Glenshaw v. Ontario Grape

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

9-29-1995

Glenshaw v Ontario Grape
Precedential or Non-Precedential:

Docket 94-3722

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Recommended Citation
"Glenshaw v Ontario Grape" (1995). 1995 Decisions. Paper 260.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/260

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 94-3722

GLENSHAW GLASS COMPANY, a Pennsylvania Corporation

V.

ONTARIO GRAPE GROWERS' MARKETING BOARD;
AGRICULTURAL PRODUCTS BOARD OF AGRICULTURE CANADA,
Appellants

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 91-00941)

Argued July 28, 1995

Before: NYGAARD and McKEE, Circuit Judges and
FULLAM, District Judge*

(Opinion Filed September 29, 1995)

GEFF BLAKE, ESQUIRE (Argued)
HENRY F. SIEDZIKOWSKI, ESQUIRE
Elliott, Reihner, Siedzikowski, North & Egan
400 Spruce Street
300 Mellon Bank Building
Scranton, PA 18503
Attorney for Appellants

RICHARD F. RINALDO, ESQUIRE (Argued)
Meyer, Unkovic & Scott
1300 Oliver Building
Pittsburgh, PA 15222
Attorney for Appellee

AMY J. GREER, ESQUIRE
Eckert Seamans Cherin & Mellott
42nd Floor, 600 Grant Street
Pittsburgh, PA 15219
Attorney for Appellee

1
* Honorable John P. Fullam, Senior United States District Judge
for the Eastern District of Pennsylvania, sitting by designation.

OPINION OF THE COURT

NYGAARD, Circuit Judge.
This case arises from the Chapter 11 bankruptcy of

Keystone Foods, Inc. of North East, Pennsylvania. The Ontario

Grape Growers' Marketing Board and the Agricultural Products

Board of Agriculture Canada appeal from the district court's

order awarding Glenshaw Glass Corporation the sale proceeds of

certain grape products processed and stored by Keystone on behalf

of appellants. We will reverse.

I.

A. The Parties

Keystone was a farm cooperative that processed and sold

food products, including grapes, for its member farmers. Keystone

had three main divisions: 1) an industrial sales division, which

processed and sold bulk fruit juice; 2) a retail sales division,

which bottled and packaged fruit juice, provided either by its

members or purchased on the open market; and, 3) a division that

processed, such as pressing grapes and concentrating the juice,

and packed them for third parties. Pursuant to packing and

processing agreements, food products on Keystone's premises were

not included in Keystone's inventory unless and until Keystone

actually purchased them.

2
 For several years, Keystone had borrowed money from the

Baltimore Bank for Cooperatives, now called the National Bank of

Cooperatives. The Bank held a perfected first priority security

interest in Keystone's present and future accounts, inventory,

equipment, contract rights, goods, general intangibles and other

property, and a first mortgage on Keystone's real property. It

is undisputed that the Bank had first priority with respect to

these items.

Glenshaw, the plaintiff below, sold glass containers to

Keystone for use in bottling juice. After the Bank perfected its

security interest, Glenshaw obtained and perfected a similar all-

encompassing security interest in Keystone's present and future

assets, including its inventory.

The defendant/appellants, whom we shall collectively

call the Grape Growers, are Ontario Grape Growers' Marketing

Board, which acts as an agent for co-appellant/co-defendant

Agricultural Products Board of Agriculture Canada, which

purchases, processes, stores, ships and sells surplus Canadian

agricultural products, including surplus Canadian-grown grapes.

Each annual grape harvest represents an individual "Surplus Grape

Program."

B. The Contracts Between Keystone and the Grape Growers

On September 15, 1988, the Grape Growers and Keystone

entered into two agreements important to this litigation. At the

time, Keystone owed the Grape Growers more than $450,000 for

Keystone's purchases pursuant to the 1987 Canadian Surplus Grape

Program. When the Grape Growers needed processing and storage

3
services for the 1988 Surplus Grape Program, it allowed Keystone

to work off its debt by processing 1988 surplus grapes and

storing the juice and concentrate.

The primary contract was the "Processing and Storage

Agreement," under which the Grape Growers shipped grapes to

Keystone for custom processing, juice concentrating and storage.

Keystone agreed ultimately "to return to the Board juice or

concentrate" resulting from the processing. As for grapes in

processing or storage at Keystone's facilities, the agreement

clearly stated:
Title to all grapes processed by Keystone
under this Agreement, and to all juice or
concentrate resulting from such processing,
shall be in the Board [i.e. the Grape
Growers], and nothing contained herein, and
no act of Keystone or the Board, shall cause
Board title to vest in Keystone, except by a
bill of sale or other title of transfer
instrument being executed by the Board.

Nothing in the Agreement gave Keystone authority to use or sell

the appellants' grapes or grape product.

The second agreement, executed on the same day, was the

"Purchase Agreement." This contract gave Keystone an option,

until October 1989, to purchase certain amounts of the grapes

delivered to it for processing and storage by the Grape Growers.

Keystone agreed "[n]ot to use or sell any of the grapes, juice or

concentrate without receiving the prior written consent of the

Board in the form of a stock release issued by the Board."

C. Course of Dealing Under the Contracts

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 Pursuant to the Processing and Storage Agreement, the

Grape Growers shipped 1988 surplus Canadian-grown grapes to

Keystone. When the grapes were delivered, Keystone did not pay

for the grapes, nor were they included in Keystone's inventory.

Rather, Keystone regularly sent invoices to the Grape Growers

reflecting Keystone's charges for processing, concentrating,

storing and loading the grapes. Those charges were deducted from

Keystone's debt to the Grape Growers from the 1987 Surplus Grape

Program. In total, the Grape Growers delivered nearly 7,000 tons

of grapes to Keystone pursuant to the Processing and Storage

Agreement.

In November 1988, without prejudice to the Grape

Growers' ownership rights in the grapes delivered under the

Processing and Storage Agreement, the parties amended the

agreement to give the Grape Growers a security interest in the

grapes in the event the Grape Growers were deemed not to own

them. In December 1988, the Grape Growers perfected this

security interest by filing the proper financing statement, which

indicated that it was being filed without prejudice to the Grape

Growers' claim to ownership of the grape product.

The Grape Growers assert that the decision to obtain a

security interest in the grapes was made in October 1988 after

they discovered that Keystone had converted some of the Grape

Growers' grapes, contravening the parties' agreement that the

grapes only be processed and stored for the Grape Growers. The

district court, however, found that the Grape Growers discovered

this violation in May 1989 rather than in October 1988. Because

5
it does not affect our decision, we will accept the district

court's finding. Upon discovering the unauthorized use of its

grape product, the Grape Growers, after the fact, formally

released the product to Keystone, which paid the Grape Growers

the sales price and a sales commission.

In a separate transaction in February 1989, Keystone

made one purchase pursuant to the Purchase Agreement, in the

amount of $93,325.00. The Grape Growers issued a formal, written

release of the product to Keystone in accordance with the

Purchase Agreement. The Grape Growers also received a commission

on the sale.
D. The Keystone Bankruptcy and the Grape Growers'
Removal of the Grape Product from the Bankruptcy
Estate

On June 9, 1989, Keystone filed a voluntary Chapter 11

petition in Bankruptcy. Keystone's largest creditors were the

Bank, to which it owed approximately $1.8 million, and Glenshaw,

to which it owed approximately $1.6 million.

On June 28, 1989, the bankruptcy court held a hearing

to discuss preliminary matters. In re Keystone Foods, Inc., No.

89-00318E (Bankr. W.D. Pa. June 28, 1989). Counsel for the

Grape Growers attended the hearing, at which the parties

discussed the Grape Growers' claim to the grapes delivered to

Keystone under the Processing and Storage Agreement and the

resulting grape product. The bankruptcy court noted that the

Grape Growers' contingent security interest created an ambiguity

as to which party had priority in the grape product. Although

6
sale of the grape product at issue was discussed, the court did

not authorize the Grape Growers or any other party to make a

sale.

Despite the bankruptcy, and without informing the

bankruptcy court or Keystone's creditors, the Grape Growers sold

the grape product to third parties and removed it from Keystone's

premises. The Grape Growers made a series of sales beginning

immediately after the June 28, 1989 bankruptcy hearing and

continuing at least until November 1989. Neither the Bank nor

Glenshaw became aware of the sales or removal of product from

Keystone's premises until after November 1989. Keystone itself

remained in business after its bankruptcy filing until May or

June 1990, following a liquidation of its assets in February

1990.

E. Assignment of Claims to Glenshaw

The Bank, Glenshaw and Keystone entered into a

settlement agreement, which was approved by order of the

bankruptcy court. In Re Keystone Foods, Inc., No. 89-00318E

(Bankr. W.D. Pa. 1991) (unpublished order). The settlement

authorized Glenshaw to pursue any claims of the Bank, Keystone

and Glenshaw, against the Grape Growers, which arose out of the

Processing and Storage Agreement, the Purchase Agreement, and the

Grape Growers' post-petition removal of the grape product from

the Keystone bankruptcy estate.

F. Proceedings in the District Court

On June 7, 1991, two days after the bankruptcy court

approved the settlement agreement, Glenshaw sued the Grape

7
Growers, seeking damages for breach of contract, conversion and

willful violation of the automatic stay. The district court

found in Glenshaw's favor on its claims for conversion and

willful violation of the automatic stay. It held that, in

addition to processing and storage, the grapes were also

delivered to Keystone for sale, and thus should be treated as

consigned goods under 13 Pa. Cons. Stat. § 2326, (c) which

states:
Consignment sales -- Where goods are
delivered to a person for sale and such
person maintains a place of business at which
he deals in goods of the kind involved, under
a name other than the name of the person
making delivery, then with respect to claims
of creditors of the person conducting the
business the goods are deemed to be on sale
or return. The provisions of this subsection
are applicable even though an agreement
purports to reserve title to the person
making delivery until payment or resale or
uses such words as "on consignment" or "on
memorandum." However, this subsection is not
applicable if the person making delivery:

(1) complies with an applicable law providing
for the interest of a consignor or the like
to be evidenced by a sign;
(2) establishes that the person conducting
the business is generally known by his
creditors to be substantially engaged in
selling the goods of others; or
(3) complies with the filing provisions of
Division 9 (relating to secured
transactions).

In addition, subsection (b) provides that goods held on

sale or return are subject to claims of creditors of the buyer

while it holds them. Thus, the district court held that, even

though the Grape Growers purported to reserve title to the

8
grapes, section 2326 required that the grape deliveries be deemed

consignments, making them part of the bankruptcy estate pursuant

to subsection (b). The court then found that the Bank and

Keystone each had priority to the grape product over the Grape

Growers because the Grape Growers had failed to establish that

any of the exceptions in subsections (c)(1)-(3) applied. The

district court held that, because the Grape Growers failed to

give notice to Keystone's creditors or file its financing

statement covering the grapes and grape product before delivering

the grapes to Keystone, as required by 13 Pa. Cons. Stat.

§9114(a)(1), the Grape Growers failed to satisfy the

notice/filing exception set forth in section 2326(c)(3).

Therefore, the Bank's security interest in Keystone's property

gave it priority over the Grape Growers as to the grapes and

grape product at issue. In turn, Glenshaw, by virtue of its

assignment of claims from the Bank, also had priority over the

Grape Growers. In addition, the district court held that the

Grape Growers' removal of the grape product from Keystone's

premises constituted a violation of the automatic stay provision

of the Bankruptcy Code, 11 U.S.C. §362.

The district court awarded damages to Glenshaw, as

assignee of the claims of the Bank and Keystone, in the amount of

the total sale proceeds the Grape Growers realized in post-

petition sales of the grape product -- $1,365,452 plus interest

from the date of the conversion.

On appeal, the Grape Growers argue that the district

court erred in five respects: (1) by treating the grapes the

9
Grape Growers delivered to Keystone merely for processing and

storage as goods on consignment under section 2326, thus

subjecting the resulting grape product to the claims of

Keystone's creditors; (2) by holding that Glenshaw took priority

over the Grape Growers as to the grape product even if it was

properly deemed to be on consignment; (3) by holding that the

Grape Growers violated the automatic stay; (4) by admitting into

evidence a handwritten memorandum by an attorney for the Grape

Growers that suggested that the Grape Growers intentionally

failed to notify Keystone's creditors of the Grape Growers'

interest in the grape product; and (5) in calculating damages.
II.

The central issue is whether section 2326 subjects the

grapes delivered by the Grape Growers to Keystone for processing

and storage to the claims of Keystone's creditors. Two sub-

issues emerge: (1) was this a consignment transaction? and (2)

if not, does section 2326 apply to bailment transactions not

involving a consignment?

A. Was this a Consignment?

Generally, there are two types of consignments -- true

consignments and security consignments. Armor All Products v.
Amoco Oil Co., 533 N.W.2d 720, 725 (Wis. 1995). A true

consignment creates an agency pursuant to which goods are

delivered to a dealer for the purpose of resale; the consignor

usually requires the consignee to charge a certain price for the

goods. Id. A security consignment, on the other hand, occurs

10
when the delivering party agrees to take the goods back in lieu

of payment by the receiving party if the latter fails to sell

them; to provide security to the consignor, title to the goods

remains in the consignor's name. Id. In both situations, goods

are delivered for sale -- that is, for sale by the receiving

party.

In contrast, a bailment occurs when property is

entrusted to a party temporarily for some purpose; upon the

fulfillment of that purpose the property is "redelivered to the

person who delivered it, otherwise dealt with according to his

directions or kept until he reclaims it." Smalich v. Westfall,

269 A.2d 476, 480 (Pa. 1970). Although every consignment

involves a bailment of sorts because the goods are entrusted for

the purpose of sale, not every bailment is a consignment. Armor

All Products, 533 N.W.2d at 727 (a bailment without more does not

create a consignment).

We conclude that the transaction was a bailment, but

not a consignment. Neither the Processing and Storage Agreement

nor the Purchase Agreement, whether read individually or

collectively, gives Keystone the right to sell the Grape Growers'

product. The grapes were delivered to Keystone only for

processing and storage. Afterwards, the grapes were to be

redelivered to the Grape Growers or otherwise dealt with

according to the Grape Growers' directions.

Furthermore, the fact that the grape product would

ultimately be sold to other parties by the Grape Growers does not

alter the foregoing analysis because the Grape Growers, the

11
bailor, would both conduct and control the eventual sale. In re

Zwagerman, 125 B.R. 486, 491 (W.D. Mich. 1991) (no consignment

when holder of the goods would process them and return them for

later sale by the owner). The fact that Keystone held an option

to purchase some of the grapes pursuant to the Purchase Agreement

does not make the transaction a consignment; indeed, that fact

militates against such a result. E.g., In re Sitkin, 639 F.2d

1213, 1217 (1st Cir. 1981) (citations omitted), ("A bailment may

still exist where the bailee has a continuing option to purchase

or to sell."). As to those grapes that Keystone did opt to

purchase, the Grape Growers made the sale, received a sales

commission, and exercised no control over the grapes or their

resale pricing thereafter.

Therefore, to the extent that the district court found

that the Grape Growers delivered the grapes to Keystone for sale,

this finding was clearly erroneous. The record demonstrates

that, consistent with the contracts and the parties' course of

dealing, the grapes were delivered to Keystone merely for

processing and storage.

B. Does Section 2326 Apply?

Having determined that the Grape Growers' delivery of

grapes to Keystone for processing and storage constituted a

bailment, but not a consignment or bailment for sale, the

question is whether section 2326 applies to bailments in which

the bailee has no authority to sell the bailor's goods.

Emphasizing that, by its plain language, section 2326

applies when goods are "delivered for sale," the majority of

12
courts have held that goods not delivered to a party for sale do

not come within the scope of section 2326. See, e.g., Evergreen

Marine Corp. v. Six Consignments of Frozen Scallops, 4 F.3d 90

(1st Cir. 1993) (following In re Sitkin) ("[T]emporary

entrustments of possession by a bailee, without more, are not

'sales on consignment,' within the meaning of UCC § 2-326.");

Walter F. Heller & Co. v. Riviana Foods, Inc., 648 F.2d 1059 (5th

Cir. 1981) (By its terms, section 2326 applies only when goods

are delivered "for sale."); In re Key Book Service, Inc., 103

B.R. 39 (Bankr. D. Conn. 1989) (delivery of books, merely for

shipping, billing and warehousing, is not a "delivery for sale"

under section 2326).

We too conclude that section 2326 does not apply to

bailments under which, as here, the bailee is merely entrusted

with temporary possession of the bailor's goods and has no

authority to sell them. First, and most importantly, the plain

language of the statute requires that the goods have been

"delivered for sale." It is a mistake to require the bailee to

invoke one of the exceptions set forth in subsections (c)(1)-(3)

when the bailor's creditors have failed, as here, to demonstrate

that the language in the main body of the statute is applicable.

Second, even the language in the statute regarding

reservation of title indicates that the statute was intended to

apply to consignments: "[Section 2326(c) is] applicable even

though an agreement purports to reserve title to the person

making delivery until payment or resale or uses such words as 'on
consignment' or 'on memorandum.'" 13 Pa. Con. Stat. §2326(c).

13
Thus, the section clearly contemplates sales to ("payment") or by

("resale") the receiver of the goods.

Third, the official comment to section 2326 reveals

that the section was intended to apply to consignments:
The type of "sale on approval," "on trial" or
"on satisfaction" dealt with involves a
contract under which the seller undertakes a
particular business risk to satisfy his
prospective buyer with the appearance or
performance of the goods in question. The
goods are delivered to the proposed purchaser
but they remain the property of the seller
until the buyer accepts them....The type of
"sale or return" involved herein is a sale to
a merchant whose unwillingness to buy is
overcome only by the seller's engagement to
take back the goods...in lieu of payment if
they fail to be resold.

Official UCC Comment 1, section 2326. Thus, section 2326 is

concerned with eliminating, as to the rights of a consignee's

creditors, the difference between true consignments and security

consignments. Armor All Products, 533 N.W.2d at 726; see also

Official Comment 2, section 2326 (As against creditors of the

"buyer..., words such as 'on consignment' or 'on memorandum,'
with or without words of reservation of title in the seller, are

disregarded when a buyer has a place of business at which he

deals in goods of the kind involved....") (emphasis added).

There is no indication that the section was intended to eliminate

the distinction between consignments and situations where a party

is merely entrusted with temporary possession of goods and has no

authority to sell them. Armor All Products, 533 N.W.2d at 726.

Finally, that the bailee's creditors think an

14
entrustment of goods looks like a consignment does not persuade

us that section 2326 should encompass both situations. As the In

re Zwagerman Court opined, there are a number of circumstances in

which goods may be on the premises of the bankrupt party and not

be subject to the interests of creditors. 125 B.R. at 491

(citing In re Groff, 898 F.2d 1475 (10th Cir. 1990) (cattle owned

as part of a joint venture between debtor and another were not

subject to claims of creditors of debtor in his individual

capacity)). Thus, we agree that section 2326 "is not a cure-all

for all hidden ownership interests." Id. Moreover, modern

commercial lenders do not extend credit based on a debtor's

"ostensible ownership of merchandise. Today creditors either

investigate that appearance or do not rely on it at all." Armor

All Products, 533 N.W.2d at 729 (quoting John Dolan, The UCC's

Consignment Rule Needs an Exception for Consumers, 44 Ohio St.

L.J. 21, 29 (1983)).

We conclude that the court erred by applying section

2326 to this transaction, and the grape product in question

neither became part of the Keystone bankruptcy estate, nor

subject to the claims of Keystone's creditors.

III.

Finally, Glenshaw argues that, even if the grapes were

not delivered to Keystone for sale pursuant to a consignment

transaction, it is nonetheless entitled to recover damages

because the Grape Growers violated the automatic stay provision

of the Bankruptcy Code, 11 U.S.C. § 362.

15
 Under § 362(a), a voluntary Chapter 11 bankruptcy

filing operates as a stay of "any act to obtain possession of

property of the estate or of property from the estate or to

exercise control over property of the estate...[and] any act to

collect, assess, or recover a claim against the debtor that arose

before the commencement of [the case]...." Parties injured by a

willful violation of the automatic stay are entitled to seek

actual damages, costs and attorneys' fees, and punitive damages.

11 U.S.C. § 362(h).

The district court determined that the Grape Growers

violated the stay by selling and then removing the grape product

from Keystone's premises. We need not decide whether that

determination was proper. Although Glenshaw's complaint

requested both actual and punitive damages, the district court

awarded only actual damages -- the $1,365,452 in sale proceeds

realized by the Grape Growers from the post-petition sale of the

product -- for both conversion of estate property and violation

of the automatic stay. We have already determined that Glenshaw

is not entitled to recover the sale proceeds because the grape

product never became part of the bankruptcy estate. Inasmuch as

Glenshaw is unable to support a basis for recovering actual

damages, we need go no further.

IV.

We conclude that the district court erred by

determining that section 2326 applied to the grape product in

question. The grapes were delivered under bailment to Keystone

and thus never became part of the bankruptcy estate under section

16
2326. Accordingly, we will vacate the award of damages to

Glenshaw.

17