Opinion
Case No. 00-42069-BJH-11 and, Case No. 00-42141, through No. 00-42149 Jointly Administered Under Case Nos. 00-42141BJH-11, Adversary No. 01-4006.
April 17, 2001
MEMORANDUM OPINION
Before the Court are (i) the proof of claim filed by Cherry Air, Inc. ("Cherry Air") in the bankruptcy case of OK Turbines, Inc. ("OKT") and OKT's objection to that claim (the "Claim Objection"), and (ii) the Motion for Summary Judgment (the "Motion") filed by OKT in connection with the above adversary proceeding (the "Adversary"). Previously finding that the Claim Objection and the Adversary have common questions of law and fact and could be most efficiently administered as one action, the Court ordered that the Claim Objection would be consolidated for trial with the Adversary. The Court heard arguments on the Motion on February 28, 2001.
After considering the summary judgment record and the parties' briefs, the Court issues this Memorandum Opinion which shall constitute the Court's findings of fact and conclusions of law under Federal Rule of Civil Procedure 52, made applicable here by Bankruptcy Rule 7052. The Court has core jurisdiction over the Claim Objection, the Adversary, and the Motion under 28 U.S.C. § 1334 and 157(b).
I. Contentions of the Parties
In the Motion, OKT seeks a summary judgment disallowing Cherry Air's claim in its bankruptcy case for a variety of reasons. As relevant here, OKT contends that (i) Cherry Air cannot establish its ownership of the aircraft parts at issue in the Adversary (the "Parts") purchased by OKT from 3D Industries ("3D"), (ii) an affiliate of Cherry Air, Addison Aviation Services, Inc. ("AAS"), actually owned and sold the Parts to 3D, (iii) OKT is either a good faith purchaser for value in accordance with § 2.401(a) of the Texas Business Commerce Code or a buyer in the ordinary course of business in accordance with § 2.401(b) of the Texas Business Commerce Code, and (iv) as such, OKT has no liability to Cherry Air in connection with its purchase of the Parts from 3D.
Cherry Air contends that (i) its affidavits should be admitted to establish its ownership of the Parts, (ii) it did not sell the Parts to b2 Parts, Inc. ("b2") or b2's affiliate, 3D, (iii) it consigned the Parts to b2, (iv) it demanded the return of the Parts from b2 before the Parts were sold to OKT, (v) b2 fraudulently kept the Parts and sold them to OKT without Cherry Air's authority or approval, (vi) Cherry Air demanded the return of the Parts from OKT, (vii) OKT refused to return the Parts, and (viii) OKT converted the Parts and must either return the Parts or pay Cherry Air the value of the Parts. Cherry Air further contends that the Motion must be denied because there are material facts in dispute with respect to the relevant issues.
II. Cherry Air's Factual Contentions
Because Cherry Air asserts that there are material facts in dispute, the Court will analyze the Motion in light of Cherry Air's factual contentions.
Cherry Air is in the business of providing air charter services. See Cherry Air's response to the Motion (the "Cherry Air Response") ¶ 5. Cherry Air conducts its business at Addison Airport in Dallas County, Texas. Id. Cherry Air operates and maintains a number of aircraft in its business activities. Id. To maintain its aircraft, Cherry Air keeps a stock of aircraft parts. Id. In May, 1998, Cherry Air determined that the Parts were excess aircraft parts that it no longer needed. See Cherry Air Response ¶ 7. Cherry Air and its affiliate, AAS, operate on a consolidated basis. See Hearing Transcript ("Tr.") at 32.
Bo Baker ("Baker") is the President of 3D and b2. See Cherry Air Response ¶ 6. Baker learned of Cherry Air's excess parts. See id. ¶ 9. Baker approached the Vice-President of Cherry Air, James Donaldson, and represented that she had a purchaser for the Parts. Id. Donaldson agreed to consign the Parts to Baker to sell to her prospective purchaser. Id.
Relying on Baker's representations, Cherry Air gave possession of the Parts to Baker and her companies (b2 and 3D) on May 5 and 7, 1998. See Cherry Air Response ¶ 10. On May 11, 1998, when Cherry Air had not been paid by Baker or either of her companies, Cherry Air terminated the consignment agreement, revoked Baker's authority to sell the Parts, and demanded a return of the Parts. See id. ¶ 11. Although Cherry Air knew who Baker's proposed purchaser was on May 11, 1998, Cherry Air did not notify that prospective purchaser (OKT) that Baker no longer had any authority to sell the Parts. See Motion, Exhibit C at 15; Exhibit D at 52, lines 17-22. Other than to demand their return, Cherry Air took no further steps to regain possession of the Parts. A few days later, Baker, acting through b2 and/or 3D, sold the Parts to OKT. See Cherry Air Response ¶ 13. OKT wired $205,600 to 3D/b2 for the Parts. See Motion, Exhibit A at 46-47, 51; Cherry Air Response ¶ 48. Baker did not pay Cherry Air for the Parts. See Cherry Air Response ¶ 13.
Of course, Cherry Air states that Baker "attempted to sell the Parts" to OKT, not waiving its legal contention that Baker was a "thief" at this point and that a "thief" cannot convey good title. See Cherry Air Response ¶¶ 13, 14.
On October 2, 1998, Cherry Air sued Baker, b2 and OKT in Texas state court. See Cherry Air Response ¶ 15. OKT was dismissed from that suit, without prejudice. Id. Cherry Air sought and obtained a summary judgment against Baker and b2 for fraud and conversion of the sale proceeds. See Cherry Air Response ¶ 16; see also Motion, Exhibit D, Tabs 6, 7. Baker is currently in jail on unrelated charges. See Cherry Air Response ¶ 16. Neither 3D nor b2 is in business or has assets. Id. The state court judgment remains uncollected. Id.
III. The Motion
A. Summary Judgment Standards
Bankruptcy Rule 7056, incorporating Federal Rule of Civil Procedure 56, provides that summary judgment is appropriate if there is no genuine dispute over any material facts. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986). The summary judgment procedure is "an integral part of the federal rules as a whole, which [is] designed to 'secure the just, speedy and inexpensive determination of every action.'" See Celotex Corp., 477 U.S. at 327 (citing FED. R. CIV. P. 1). Under Federal Rule of Civil Procedure 56(c), summary judgment is proper when the record establishes that no genuine issue as to any material fact exists, and that the moving party is entitled to judgment as a matter of law. The substantive law will identify what facts are material. See Anderson, 477 U.S. at 248; FDIC v. S.W. Motor Coach Corp., 780 F. Supp. 421, 422 (N.D.Tex. 1991). A dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Anderson, 477 U.S. at 249; Calpetco 1981 v. Marshall Exploration, Inc., 989 F.2d 1408, 1413 (5th Cir. 1993) (noting "mere disagreement" between parties is not enough to create genuine dispute). "Stated another way, 'if the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.'" Epps v. NCNB Texas Nat'l Bank, 838 F. Supp. 296, 299 (N.D.Tex. 1993) (quoting Friou v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir. 1991)). "However, all of the evidence must be viewed in the light most favorable to the motion's opponent." Epps v. NCNB Texas Nat'l Bank, 838 F. Supp. at 299, quoting Gremillion v. Gulf Coast Catering Co., 904 F.2d 290, 292 (5th Cir. 1990). Once the movant has made a proper motion, the burden shifts to the nonmoving party to establish the existence of a genuine issue for trial. See Celotex, 477 U.S. at 323-24; Matsushita Elec. Indus. Co., 475 U.S. at 585-86. The nonmovant must raise more than a mere scintilla of evidence, and he "must do more than simply show that there is some metaphysical doubt as to the material facts." See Matsushita Elec. Indus. Co., 475 U.S. at 586.
B. Whether OKT is Entitled to Summary Judgment
While OKT contends that AAS owned the Parts and "sold" them to Baker, and disputes Cherry Air's ability to offer evidence (as being in violation of the statute of frauds or improper parol evidence) that Cherry Air owned the Parts and "consigned" them to Baker, the Court must view the evidence in the light most favorable to Cherry Air. Without ruling on OKT's evidentiary objections to the admission of Cherry Air's affidavit evidence of an oral consignment agreement, the Court will evaluate the Motion based upon Cherry Air's factual contentions and those facts established by OKT's summary judgment evidence that Cherry Air did not controvert.
Baker, 3D and b2 are referred to hereinafter as "Baker."
Thus, accepting Cherry Air's contention that it owned the Parts and consigned them to Baker for sale, the Court must first consider the nature of a consignment relationship. As noted by one commentator, "[a] true consignment is one in which the consignor retains extensive control over the goods but gives up possession with the intent that they be sold to a third party and in which the consignee may return the goods at any time and is not obligated to pay a fixed price for them. The consignment sale is theoretically not subject to the Code as it is merely an agency or service contract combined with a bailment." 3A RONALD A. ANDERSON, ANDERSON ON THE UNIFORM COMMERCIAL CODE § 2-326:48 (3d ed. 1995) (footnotes omitted).
However, certain provisions of the Texas Business Commerce Code do apply to consignments. For example, if the consignment is intended to create a security interest, Article 9 applies. See id. §§ 2-326:65 — 2-326:67. Moreover, Article 2 of the Texas Business Commerce Code will apply to protect creditors of the consignee. See id. § 2-326:44. Specifically, under section 2.326(c), a consignment sale is converted into what is known as a "sale or return" in order to protect the creditors of the consignee unless the consignor takes the specified steps to protect its interest. See TEX. BUS. COMM. CODE § 2.326 (West 1977); Fuller v. Texas W. Fin. Corp., 644 S.W.2d 442-443 (Tex. 1982).
Cherry Air does not contend that the consignment was intended to create a security interest; and thus, Article 9 does not apply. See 3A Anderson, supra p. 5, § 2-326:64 ("If a consignment is in fact a secured transaction, it is subject to Article 9. If it is not, it is subject to UCC § 2-326(3)."). Moreover, Baker's creditors are not involved in this dispute; and thus, § 2.326(c) does not apply. See Fuller, 644 S.W.2d at 443. ("We also agree, however, with Fuller's contention that section 2.326(c) of the Texas Business Commerce Code does not apply to transactions between original contracting parties or their assignees. The language of section 2.326(1) indicates the intent of the parties is to be disregarded only when the rights of third party creditors intervene."). However, under Cherry Air's theory of the case, general principals of agency law do apply.
The following undisputed facts are relevant to the Court's agency analysis. Cherry Air made Baker its agent to sell the Parts when it consigned the Parts to Baker. Cherry Air terminated its agency relationship with Baker when it terminated the oral consignment agreement. Cherry Air demanded that Baker return the Parts. However, when Baker failed to return the Parts, Cherry Air took no further action. Cherry Air did not retake possession of the Parts or otherwise attempt to restrain Baker's sale of the Parts, and Baker remained in possession of the Parts. Although Cherry Air knew that Baker intended to sell the Parts to OKT, Cherry Air did not take any steps to put OKT on notice that its agent, Baker, no longer had any authority to act with respect to the Parts. There is no evidence that OKT knew who Baker's principal was. In fact, deposition testimony from OKT's representative established that OKT had no knowledge of Cherry Air's identity and ownership of the Parts. See Motion, Exhibit A at 44, lines 14-23. Cherry Air was an undisclosed principal. Approximately 2 weeks after Baker's sale of the Parts to OKT, Cherry Air demanded a return of the Parts from OKT. See Motion, Exhibit A, Tab 2. OKT refused to return the Parts or pay Cherry Air for them, since it had already paid Baker the agreed purchase price for the Parts.
Applying these facts to general principals of agency law, the Court concludes that Cherry Air has no claim against OKT for either conversion of the Parts or damages. An agent acting within the scope of its apparent authority binds the principal, even if the actual authority has been terminated. In Biggs v. U.S. Fire Ins. Co., 611 S.W.2d 624, 629 (Tex. 1981), the Texas Supreme Court noted that "[a]pparent authority is based on the doctrine of estoppel, and one seeking to charge the principal through apparent authority of an agent must establish conduct by the principal that would lead a reasonably prudent person to believe that the agent has the authority that he purports to exercise. When an agent acts within the scope of this apparent authority, the acts bind the principal as though the agent actually possessed such authority." (citations omitted). The Texas Supreme Court recently quoted this language with approval in In re Users System Services, Inc., 22 S.W.3d 331, 338, n. 16 (Tex. 1999).
Baker was in possession of the Parts and appeared to have authority to sell them. Because Cherry Air could have advised OKT that Baker no longer had any authority to sell the Parts before the sale was consummated and failed to do so, Cherry Air is bound by Baker's actions — i.e., the sale of the Parts to OKT — under general principals of agency law. See id.; see also Maccabees Mut. Life Ins. Co. v. McNiel, 836 S.W.2d 229, 233 (Tex.App.-Dallas 1992) ("When an agent acts within the scope of this apparent authority, the acts bind the principal as though the agent has actual authority.").
Moreover, under applicable provisions of the Texas Business Commerce Code, Cherry Air's claim against OKT must be disallowed. "A person receiving goods for sale on consignment has the power to transfer title as against the transferor to a buyer in the ordinary course of business." See 3A Anderson, supra p. 5, § 2-326:55. Cherry Air admits in prior pleadings that b2 was engaged in the business of buying and selling aircraft parts. See Motion, Exhibit C, Tab 6 (Original Petition filed by Cherry Air in state court ¶ 9); see also OKT's Answer to First Amended Complaint ("OKT Answer"), Exhibit A. Cherry Air failed to present evidence creating a genuine dispute about 3D being engaged in the business of dealing in aircraft parts. Based upon OKT's summary judgment evidence (see, e.g. OKT Answer, Exhibit A), the Court finds that 3D was engaged in the business of dealing in aircraft parts. The Court further finds that Baker, individually, held herself out as having knowledge or skill sufficient to sell the Parts on Cherry Air's behalf or Cherry Air would not have orally consigned the Parts to her for sale. Thus, the Court concludes that Baker, individually, and her companies, b2 and 3D, were "merchants" within the meaning of § 2.104 of the Texas Business Commerce Code.
Based upon the summary judgment record, the Court finds that OKT was a "buyer in the ordinary course of business" within the meaning of § 1.201(9) of the Texas Business Commerce Code. Although Cherry Air offered evidence of prior experiences that OKT had with Baker that Cherry Air contends should have put OKT on notice that Baker was a "con artist" and made further dealings with her "suspect," those prior experiences are not relevant here. Under § 1.201(9), a "'[b]uyer in the ordinary course of business' means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights . . . of a third party in the goods buys in the ordinary course from a person in the business of selling goods of that kind. . . ." See TEX. BUS. COMM. CODE § 1.201(9) (West 1996). In turn, under § 1.201(19) "'good faith' means honesty in fact in the conduct or transaction concerned." § 1.201(19). See TEX. BUS. COMM. CODE § 1.201(9) (West 1996). Cherry Air offered no evidence to dispute OKT's summary judgment evidence that OKT bought the Parts from Baker, a person in the business of selling aircraft parts, without any knowledge that the sale was in violation of Cherry Air's ownership rights. In fact, OKT did not know that Baker was acting on behalf of Cherry Air. OKT did not know that Baker's authority to act had been terminated by Cherry Air. Cherry Air could have notified OKT of its status as the owner of the Parts and its termination of Baker's authority to act, but it did not do so.
The Court also finds that Cherry Air "entrusted" the Parts to Baker within the meaning of § 2.403(b) of the Texas Business Commerce Code. "'Entrusting' includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting of the possessor's disposition of the goods have been such as to be larcenous under the criminal law." See TEX. BUS. COMM. CODE § 2.403(c) (West 1993).
While admitting that it entrusted the Parts to Baker initially, Cherry Air contends that it did not "acquiesce" in Baker retaining the Parts after it terminated the oral consignment agreement. The Court disagrees. Although Cherry Air did send a letter notifying Baker that the consignment was terminated and demanded a return of the Parts, Baker refused to return the Parts. Notwithstanding Baker's failure to return the Parts, Cherry Air took no further action to protect itself. Cherry Air could have sought a temporary restraining order in Texas state court to prevent any sale of the Parts by Baker. Alternatively, Cherry Air could have given Baker's identified purchaser, OKT, notice that Baker's authority to act had been revoked. Cherry Air's failure to take further action once it became clear that Baker was refusing to return the Parts constitutes an "acquiescence in retention" by Baker within the meaning of § 2.403(c). See Simson v. Moon, 222 S.E.2d 873, 875 (Ga.Ct.App. 1975), cert. dismissed, 225 S.E.2d 314 (Ga. 1976) ("Even though the dealer here did not have actual possession of the truck at the time of the sale to Simson, . . . the dealer nevertheless manifested his ability to control and dispose of the truck as if it were in his inventory. Simson did not have actual knowledge of the prior sale and was not put on notice of any unusual circumstances such as would deny him of the status of a 'buyer in ordinary course of business.'") (footnote omitted); see also Williams v. Western Sur. Co., 492 P.2d 596, 597-98 (Wash. Ct. 1972), review denied, Case No. 42321, 1972 WL 39938 (Wash. Apr. 24, 1972) ("Power Loan 'entrusted' the mobile home to Ballou-Curtiss by delivering it to them and acquiescing in its retention by them within the scope of the definition of the term in RCW 62A.2 — 403(3). Ballou-Curtiss dealt in the business of selling mobile homes and trailers and held itself out to the public as having skill and knowledge of the mobile home business, and as such was a 'merchant' as defined in RCW 62A.2 — 104(1). Finally, the Williamses were 'buyers in the ordinary course of business' as that term is defined in RCW 62A.1 — 201(9). Thus, by virtue of RCW 62A.2-403(2), when Ballou-Curtiss sold and transferred the mobile home to Williamses, they did so free and clear of any security interest of Power Loan.") (footnotes omitted); cf. 1 WILLIAM D. HAWKLAND, HAWKLAND UNIFORM COMMERCIAL CODE SERIES § 1-105:05 (2000 Supp.) ("On the other hand, the law of Section 2-403 is not made to depend on any local variations. It uniformly provides that any entrusting of possession to a merchant who deals in goods of that kind gives the merchant the power to transfer all rights of the entruster to a buyer in the ordinary course. The section also defines 'entrusting' to include acquiescence in retention of possession.").
In accordance with § 2.403(b), Baker had the "power to transfer all rights of the entruster [Cherry Air] to a buyer in the ordinary course of business [OKT]." Thus, Baker transferred good title to the Parts to OKT. OKT paid Baker the agreed purchase price. Cherry Air has no claim against OKT for conversion of the Parts or for damages.
For at least these reasons, the Court concludes that OKT is entitled to a summary judgment determining that it has no liability to Cherry Air with respect to the Parts and disallowing Cherry Air's claim. An Order granting the Motion will be entered separately.
OKT also contends that it is entitled to summary judgment in accordance with § 2.403(a) of the Texas Business Commerce Code. Because the Court has already concluded that the Motion should be granted, the Court does not address this contention.