IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
No. 97-50969
Summary Calendar
_______________
AMERICAN GOOSENECK, INC.,
d/b/a AG PRODUCTS,
Plaintiff-Appellant-
Cross-Appellee,
VERSUS
WATTS TRUCKING SERVICE, INC.,
and
MEL KEMP,
Defendants-Appellees-
Cross-Appellants.
_________________________
Appeals from the United States District Court
for the Western District of Texas
(SA-96-CV-181)
_________________________
September 16, 1998
Before JOLLY, SMITH, and WIENER, Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
American Gooseneck, Inc., doing business as AG Products
(“Gooseneck”), sued Watts Trucking Services, Inc. (“Watts
Trucking”), and Mel Kemp for conversion. Gooseneck claimed that
Watts Trucking and Kemp had purchased front load containers, or
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion
should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
“dumpsters,” on which Gooseneck held a valid and enforceable lien.
Watts Trucking then distributed the dumpsters throughout the
country, and the containers cannot be identified or returned. The
district court held for Gooseneck on its conversion claim and
awarded $28,500, the amount the court determined to be the fair
market value of the dumpsters at the time and place of conversion.
Gooseneck has appealed, however, claiming that it should also
have received the value of the lost use of the containers during
their period of detention as well as exemplary damages and pre- and
post-judgment interest. Defendants cross-appealed, asserting that
Gooseneck's lien was invalid, that Gooseneck's claim to the
dumpsters was thus subordinate to that of Watts Trucking under the
law of secured transactions, and that Gooseneck therefore had
failed to establish conversion. We reverse the finding of
liability, thus mooting the damages issue, and we render judgment
in favor of defendants.
I.
Gooseneck, an Arizona corporation, buys, sells, and leases
trash containers. In April 1993, Mid Western Waste, Inc. (“Mid
Western”), a company owned by James Covington, leased 279 eight-
yard front load dumpsters and six six-yard dumpsters from
Gooseneck. Mid Western subsequently defaulted on the lease.
Gooseneck and Mid Western then agreed that Mid Western would
actually purchase the dumpsters, on an installment basis, with the
dumpsters serving as security. In August 1993, Gooseneck filed
2
with the Texas Secretary of State a UCC-1 statement describing the
type of containers held as security. The UCC-1 form, however, did
not include the signature of Covington (for the debtor, Mid
Western) as required by the Texas UCC. See TEX. BUS. & COM. CODE
ANN.§ 9.402(a) (Tex. UCC) (Vernon 1994).
On November 3, 1993, Covington and James Watts entered an
agreement for Watts Trucking to purchase the 285 containers from
Mid Western for $20,500. Watts is the sole shareholder of both
Watts Trucking and a separate company, Texas Waste Systems, Inc.
(“Texas Waste”). Kemp worked for Watts as general manager of Texas
Waste. Under the agreement between Watts and Covington, Watts
Trucking was to take the dumpsters in exchange for two cashier's
checks and satisfaction of a debt owed by Mid Western.
Watts directed Kemp, Texas Waste's manager, to issue the
checks to Mid Western, and the checks Kemp gave Mid Western showed
Texas Waste as the purchaser of the checks. Kemp was acting,
however, solely on behalf of Watts and Watts Trucking, not Texas
Waste. Watts Trucking was to reimburse Texas Waste for the
expenditure.
In late November and early December 1993, Kemp began to take
possession of the containers for Watts Trucking. The containers
were initially stored in Texas Waste's yard, where Greg Hambicki,
a Gooseneck sales representative, observed them in March 1994.
Hambicki then told Kemp he thought the containers belonged to
Gooseneck. Kemp told Hambicki he had bought the containers and
that Hambicki would have to talk to someone else in the company
3
about the claim. Thereafter, Kemp, at Watts's instruction, began
shipping the containers to various parts of the country.
II.
Apparently unaware that it was Watts Trucking, not Texas
Waste, that had purchased the dumpsters, Gooseneck filed suit in
state court to enforce its lien against Texas Waste. In March
1996, the state court entered a judgment finding that Gooseneck
held an enforceable lien on the containers as against Texas Waste.
During the state trial, Gooseneck learned for the first time
that Kemp had been acting for Watts Trucking, not Texas Waste, in
purchasing, acquiring, and distributing the containers, and in
February 1996, Gooseneck sued Watts Trucking and Kemp in state
court. Watts Trucking removed the case to federal court on the
basis of diversity of citizenship. Relying on the state court's
determination that Gooseneck had a valid lien on the dumpsters, the
federal district court held for Gooseneck on its conversion claim
and awarded it $28,500, the amount the court determined to be the
fair market value of the dumpsters at the time and place of
conversion.
III.
Because we agree with defendants that the court erred in
finding conversionSSa conclusion that renders moot Gooseneck's
claims concerning the inadequacy of the district court's remedySSwe
first address the cross-appeal. Defendants note that the UCC-1
financing statement Gooseneck filed with the Secretary of State and
4
exhibited at trial lacked the debtor's signature and is thus
invalid under Texas secured transactions law. See TEX. BUS. & COM.
CODE ANN. § 9.402(a)(Vernon 1994). They argue that because the lack
of the debtor's signature rendered AG's security interest
imperfectSSa point the district court madeSSpriority of claims to
the dumpsters depends on § 9.301, the commercial code provision
governing the rights of “buyers who take priority over unperfected
security interests.” TEX. BUS. & COM. CODE ANN. § 9.301 (Vernon
1994). As it applies here, § 9.301(a)(3) provides that
an unperfected security interest is subordinate to the
rights of . . . in the case of goods, . . . a person who
is not a secured party and who is a transferee in bulk or
other buyer not in the ordinary course of business, . . .
to the extent that he gives value and receives delivery
of the collateral without knowledge of the security
interest and before it is perfected.
The district court failed to apply § 9.301(a)(3).
Defendants argue that all the statutory elements of this
provision are satisfied, and that Gooseneck's security interest in
the dumpsters was thus subordinate to Watts Trucking's interest.
They contend that (1) Gooseneck held an unperfected security
interest in the dumpsters, (2) Watts Trucking bought the dumpsters
not in the ordinary course of business, (3) Watts Trucking gave
value for the dumpsters, and (4) Watts Trucking received delivery
without knowledge of the unperfected security interest.
If all these assertions are correct, Gooseneck's security
interest was subordinate to Watts Trucking's rights. Watts
Trucking thus could not have engaged in conversion, which requires
“the wrongful exercise of dominion and control over another's
5
property in denial of or inconsistent with his rights.” Green
Int'l, Inc. v. Solis, 951 S.W.2d 384, 391 (Tex. 1997).
Defendants' analysis is correct. The record establishes, and
the district court found, that Gooseneck's security interest was
unperfected and, consequently, is subordinate to the ownership
rights of Watts Trucking, which purchased the dumpsters for value
not in the ordinary course of business and received them without
knowledge of the unperfected security interest.
Gooseneck contends that defendants did not raise this “failure
of perfection” argument at trial and are therefore barred from
pressing it on appeal. This claim, however, is without merit.
Defendants pursued this line of argument a number of times in
the district court. The pre-trial order highlighted the contention
three times. In its statement of the case, Watts Trucking claimed
that “[t]he UCC-1 was defective and therefore constitutes no notice
to Watts of AG Products' security interest.” As a contested issue
of fact, the parties identified whether “[Gooseneck] perfected its
security interest in the Containers by filing a UCC-1 Financing
Statement on August 16, 1993,” and as a contested issue of law, the
parties included “[w]hether [Gooseneck's] lien filed August 16,
1993 was valid.”
The validity of Gooseneck's lien as to Watts Trucking also
surfaced at trial. On the day of trial, Watts Trucking filed a
brief attacking the UCC-1 as unperfected because it lacked the
debtor's signature. Even after trial, defendants pursued the
failure-of-perfection argument. Watts Trucking filed a post-trial
6
brief re-stating the argument, and it moved for judgment under
FED. R. CIV. P. 52(c) at the close of the evidence on the same
ground. Given all these statements of the failure-of-perfection
argument, Gooseneck's claim that defendants are raising a new issue
on appeal is unfounded.
Neither can Gooseneck successfully argue that Watts Trucking
is precluded from contesting the validity of a lien the state court
already had declared valid. While a Texas court did approve the
enforceability of the lien in a case brought by Gooseneck to
enforce the lien against Texas Waste, Watts Trucking was not a
party to that suit and thus could not have appealed the judgment or
argued that a defect in the UCC filing rendered the lien invalid.
To invoke collateral estoppel, or issue preclusion, the
invoking party must establish that the facts sought to be litigated
in the second case were fully and fairly litigated in the prior
action, that those facts were essential to the judgment in the
first action, and that the parties in the second case were cast as
adversaries in the first action. Bonniwell v. Beech Aircraft
Corp., 663 S.W.2d 816, 818 (Tex. 1984); Benson v. Wanda Petroleum
Co., 468 S.W.2d 361, 362-63 (Tex. 1971). This last element is
missing here. Watts Trucking is a separate entity from Texas Waste
and was never in privity with Texas Waste, the defendant in the
state court action. Because Watts Trucking was not cast as an
adversary in the first case, the resolution of that action does not
control what it may argue now.
Gooseneck also makes a vain attempt to cast defendants'
7
failure-of-perfection argument as a defense that FED. R. Civ.
P. 8(b) would require to be “set forth affirmatively” in the
answer to the initial complaint. In arguing that Gooseneck's
security interest was imperfect, and thus was subordinate to Watts
Trucking's interest, defendants are not setting forth an
affirmative defense; they are simply contesting an element of
Gooseneck's prima facie conversion caseSSi.e., that its right to
the dumpsters was superior to that of Watts Trucking. A denial
that an essential element of a claim exists is not the same as an
affirmative defense to the claim and need not be included in the
answer under rule 8(b). Compare rule 8(b) with FED. R. CIV. P. 8(c).
Gooseneck then argues that the cross-appeal should be
dismissed because the defendants/cross-appellants briefed the wrong
lawSSthat of Texas instead of that of Oklahoma, the state where the
debtor resides. Gooseneck points to UCC § 9.103(c)(2), which says
that for “mobile goods” the law of the jurisdiction in which the
debtor is located governs the perfection and the effect of
perfection or nonperfection of a security interest. Gooseneck
notes that the debtor here, Mid Western, was an Oklahoma
corporation and that Oklahoma law thus should apply. Because
defendants briefed Texas secured transactions law, Gooseneck
reasons, the failure-of-perfection argument is barred because it is
not accompanied by a proper legal analysis, as required by FED. R.
APP. P. 28(a)(c).
Gooseneck has never previously asserted that the Texas UCC
does not govern the security interest here, and Texas law in fact
8
would control, unless the dumpsters at issue were “mobile goods”
rather than “ordinary goods,” a question appropriate for the trial
court. See TEX. BUS. & COM. CODE ANN. § 9.103 (Vernon 1994). Indeed,
Gooseneck did not object to the pretrial order, which stated that
there were no conflict-of-law issues to resolve and implied that
there were no state statutes or regulations at issue other than
those included in Vernon's Texas Statutes.1 Moreover, the district
court expressly tested the validity of Gooseneck's financing
statement “[u]nder Texas law,” and Gooseneck never attacked this
decision in any post-trial filing, nor has it cited to the record
to show where it preserved its position about the applicability of
Oklahoma secured transactions law.
Gooseneck acquiesced in the district court's choice of Texas
law as controlling the issue of UCC-1's validity, and it is a
little late in the day for Gooseneck to change its tune. The
position Gooseneck took in the district court binds it on appeal,
particularly as its position on appeal requires resolution of a
factual issue regarding the mobility of the dumpsters. See
American Int'l Trading Corp. v. Petroleos Mexicanos, 835 F.2d 536,
540 (5th Cir. 1987); Shelak v. White Motor Co., 581 F.2d 1155, 1160
(5th Cir. 1978).
On the merits, Gooseneck claims that, under both Oklahoma and
1
Item 20 of the pre-trial order states: “List conflict of law questions, if
any: Not Applicable.” Item 21 states: “A copy of any statute not found in the
United States Code, Code of Federal Regulations or Vernon's Texas Statutes is
attached hereto: Not Applicable.” The plain implication is that the district court
believed, and the parties understood, that Texas law was the only applicable state
law in the case.
9
Texas law, Gooseneck's security interest was perfected, despite the
lack of the debtor's signature. Because Gooseneck is wrong with
respect to the law of both states, we need not address the issue of
which state's law appliesSSan issue that turns on the factual
question of whether the dumpsters are “mobile goods,” see TEX. BUS.
& COM. CODE ANN. § 9.103 (Vernon 1994), and that we are consequently
ill-equipped to resolve.
While Gooseneck claims that Oklahoma's secured transactions
law does not require the debtor's signature as a precedent to
perfection, even a cursory look at that state's law shows that the
debtor's signature is required. Section 9-402(1) of Oklahoma's UCC
includes the signature of the debtor as an essential element of a
sufficient financing statement, see OKLA. STAT. ANN. tit. 12A
§ 9-402(1), and courts interpreting Oklahoma law on this issue have
required the debtor's signature for perfection. See, e.g.,
Pontchartrain State Bank v. Poulson, 684 F.2d 704, 705, 706-07,
708-09 & nn. 1,2 (10th Cir. 1982); Wilmot v. Central Okla. Gravel
Corp., 620 P.2d 1350, 1353-54 (Okla. Ct. App. 1980).
Citing § 9-402(2), Gooseneck states that Oklahoma permits a
financing statement to be sufficient when it is signed by the
secured party instead of the debtor. Gooseneck apparently fails to
read the whole of that statutory provision. Section 9-402(2)
permits a secured party's signature to be sufficient only for
certain classes of collateral that do not include the dumpsters
10
here.2
Texas law also requires the presence of the debtor's signature
to create a valid financing statement. See TEX. BUS. & COM. CODE ANN.
§ 9.402(a) (Vernon 1994). Without a UCC-1 signed by the debtor,
Gooseneck at most held an unperfected lien.3 Id.; Sommers v. Int'l
2
The statute provides:
A financing statement which otherwise complies with subsection (1) is
sufficient when it is signed by the secured party instead of the debtor
if it is filed to perfect a security interest in:
(a) collateral already subject to a security interest in another
jurisdiction when it is brought into this state, or when the debtor's
location is changed to this state . . .; or
(b) proceeds . . . if the security interest in the original
collateral was perfected . . .; or
(c) collateral as to which the filing has lapsed; or
(d) collateral acquired after a change of name, identity or
corporate structure of the debtor . . . .
12A O.S. § 9-402(2) (emphasis added). Because the dumpsters do not fit into any of
these four categories, the subsection does not apply.
3
It may seem harsh that a “technicality” such as a missing signature could
subordinateSSand sometimes, as in this case, destroySSa party's security interest
in collateral it believes is valid security. Gooseneck argues that the missing
signature should not weaken its security interest, because Watts Trucking could
easily have learned of Gooseneck's interest in the dumpsters had it made reasonable
efforts to discover any encumbrances on the property. Gooseneck also points to
caselaw holding that “[s]ubstantial compliance is sufficient to satisfy the
requirements of § 9.402.” Crow-Southland Joint Venture No. 1 v. North Fort Worth
Bank, 838 S.W.2d 720, 723 (Tex. App.SSDallas 1992, writ denied). This court,
however, has previously rejected Gooseneck's arguments:
When the state legislature swept away all statutes and judicial
precedents concerning secured transactions in personal property,
tangible and intangible, it never intended that the simpler
requirements could be ignored. The process of simplification of
statutory procedures does not give license to omit one of the simpler
requirements.
It is true that the legislature did provide in [UCC § 9-402(5)] that
(5) A financing statement substantially
complying with the requirements of this
section is effective even though it contains
minor errors which are not seriously
misleading.
Obviously this pertains to minor errors in the contents of the
(continued...)
11
Bus. Machs., 640 F.2d 686, 689 (5th Cir. Unit A Mar. 1981);
Republic Nat'l Bank v. Fitzgerald (In re E.A. Fretz Co.), 565 F.2d
366, 369-73 (5th Cir. 1978). Consequently, § 9.301, which
identifies persons who take priority over unperfected security
interests, determines whose interest in the dumpsters had priority
in this case.
We agree with defendants that all the elements of § 9.301 are
met, and that Gooseneck's interest was therefore subordinate to
that of Watts Trucking. First of all, Watts Trucking bought the
dumpsters not in ordinary course of business. A buyer in ordinary
course of business buys “from a person in the business of selling
goods of that kind . . . .” TEX. BUS. & COM. CODE ANN. § 1.201(9)
(Vernon 1994). Because Mid Western, the seller, was not “in the
business of selling” dumpsters, Watts Trucking was a buyer not in
ordinary course of business.4
(...continued)
statement and does not relate to one of the formal requisites of a
financing statement such as the signatures of the secured parties.
Republic Nat'l Bank v. Fitzgerald (In re E.A. Fretz Co.), 565 F.2d 366, 373 (5th
Cir. 1978).
4
Gooseneck notes that, in the definition of “buyer in ordinary course of
business,” the code defines “buying” so as to exclude “a transfer . . . in total or
partial satisfaction of a money debt.” TEX. BUS. & COM. CODE ANN. § 1.201(9) (Vernon
1994). Gooseneck thus argues that Watts Trucking was not a “buyer not in ordinary
course of business” because part of the consideration it gave for the dumpsters was
satisfaction of a debt owed by Mid Western. This argument fails for two reasons.
First, § 1.201 defines “buying” for the purposes of identifying a “buyer in
ordinary course of business.” The sentence precluding debt satisfaction
transactions from being “buying” simply operates to exclude debt satisfaction
transactions from those transactions that otherwise would make a purchaser a “buyer
in ordinary course of business.” We should not lift the sentence from its context
and interpret it to mean that any purchase that involves a debt satisfaction as
consideration is not “buying.” Section 1.201(9) merely identifies those buyers who
are buyers in the ordinary course of business. All other buyers, even those who buy
(continued...)
12
Watts Trucking also obviously gave value for the dumpsters,
paying $20,500. While a portion of this was satisfaction of a debt
Mid-Western owed, the consideration Watts Trucking gave certainly
constituted “value.”5
Finally, Watts Trucking received delivery without knowledge of
the unperfected security interest. Actual, not constructive,
knowledge forms the litmus test under § 9-310(a)(3). See TEX. BUS.
& COM. CODE ANN. § 1.201(25) (Vernon 1994) (“A person 'knows' or has
'knowledge' of a fact when he has actual knowledge of it.”). The
district court found that Watts Trucking entered its agreement to
purchase the containers on November 3, 1993, and that Kemp began to
take possession of the containers in late November or early
December 1993. The parties stipulated that “[t]he [c]ontainers
have been under the control of Watts Trucking Service, Inc. at all
times since December 1, 1993.” The key question, then, is whether
defendants had actual knowledge of Gooseneck's unperfected security
interest in the dumpsters as of December 1993.
(...continued)
by satisfying a debt, are buyers not in the
ordinary course of business. See Chase Manhattan Bank, N.A. v. J & L Gen.
Contractors, Inc., 832 S.W.2d 204, 211 (Tex. App.SSBeaumont 1992, no writ) (holding
that trucking company was buyer not in ordinary course of business where it
satisfied a debt of $681,615 in exchange for property worth $630,000).
Second, even if the sentence defining buying in § 1.201(9) did apply to buyers
not in the ordinary course of business, Watts Trucking still would have bought the
dumpsters. It did so by fully canceling a debt and giving two cashier checks for
the containers. Money was exchanged here; this was not only a debt-cancellation
transaction.
5
See TEX. BUS. & COM. CODE ANN. § 1.201(44) (“[A] person gives 'value' for
rights if he acquires them . . . in total or partial satisfaction of a pre-existing
claim.”); Chase Manhattan Bank, N.A. v. J & L General Contractors, Inc., 832 S.W.2d
204, 211 (Tex. App.SSBeaumont 1992, no writ) (holding that purchaser of equipment
gave value when it satisfied debt).
13
Watts and Kemp never checked the UCC-1 filings to see whether
Gooseneck had a lien, nor did the UCC require them to do so. They
both testified that they lacked actual knowledge of any such lien,
and neither Watts nor Kemp actually knew of any lien on the
dumpsters when Watts Trucking bought them. The record suggests
that the first time Watts Trucking or Kemp would have had any idea
that Gooseneck might have a lien was March 1994, when a Gooseneck
sales representative saw the containers in Texas Waste's yard and
contacted Kemp to discuss Gooseneck's interest in the containers.
Given these facts, it is evident that Watts Trucking had no actual
knowledge of Gooseneck's lien when it received delivery.
Under § 9.301(a)(3), Watts Trucking's interest in the
dumpsters is superior to Gooseneck's unperfected security interest,
which was imperfect because the UCC-1 filing lacks the debtor's
signature. Hence, under § 9.301(a)(3), Gooseneck's interest is
subordinate to that of Watts TruckingSSa buyer not in ordinary
course of business who gave value for the dumpsters and received
them without knowledge of Gooseneck's unperfected security
interest. Because Gooseneck does not have a right to the dumpsters
superior to that Watts Trucking holds, the defendants cannot be
liable for conversion.6
The judgment is REVERSED and RENDERED in favor of defendants.
6
See Chase Manhattan, 832 S.W.2d at 211 (rejecting bank's conversion claim
against purchaser of collateral where bank's financing statement was insufficient
and bank's security interest was therefore subordinate to right of purchaser).
14