Collins, J Edward

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Boston College Law ReviewVolume 1Issue 1 Number 1 Article 810-1-1959The Retail Paper Purchaser and the Proceeds LienJ Edward CollinsFollow this and additional works at: http://lawdigitalcommons.bc.edu/bclrPart of the Commercial Law Commons, and the Litigation CommonsThis Comments is brought to you for free and open access by the Law Journals at Digital Commons @ Boston College Law School. It has beenaccepted for inclusion in Boston College Law Review by an authorized administrator of Digital Commons @ Boston College Law School. For moreinformation, please contact nick.szydlowski@bc.edu.Recommended CitationJ Edward Collins, The Retail Paper Purchaser and the Proceeds Lien, 1 B.C.L. Rev. 97 (1959),http://lawdigitalcommons.bc.edu/bclr/vol1/iss1/8THE RETAIL PAPER PURCHASER AND THEPROCEEDS LIENJ. EDWARD COLLINS*One of the numerous ways by which a retailer may doublefinance is by accepting a down payment on the conditional sale ofan article floor-planned by an inventory financer, transferring theconditional sales contract and note to a financing agency other thanhis inventory financer, and keeping the proceeds of both transactionswithout any accounting. The resulting battle between the two financ-ing agencies he could enjoy if not worried as to whether he was tobe indicted for his behavior. While, strangely enough, the litigationbetween two such financers has been somewhat sparse, the cases lackneither dramatic nor legal interest. Can the retailer be considereda pirate of the inventory financer's business? Should the retail fi-nancer be protected as the holder of a negotiable specialty? Theseare some of the questions raised by the problems in this area.'A recent Michigan case, Dart National Bank v. Mid-West Cor-poration,2 presents the problems in a rather interesting posture. Herethe retail financer sought to replevy a house trailer which had beenthe object of trust receipt financing undertaken by the defendantinventory-financing entruster. Pursuant to a statement properly filedunder the Michigan Uniform Trust Receipts Act,' a trust receipt wasissued, in which the retailer-trustee agreed not to sell the trailer, untilfull payment was made of the amount due the entruster. In completedisregard of the trust receipt, the retailer sold the trailer under aconditional sales contract to a good faith purchaser who turned inart old trailer as down payment, and gave the usual negotiable notesecured by the conditional sales agreement for the balance. The noteand agreement were negotiated and assigned to the plaintiff bankunder a warranty that the trailer was free of all liens and encum-brances save the interest of the conditional purchaser. On learningof the transaction shortly thereafter, the entruster, who of coursehad not been paid, talked the purchaser into surrendering the trailerto him and caused the return of the trade-in. In its defense to thereplevin action, the entruster contended that the bank acquired no* Associate Professor of Law, Boston College Law School, A.B. 1934, LL.B. 1937,Boston College; LL.M. 1938, Cornell.I See Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 Yale L.J.1057 (1954) ; Kripke, Chattel Paper as a Negotiable Specialty Under the UniformCommercial Code, 59 Yale L.J. 1209 (1950).2 356 Mich. 574, 97 N.W.2d 98 (1959).Mich. Comp. Laws,	 551.401-555.419.97BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWinterest, in the trailer because the retailer had agreed under the trustreceipt not to sell the property•until the &um secured'had been paid,and further because the bank was not a good faith purchaser, ithaving made no inquiry of the retailer as to whether any liens wereoutstanding against the trailer. The court disposed of the latter pointby finding that such an' inquiry, in view of the warranty containedin the contract, would have been fruitless. This was the first trans-action between 'the bank and the retailer, and the bank had no actualknowledge of the existence of 'the trust receipt transaction.A major battle ground under the Uniform Trust Receipts Act ininventory-financer versus retail-financer litigation has centered aboutthe applicability of Sections 9 and 10. Section 9 gives a good faithpurchaser from the trustee of negotiable or quasi-negotiable instru-ments,' • arising out of the conditional sales transaction, rights 'freeof the interest o£' the 'entruster; despite complete compliance withthe statutory requirement for the filing of the entruster's interest.Section 10 affords' to the entruster "to .the extent to which and asagainst' all classe's' of persOns as to whom his security' interest was"valid at the time of disposition the trustee" the proceeds 'of goodssold by ,the . truStee,'other than in compliance with the terms of thetrust receipt agreement.5 Not 'surprisingly, diverse results' have beenhad in the caseslargely• dependent upon whether the individual courthas read • SeCtion 9 or 10 to' be controlling. While, mathematiCallymore courts seem' to have favored protection of the retail rather thanthe. inventory financer, there can hardly be said to be any reeognizable'majority 'on either side of the question'.°,	 .In the present litigation, the' court ignored previoUs Michigancases dealing 'with 'the rights of a financing agency of a dealer whosells in violation of the terms of the financing agreement,' decidedprior to or apart froM the Uniform Trust Receipt Act,' and concerned4 Section' 9(1) (a) 'deals' with the rights of pufchasers from a trustee of negotiableinstruments and documents as well as of " . . . instruments in such form as are by com-mon practice purchased and sold as if negotiable.... ." See Gilmore, supra note . 1,pages' 1102-1107.5 This is subject to the limitation that the proceeds must be received by the trusteewithin. ten days of a . demand by the entruster for a prompt accounting. Knowledgeon the part of the entruster of the existence of proceeds for ten days without demandfor an accounting constitutes a waiver by the entruster of his rights in' the proceedi.6 Skilton, Cars For Sale: Some Comments on the Wholesale Financing of Auto-mobiles, 1957 Wis. L. Rev. 352, 422.1 In National Bond & Investment Company iv. Union Investment Company, 260Mich. 307,. 244 N.W. 483 (1932), autos covered by a floor mortgage plan were' sold.The financer of the conditional sales contract and transferee of the contract and -notewas held to acquire only the rights of the conditional vendee and to be Subject to theinterest of the mortgagee. . . .In the later case of Fidelity Corporation v. Associates ,Discount Corporation, 34096COMMENTSitself solely with the interpretation of the Act. , In so doing, thedecision can hardly be said to be helpful. The Court quotes Section10 only to ignore it; and reaches its conclusion by finding that thenote, despite its reference to the conditional sales contract, was nego-tiable under the NIL and Section, 9(1) (a). By Section 9(1) (b) thenote is to be. considered the equivalent , of the trailer entrusted tothe retailer. Back, to Section 9(1)(a), the. note-now-trailer havingbeen taken: from the retailer by the bank for value An. good faith,it is held free by the bank of the entruster's' interest. The same con-clusion is then 'reached by the court with respect to the 'conditionalsales 'contract. It iis an "instrument" as defined by Section • of -theAct, being a credit instrument; it becomes the equivalent of thetrailer '.under Section 9(1) (b), and by Section 9(1)(a) the condi-tional , sales..agreement-now-trailer is held free of the entruster's in-terest, it having been taken..by :the. bank in the manner customaryfor instruments which by common practice are purchased and soldas "if negotiable".While the end result of the decision is not undesirable, and itsconclusion probably unassailable in the absence of Section 10, thecourt has obviously failed to come to grips with the latter section(possibly for the reason that these two sections appear irreconcilablein this context). Consequently the case is something less than satis-factory in view of the decisions which have protected the entrusterby recognition of the proceeds lien provided for by Section 10. 8The Uniform Commercial Code deals with the subject in Sections9-306 and 9-308. By the former section a lien is given to the inven-tory financer on the proceeds of installment sales, the lien encompass-ing the conditional sales contracts and other "chattel papers". Inthe hands of the retailer they are subject to the entruster's securityMich. 610, 66 N.W.2d 235 (1954), the floor plan mortgage gave the mortgagor-retailer the right to sell for cash or credit terms approved by the mortgagee. Theconditional sales contract under which the retailer sold the mortgaged cars was as-signed to a financing agency without recourse. No payment having been made by theretailer to the mortgagee, an unsuccessful attempt was made to have the finance com-pany declared a trustee of the receipts of the conditional sales contract. By lookingat the "realities of the transaction" the court found the retailer received the sameamount of money as if there had been a cash sale, and that it should be treatedas the equivalent of a sale for cash. Consequently, the purchaser of the sales contractwas protected.8 General Motors Acceptance Corporation v. Associates Discount Corporation, 38N.Y.S.2d 972 (Syracuse Munic. Ct, 1942), rev'd on other grounds, 267 App. Div. 1032,48 N.Y.S.2d 242 (4th Dep't 1944) ; Canandaigua National Bank & Trust Company v.Commercial Credit Corporation, 135 N.Y.S.2d 66 (4th Dept 1954), reversing 204Misc. 946, 126 N.Y.S.2d 376 (Sup. Ct. 1953). For a variation of the problem of thenature of the entruster's interest under Section 10 see In re Harpeth Motors, Inc., 135F. Supp. 863 (D.C. Tenn. 1955).99BOSTON COLLEGE INDUSTRIAL AND COMMERCIAL LAW REVIEWrights. By Section 9-308; however, the financer of the conditionalsales agreement who purchases the retail paper from the trustee bygiving "new value" for it is protected as against the•original inventoryfinancer, with respect to the note (which is presumably in negotiableform) whether he has knowledge of the entruster's security interestor not if he takes in the ordinary course of business, and with respectto any non-negotiable instruments only if he has a lack of knowledgeof the entruster's outstanding interest, and in addition takes in theordinary course of buMness. Both sections having been extremelycarefully drafted with full cognizance of the difficulties of interpre-tation experienced under the Uniform Trust Receipts Act, and bothsections having been completely re-written in 1957, it is anticipatedthat the major problems of interpretation have been eliminated.Under these sections the result reached in Dart National Bank v.Mid-West Corporation has been preserved.100

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