identity of most of the cattle was destroyed when the petition in bankruptcy was filed.
Under these circumstances, strict application of a ten day limitation on the right to reclaim is unwarranted. The fundamental purposes of imposing the ten day limitation on the sellers’ rights have been fulfilled and the sellers made an attempt to comply with the Code’s terms. Reason and logic mandate that we not require a futile gesture on behalf of the sellers to reclaim their cattle when it had already lost its identity. The right to reclaim under § 2.502, we think, has been properly preserved.
II.
Having concluded that as between the seller and buyer, the seller is entitled to prevail, we turn to the sellers’ rights as against the finance corporation. Relying basically on Article 9 provisions that outline priorities between perfected and unperfected security interests, C.I.T. first argues that any attempt by the sellers to retain title to the goods merely reserves an unperfected security interest and that
It is true that § 2.401(a) of the Code modifies an attempt to retain title to the retention of an unperfected security interest in the goods. And, indeed, if this interest was the only interest of the sellers, the application of Article 9 provisions would seem to cut off the sellers’ rights. But closer examination of the Code provisions and the Code’s underlying philosophy leads to the conclusion that these provisions do not contemplate a situation in which the sale is for cash and thus do not control the outcome of the litigation at hand.
Section 2.401(a) deals with the situation in which the seller of goods attempts to retain title to the goods, but the sale is nevertheless a credit transaction, not cash. A common example of this type of transaction is when goods are sold to a buyer, and the buyer is obligated to make periodic payments for the goods. Title to the goods, however, is not supposed to pass to the buyer until the last payment is made at the end of the term. See The Sherer-Gillett Co. v. Long, 318 Ill. 432, 149 N.E. 225 (1925).
But this simply is not the ease when a sale is made for cash. In a cash sale the seller believes, and not unreasonably, that he has his payment in hand. The only phase of the transaqtion left uncompleted is the seller’s cashing the check. All he has to do is put the check in the mail and wait for it to be cleared at the bank, or take the check directly to the bank and cash it. Because the limited time sequence, extending from the receipt of the check to its being cashed, is so short, it would be unreasonable to require the cash seller to follow the litany of the Code and take measures to perfect an alleged security interest. See Corman, Cash Sales, Worthless Checks and the Bona Fide Purchaser, 10 Vanderbilt L.R. 55, 65 (1956).
Presumably, any shifting of the loss from the purchaser to the seller that might be contemplated by the Code is based on the Code’s provisions that authorize the seller to follow the prescribed steps and protect himself against loss. But because of the limited time sequence involved, the seller does not have the opportunity to protect himself. It would take more time and effort to protect his interest under the Code than to simply collect on the check. The reasons for limiting a seller’s interest to an unperfected security interest simply do not exist in the cash sale transaction.
Supporting the conclusion that the seller’s rights are not cut off under Article 9 are the explicit provisions of
Even assuming the validity of C.I.T.’s argument that the sellers have only an unperfected security interest that is subordinate to their perfected interest, the finance corporation is still not entitled to prevail over the sellers. In order for C.I.T. to have a valid security interest in the cattle, three fundamental requirements must be met. First, the debtor and creditor must enter into an agreement and that agreement must be reduced to writing. The record is clear that C.I.T. had been financing Samuels’ operations at least since 1963 and had a security interest in Samuels’ assets and inventory. Second, the creditor must give value. The Code makes clear that an antecedent debt will constitute value. Third, the debtor must acquire rights in the collateral to which the lien can attach. It is with respect to the third element making up an enforceable security interest that gives rise to the difficulty in the case at hand.
Less than absolute ownership of goods has been deemed by the courts to be sufficient rights in property to which a lien on after-acquired property can attach. Although the location of title to the goods generally does not determine the rights of the parties, the Code provides that the title to goods follows their possession. Consequently if the presence of title made any difference, which it does not, title would seem to be in the debtor Samuels. In addition to possession of the cattle, Samuels had other rights incident to mere possession such as the right to begin slaughtering the cattle and processing and packaging the meat.
But even assuming that the debtor had sufficient rights in the collateral to which C.I.T.’s lien attached, C.I. T.’s rights in the collateral, like the rights of the debtor, were only conditional. Since the Code provides that the rights of the creditor stem from the debtor’s obtaining rights in the collateral, it seems that the creditor’s rights are derived from, and are no greater than, the rights of the debtor. J. White and R. Summers, The Uniform Commercial Code 795 (1968). When the debtor’s rights in the collateral are only conditional, the rights of the creditor are also so limited. The only source of rights upon which Samuels could rely to claim any rights in the goods, including mere possession, was the contract of purchase between itself and the sellers. When Samuels failed to fulfill its part of the bargain by not paying, this contractual relationship came to an end, and thus Samuels had absolutely no right to retain or dispose of the merchandise. Since under Texas law the debtor had only a defeasible interest in the property that was terminated when it failed to pay, the lienholder’s right, derived solely from the rights of the debtor, also terminated.
This general approach to the provisions of the Code was set forth in In re Mort, 208 F.Supp. 309 (E.D.Pa., 1962), and the reasoning of that case, although subject to some disagreement, has been reaffirmed by courts and commentators alike. In re Helms Veneer Corp., supra; In re Lindenbaum’s, Inc., 2 U.C.C.Rep. 495 (E.D.Pa., 1964); Greater Louisville Auto Auction v. Ogle Buick, Inc., supra; Countryman, Buyers and Sellers of Goods in Bankruptcy, 1 N.M.L.R. 435, 447, n. 63 (1971); see International Harvester Credit Corp. v. America Nat’l Bank, 296 So.2d 32 (Fla., 1974); Braucher, Reclamation of Goods from a Fraudulent Buyer, 65 Mich.L.R. 1281 (1967). But see, In re Hayward Woolen Co., 3 U.C.C.Rep. 1107 (Referee in Bankruptcy 1967); Guy Martin Buick v. Colorado Springs Nat’l Bank, 32 Colo.App. 235, 511 P.2d 912 (1973); Evans Products Co. v. Jorgensen, 245 Or. 362, 421 P.2d 978 (1966). In Mort the petitioner sought reclamation of goods that he delivered to the bankrupt two days before bankruptcy. The bankrupt had issued a check in payment for the goods, but because of the intervening bankruptcy, the check was dishonored. The court found that the sale was for cash and, relying on §§ 2 — 507(2) and 2 — 511, concluded that the unpaid seller of the goods had the right to reclaim them. Even without regard to whether the lienholder’s rights had attached to the property, the court held that the seller’s right to reclaim was superior to the rights of any creditor, including the rights of the trustee in bankruptcy. Likewise, the unpaid seller’s rights to reclaim in the instant case are superior to the unattached lien of C.I.T.
III.
The third question is whether C.I.T. qualifies as a good faith purchaser. Under § 2.403 of the Code, the buyer of goods from a seller is vested with a limited interest that it can convey to a good faith purchaser and thus create in the purchaser a greater right to the goods than the buyer itself had. This is possible even when the buyer obtains the goods as a result of giving a check that is later dishonored or when the purchase was made for cash. But in order to attain this status, the proponent must be a purchaser that gives value and acts in good faith. While C.I.T. gave value for the goods within the meaning of the Code, it failed to meet the test of a purchaser or one acting in good faith.
With regard to C.I.T.’s status as a purchaser, the Code broadly defines this term as one who take “by sale, discount, negotiation, mortgage, pledge, lien, issue or reissue, gift or any other voluntary transaction creating an interest in property.” Texas Business and Commerce Code, § 1.201(32) (1968); see id. § 1.201(33). As noted earlier, C.I.T. does not have an interest in the cattle because its rights in the collateral are derivative of its debtor’s rights in it. When Samuels failed to pay for the cattle, its rights in the cattle terminated and thus so did C.I.T.’s. C.I.T.’s status as a good faith purchaser is also defeated with regard to its acting in good faith. The Code defines good faith as “honesty in fact in the conduct or transaction concerned.” Texas Business and Commerce Code, § 1.201(19) (1968). Implicit in the term “good faith” is the requirement that C.I.T. take its interest in the cattle without notice of the outstanding claims of others. See Greater Louisville Auto Auction v. Ogle Buick, Inc., supra, 387 S.W.2d at 21. See also Fidelity and Casualty Co. v. Key Biscayne Bank, 501 F.2d 1322, 1326 (5th Cir. 1974).
Since C.I.T. was so intimately involved in Samuels’ financial affairs, it must have known that when it refused to advance additional funds, unpaid checks issued to cattle sellers by Samuels would be dishonored. Samuels’ operations were totally dependent on the financing of C.I.T. and both parties knew it. From its enduring involvement in the weekly financing, C.I.T. apparently knew that Samuels was purchasing and processing cattle up until the very time of filing the petition. Knowing that cattle had been purchased and processed immediately preceding its refusal to advance more money, C.I.T. must have known as a result of this refusal that some cattle sellers who had recently delivered their cattle to Samuels would not be paid. Because C.I.T. and Samuels were so intertwined in the management of the financial affairs of the business, we do not think that C.I.T. can plausibly claim, in complete honesty, that it was unaware of the claims of the unpaid cattle sellers. Since C.I.T. was aware of these outstanding claims, it does not qualify as a good faith purchaser.
IV.
We now turn to the unpaid cattle sellers’ rights as against the trustee in bankruptcy. It is true that under § 70c of the Bankruptcy Act the trustee, as a hypothetical lien creditor, will cut off the rights of the sellers as holders of unperfected security interests. But as pointed out earliéi-, the sellers’ rights are not limited merely to the retention of an unperfected security interest, for they also have the right to reclaim the cattle. Thus the question becomes whether the trustee’s lien gives him a priority of interest in the proceeds of sale of the cattle as against the sellers’ rights to reclaim.
Turning again to § 2.507 of the Code in order to define the sellers’ rights, we see that the section and accompanying comments implicitly give the sellers the right to reclaim, but it expressly subordinates that right only to a good faith purchaser. There is no mention of a subordination of the reclamation rights to the trustee in bankruptcy, nor is there any suggestion in this provision, the following comments, or otherwise that the drafters of the Code intended that the sellers’ right to reclaim be so subordinated. Indeed, in view of the historical developments leading to the drafting and subsequent amendment of § 2.705, an analogous provision which deals solely with credit sales and not cash, irresistible logic compels the conclusion that the Code draftsmen intended for the sellers’ reclamation rights to prevail over the trustee’s lien.
When § 2.705 was originally written, it spelled out that a seller’s right to reclaim was subordinate to “a buyer in ordinary course or other good faith purchaser or lien creditor . . . .” Texas Business and' Commerce Code, § 2.702(c) (1968). Construing this provision, the Third Circuit in In re Kravitz, 278 F.2d 820 (1960), held that a trustee
Kravitz and its implications have been widely discussed. Peters, Remedies for Breach of Contracts Relating to the Sale of Goods under the Uniform Commercial Code: A Road Map for Article 2, 73 Yale L.J. 199, 219, n. 64 (1963). Although the permanent editorial board in 1962 rejected a proposed amendment to § 2.702 based on the Kravitz decision that would have deleted the words “lien creditor,” the board in 1966 adopted the amendment and deleted this party as one to which reclamation rights would be subordinated. J. White and R. Summers, The Uniform Commercial Code, 243 (1972). This amendment, obviously thoroughly considered, amply demonstrates that the provisions of the Code were not intended to subordinate the sellers’ reclamation rights to those of the trustee in bankruptcy.
But even assuming the continuing vitality of Kravitz, that decision does not control the outcome of this litigation. The litigants in Kravitz dealt on the basis of a credit transaction and thus § 2.703, dealing solely with credit transactions, defined the rights of the sellers as against the trustee in bankruptcy. Under the facts of the instant case, however, we are concerned with a cash sale, and thus the sellers’ rights are defined by § 2.507. Nowhere in that provision, the accompanying comments, or the law of Texas, is the sellers’ rights to reclaim subordinated to a lien creditor or a trustee in bankruptcy. The sellers’ right to reclaim having been properly preserved, the cattle farmers are entitled to exercise it now.
V.
We believe it inequitable to deny the claims of the stock farmers who produced and delivered the cattle, in favor of the mortgagee who refused to advance the money before bankruptcy. We adhere to the teachings of Bank of Marin v. England, 385 U.S. 99, 103, 87 S.Ct. 274, 277, 17 L.Ed.2d 197 (1966):
“ * * * There is an overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction. Section 2a, 52 Stat. 842, 11 U.S.C. § 11(a); Pepper v. Litton, 308 U.S. 295, 304-305 [60 S.Ct.) 238, 84 L.Ed. 281]; Securities & Exchange Commission v. United States Realty & Imp. Co., 310 U.S. 434, 455 [60 S.Ct. 1044, 84 L.Ed. 1293.] We have said enough to indicate why it would be inequitable to hold liable a drawee who pays checks of the bankrupt duly drawn but presented after bankruptcy, where no actual revocation of its authority has been made and it has no notice or knowledge of the bankruptcy. The force of §§ 70d(5) and 18f can be maintained by imposing liability on the payee of the checks if he has received a voidable preference or other voidable transfer. The payee is a creditor of the bankrupt, and to make him reimburse the trustee is only to deprive him of preferential treatment and to restore him to the category of a general creditor. To permit the trustee under these circumstances to obtain recovery only against the party that benefited from the transaction is to do equity.”
It is our firm belief that the approach to the Code outlined above is eminently reasonable and conforms with the Code’s express provisions and underlying policies. We do not believe that the drafters of the Code intended for the unpaid sellers to walk away from this transaction with nothing, neither their goods nor the purchase price, while the mortgagee enjoys a preferred lien on that for which it refused to advance payment. Based on our understanding of the Code, such a result is insupportable.
We again reverse the judgment of the district court.
. In the Matter of Samuels & Co., Inc. v. Mahon, 483 F.2d 557 (5th Cir. 1973). This opinion has been noted unfavorably on at least two occasions. Note, 54 Boston Univ. L.R. 469 (1974); note, 52 Tex.L.R. 570 (1974).
. 7 U.S.C. § 181 et seq. (1970).
. One question that arises with respect to our second review is whether we can decide the questions presented without sending the case back to the district court for evidence of custom and practice.' While the record is not as fully developed as it might be, we believe that the questions can be decided without a remand. Neither the district court, this court nor the Supreme Court questioned the factual findings of the referee in bankruptcy, and he specifically found that there was an established course of conduct existing between the parties. This course of conduct, as the referee pointed out, at least conformed with, if not conducted expressly in accordance with, the federal regulations governing the transaction between the buyer and seller. Specifically, when cattle are sold on a grade and yield basis, the contract price is incapable of immediate determination. The cattle must first be slaughtered, chilled and then graded before the purchase price can be calculated. When this procedure is followed, and no one contends that it was not, then the price is determined and a check is issued to the seller. No one, neither the parties to the litigation nor the courts that have attempted to resolve the issues, contested these factual determinations made by the referee. While it is true that the evidence on which the referee relied in arriving at these conclusions is not detailed in the record, these conclusions, made in light of the regulations and in the absence of contentions to the contrary or any doubts raised throughout the appellate process, constitute a sufficient basis on which we can rely in deciding the case. Moreover, from reading the opinion of .the referee, it seems that the theories on which we rely are essentially those relied on by him in his holding for the cattle farmers.
. In the event that a conflict among secured interest holders arises, the Code clearly provides that generally the unperfected interest will always be subordinate to the perfected interest. The only exception to this rule is the purchase money security interest. When the transaction involves inventory, the Code gives this particular interest priority over the perfected lien if, and only if, the holder perfects its interest when the buyer takes possession of the. goods and the seller gives notice to the financier. Texas Business and Commerce Code, §§ 9.312(c)(1)—(2) (1968); Hogan, Unperfected Security Interests and the Floating Lien, 44 Tex.L.R. 713, 720 (1966).
But these requirements just further demonstrate the impracticality of requiring a cash seller to take steps to perfect and protect his interest in the goods sold. Plainly the cash seller need only cash his check and his interests are totally and undeniably protected, rather than follow the often confusing and more demanding provisions of the Code. Moreover, because at least some of the sellers delivered their cattle immediately prior to Samuels filing a petition for bankruptcy, it was practically impossible for them to comply with the requirements of the Code before Samuels closed its doors and C.I.T. asserted its claims to the cattle. Because of the impracticality demonstrated by an analysis of these provisions in light of the limited element, we do not think that the Code intended to limit the cash seller’s rights only to an unperfected security interest and subject the seller to the consequences of holding such an undesirable interest.