PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

SONY CORPORATION OF AMERICA, now

known as Sony Electronics, Inc.,

Plaintiff-Appellee,

v.

BANK ONE, WEST VIRGINIA,

HUNTINGTON NA, formerly known as

No. 94-2230

First Huntington National Bank,

N.A.,

Defendant-Appellant,

v.

THE STEREO FACTORY, INCORPORATED,

Defendant-Appellee.

SONY CORPORATION OF AMERICA, now

known as Sony Electronics, Inc.,

Plaintiff-Appellant,

v.

THE STEREO FACTORY, INCORPORATED;

No. 94-2334

BANK ONE, WEST VIRGINIA,

HUNTINGTON NA, formerly known as

First Huntington National Bank,

N.A.,

Defendants-Appellees.

Appeals from the United States District Court

for the Southern District of West Virginia, at Huntington.

Robert J. Staker, Senior District Judge.

(CA-92-1099-3)

Argued: July 10, 1995
Decided: May 30, 1996

Before RUSSELL, WIDENER, and HALL, Circuit Judges.

_________________________________________________________________

Affirmed as modified by published opinion. Judge Russell wrote the

majority opinion, in which Judge Hall joined. Judge Widener wrote

a dissenting opinion.

_________________________________________________________________

COUNSEL

ARGUED: Daniel Joseph Konrad, HUDDLESTON, BOLEN,

BEATTY, PORTER & COPEN, Huntington, West Virginia, for

Appellant. Bonnie Irvin O'Neil, THOMPSON, HINE & FLORY,

Columbus, Ohio, for Appellees. ON BRIEF: Thomas R. Allen,

THOMPSON, HINE & FLORY, Columbus, Ohio; Richard M. Francis, BOWLES, RICE, MCDAVID, GRAFF & LOVE, Charleston,

West Virginia, for Appellee Sony Corp.

_________________________________________________________________

OPINION

RUSSELL, Circuit Judge:

This case involves a dispute between two secured creditors with

competing claims to the proceeds from the sale of inventory. The

main issue before this court is whether Sony Corporation of America

("Sony"), the holder of a purchase money secured interest in the

inventory, had a first-priority claim in the proceeds even though the

seller received payment for the inventory on the day after the delivery

of the goods to the buyer. We must decide just how strictly we should

read § 9-312 of the Uniform Commercial Code, which gives the

holder of a purchase money secured interest in inventory "priority in

identifiable cash proceeds received on or before the delivery of the

inventory to a buyer . . . ." W. Va. Code § 46-9-312(3) (emphasis

added). The district court concluded that Sony had a first priority

 2
claim in the proceeds, notwithstanding the fact that payment was

received on the day after the delivery of the goods. We agree.

This case also presents a second issue regarding the identifiability

of cash proceeds that are deposited in the seller's checking account

and comingled with other funds in that account. We must decide

whether the district court could presume that the seller had transferred

a portion of the proceeds to a savings account even though the seller

had clearly earmarked those funds as having originated from another

source. We conclude that the district court correctly determined that

the funds transferred to the savings account constituted identifiable

proceeds from the sale of the inventory. We therefore affirm the decision of the district court, although we make a slight modification to

the judgment regarding the calculation of damages.

I.

Stereo Factory, Inc., one of the defendants, is a West Virginia corporation, primarily located in Huntington, West Virginia. On August

23, 1988, the First Huntington National Bank1 (the "Bank"), the other

defendant, loaned $200,000 to Stereo Factory. The loan was secured

by a blanket security agreement granting the Bank a security interest

in virtually all of Stereo Factory's personal property, including its

inventory. On July 13, 1989, the Bank made a second loan in the

amount of $550,000 and secured by a second security agreement. The

Bank perfected its security interests by filing the appropriate financing statements with the proper authorities.

On August 16, 1990, Sony entered into a purchase money security

agreement with Stereo Factory. Sony agreed to extend credit to Stereo

Factory for the purchase of Sony merchandise. In return, Stereo Factory granted Sony a purchase money security interest in all goods and

inventory sold to it by Sony, as well as the proceeds of those goods

and inventory. Sony perfected its security interest and notified the

holders of conflicting security interests, including the Bank, that Sony

held a purchase money security interest in the inventory.

_________________________________________________________________

1 The First Huntington National Bank is now known as Bank One,

West Virginia, Huntington NA.

 3
On August 19, 1992, Stereo Factory submitted to Sony a purchase

order for 1,150,000 audio cassette tapes at the price of $.55 per tape.

Stereo Factory made a down payment of $160,000 on the following

day. On August 21, 1992, Sony sent a shipment of 227,860 tapes to

Stereo Factory for a total invoice price of $125,323. Upon receiving

the shipment, Stereo Factory sent the tapes to H.K. Tronics, one of

its customers. H.K. Tronics received the first shipment on August 27,

and on that day paid for the shipment by a cashier's check in the

amount of $120,765.80 payable to Stereo Factory. 2 On August 31,

Stereo Factory deposited the check into a checking account that it

maintained with the Bank.

Also on August 21, 1992, Sony sent a second shipment of 422,140

audio cassette tapes to Stereo Factory for a total invoice price of

$232,177. Upon receiving the shipment, Stereo Factory immediately

sent the tapes to Delinda Camera & Art Supply ("Delinda Camera"),

another one of its customers. Delinda Camera received the shipment

on August 24, and issued a check that same day for $221,655, payable

to Stereo Factory. Delinda Camera gave the check to the driver of the

truck that delivered the shipment. Stereo Factory deposited the check

into its checking account on August 25.

In this case, we are most concerned with the third and final shipment of tapes. On August 31, 1992, Sony shipped the remaining

500,000 audio cassette tapes to Stereo Factory for the total invoice

price of $275,000. Upon receiving the shipment, Stereo Factory

immediately sent the tapes to Delinda Camera, which received the

shipment on September 3. Delinda Camera had agreed to pay

$262,500 for the shipment, subject to a $20,000 discount if it paid for

the tapes in cash within three days of receipt. On September 4,

Delinda Camera issued a check payable to Stereo Factory for

$242,468.50.3 Delinda Camera either gave the check directly to the

_________________________________________________________________

2 The record does not explain why Stereo Factory was selling shipments of tapes at a loss. Cf. Joseph Heller, Catch-22 229 (New Laurel

ed., Dell Publishing 1990) (1955) (chapter 22) (Milo Minderbinder

explains how he can make a profit buying eggs at seven cents apiece and

selling them for five cents).

3 Delinda Camera deducted $31.50 from the price because the shipment

was short by 60 tapes.

 4
truck driver or mailed it to Stereo Factory by overnight mail. The Stereo Factory invoice documenting this transaction confirms a delivery

date of September 3 and a payment date of September 4. Stereo Factory deposited the check into its checking account on September 8.

Although Stereo Factory received full payment from its customers

for the three shipments of tapes, it did not make any payments to

Sony except for the $160,000 down payment. After deducting various

credits, Stereo Factory owes Sony a total of $468,720.51 for the three

shipments.

While Stereo Factory was not paying its debt to Sony, on September 9, 1992, Stereo Factory sold its Parkersburg operation to T.D.S.,

Inc. ("T.D.S.") for $250,000. T.D.S. obtained a loan from the Bank,

which issued a cashiers check to T.D.S. The cashiers check, No.

246208, contained the words "Loan proceeds." Upon receiving the

cashiers check from T.D.S., Stereo Factory deposited it into its checking account. Also on September 9, Stereo Factory opened a savings

account, which was pledged to the Bank to secure Stereo Factory's

outstanding loans. In opening the savings account, Stereo Factory

deposited a check in the amount of $78,266.64 drawn from its checking account. Stereo Factory indicated in two ways that it intended the

$78,266.64 amount to come from the $250,000 it had just deposited

into the Checking Account. First, the check issued by Stereo Factory

contained the words "Loan Proceeds Receipt." Second, the savings

account deposit slip contained the words "Proceed of Cashiers Check

246208."

Stereo Factory also maintained a sweep account with the Bank.

The funds in this account were used to purchase part of the Bank's

investment portfolio. This account was aptly named because Stereo

Factory would periodically "sweep" funds from the checking account

into the sweep account so that Stereo Factory could earn a return on

those funds. On September 15, 1992, Stereo Factory transferred the

entire balance of the checking account, $221,419.80, into the sweep

account. Over the next few days, some of those funds were transferred back to the checking account to pay off various creditors. On

September 17, when the Bank took action against Stereo Factory to

collect on its outstanding loans, $123,912.94 remained in the sweep

account.

 5
Without giving Stereo Factory prior notice, the Bank set off

$123,912.94 from the sweep account and $78,266.64 from the savings

account, for a total of $202,179.58. The funds were applied toward

the principal that Stereo Factory owed to the Bank. The Bank also liquidated additional collateral in order to further reduce Stereo Factory's indebtedness.

On December 2, 1992, Sony brought this action against Stereo Factory to recover on Stereo Factory's debt in the amount of

$468,720.51, which represents the unpaid portion of the cost of the

three shipments of tapes. On March 5, 1993, Sony added the Bank as

a defendant and sought from the Bank the recovery of the

$202,179.58 set off from Stereo Factory's bank accounts. Sony

claimed that the moneys in Stereo Factory's bank accounts, which the

Bank seized and converted, constituted identifiable proceeds of

Sony's purchase money collateral, to which Sony had a first priority

claim.

The parties jointly filed stipulations of fact, and no factual dispute

having remained, Sony and the Bank filed cross-motions for summary

judgment. On August 30, 1994, the district court granted summary

judgment in favor of Sony against the Bank in the amount of

$202,179.58. The district court also granted summary judgment in

favor of Sony against Stereo Factory in the amount of $266,540.93,

which constitutes the difference between the amount due to Sony

from Stereo Factory and Sony's judgment from the Bank.

The Bank has appealed the decision of the district court. Sony has

also filed a cross-appeal in which it argues that the district court

should have entered a judgment against Stereo Factory in the amount

of $468,720.51, instead of $266,540.93. For the reasons stated herein,

we affirm the district court's granting of summary judgment in favor

of Sony, but we modify the judgment against Stereo Factory as

requested in Sony's cross-appeal.

II.

This Court reviews de novo the district court's granting or denying

of summary judgment. Lone Star Steakhouse & Saloon, Inc. v. Alpha

of Virginia, Inc., 43 F.3d 922, 928 (4th Cir. 1995). Summary judg-

 6
ment is appropriate where the record shows that"there is no genuine

issue as to any material fact and that the moving party is entitled to

a judgment as a matter of law." Fed. R. Civ. P. 56(c).

This case turns on the interpretation of § 9-312(3) of the Uniform

Commercial Code ("U.C.C."), which West Virginia has adopted. That

section reads as follows:

(3) A perfected purchase money security interest in

inventory has priority over a conflicting security interest in

the same inventory and also has priority in identifiable cash

proceeds received on or before the delivery of the inventory

to a buyer if:

(a) The purchase money security interest is

perfected at the time the debtor receives possession of the inventory; and

(b) The purchase money secured party gives

notification in writing to the holder of the conflicting security interest if the holder had filed a

financing statement covering the same types of

inventory (i) before the date of the filing made by

the purchase money secured party, or (ii) before

the beginning of the twenty-one day period where

the purchase money security interest is temporarily

perfected without filing or possession (subsection

(5) of section 9-304 [§ 46-9-304(5)]); and

(c) The holder of the conflicting security interest receives the notification within five years

before the debtor receives possession of the inventory; and

(d) The notification states that the person giving the notice has or expects to acquire a purchase

money security interest in inventory of the debtor,

describing such inventory by item or type.

W. Va. Code § 46-9-312(3) (emphasis added).

 7
The issue in this case is whether the proceeds from the third shipment of tapes were delivered "on or before the delivery" of the goods.

The parties have stipulated that the shipment was delivered on September 3, 1992, and that Delinda Camera's check in payment for the

shipment was dated September 4, 1992. The check was either given

directly to the truck driver who delivered the shipment or mailed to

Stereo Factory by overnight mail.4 The Bank argues that payment was

not made "on or before the delivery" because Stereo Factory did not

receive payment on the day of delivery.

This issue is critical because it determines which party has priority

to the proceeds of the third shipment of tapes. If Stereo Factory

received payment "on or before the delivery" of the third shipment of

tapes, as Sony contends, then Sony has a first priority purchase

money security interest in those proceeds under§ 46-9-312(3).5 If

Stereo Factory did not receive payment "on or before the delivery"

and Sony therefore does not have a priority interest under § 46-9-

312(3), then the Bank has a priority interest in the proceeds under

§ 46-9-312,(5)6 which provides that the first party to file and perfect

its secured interest takes priority.

_________________________________________________________________

4 The parties had difficulty establishing the exact events that transpired

because they could not locate the truck driver who delivered the shipment.

5 The district court found that Sony met the four enumerated requirements of § 46-9-312(3). The Bank does not challenge this finding on

appeal.

6 Section 46-9-312(5) reads as follows:

(5) In all cases not governed by other rules stated in this section (including cases of purchase money security interests which

do not qualify for the special priorities set forth in subsections

(3) and (4) of this section), priority between conflicting security

interests in the same collateral shall be determined according to

the following rules:

(a) Conflicting security interests rank according to priority in time of filing or perfection. Priority dates from the

time a filing is first made covering the collateral or the time

the security interest is first perfected, whichever is earlier,

provided that there is no period thereafter when there is neither filing nor perfection.

(b) So long as conflicting security interests are unperfected, the first to attach has priority.

 8
The "on or before the delivery" language of§ 46-9-312(3) was

meant to distinguish between cash proceeds and accounts proceeds.

Comment 3 to § 46-9-312 reads as follows:

When under these rules the purchase money secured party

has priority over another secured party, the question arises

whether this priority extends to the proceeds of the original

collateral. . . . In the case of inventory collateral under subsection (3), where it was expected that the goods would be

sold and where financing frequently is based on the resulting accounts, chattel paper, or other proceeds, the subsection

gives an answer limited to the preservation of the purchase

money priority only insofar as the proceeds are cash

received on or before the delivery of the inventory to a

buyer, that is, without the creation of an intervening account

to which conflicting rights might attach.

W. Va. Code § 46-9-312 cmt. 3 (emphasis added). Where the sale of

inventory results in an account, the rights of the purchase money

secured creditor in the proceeds may conflict with the rights of other

creditors who have security interests in the accounts. The drafters of

the U.C.C. decided to protect accounts financers over inventory

financers, and they limited the priority of purchase money secured

creditors to the cash proceeds of inventory collateral. As comment 8

to § 46-9-312 explains:

Many parties financing inventory are quite content to protect

their first security interest in the inventory itself, realizing

that when inventory is sold, someone else will be financing

the accounts and the priority for inventory will not run forward to the accounts. Indeed, the cash supplied by the

accounts financer will be used to pay the inventory financing.

W. Va. Code § 46-9-312 cmt. 8. In using the"on or before the delivery" language of § 46-9-312(3), the framers intended to differentiate

between transactions in which the buyer paid in cash and transactions

in which the buyer set up a credit arrangement and ended up owing

the seller for the cost of the goods.

 9
Delinda Camera did not purchase the third shipment of tapes from

Stereo Factory on credit. Delinda Camera and Stereo Factory clearly

contemplated a cash transaction, and Delinda Camera's payment for

the shipment included a $20,000 discount for payment in cash. Furthermore, the fact that Delinda Camera issued its check on the day

following the receipt of the third shipment of tapes does not imply

that credit was extended to Delinda Camera. Given the realities of

modern business, it is reasonable to expect a slight delay between the

unloading of goods and the issuance of a check in payment for those

goods. In a large company, it may take several hours--or even

overnight--for the paperwork to travel from the receiving department, where the goods are unloaded, to the bookkeeping department,

where the payment check is issued. Such a delay merely reflects the

time it takes an organization to process its work; it does not indicate

the extension of credit for that short period of time. Moreover, if a

buyer receives a shipment of goods after its business office has closed

for the day, it may pay for that shipment on the following morning

simply because there was no chance to issue a check earlier.

We agree with the district court that, although the check was dated

the day after delivery, Delinda Camera's payment for the third shipment of tapes was reasonably contemporaneous with the delivery of

the goods and constituted payment "on delivery." We therefore reject

the Bank's argument that Delinda Camera could have made payment

"on delivery" only if it tendered its check to the truck driver or mailed

its check to Stereo Factory on the same day that the shipment was

delivered. We find that the Bank's position would lead to arbitrary

results. Assume, for instance, that the truck driver arrived at Delinda

Camera's premises at 9:00 a.m. on September 3, unloaded the third

shipment of tapes, and drove off to his next destination. In this situation, it should make little difference whether Delinda Camera wrote

and mailed its check at 5:00 p.m. on September 3 or at 9:00 a.m. on

September 4; either check would have been written after the truck

driver left the premises, but within a reasonable period of time to be

considered contemporaneous with delivery under normal business

practices. Under the Bank's rule, however, mailing the check at the

close of business on September 3 would be considered payment on

delivery, but mailing the check at the opening of business the following morning would be considered payment after delivery. We see no

reason why we should adopt such an arbitrary distinction.

 10
We note that Sony's and the Bank's dispute over the proceeds in

question turns on the payment arrangements of Stereo Factory and

Delinda Camera, neither of whom had a particular interest in whether

payment was made "on or before the delivery" of the third shipment

of tapes. In this situation, Sony could have done more to protect its

purchase money secured interest in the inventory. In its contractual

arrangement to supply Stereo Factory with tapes, it could have

required Stereo Factory, when its sells its inventory, to receive payment in cash on or before delivery of the inventory. Sony did not

include such a provision in its contract with Stereo Factory and, thus,

conditioned its purchase money security interest in the proceeds on

the actions of Stereo Factory and its customer. Although we hold that

Delinda Camera's check dated the day following delivery constituted

payment on delivery in this case, we would not have tolerated a longer delay. As the district court warned, "[e]very moment of delay

between the delivery and the payment should be accounted for and

the greater the delay, the more likely the purchase money secured

party will be unable to avail itself of the protections of [W. Va. Code

§ 46-9-312(3)]." Sony Corp. of America v. The Stereo Factory, Inc.,

Civil Action No. 3:92-1099, am. mem. op. at 12 (S.D. W. Va. Sept.

2, 1994). Purchase money secured creditors would behoove themselves to require by contract that all payments for the sale of the purchase money inventory be received in cash on or before the delivery.

III.

We now turn to the question of whether the funds set off by the

Bank from Stereo Factory's savings account are "identifiable" proceeds of the sale of the third shipment of tapes. See W. Va. Code

§ 46-9-312(3) ("A perfected purchase money security interest in

inventory has priority over a conflicting security interest in the same

inventory and also has priority in identifiable cash proceeds received

on or before the delivery of the inventory to a buyer . . . ." (emphasis

added)). The proceeds from the sale of the third shipment of tapes

were placed in Stereo Factory's checking account on September 8,

1992, when Stereo Factory deposited Delinda Camera's check in the

amount of $242,468.50. On September 17, 1992, the Bank set off

$123,912.94 from Stereo Factory's checking account and $78,266.64

from its savings account. The Bank argues on appeal that the moneys

 11
in the savings account are not identifiable cash proceeds from the sale

of the third shipment of tapes.

In tracing and identifying proceeds under Article 9 of the U.C.C.,

courts have utilized the "lowest intermediate balance rule." E.g.,

C & H Farm Serv. Co. of Iowa v. Farmers Savings Bank, 449

N.W.2d 866 (Iowa 1989); General Motors Acceptance Corp. v. Norstar Bank, N.A., 532 N.Y.S.2d 685 (N.Y. Sup. Ct. 1988); Ex parte

Alabama Mobile Homes, Inc., 468 So.2d 156 (Ala. 1987). This rule

has been defined as follows:

The rule, which operates on a common-sense view that

dollars are fungible and cannot practically be earmarked in

an account, provides a presumption that proceeds remain in

the account as long as the account balance is equal to or

greater than the amount of the proceeds deposited. The proceeds are "identified" by presuming that they remain in the

account even if other funds are paid out of the account. . . .

Under the rule, however, if the balance of the account dips

below the amount of deposited proceeds, [the prior] security

interest in the identifiable proceeds abates accordingly. This

lower balance is not increased if, later, other funds of the

debtor are deposited in the account . . . .

C.O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 431 N.E.2d 370,

372 (Ill. 1982). The lowest intermediate balance rule assumes that

"the debtor spends his own money out of the account before he

spends the funds encumbered by the security interest." Ex parte Alabama Mobile Homes, Inc., 468 So.2d 156, 160 (Ala. 1985). Furthermore, funds that are not spent but transferred to other accounts or

used to purchase investments are identifiable as proceeds of the collateral. Central Production Credit Ass'n v. Hans , 545 N.E.2d 1063,

1072-74 (Ill. App. Ct. 1989) (funds in checking account were identifiable proceeds even though the funds had been used to purchase

investments, which were then sold and redeposited into the checking

account). Thus, the rule preserves the proceeds to the greatest extent

possible as the account is depleted. C. O. Funk & Sons, 431 N.E.2d

at 372.

 12
On September 9, 1992, the day after Stereo Factory deposited the

proceeds into the checking account, Stereo Factory transferred

$78,266.64 from its checking account to its savings account. Before

making this transfer, however, Stereo Factory deposited a check in the

amount of $250,000 it had received from the sale of its Parkersburg

operation. Stereo Factory indicated in several ways that it intended

the $78,266.64 transferred to the savings account to come from the

$250,000 it had just deposited into the checking account. First, the

check issued by Stereo Factory and deposited into the savings account

contained the words "Loan Proceeds Receipt," which referred to the

$250,000 cashiers check.7 Second, the savings account deposit slip

contained the words "Proceed of Cashiers Check 246208." The Bank

argues that, because Stereo Factory earmarked the $78,266.64 in the

savings account to come from the $250,000 cashiers check, the funds

in the savings account cannot be identified as proceeds from the sale

of the third shipment.

We disagree. We state again that "dollars are fungible and cannot

practically be earmarked in an account . . . ." C.O. Funk & Sons, 431

N.E.2d at 372. Once Stereo Factory deposited the $250,000 in its

checking account, those funds were commingled with the other funds

in the account and lost their identity as proceeds from the sale of the

Parkersburg operation. Stereo Factory no longer had the ability to isolate a portion of that $250,000 and transfer those specific funds to its

savings account. The words on the check and deposit slip merely provided useful notes for Stereo Factory's internal recordkeeping. Those

notes, however, did not earmark the transferred funds and do not

override the operation of the lowest intermediate balance rule.

Stereo Factory transferred $78,266.64 from its checking account to

its savings account. The lowest intermediate balance rule allows a

court to presume that those funds were identifiable cash proceeds

from the sale of the third shipment of tapes.

_________________________________________________________________

7 The cashiers check in the amount of $250,000 constituted the proceeds of a loan from the Bank to T.D.S., which T.D.S. then used to purchase Stereo Factory's Parkersburg operation. The cashiers check itself

contained the words "Loan Proceeds."

 13
IV.

Finally, we turn to Sony's cross-appeal. Sony contends that the district court erred in granting a judgment against Stereo Factory in the

amount of only $266,540.93. In determining this amount, the district

court reduced the full amount that Stereo Factory owed to Sony

($468,720.51) by the amount of Sony's judgment against the Bank

($202,179.58). The Bank reasoned that a judgment of $468,720.51

against Stereo Factory and $202,179.58 against the Bank would

create a windfall for Sony. Sony argues in its cross-appeal that the

district court should have awarded Sony a judgment against Stereo

Factory in the full amount owed, $468,720.51. We agree.

Sony has a judgment against the Bank in the amount of

$202,179.58 because the Bank set off from Stereo Factory's accounts

funds to which Sony had first priority. Despite the Bank's set-off and

Sony's judgment against the Bank, the fact remains that Stereo Factory owes Sony $468,720.51. Sony is entitled to a judgment against

Stereo Factory in that amount. Of course, the judgment against Stereo

Factory should be reduced by the amount of any funds collected from

the Bank. But, in the case that the Bank cannot pay its judgment in

full, Sony has the right to seek from Stereo Factory the balance of its

debt.

In all likelihood, the Bank will pay its judgment in full, and the

judgment against Stereo Factory will be reduced to $266,540.93, the

amount awarded by the district court. The Bank, after all, is the only

defendant with the funds to pay its judgment, and Sony asserted its

priority to the $202,179.58 set off by the Bank precisely because it

knew that Stereo Factory does not have the funds to pay its judgment.

Nonetheless, correcting the judgment serves a purpose. It makes

clear that Stereo Factory is ultimately liable for the full amount of its

unpaid debt to Sony, and that any amounts paid by the Bank to Sony

reduces the debt that Stereo Factory owes to Sony. Thus, the Bank has

a right to indemnification from Stereo Factory for any amount it must

pay to Sony because that money reduces Stereo Factory's debt to

Sony. The district court, by reducing the judgment against Stereo Factory to $266,540.93, perhaps indicated that Stereo Factory was no

longer obligated to pay the remaining $202,179.58 and that the Bank

 14
would not be entitled to indemnification for that amount. We want

there to be no confusion that the Bank can look to Stereo Factory for

indemnification for any money that it must pay to Sony.

We conclude that the district court erred in awarding a judgment

against Stereo Factory in the amount of $266,540.93. It should have

awarded Sony a judgment against Stereo Factory in the amount of

$468,720.51, subject to be reduced by any amounts collected from the

Bank.

V.

For the foregoing reasons, we affirm the district court's granting of

summary judgment in favor of Sony, and we modify the order to

reflect a judgment against Stereo Factory in the amount of

$468,720.51, subject to be reduced by any amounts collected from the

Bank.

AFFIRMED AS MODIFIED

WIDENER, Circuit Judge, dissenting:

I respectfully dissent for two reasons, neither of which is more

important than the other.

First, this case involves a question of state law that has not been

answered by the West Virginia courts or in any other reported decision. As a matter of procedure and prudent deferment to the state

courts, I believe this court should let West Virginia courts decide this

novel question of state law. Second, having reached the merits of this

case, I suggest that the majority misconstrues the facts of the case as

well as the language of the applicable statute to achieve what can only

be termed an incorrect result.

I.

This is a case of first impression, not only in the federal courts, but

also in the courts of the fifty states. It is purely a question of state law.

Especially for those reasons, I think the refusal of the majority to refer

 15
the question decided to the Supreme Court of West Virginia is an

abuse of discretion if it is possible to impose that standard in the situation presented here. Declining to accept the open invitation of the

courts of a State to decide such a question of law, uniquely state, may

even be said without undue exaggeration to border on a return to Swift

v. Tyson, 16 Pet. (41 U.S.) 1 (1842); forgetting, along the way, the

teaching of Erie that "whether the law of the State shall be declared

by its Legislature in a statute or by its highest court in a decision is

not a matter of federal concern. There is no federal general common

law." Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).

II.

This case is on appeal from an order on summary judgment. We

review summary judgment orders de novo. Donmar Enters., Inc. v.

Southern Nat'l Bank of North Carolina, 64 F.3d 944, 948 (4th Cir.

1995).

III.

Both the district court and the majority erred, I submit, in the principal premise of each of those decisions when each found that

Delinda Camera did not purchase the third shipment of tapes on

credit. The district court found:

It [,Delinda Camera,] did not purchase the tapes in the Third

Shipment on credit.

Mem. Op. & Order, at 10, Sept. 2, 1994. JA 144. The majority found:

Delinda Camera did not purchase the third shipment of tapes

from Stereo Factory on credit.

Slip. op. at 10. This mistaken statement of fact goes to the heart of

the majority's opinion and I think it is plainly wrong. To understand

the true nature of the transaction between Stereo Factory and Delinda

Camera, we must look to the shipment invoice.1

_________________________________________________________________

1 The record does not contain a copy of the Purchase Order, if one even

exists. The invoice is the sole written documentation we have of the

transaction.

 16
[A COPY OF THE SHIPMENT INVOICE IS INCLUDED

IN THIS SPACE IN THE PRINTED OPINION AND WILL

BE INCLUDED WHEN THE OPINION APPEARS IN THE 

FEDERAL REPORTER]

 17
Stereo Factory's invoice for the last shipment of tapes to Delinda

Camera clearly shows that this was a charge transaction. See Stipulations of Fact, Ex. P, Sept. 22, 1993. JA 97. The transaction could have

been C.O.D., cash, or charge, and it was charge. Under the section of

the invoice titled "TERMS", the box next to"CHARGE" contained

an X while the boxes next to "C.O.D." and"CASH" were not marked.

The invoice shows on its face that the tapes were delivered to

Delinda Electronics on September 3, 1992.

"9-3-92, Delivered RC [apparently initials]

60 short 499,940 total"

The invoice also shows on its face payment on September 4, 1992.

"Paid

CK 38752

9-4-92"

The invoice also provides "Mr Ritz to send check within 3 days of

receipt of goods for $20,000 cash discount."

Neither the opinion of the district court nor the opinion of the

majority refers to the stated terms of the sale as shown by the invoice,

much less explain them. The obvious, and only, explanation from the

invoice is that the transaction was a credit transaction. That the

invoice is that of the transaction at hand is agreed to by Stipulation

of Fact, Exhibit P. "There would be no reason in having a stipulation

of facts if parties were at liberty to ignore it . .. ." Judge Parker in

Westinghouse Elec. Corp. v. Bulldog Electric Prod. Co., 179 F.2d

139, 141 (4th Cir. 1956). So the facts relied upon by the district court

and the majority, by ignoring the invoice, are shown to be in error.

IV.

The district court and the majority rely on comment 3 to § 46-9-

312, which recognizes the distinction between payment on delivery of

inventory and payment after delivery, and distinguishes cash proceeds

from accounts proceeds. And that comment, indeed, provides that

§ 312(3)

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gives an answer limited to the preservation of the purchase

money priority only insofar as the proceeds are cash

received on or before the delivery of the inventory to a

buyer, that is, without the creation of an intervening account

to which conflicting rights might attach. W. Va. Code § 46-

9-312 cmt. 3.

Even the majority opinion itself provides that "[w]here the sale of

inventory results in an account, the rights of the purchase money

secured creditor in the proceeds may conflict with the rights of other

creditors who have security interests in the accounts." Slip op. at 9.

The majority specifically recognizes that the Code treats cash transactions and credit transactions differently:

In using the "on or before the delivery" language of § 46-9-

312(3), the framers intended to differentiate between transactions in which the buyer paid in cash and transactions in

which the buyer set up a credit arrangement and ended up

owing the seller for the cost of the goods.

Slip op. at 9. Thus, while the majority acknowledges that a different

result obtains if an account is created, it fails to acknowledge that an

account is created when payment is received after delivery. The Code

defines an account as "any right to payment for goods sold . . . which

is not evidenced by an instrument or chattel paper." W. Va. Code

§ 46-9-106. If the seller receives payment on or before delivery, then

the parties have not created an account, I submit. But, if the seller

does not receive payment on or before delivery, then the parties have

created an intervening account to which conflicting rights might

attach.

In this case, the invoice and stipulations of fact show the creation

of an intervening account. The failure to recognize this fact is the

principal error in the majority opinion, which goes out of its way to

attempt to justify its conclusion that this was a cash transaction.

But the factual underpinning of the justification fails.

The majority opinion provides that "Delinda Camera and Stereo

Factory clearly contemplated a cash transaction." Slip op. at 10. The

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invoice, however, provides that the transaction was"CHARGE."

Indeed the boxes on the invoice for "C.O.D." and "CASH" are left

blank. J.A. 97.

The majority opinion provides that ". . . payment for the shipment

included a $20,000 discount for payment in cash." Slip op. at 10. The

invoice, however, provides "Mr Ritz to send check within 3 days of

receipt of goods for $20,000 cash discount." So the discount was not

for cash only, as the majority opinion implies, but also for payment

"within 3 days of receipt of goods," hardly the same. J.A. 97. The

majority opinion provides that ". . . the fact that Delinda Camera

issued its check on the day following the receipt of the third shipment

of tapes does not imply that credit was extended to Delinda Camera."

Slip op. at 10. The stipulations of fact, however, provide that "[o]n

Sept. 3, 1992, Delinda received the Third Shipment. The next day, on

September 4, 1992, Delinda issued a check payable to Stereo Factory

. . . ." Stipulation 18, J.A. 49-50.

Thus, the check of Delinda Camera was not even issued until the

day after delivery. During the period of time between the delivery of

the goods and at least the issuance of the check, there is no other

explanation but that credit was extended to Delinda Camera, and this

is even verified by the invoice that it was a "CHARGE" transaction.

The majority opinion relies on what it calls "the realities of modern

business," to wit:

Given the realities of modern business it is reasonable to

expect a slight delay between the unloading of goods and

the issuance of a check in payment for those goods. In a

large company, it may take several hours--or even

overnight--for the paperwork to travel from the receiving

department, where the goods are unloaded, to the bookkeeping department, where the payment check is issued.

Slip op. at 10.

This statement is subject to the same difficulty as are the critical

parts of the factual foundation of the majority opinion I have mentioned above.

 20
There is nothing in the record about the "realities of modern business."

There is nothing in the record about a "slight delay between the

unloading of goods and the issuance of the check in payment of those

goods."

There is nothing in the record about whether or not Delinda Camera is "a large company."

There is nothing in the record about whether, at Delinda Camera,

it may take "several hours or even overnight for the paperwork to

travel from the receiving department to the bookkeeping department."

There is nothing in the record about whether or not Delinda Camera has a receiving department.

There is nothing in the record about where the goods were

unloaded, much less whether at a receiving department.

There is nothing in the record about whether or not Delinda Camera has a bookkeeping department.

There is nothing in the record about where the payment check was

issued, at any bookkeeping department or elsewhere.

Shortcutting, such as that which the majority engages in here, is

quite contrary to proof of custom of the trade, for I must assume that

is what the majority seeks to rely upon in the above recitation of facts.

Custom or Usage in Trade and Commerce. In evidencing

a custom or usage . . . by a specific instance, the same general principle as before is applicable; that is, the instances

offered (a) should be sufficiently numerous to indicate a

fairly regular course of business and (b) should occur under

conditions substantially similar to that in question. 2

Wigmore on Evidence § 379 (Chadbourne Revision 1979).

There is nothing in the record to show any regular course of business, or similar condition, or specific instance of any of the facts just

 21
relied upon. Even if the majority has relied upon judicial notice for

the facts just recited, which it has also not stated, that should not, and

indeed cannot, be legitimately accomplished under Fed. R. Evid. 201,

which provides, among other things, that for a court to take judicial

notice of a fact it "must be one not subject to reasonable dispute" and

either "generally known within the territorial jurisdiction of the trial

court" or "capable of accurate and ready determination by resort to

sources whose accuracy cannot reasonably be questioned." Fed. R.

Evid. 201(b).

In the case before us, the facts recited by the majority fail on all

three grounds. The facts may be disputed, they are not shown to be

generally known within the territorial jurisdiction of the trial court,

and they are not shown to be capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably

questioned.

Thus, the critical factual underpinnings of the majority opinion, I

submit, have been shown to be without sufficient foundation.

V.

The cardinal principle of certainty has been the same in commercial law for more than 200 years. By any account, and common consent, Lord Mansfield, was principally, even if not wholly, responsible

for the transposition of the law merchant into the common law from

whence grew our commercial statutes and the Uniform Commercial

Code, with which we are concerned here. He expressed the principle

this way:

In all mercantile transactions the greater objective should be

certainty: and, therefore, it is of more consequence that a

rule should be certain than whether the rule be established

one way or the other. Vallejo v. Wheeler, 98 Eng. Rep.

1012, 1017 (K.B. 1774).

Mansfield repeated that statement in almost the same words in

Buller v. Harrison, 98 Eng. Rep. 1243, 1244 (K.B. 1777). That the

principle has not changed is shown by the very Code with which we

 22
deal. The purpose of Article 9 of the UCC entitled SECURED

TRANSACTIONS: SALES OF ACCOUNTS AND CHATTEL

PAPERS is found in the official comment thereto, which provides

that "[t]he aim of this Article is to provide a simple and unified structure within which the immense variety of present-day secured financing transactions can go forward with less cost and greater certainty."

Official Comment to West Virginia Code, Ch. 46, Article 9, Vol. 13,

p. 507 (1993).

In the face of such authority, early and late, the majority decides

that payment which must have been made "on or before the delivery

of the inventory to a buyer" under § 46-9-312(3) is made "on delivery" if it was made "reasonably contemporaneous with the delivery

of the goods," slip op. at 10. And the opinion then holds that "Delinda

Camera's check dated the day following delivery constituted payment

on delivery in this case . . . ." Slip op. at 11.

Thus, I submit that the majority has not only failed to follow the

statute involved in this case, as well as the facts, but, by defining "on

or before the delivery" to mean "reasonably contemporaneous" it has

substituted the uncertain words "reasonably contemporaneous" for the

certain words "on or before," which have not been given other than

a literal meaning so far as I have been able to ascertain.2

_________________________________________________________________

2 E.g. Sheerer v. Manhattan Life Ins. Co., 20 F. 886, 888 (C.C.D. Ky.

1884) (on or before means at the instant of expiration or at any time in

advance of that instant); Edward Knapp & Co. v. Tidewater Coal Co.,

81 A. 1063, 1066 (Conn. 1912) (on or before excludes after); Council 81,

Am. Fed'n of State, County, and Mun. Employees v. Delaware, 293 A.2d

567, 570 (Del. 1972) (on or before means not later than); Rhoads v.

Myers, 245 N.W. 707, 710-11 (Iowa 1932) (on or before means at any

time in advance of, to the exclusion of any time after); O.A. Talbott &

Co. v. Byler, 217 S.W. 852, 853 (Mo. Ct. App. 1950) (on or before a certain date in a contract limits time of performance to that date); McCrory

Stores Corp. v. Goldberg, 122 A. 113, 113 (N.J. 1923) (letter postmarked

7:30 p.m. October 31 does not satisfy requirement of notice on or before

October 31 because not received on that date); Kauscher v. National

Builders & Realtors, Inc., 92 N.E.2d 702, 703 (Ohio Ct. App. 1949) (on

or before gives option of earlier delivery without obligation to do so);

Edlund v. Bounds, 842 S.W.2d 719, 726 (Tex. Ct. App. 1992) (on or

 23
In sum, I would reverse.

_________________________________________________________________

before means immediately at or at any time in advance of the named

period); Novosad v. Svrcek, 102 S.W.2d 393, 395 (Tex. 1937) (on or

before in a contract or note means the maker has the option to pay before

a fixed time and the paper does not mature until the expiration of that

time); Lovenberg v. Henry, 140 S.W. 1079, 1080 (Tex. 1911) (on or

before means immediately at or at any time in advance of).

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