Opinion ID: 3009789
Heading Depth: 2
Heading Rank: 2

Heading: Does Section 2326 Apply?

Text: 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.