Court: United States Bankruptcy Court, N.D. Alabama; June 27, 2006; Us Bankruptcy; United States Bankruptcy Court
A hearing took place on May 22, 2006, before Bankruptcy Judge Tamara O. Mitchell regarding cross Motions for Summary Judgment filed by AVCO Corporation and JP Morgan Chase Bank, with appearances from attorneys representing both parties and the Bankruptcy Administrator. The Court has jurisdiction under 28 U.S.C. 1334(b), 151, and 157(a), and this case is classified as a core proceeding under Title 11 of the U.S. Code.
Key findings include that Citation Corporation entered into a Consignment Agreement with AVCO on December 11, 2002, for steel to forge airplane crankshafts. AVCO retained title to the steel, which Citation was to use solely for this purpose, and Citation bore the risk of loss. The Agreement prohibited sale of the steel, and required both parties to monitor the steel's return to AVCO after processing. Following Citation's chapter 11 bankruptcy filing on September 18, 2004, JP Morgan had previously secured a lien on Citation's inventory through a U.C.C.-1 financing statement. As of the bankruptcy filing, 306,000 pounds of steel were located at Citation's facility. In response to AVCO's motion for relief from the automatic stay to reclaim the steel, a stipulation was reached allowing AVCO to take possession while preserving the rights of other parties to contest ownership or assert liens on the steel and its proceeds.
AVCO and JP Morgan agreed in a Consent Order that if an adversary proceeding regarding the Steel were to commence, the burden of proof would mirror that of a scenario where the Debtors retained the Steel and AVCO sought its turnover. This adversary proceeding was initiated by JP Morgan on February 14, 2005, placing the burden on AVCO to establish ownership of the Steel.
JP Morgan asserts that the Agreement clearly indicates the parties intended to create a consignment, evidenced by the frequent use of the term "consign." They argue that the Agreement's clarity precludes the admissibility of parole evidence under Texas law and claim it falls under the U.C.C., granting them a perfected security interest and a first priority lien on the Steel due to AVCO's failure to perfect a lien. Additionally, JP Morgan alleges that AVCO owes the Debtor $306,000 and that their pre-petition liens attach to the Steel proceeds.
Conversely, AVCO argues that the Agreement plainly establishes a bailment rather than a consignment, maintaining its ownership of the Steel. They contend that the U.C.C. does not govern the Agreement, negating the requirement for an Article 9 financing statement. AVCO claims the Agreement is not ambiguous and argues that if JP Morgan labels it a consignment, substantial evidence must show that the Steel was delivered for sale to the Debtor, which was not the case. As a bailment, AVCO contends that JP Morgan's rights as a secured creditor cannot surpass those of the Debtor.
Regarding legal standards for summary judgment, it is noted that such a judgment is appropriate only when no genuine material fact issues exist and the movant is entitled to judgment as a matter of law. The court must evaluate whether material facts, which could determine the outcome, exist, with the burden of proof lying with the party moving for summary judgment. The court assesses the evidence in favor of the non-moving party, and if reasonable minds could disagree on the inferences from undisputed facts, summary judgment should be denied. According to the Consent Order, the burden of proof remains with AVCO to demonstrate ownership of the Steel.
The Court is applying the Erie Doctrine and Alabama choice-of-law rules to interpret the Agreement, establishing that it will follow Texas law due to the contract's acceptance in Texas, despite being drafted in Pennsylvania. Under Texas law, contract interpretation requires assessing the parties' intentions by examining the contract's contents. The case focuses on whether the Agreement constitutes a consignment or a bailment. The plaintiff argues it is a consignment controlled by the U.C.C., while AVCO contends that it should be classified as a bailment, denying JP Morgan's rights to the steel involved. Texas law defines a consignment as the delivery of goods to a merchant for sale, while bailment entails delivering property to another with a specific purpose and the expectation of its return. Relevant case law, including the Fifth Circuit's decision in In re Sitkin, illustrates the complexities in distinguishing between sales, consignments, and bailments, emphasizing factors such as possession, responsibility, and the right to demand the return of goods.
The Fifth Circuit determined that the agreement in question constituted a bailment under Alabama law rather than a security agreement or contract for sale, as Sitkin lacked sufficient rights to grant a security interest in the film to its creditor. In a related case, Stieff v. Walthall Music Company, the Texas Supreme Court evaluated whether a contract was a bailment or an outright sale concerning pianos consigned for four months. The court ruled that Walthall was responsible for the pianos but had to return unsold items to Stieff after bankruptcy. The court emphasized that a sale requires the transfer of title, and found that the contract's language supported a bailment due to the consignor's right to demand the return of goods. The court concluded that since the sender retains the right to reclaim the goods, the arrangement between Stieff and Walthall was a bailment, preventing a creditor from claiming title to the bailed goods for the debtor's pre-existing debts.
In applying this legal precedent, the current court analyzed the Agreement and found no intent or language indicating a consignment under the U.C.C. Despite the term "consign" appearing numerous times, its context demonstrated that a bailment existed. Key factors included: AVCO delivering steel to Citation for specific purposes, AVCO retaining the right to recall the steel, ownership remaining with AVCO, no authorization for Citation to sell the steel, and the risk of loss falling on Citation. Consequently, the court concluded that the arrangement did not imply a transfer for sale, confirming that AVCO retained ownership of the steel, and denying Plaintiff's claim to a lien on the steel possessed by Citation. The court granted AVCO's Motion for Summary Judgment.
AVCO’s Motion for Summary Judgment is granted, while JP Morgan’s Motion for Summary Judgment is denied, resulting in a judgment in favor of AVCO against the Plaintiff. The court references a General Order of Reference from July 16, 1984, amended on July 17, 1984, which directs that all bankruptcy-related cases be referred to Bankruptcy Judges in the district. Core proceedings under 28 U.S.C. § 157(b)(2) include matters related to estate administration and asset liquidation, excluding personal injury torts or wrongful death claims. This Memorandum Opinion serves as findings of fact and conclusions of law under Federal Rule of Civil Procedure 52 and is applicable in bankruptcy adversary proceedings through Federal Rule of Bankruptcy Procedure 7052. The court is permitted to take judicial notice of its own files, as established in prior case law. The findings are based on the parties' Joint Stipulation of Undisputed Facts and relevant motions, objections, and responses. The debtor, referred to as Citation or Debtor, was one of the consolidated debtors in this Chapter 11 case. Summary judgment is granted if there are no genuine issues of material fact. Alabama's bailment definition aligns with Texas law, emphasizing the delivery of personal property for a specific purpose with an implied or express contract for its return. The nature of a transaction, rather than specific terms like "consigned," determines its inherent character, as demonstrated in relevant case law.
