Court Opinion

ID: 9482180
Source: CourtListenerOpinion
Date Created: 2023-08-05 08:42:44.722096+00
Date Added: 2024-06-11T17:48:49.119441
License: Public Domain

GUY, Circuit Judge,
dissenting.
1 respectfully dissent from the decision reached by the court. Although any case that intertwines the provisions of the Bankruptcy Code with those of the Uniform Commercial Code can become confusing and complex, I believe the error committed by the bankruptcy court can be stated quite simply. The Uniform Commercial Code under certain circumstances protects persons who extend credit secured by chattels or other property that appear to be owned by the debtor. The UCC efforts in this regard are both logical and understandable. The bankruptcy court, however, read such sections as if they actually transferred title to the debtor, which they do not. I know of no provision in the Bankruptcy Code that allows the court to include property in the estate of the debtor which simply does not belong to the debtor. Although the facts have been set forth by the court, I believe it is important in understanding my point of departure to view the facts in a somewhat different light, which I believe comports with what actually occurred.
Ciba-Geigy is a manufacturer of various products, including agricultural herbicides, and distributes its products through a network of distributors. Kova, Inc., is one such distributor. Flo-Lizer was a longtime seller of agricultural supplies and, *1243among other things, sold the agricultural chemicals made by Ciba-Geigy. Flo-Lizer purchased Ciba-Geigy products from Kova. Ciba-Geigy shipped chemicals under bills of lading that were made out to itself even though Kova would ultimately purchase the product from Ciba-Geigy for resale. In my opinion, Ciba-Geigy proceeded in this manner to avoid the exact situation in which it finds itself in this case. Section 1302.49 of the Ohio Revised Code (U.C.C. § 2-505) provides that, whenever goods are shipped under a non-negotiable bill of lading made out to the seller, the seller “reserves possession of the goods.” Ciba-Geigy followed this procedure and then filed a UCC-1 financing statement required by the Ohio Uniform Commercial Code, which covered the following: “agricultural chemicals manufactured by Ciba-Geigy and warehoused by Kova Fertilizer, Inc., for Ciba-Geigy at Flo-Lizer (location)_” Thus, the court is incorrect when it states that what occurred here could have been avoided simply by Ciba-Geigy filing financing statements. It is true that the financing statements that were filed did not show Flo-Lizer as the debtor, but the very good reason for that is because Kova, not Flo-Lizer, was the debtor. It is clear that Flo-Lizer understood this relationship, and when it wanted to purchase the chemicals in question, it attempted to accomplish the purchase by telephoning a Kova employee in late February 1986 and requesting that Flo-Lizer be invoiced by Kova for the chemicals. Kova refused to do so because of serious reservations about the creditworthiness of Flo-Lizer at that time. Indeed, in March of 1986, Kova actually retrieved certain chemical products it had previously delivered to Flo-Lizer.
Flo-Lizer’s relationship with Paribas began in October of 1984 when Paribas agreed to extend a line of credit up to $7,500,000 to Flo-Lizer. To secure the repayment of any indebtedness to Paribas, Flo-Lizer granted to Paribas, under a security agreement, a security interest in its inventory (including fertilizers, fertilizer products, and chemicals) and accounts receivable. Since the chemicals at issue here were not shipped until January and February of 1986, obviously they were not part of the on-premises inventory that was pledged to secure the loan from Paribas. Several months before Ciba-Geigy shipped the chemicals, Paribas demanded of Flo-Lizer payment of its loan in full because Flo-Lizer no longer met certain loan covenant requirements. After negotiations, Flo-Lizer and Paribas worked out an agreement, which was executed on February 19, 1986, and which, among other things, reduced the line of credit extended to $3,000,000 and provided for full repayment of all indebtedness by June 30, 1986. As late as this point in time, Flo-Lizer had never asserted that it owned the chemicals in question, nor had Flo-Lizer included the chemicals in the borrowing base certificates that it submitted to Paribas. Flo-Lizer never paid for the chemicals, nor did it show an entry on its account books indicating that such a payment was due. It is true, however, that, after Flo-Lizer called Kova and asked to be invoiced for the chemicals, even though Kova refused to issue invoices, Flo-Lizer went ahead and increased the dollar amount of the assets shown in the borrowing base certificates by an amount approximating the value of the chemicals. It is not at all clear what influence, if any, this had on the conduct of Paribas, except that it is worthy of note that it occurred at a time when the line of credit extended by Paribas had been substantially decreased, not increased. We also know that when Paribas made a claim for the stored chemicals in the bankruptcy proceeding, this claim was rejected. I find nothing in this scenario thus far which suggests that there is any legal or even equitable reason to include these chemicals in the bankrupt’s estate after bankruptcy is filed. There is, however, more to the scenario.
It is true that these chemicals being sold to Kova were in fact delivered to Flo-Lizer and stored in tanks on Flo-Lizer’s premises. Although the tanks were under seal,1 there was otherwise no indication that the contents of the tanks belonged to Ciba-Geigy. Ohio Revised Code § 1302.39 (U.C.C. § 2-326) provides that “where *1244goods 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.” This section also states that goods held on “sale or return” are subject to creditors’ claims while in the buyer’s possession. It cannot be gainsaid that the provisions of section 1302.39 appear to have more than a casual relationship to what unfolded here. The problem, for me at least, is that the chemicals, in the words of the statute, were not delivered to a person for sale. Kova, not Flo-Lizer, was to buy these chemicals from Ciba-Geigy. Furthermore, Flo-Lizer was paid for the storage of these chemicals which were kept under seal. This, of course, does not detract from the fact that Paribas could have been misled. A reasonable lender seeing storage tanks on Flo-Lizer’s property, with nothing to indicate that they belonged to another, could reasonably assume that the tanks and their contents, if indeed there were contents, were part of Flo-Lizer’s “inventory.” This does not compel the conclusion, however, that these goods became part of the bankrupt’s estate. The problem with making them part of the bankrupt’s estate can be illustrated by the following example. Suppose that the chemicals were worth $50,000 and further suppose that Paribas’s secured claim was for $10,000. If all of the chemicals were part of the bankrupt’s estate, there would be a fund out of which $10,000 would be available to Paribas as a secured creditor and $40,000 would be available to the unsecured creditors. Considering the $40,000 came from products belonging to Ciba-Geigy for which it was never paid, it seems to me a result neither justified nor dictated by the Bankruptcy Code. I emphasize “Bankruptcy Code” because bankruptcy law controls. Whatever Paribas’s rights may have been under state law, if no bankruptcy intervened, those rights are not determinative of the outcome of the question of possession or ownership under the Bankruptcy Code. I hasten to add that it is not clear from the record that any such windfall as suggested by my hypothetical might occur to unsecured creditors, yet I note that they appeared in this matter in opposition to Ciba-Geigy’s position.
The debtor, Flo-Lizer, made a misrepresentation (perhaps by silence) if it led Pari-bas to believe that it was the owner of the tanks’ contents. It compounded what initially might have been an innocent or negligent misrepresentation with an intentional misrepresentation when it subsequently increased its borrowing base certificates to reflect the value of the chemicals, which it not only knew it had not purchased but, even worse, knew that Kova would not sell. I recognize that, in some instances, under the so-called strongarm powers that arise during a bankruptcy proceeding, the trustee or debtor-in-possession can exercise rights, which, without the bankruptcy proceeding, the debtor could not exercise. I do not believe, however, that the strong-arm provisions are sufficient to convert property in which the debtor has no ownership whatsoever into property of the estate.
I would reverse and remand.

. The seals in fact were never broken until, with the authorization of the bankruptcy court, Ciba-*1244Geigy picked up the product and resold it. The funds from resale, however, were placed in a special bank account so that upon the final outcome of this litigation the bank account, rather than the chemicals, will be owned by the prevailing party.