In Re Coupon Clearing Service, Inc., Debtor. Foothill Capital Corporation v. Clare's Food Market, Inc. Shoprite of Oakland, Inc. Brown's Super Stores, Inc. Singers Supermarkets, Inc. Glass Gardens, Inc. Shop-Rite at 26th St., Inc. Shoprite of Lincoln Park, Inc. Big v. Supermarkets, Inc. Shoprite of Hunterdon County, Inc. Shop-Rite of Clinton, Inc. Shoprite of Carteret, Inc. Inserra Supermarkets, Inc. Shoprite of Perth Amboy, Inc. Nutley Park Shop-Rite, Inc. Sunrise Market, Inc. Racar, Inc. Trio Food Centers, Inc. Perlmart, Inc. Village Supermarkets, Inc. Brookdale Shoprite, Inc. Bliss, Inc. Shop-Rite of Pennington, Inc. Shoprite of Parsippany Shoprite of Little Falls, Inc. Landis Supermarkets, Inc. Delsea Supermarkets, Inc. Grade a Market, Inc.
Docket: 95-55864
Court: Court of Appeals for the Ninth Circuit; May 20, 1997; Federal Appellate Court
A legal dispute arose involving Clare's Food Market, Inc. and other ShopRite Retailers (plaintiffs-appellees) against Foothill Capital Corporation (defendant-appellant) concerning the proceeds from cents-off coupons redeemed by the Chapter 7 debtor, Coupon Clearing Service, Inc. (CCS). CCS, functioning as a coupon clearinghouse, was responsible for processing coupons submitted by retail stores and paying the ShopRite Retailers for these coupons. Foothill provided a revolving line of credit to CCS and claimed entitlement to the coupon proceeds based on a security interest in CCS's inventory, equipment, and accounts. The ShopRite Retailers argued that the proceeds belonged to them, asserting that CCS acted as their agent and could not assign the proceeds to Foothill.
The bankruptcy court sided with Foothill, determining that its perfected security interest took priority over the ShopRite Retailers’ claims. However, the district court found significant material facts in dispute, leading it to vacate the bankruptcy court’s decision and remand the case for further proceedings. Foothill appealed this order, and the appellate court reversed the district court's ruling, affirming the bankruptcy court's decision to grant summary judgment in favor of Foothill.
In the context of supermarket operations, customers present manufacturer coupons to ShopRite Retailers for discounts, with manufacturers reimbursing the retailers for the discounts and providing a handling fee. To manage the volume of coupons, the manufacturers authorized the use of coupon clearinghouses, like CCS, to facilitate this process.
ShopRite Retailers redeem coupons by shipping them to CCS, which records essential details such as the number, weight, and retailer identity. CCS assigns a batch number to each shipment, weighs it, and acknowledges receipt to the retailer, including the date, batch number, and weight. The coupons are then sent to Cupomex for processing. CCS generates invoices for manufacturers detailing the retailer's information, coupon quantity, face value, and handling fees. Upon receiving the coupons, manufacturers verify redemption and pay CCS the redemption fees, providing a report on the retailers and any non-redeemed coupons. Many manufacturers require CCS to have clearinghouse authorization agreements, and CCS's invoices indicate that it holds all rights to coupon proceeds, directing payments to itself.
ShopRite Retailers have contracts with CCS, known as Service Agreements, which stipulate that CCS will advance amounts equal to coupon face value plus handling fees, minus CCS's service fees and chargebacks. These agreements grant CCS the rights to retain manufacturer payments, process coupons exclusively, require retailers to forward direct payments to CCS, and mandate reimbursement for chargebacks. Notably, CCS is not classified as the retailers' agent, despite referring to itself as such in marketing materials in 1991. The Service Agreements vary in their terms regarding CCS's assignment of coupon proceeds, with some agreements explicitly allowing for assignment while others do not.
Additionally, Foothill provided a revolving credit line to CCS, secured by a security interest in CCS's accounts receivable from manufacturers. Payments from manufacturers are directed to a lockbox at Foothill's bank, enabling Foothill to manage these payments against CCS's loan obligations.
In October 1991, ShopRite Retailers initiated legal action against CCS and Foothill in California Superior Court for failing to reimburse $4 million in coupon proceeds. The court granted a temporary restraining order and a preliminary injunction to impose a constructive trust over the coupons. Following CCS's Chapter 7 bankruptcy filing in November 1991, the case moved to federal bankruptcy court. By November 1993, after extensive discovery, both ShopRite and Foothill filed cross-motions for summary judgment, with the Trustee supporting Foothill’s motion. On April 1, 1994, the bankruptcy court issued a memorandum opinion, ruling in favor of Foothill. The court found no agency relationship between CCS and ShopRite, that CCS had valid rights under California Commercial Code § 9203(1) to grant Foothill a security interest, and that CCS was not required to be licensed as a collection agency, thus validating the Service Agreements. The court later ruled that CCS's operations were not subject to the Personal Property Broker Law (PPBL), and even if they were, the contracts were not void. ShopRite appealed, leading to a district court order on April 10, 1995, which vacated the bankruptcy court's previous order and remanded for reconsideration due to disputed facts. Foothill's motion for rehearing was denied. The district court emphasized that the bankruptcy court must reassess both summary judgment motions. Foothill subsequently appealed to this court.
Regarding jurisdiction, the ShopRite Retailers argued that the district court's order was interlocutory and not final, questioning this court's jurisdiction under 28 U.S.C. § 158(d). The district court holds original jurisdiction over bankruptcy cases and refers them to the bankruptcy court, which can issue final orders in core proceedings, while it can only submit proposed findings in non-core proceedings. The bankruptcy court determines if a case is core or related under 28 U.S.C. § 157.
The district court possesses bankruptcy appellate jurisdiction under 28 U.S.C. § 158(a), and the appellate court has jurisdiction over final decisions of the district court pursuant to 28 U.S.C. § 1291, with exceptions for direct Supreme Court reviews. Appeals from final decisions made under § 158(a) and (b) fall within the appellate court's jurisdiction as outlined in 28 U.S.C. § 158(d). Jurisdiction exists when both the bankruptcy court order and the lower appellate decision are final. A "pragmatic approach" is applied to determine the finality of these decisions. Certain bankruptcy proceedings are considered sufficiently distinctive to warrant appealability as of right due to their impact on individual rights or the case's outcome.
In this instance, the bankruptcy court’s summary judgment order in favor of Foothill was deemed final and appealable due to its significant effect on the parties' rights and the case's resolution. However, a more complex issue arises regarding the district court's order that vacated the bankruptcy court's decision and remanded for further proceedings. The appellate court typically lacks jurisdiction when a lower appellate decision remands for further factual findings on central issues. Nonetheless, it may assert jurisdiction if the legal issue raised could resolve the case or materially assist the bankruptcy court in its remand decisions.
ShopRite Retailers argue that several disputed facts prevent summary judgment for either party. They acknowledge that CCS was supposed to remit coupon proceeds on a fixed schedule but contest Foothill's inferences drawn from this fact, claiming lack of evidentiary support. Foothill's inferences include that: 1) a time gap existed between CCS's payment to ShopRite and its collection from manufacturers; 2) CCS was regularly advancing funds to ShopRite; and 3) a debtor-unsecured creditor relationship existed that allowed CCS to assign a security interest in the coupons to Foothill.
ShopRite further asserts that although CCS had no obligation to segregate coupon proceeds, the coupons and proceeds were identifiable and traceable. They also dispute Foothill's interpretation of a clause in the Service Agreements regarding the assignment of coupons to CCS, maintaining that the assignment was solely for collection purposes.
The court finds that the disputed facts presented by ShopRite are merely legal inferences drawn from undisputed facts, including CCS's obligation to reimburse ShopRite on a fixed schedule, the lack of duty to segregate funds, and the explicit assignment of coupons to CCS under some agreements. The court distinguishes the present case from Almar Communications Ltd. v. Telesphere Communications, Inc., noting that in Telesphere, the documentation suggested an agency relationship, whereas no such contradiction exists here.
The court asserts jurisdiction over the appeal, as the primary issue is legal and will resolve the summary judgment motions without further factual inquiries. It also references Section 541 of the Bankruptcy Code, which outlines that a debtor's interest in property is defined by state law and emphasizes that property held in trust for another is not considered property of the bankruptcy estate, including constructive trusts under California law when a party wrongfully detains another's property.
ShopRite Retailers argue that under California law regarding agency, trust, and bailment, CCS cannot claim a valid perfected security interest in the coupon proceeds because those proceeds are held in trust for ShopRite. According to Division 9 of the California Commercial Code, a valid security interest requires the transferee, CCS, to possess "rights in the collateral," a term not defined by the Code but clarified through bankruptcy and common law principles.
California courts define an agent as someone authorized to manage affairs on behalf of another and accountable for those transactions. Evidence of an agency relationship can arise from the parties' actions and communications. A key element is the principal's authority to control the agent's actions. However, if the principal only controls the outcome of the agent's work without dictating the methods, an independent contractor relationship exists.
The bankruptcy court determined that ShopRite could not control CCS’s operations sufficiently to establish an agency relationship because: 1) ShopRite lacked the ability to dictate how CCS processed coupons; 2) ShopRite could not direct CCS's operational methods or hours; 3) ShopRite had no authority over CCS's employees; and 4) ShopRite could not restrict CCS's use of coupon proceeds before the agreed payment timeline. Thus, the court concluded that CCS was an independent contractor, not an agent of ShopRite.
ShopRite disputes the court's conclusion, asserting that the presence of some control over CCS, even if not day-to-day, could still constitute an agency relationship. They argue that the appropriate test should assess whether CCS was subject to any degree of control or restrictions by ShopRite, rather than whether ShopRite exercised extensive oversight over CCS’s business operations.
The ShopRite Retailers' reliance on previous cases is deemed inapplicable due to significant factual distinctions. In Penthouse Int'l Ltd., a freelance photographer was recognized as having implied authority, establishing an agency relationship because of the principal's control. Similarly, in City of Los Angeles, a parking lot operator was found to be both an agent and an independent contractor due to substantial control exerted by the city over the operator's operations. Conversely, the ShopRite Retailers lacked sufficient control over CCS to establish an agency relationship, as their only authority was to ensure CCS performed its contractual obligations.
Regarding the assertion of a trust relationship, the ShopRite Retailers argue that CCS held coupon proceeds in trust. They contend that while CCS wasn't required to segregate these proceeds, it shouldn't have commingled them with general operating funds or used them as collateral. The Retailers cite the case of In re Penn Cent. Transp. Co., where commingling did not negate a trust when proceeds were traceable. However, the court finds that precedents involving freight forwarders and carriers provide more relevant guidance. In these cases, the courts ruled that funds collected by freight forwarders were not held in trust for carriers, as the forwarders were allowed to commingle funds and were not required to make payments from specific collections.
CCS did not hold coupon proceeds in trust for the ShopRite Retailers, as it was obligated to make fixed payments to them regardless of when it received payment from manufacturers. The Service Agreements did not require CCS to segregate manufacturer payments or prevent commingling with its general funds. A debtor-creditor relationship exists when the recipient can use funds as their own, which was the case here. The ShopRite Retailers bore the entire risk of non-reimbursement from manufacturers, indicating a lack of agency or trust relationship, as the principal or beneficiary typically assumes such risks. Although CCS had the right to charge certain costs to the retailers, it also faced losses if it could not collect from them, reinforcing the shared risk between both parties. Therefore, the relationship between CCS and the ShopRite Retailers is legally recognized as a debtor-creditor relationship.
Regarding Foothill's security interest in the coupon proceeds, the ShopRite Retailers argue that such proceeds were never CCS's accounts. Under California Commercial Code, an account is defined as a right to payment for goods or services rendered, while rights arising from other sources are considered general intangibles. Foothill's financing statement, covering both accounts and general intangibles, is adequate to secure any rights CCS may have in the coupon proceeds. However, assignments for collection purposes create a trust relationship where the assignee holds the proceeds in trust for the assignor, as per Section 9104(f) of the Code.
The ShopRite Retailers contend that the assignment of coupons to CCS falls under an exception; however, if the assignment serves purposes beyond mere collection, it is not exempt from Division 9. In this instance, CCS was obligated to pay ShopRite on a set schedule regardless of manufacturer payments and was engaged in additional commercial activities, such as sorting, labeling, and counting coupons. This arrangement enabled ShopRite to receive advances on coupon proceeds and utilize funds immediately, even if later reclaimed by CCS. Consequently, section 9104(f) does not exempt this assignment, as it was for purposes beyond collection.
Foothill's rights in the coupon proceeds are governed by section 9203 of the Code, which requires determining if Foothill's security interest "attached." Attachment necessitates three conditions: possession of collateral by the secured party or a signed security agreement, provision of value by the secured party, and the debtor’s rights in the collateral. While subsection (a) and (b) are not disputed, the parties argue over whether CCS had adequate rights in the coupon proceeds for a valid security interest under section 9203(1)(c).
The term "rights in the collateral" is not defined in Division 9. Mere possession does not suffice; a debtor must possess rights beyond that. ShopRite claims CCS only held a security interest or agent's lien, arguing CCS's lack of advances prevents foreclosure and attachment of its security interest. However, the bankruptcy court determined that CCS had sufficient rights to the coupon proceeds for Foothill's perfected security interest to attach. The court noted that the Service Agreements varied in assignment language and collectively conferred rights to CCS beyond mere possession, including rights to receive, retain, and utilize coupon proceeds, as well as to commingle them with operating funds. Thus, the bankruptcy court concluded that Foothill's perfected security interest attached to the coupon proceeds, a conclusion supported by the analysis of the Service Agreements and the parties' conduct.
A debtor without ownership of collateral can still secure rights in the collateral if authorized by the actual owner. CCS held exclusive rights to amounts due from manufacturers as specified in the invoices. There was no obligation for CCS to segregate coupon proceeds from its general funds, allowing CCS to utilize those proceeds as operational funds, thereby granting it rights beyond mere possession. Consequently, CCS had sufficient rights to grant Foothill a valid security interest in the coupon proceeds, which properly attached. The district court's orders vacating the bankruptcy court's ruling are reversed, and the matter is remanded to affirm the bankruptcy court's grant of a perfected security interest to Foothill.
Additionally, the ShopRite Retailers argue that disputed factual issues prevent the court from asserting jurisdiction under 28 U.S.C. § 158(d), although the bankruptcy court found these facts undisputed. Coupons had specific conditions, including being void if transferred, valid only if redeemed by authorized retailers, and subject to manufacturers' redemption policies, which typically included a handling fee. CCS was required to enter into Clearinghouse Agreements with major manufacturers, which accounted for about 40% of the trustee's funds. These agreements mandated written contracts with retailers, insurance for coupons post-retail possession, proper packaging and invoicing, fraud protection policies, prompt reimbursements, record audits, and acknowledgment of manufacturers' rights to interact with retailers directly. CCS also retained the right to chargeback unredeemed coupons and faced rejection of certain promotional coupons by manufacturers.
