Petition for Writ of Certiorari — Ideco Division of Dresser Industries, Inc. v. Crocker National Bank

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THE

Supreme Court af the United States

OCTOBER TERM, 1989

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Petitioner,

CROCKER NATIONAL BANK AND

T. O. S. INDUSTRIES, INC.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

ROBERT HAYDEN BURNS

JAMES R. O’DONNELL

KEVIN F. RISLEY

JEANNETTE MCALLISTER

BUTLER & BINION

1600 First Interstate Bank Plaza

Houston, Texas 77002

(713) 237-3269

Attorneys for Petitioner

Alpha Law Brief Co., Inc. — 8748 Westpark — Houston, Texas 77063 — 789-2000

QUESTIONS PRESENTED

If a District Court assumes certain disputed facts

adversely to the defendant in order to enter a sum-

mary judgment for the defendant, does the action of

the Court of Appeals in reversing and remanding

for the entry of judgment in favor of the plaintiff,

without allowing for further fact-finding on the as-

sumed issues, deprive the defendant of due process

of law?

If a District Court assumes certain disputed facts

adversely to the defendant in order to enter a sum-

mary judgment for the defendant. does the action

of the Court of Appeals in reversing and remanding

fer the entry of judgment in favor of the plaintiff,

without allowing for further fact-finding on the as-

sumed issues, violate the defendant’s right to trial

by jury?

In reviewing a summary judgment, to what degree

can the Court of Appeals examine the evidence to

make factual findings that were not addressed by

the District Court rather than remand the case further

for proceedings in the District Court?

Can a Court of Appeals make factual findings that

are contrary to the judicial admissions of the plaintiff

in order to reverse a summary judgment in favor of

the defendant granted by the trial court and remand

the case for the entry of judgment in favor of the

plaintiff?

Il _—

TABLE OF CONTENTS

Page

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III

TABLE OF AUTHORITIES

CASES Page

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L.Ed.2d

OE OED ice ese ss cecetiveecss 9

Avia Group International, Ltd. v. L. A. Gear California,

eS.) 9,10

Celotex Corp. v. Catrett, 477 U.S. 317, 91 L.Ed.2d 265,

acces ewes bese ersedensess 5,9, 10

Donahue v. Windor Locks Board of Fire Commissioners,

8 6

Fidelity & Deposit Co. v. United States, 187 U.S. 315, 47

REED CRED oo ccs cece eens vesences 11

Hill v. McDermott, Inc., 827 F.2d 1040 (Sth Cir. 1987,

cert. denied, US. _, 98 L.Ed.2d 1014, 108 S. Ct.

I 11

Houghton v. Foremost Financial Services Corp., 724 F.2d

Nea vc wins hav ve veer eesees 6

Matsushita Electrical Indusirial Co. v. Zenith Radio Corp.,

475 U.S. 57, 89 L.Ed.2d 538, 106 S. Ct. 1348 (1986) .. 6

McKenzie v. Davenport-Harris Funeral Home, 834 F.2d

oi eee as esac sso sev essseccves 6

Prineville Sawmill Co., Inc. v. United States, 859 F.2d 905

ES 6

Radobenko v .Automated Equipment Corp., 520 F.2d 540

ee eG tees cceetcr eee dccssese 6

Schwabenbauer v. Board of Education, 667 F.2d 305 (2nd

Sea sd aeeuveevegerveenessess 6

RULES AND STATUTES

Ie ues yee eereceveeesseccecer 2

ecw ha acs eacceeccvereeseeces 2

TE do sete esse veer vecesens 5,6, 8, 10, 12, 13

Sav cae ncevecccrsesereceers 3

ley yo away ees ce vaca scenes 6

eee echses cer veces csccens 7

ay ewe wcccceersstcesecees 7

OTHER

Currie, Thoughts on Directed Verdicts and Summary Judg-

eer ee a ee, 72 CE9TT) 2. cc cece ees 10

Schwarzer, Summary Judgment Under the Federal Rules:

Defining Genuine Issues of Material Fact, 99 F.R.D.

On 10

The Supreme Court—Leading Cases, 100 Harv. L. Rev.

ee aa se thk ees veevegiecsscere 10

NO. 90-

IN THE

Supreme Court of the Hnited States

OCTOBER TERM, 1989

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Petitioner,

CROCKER NATIONAL BANK AND

T. O. S. INDUSTRIES, INC.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Petitioner Ideco Division of Dresser Industries, Inc.

(“Ideco”)’ files this Petition for Writ of Certiorari to the

United States Court of Appeals for the Fifth Circuit and

asks this Court to vacate the judgment and enter judg-

ment for the Petitioner or, alternatively, to remand the

case to the trial court for further proceedings.

1. Pursuant to Sup. Ct. R. 28.1, a listing of the non-wholly

owned subsidiaries and affiliates of Dresser Industries, Inc. is in-

cluded in Appendix J.

OPINIONS BELOW

The decisions of the Court of Appeals are reported

at 889 F.2d 1432 (App. A) and 839 F.2d 1104 (App.

C). The decisions of the district court are reported at

702 F.Supp. 615 (App: B) and 660 F.Supp. 186 (App.

D).

JURISDICTION

The United States Court of Appeals entered an order

on November 29, 1989, reversing the decision of the

trial court and remanding for the entry of judgment

(App. E). A timely motion for rehearing was filed by

Ideco and overruled on January 11, 1990 (App. F).

This Court’s jurisdiction is invoked under 28 U.S.C.

§ 1241(:). Jurisdiction in the District Court was based

on 28 U.S.C. § 1332(a).

STATUTES INVOLVED

This petition involves the fifth and seventh amendments

to the United States Constitution and Fed. R. Civ. P.

56(c). Copies are reproduced in Appendix I.

STATEMENT OF THE CASE

Respondent Crocker National Bank (“Crocker”) filed

this action alleging that Ideco converted certain collateral

owned by T.O.S. Industries, Inc. (“TOS”) in which

Crocker claimed a security interest. The Original Com-

plaint filed by Crocker, in which TOS intervened, iden-

tified six drilling rigs and related component parts, in-

cluding 18 engine packages (App. G). Following dis-

covery, the District Court granted Ideco’s motion for

summary judgment (App. D). The trial court held that

(1) Ideco retained a security interest in the rigs that was

perfected by Ideco’s possession of the rigs and that was

superior to Crocker’s security interest in the after acquired

inventory of TOS, and (2) Ideco’s recovery of the engine

packages from a third party who was the bailee of TOS

was proper under § 2.703 of the Uniform Commercial

Code (“U.C.C.”). In making its ruling, the court assumed

there was a contract for the sale of the rigs and engines

between Ideco and TOS and that the rigs and engines

constituted inventory of TOS.

On appeal from that decision, the Fifth Circuit affirmed

the judgment on the rigs holding that, since the rigs were

never delivered, TOS did not have sufficient rights in the

rigs for the Crocker security interest to attach, and

agreeing that Ideco had a perfected possessory purchase

money security interest in the rigs superior to any se-

curity interest claimed by Crocker (App. C). As to the

engines, the Court remanded because of a lack of evidence

as to the relationship between TOS and Continental Drill-

ing Company (“Continental”), a third party to whom

the engines were apparently delivered.

On remand, upon leave of court, Crocker filed an

amended complaint. Crocker abandoned its claims with

regard to the original rigs and engines and asserted in-

stead that Ideco had converted thirteen completely dif-

ferent engines (App. H). A comparison of the serial

numbers and the invoices described in the original and

amended complaint establish that the thirteen engines

described in the amended complaint are not the same

engines that were the subject of the original complaint

and first appeal. The amended complaint alleged that

TOS sold the thirteen engines to Continental.

The parties then filed cross-motions for summary judg-

ment. After a hearing, the trial court again granted Ideco’s

motion for summary judgment on three separate grounds,

including that the engines were never in the possession

of TOS because the engines were delivered to Continental

pursuant to the sale to Continental (App. B). Crocker’s

motion for summary judgment admitted such a sale and

incorporated the invoices from TOS to Continental. No

proof that Ideco had retaken possession of the thirteen

engines was offered in support of Crocker’s motion. That

proof would have been necessary to establish a conversion

of the engines by Ideco.

Crocker filed a second appeal, and this time the Fifth

Circuit reversed and remanded in favor of Crocker

(App. A). It is clear that the Fifth Circuit did not

distinguish between the thirteen engines that were the

subject of the second appeal and the eighteen engines

that were the subject of the first appeal. The reversal

was based upon “a different view of the transaction than

. the district court.” 889 F.2d at 1453. Despite the

judicial admissions and uncontroverted evidence, the

Fifth Circuit concluded that there had been no sale of

the engines from TOS to Continental. This decision was

based upon an unfounded factual! determination that TOS

was the party that returned the engines to Ideco. The only

evidence in the record was that the eighteen engines,

those that were not before the court, had been returned

to Ideco by Continental. There was no evidence that the

thirteen engines had been returned to Ideco by any party.

The Fifth Circuit entered judgment reversing the trial

court’s judgment and remanding the case for further

proceedings consistent with its opinion (App. E).

In its opinion, the Fifth Circuit supplemented the trial

court as the finder of fact. It ignored uncontroverted

evidence and judicial admissions by Crocker to find

certain facts adverse to Ideco. The Fifth Circuit also

took as true certain facts that had been assumed adversely

by the District Court to Ideco to support its judgment

without any examination of the evidence relating to those

facts. By engaging in such a broad factual review of the

case, the Fifth Circuit greatly exceeded the scope of

review available to a court of appeals reviewing a grant

of summary judgment. The decision of the Fifth Circuit

also denied Ideco its right to trial by jury under the

Seventh Amendment to the United States Constitution

and the right to due process under the Fifth Amendment.

REASONS FOR GRANTING THE WRIT

In Celotex Corp. v. Catrett, 477 U.S. 317, 327, 91

L.Ed.2d 265, 106 S.Ct. 2548 (1986), this Court empha-

sized the importance of summary judgment proceedings

in the federal system:

Summary judgment procedure is properly regarded

not as a disfavored procedural shortcut, but rather

as an integral part of the Federal Rules as a whole.

Fed. R. Civ. P. 56 is to be construed not only with regard

to the rights of persons seeking a summary judgment, but

also for those parties opposing claims and defenses. Jd.

The standard embodied in Rule 56, that summary judg-

ment can be granted only when there is “no genuine issue

as to any material fact,” means that a summary judgment

is proper only when the record taken as a whole could

not lead a rational trier of fact to find for the non-moving

party. Matsushita Electrical Industrial Co. v. Zenith Radio

Corp., 475 U.S..574, 587, 89 L.Ed.2d 538, 106 S. Ct.

1348 (1986).

In its haste to dispose of this old case, the Fifth Circuit

ignored the proper standard of review from a grant of

summary judgment. A reviewing court cannot resolve

issues of fact or resolve credibility disputes, but may only

determine whether the moving party has established its

case aS a matter of law. McKenzie v. Davenport-Harris

Funeral Home, 834 F.2d 930 (11th Cir. 1987); Donahue

v. Windor Locks Board of Fire Commissioners, 834 F.2d

54 (2d Cir. 1987); Radobenko v. Automated Equip-

ment Corp., 520 F.2d 540 (9th Cir. 1975). And even

though the parties filed cross-motions, summary judgment

is not proper for either party unless that party satisfies

the requirements of Rule 56. Prineville Sawmill Co., Inc.

v. United States, 859 F.2d 905, 911 (Fed. Cir. 1988);

Houghton v. Foremost Financial Services Corp., 724 F.2d

112, 114 (10th Cir. 1983): Schwabenbauer v. Board of

Education, 667 F.2d 305, 313-i4 (2nd Cir. 1981).

The most glaring example of fact-finding by the Court

of Appeals related to the question of whether there was

a sale of the engines from TOS to Continental. Ideco has

always denied the formation of a contract for the sale

of the engines from Ideco to TOS. Without such a sale

TOS would not have had sufficient rights in the collateral

to allow Crocker’s security interest to attach to the goods.

See, U.C.C. § 9.204. In granting Ideco’s motions, the

District Court assumed all disputed or potentially dis-

puted facts in favor of Crocker and assumed that a sale

to TOS had occurred, but found Ideco’s security interest

to be superior to Crocker. In its amended complaint, TOS

claimed not only that it had purchased the engines from

Ideco, but that it resold them to Continental. The resale

was crucial because that terminated Crocker’s security

interest under U.C.C. §§ 9.306 and 9.307.

Despite all of this, the Court of Appeals found that

no sale from TOS to Continental had ocurred. This factual

determination was clearly erroneous for three reasons.

First, it was contrary to the judicial admission of Crocker

that such a sale had occurred.’

Second, it was based on a subsidiary factual determina-

tion that TOS had returned the engines to Ideco. This

finding was clearly wrong because the only evidence on

this point was an affidavit from Ideco stating that it was

Continental that had relinquished possession of the

eighteen engines, there was no evidence that Ideco ever

regained possession of the thirteen engines.

Third, the Crocker motion incorporated both the Ideco

invoices to TOS and the TOS invoices to Continental

relating to the thirteen engines. The two sets of invoices

were the only evidence of either transaction, and Ideco

consistently denied that any sale to TOS had occurred,

while TOS only blatantly denied completion of its sale

tc Continental. The two sets contained identical delivery

terms and payment terms. The Ideco invoices sent to TOS

were attached to and incorporated in the invoices TOS

sent to Continental. There was only one delivery of the

2. Crocker’s summary judgment states “TOS sold and invoiced

the Caterpillar Engines in place to Continental pursuant .. .” The

affidavit of Richard Ramirez, a TOS officer, in support of the motion

repeatedly referred to Continental as “TOS’s [sic] customer and

subpurchaser of the same . . . Caterpillar Engines. . . .”

engines, and that was to the address specified in the TOS

invoices to Continental. The Fifth Circuit accepted, with-

out question, the District Court’s asumption that a sale

from Ideco to TOS had occurred, but still made a factual

finding that no sale from TOS to Continental had oc-

curred. This inconsistent result is logically impossible:

either two sales occurred or no sales occurred. Given the

identical evidence on the two transactions, the Court of

Appeals could not assume the first sale and find as a mat-

ter of fact that the second sale had not occurred.

The Court’s lapse concerning t‘1e existence of the sale

creates two problems. First, a Court of Appeals cannot,

consistently with Rule 56, assume any facts adversely to

a party before rendering a judgment against a party.

Second, the assumption that an Ideco-TOS sale had been

made by the District Court in connection with the eigh-

teen engines described in the original complaint, but no

such assumption was ever made about the thirteen engines

set forth in the amended complaint. The Court of Appeals

made no effort to review the evidence on the issue of the

Ideco-TOS transaction,-which was a fact Crocker had to

establish to show that TOS had rights in the collateral

to which Crocker’s security interest could attach.

The existence of a sale was not the only fact assumed

by the Court of Appeals. Ideco always contested the

factual issue of whether Crocker’s security interest in

inventory extended to items like the engines. The District

Court assumed that issue adversely to Ideco in connection

with the_original eighteen engines. Neither the District

Court nor the Court of Appeals gave any consideration

to whether the thirteen engines were part of TOS’s in-

ventory, and the delivery to the F.O.B. address on the

TOS invoices to Continental strongly suggests that the

engines were never in the possession of TOS even if the

engines would have constituted inventory subject to

Crocker’s security interest. The District Court did not

need to reach this issue in entering the judgment in favor

of Ideco, but the Court of Appeals assumed the applica-

bility of the security interest.

The Court of Appeals undertook independent fact-

finding in at least one other instance when it “found”

that the thirteen rigs had been returned to Ideco by TOS.

There is no evidence from any party that those engines

were ever returned to Ideco. The Fifth Circuit’s finding

on this point is unfounded and a further usurpation of the

province of the finder of fact.

A Court of Appeals should not dispose of a lawsuit

by making determinations of contested facts when review-

ing a summary judgment. That is precisely what the Fifth

Circuit did in this case when it assumed disputed facts

adversely to Ideco and made findings of other facts ad-

versely to Ideco when the record either was without evi-

dence on that fact, contained disputed evidence of the

fact, or conclusively established the fact in favor of Ideco.

By acting as a fact finder and by assuming other facts in

dispute, the Fifth Circuit exceeded its authority and com-

pletely undercut the purpose and justification that under-

lies the availability of summary judgment proceedings.

The Fifth Circuit’s haste to force a judgment might be

explained by this Court’s decisions in Celotex Corp. v.

Catrett, supra, and Anderson vy. Liberty Lobby, Inc., 477

U.S. 242, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986), both

of which have been interpreted as encouraging the ex-

panded use of summary proceedings. See, Avia Group

International, Ltd. v. L. A. Gear California, 853 F.2d

1557, 1560 (Fed. Cir. 1988); Comment, The Supreme

Court - Leading Cases, 100 Harv. L. Rey. 100, 250, 252

(1986). These decisions were an attempt to resolve the

confusion and distrust of summary judgments that had

evolved since Rule 56 was adopted in 1938. See, Schwar-

zer, Summary Judgment Under the Federal Rules: Defin-

ing Genuine Issues of Material Fact, 99 F.R.D. 465

(1984); Currie, Thoughts on Directed Verdicts and Sum-

mary Judgments, 45 U. Chi. L. Rev. 72, 76-78 (1977).

If District Courts and courts of appeal are to be en-

couraged to utilize summary proceedings more often,

the role of an appeals court in reviewing a grant of sum-

mary judgment, especially in the context of cross-motions

filed in the District Court, takes on an increased import-

ance in the orderly and efficient administration of the

federal courts. If summary judgment is to be perceived

as a legitimate and proper means of resolution and not

as a “disfavored procedural shortcut,” Celotex Corp. v.

Catrett, supra, 477 U.S. at 327, Rule 56 must be applied

with due regard for the procedural and substantive rights

of all litigants. The case at bar is proof that summary

judgment practice has not reached that level.

The improper review of the summary judgment by the

Court of Appeals raises two constitutional issues. Because

a timely jury demand had been made in this case, Ideco

was entitled to a trial by jury on all disputed fact issues.°

Although Ideco does not dispute that a proper grant of

Summary judgment does not violate the seventh amend-

3. After the District Court had stated its intention to enter judg-

ment for Ideco, the parties waived the right to trial by jury on the

damage issue only.

ment, Fidelity & Deposit Co. v. United States, 187 U.S. 315,

319-21, 47 L.Ed. 194, 23 S. Ct. 120 (1902), it is equall

undisputed that a grant of summary judgment in a “suit

at law with disputed issues of material fact does deny a

party the right to trial by jury. By acting as a finder of

fact in this case, the Fifth Circuit denied Ideco its seventh

amendment right to a trial by jury.

Granting summary judgment against Ideco based upon

the assumption of facts adversely to Ideco and by ignoring

uncontested evidence in favor of Ideco also constitutes a

denial of due process of law. A summary judgment

reached in accordance with the requirements of Rule 56

provides procedural due process. Hill v. McDermott, Inc.,

827 F.2d 1040, 1044 (Sth Cir. 1987, cert. denied,

U.S.___, 98 L.Ed.2d 1014, 108 S.Ct. 1052 (1988).

But when a Court of Appeals undertakes to act as an

arbiter of facts in reviewing a summary judgment, the

procedural safeguards of Rule 56 are destroyed and the

party against whom the facts are found is denied both

the procedural and the substantive due process required

by the fifth amendment.

An additional ground justifying review of the case at

bar is that the Fifth Circuit ignored the judicial admis-

sions of Crocker in order to order the entry of judgment

in Crocker’s favor. In both its amended complaint and

its summary judgment motion, Crocker asserted that it

had resold the thirteen engines to Continental. Had that

resale ocurred, any security Crocker might have had in

the engines would have terminated. The Court of Appeals

found, however, as a matter of fact, that no sale of the

engines to Continental had occurred.

The intent of notice pleading is destroyed if a Court

of Appeals can ignore a party’s pleadings to make factual

determinations outside the pleadings. A party’s pleadings

must serve as an admission against that party that defines

the issues and limits the proof that can be offered by that

party. Once a party admits that an event ocurred, as

Crocker admitted the resale of the engines to Continental

in its pleadings, a court must accept those admissions

against the party that made them.

If a Court of Appeals is allowed to find facts in favor

of a party that are directly contrary to the judicially

admitted facts offered by the party, pleadings wholly fail

to serve their intended purpose. A defending party can

no longer be content to disprove an element of the plain-

tiffs case and receive a summary judgment if a Court

of Appeals is free to redefine the issues by making factual

findings outside the scope of the pleadings. In the instant

case, the Fifth Circuit did just that to grant a summary

judgment to Crocker that was not supported by Crocker’s

own pleadings. This Court should exercise review of this

case to determine the extent that a reviewing court can

find facts in favor of a party that are contrary to the

pleaded admissions of that party.

CONCLUSION

The use and review of summary judgment proceedings

has a history of distrust and disfavor in the federal courts.

Recent attempts have been made to expand the use of the

summary procedures established in Rule 56, but fair and

efficient use of Rule 56 will never exist until the courts

of appeal limit their review of summary judgments to

questions concerning the existence of disputed material

facts. The case at bar presents a stark example of a re-

viewing court that ignored contested facts, undisputed

facts, and judicial admissions and substituted its own view

of the underlying facts to order judgment when Crocker

clearly had not met its burden. The decision of the Fifth

Circuit should be reversed and the case remanded for

further review of the District Court’s grant of summary

judgment in favor of Ideco consistent with the purposes

and limits of Rule 56.

Respectfully submitted,

BUTLER & BINION

ROBERT HAYDEN BuRNS

JAMES R. O’DONNELL

KEVIN F. RISLEY

JEANNETTE MCALLISTER

1600 First Interstate Bank Plaza

Houston, Texas 77002-5008

(713) 237-3269

Attorneys for Petitioner

Ideco Division of Dresser

Industries, Inc.

CERTIFICATE OF SERVICE

I certify that three copies of this Petition for A Writ

of Certiorari to the United States Court of Appeals for

the Fifth Circuit have been sent by certified mail, return

receipt requested, to Mr. Tim S. Leonard, Kirklin &

Boudreaux. 1800 InterFirst Plaza, Houston, Texas 77002,

on this _ day of March, 1990.

JAMES R. O'DONNELL

APPENDIX A

CROCKER NATIONAL BANK,

Plaintiff-Appellant, Cross-Appellee,

and

T.O.S. Industries, Inc., d/b/a Texas Oilfield Supply,

Intervenor-Appellant, Cross-Appellee,

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant-Appellee, Cross-Appellant.

No. 89-2149,

United States Court of Appeals,

Fifth Circuit.

Nov. 29, 1989.

Creditor with security interest in debtor’s inventory

brought action against seller of inventory to debtor to

determine priority of their respective interests in inventory.

The District Court, 660 F.Supp. 186, granted summary

judgment for seller, and creditor appealed. The Court of

Appeals, 839 F.2d 1104, affirmed and remanded. The

United States District Court for the Southern District of

Texas, Lynn N. Hughes, J., 702 F.Supp. 615, again held

for seller, and creditor again appealed. The Court of

Appeals held that debtor’s return of inventory to unpaid

Seller did not extinguish creditor’s security interest in

such after-acquired inventory.

Reversed and remanded.

A-2

Tim S. Leonard, David Scott Curcio, Kirklin & Boud-

reaux, Houston, Tex., for defendant-appellee, cross-ap-

pellant.

James R. O'Donnell, Kevin F. Risley, Jeannette M.

McAllister, Butler & Binion, Houston, Tex., for plaintiff-

appellant, cross-appellee.

Appeals from the United States District Court for the

Southern District of Texas.

Before WISDOM, JOHNSON and HIGGINBOTHAM,

Circuit Judges.

PER CURIAM:

This diversity case presents the question whether under

the Texas U.C.C. a sale of a debtor’s inventory has oc-

curred when (1) the alleged buyer is an affiliate of the

debtor, (2) the debtor takes delivery of the inventory

from its seller at a facility it shares with the affiliate,

(3) the debtor never pays its seller and the affiliate never

pays the debtor, and (4) the debtor later transfers the

inventory back to its seller in exchange for a release.

We must resolve this question in order to determine

whether the debtor’s secured party here has priority over

the unpaid seller with respect to the inventory. We also

must determine whether the transfer back to the seller

extinguished the security interest.

Crocker National Bank, the secured party, and T.O.S.

Industries, the debtor, approve the district court’s judg-

ment that Crocker was not entitled to recover the value

of certain engines subject to their security agreement.

T.O.S. transferred the engines back to the seller, Ideco

Division of Dresser Industries. We reverse the judgment

of the district court and render judgment for Crocker

a ee

A-3

On its conversion claim against Ideco. The district court

found the value of the engines to be $1,332,340.00. We

reject Ideco’s argument that this finding was Clearly

erroneous.

T.O.S. Industries was a supplier of oil field equipment.

Crocker National Bank perfected a security interest under

Article 9 of the Texas Uniform Commercial Code in all

of T.O.S.’s after-acquired inventory.

Later, Ideco agreed to sell T.O.S. some drilling rigs

and engines, which T.O.S. in turn planned to sell to its

affiliate, Continental Drilling Company. T.O.S. later in-

formed Ideco it did not need the rigs. Ideco delivered

the engines to a facility in Owentown, Texas jointly owned

by T.O.S. and Continental. The facility was identified in

the Crocker-T.O.S. security agreement as a location of

T.O.S.’s inventory. The shipment papers indicated the

shipment was to Continental, but Ideco sent the invoices

to T.O.S. T.O.S. in turn sent invoices to Continental.

T.O.S. did not pay Ideco for the engines or the rigs,

and Continental never paid T.O.S. for them. T.O.S.’s

financial fortunes were declining, so it made a massive

transfer of its inventory to its creditors. At the same time.

the engines were transferred back to Ideco, and Ideco

gave T.O.S. credit memoranda and a release from its

obligation.

Crocker, which had not specifically approved either

T.O.S.’s proposed sale to Continental or the transfer of

the engines back to Ideco, filed a complaint in conversion

against Ideco in the district court. Crocker sought to

recover the value of the engines and the rigs, claiming its

security interest had priority over Ideco’s interest as an

unpaid seller. T.O.S. intervened as debtor in possession,

A-4

seeking to avoid the transfer to Ideco pursuant to 11

U.S.C. § 547(b). The district court granted summary

judgment on all the claims in favor of Ideco, and Crocker

and T.O.S. appealed. We affirmed the summary judgment

only with regard to the rigs, and remanded the case to

the district court to determine whether Ideco retained a

possessory interest in the engines superior to Crocker’s

security interest. Crocker National Bank v. Ideco Division

of Dresser Industries, 839 F.2d 1104 (Sth Cir. 1988).

On remand, the district court rendered judgment in

favor of Ideco, even though it found Ideco surrendered

its possessory interest when it delivered the engines to the

Owentown facility. The court gave several alternative

grounds to support its decision. First, it concluded that

[deco delivered the engines to Continental, so T.O.S.

never had possession and Crocker’s security interest never

attached. Second, the court held that even if T.O.S. had

possession, Crocker’s security interest was extinguished

when T.O.S. returned the engines to Ideco. Third, the

court held that if Continental held the engines as Ideco’s

bailee, Ideco properly exercised its rights as bailor by

stopping the delivery from Continental to T.O.S. Crocker

National Bank v. Ideco Division of Dresser Industries,

702 F.Supp. 615, 616-17 (S.D. Tex. 1988). Crocker and

T.O.S. again appealed.’

We take a different view of the transaction than did

the district court. We hold that the district court’s finding

that the engines were delivered to Continental instead

1. T.O.S. does not press its claims under 11 U.S.C. § 547(b) on

this appeal. It merely adopts Crocker’s arguments

A-5

of T.O.S. was clearly erroneous, as was its alternative

holding that Continental took delivery as bailee. Ideco’s

contract was with T.O.S. and it sent its invoices to T.O.S.

T.O.S. stored its inventory at the Owentown facility.

When the engines were returned, T.O.S., not Continental,

received the credit memoranda and the release. We are

thus persuaded T.O.S., not Continental, returned them.

The shipping papers merely reflected T.O.S.’s plan that

Continental would have use of the engines. Under this

view. Crocker’s security interest in the engines attached

when they were delivered to Owentown. Tex. Bus. &

Comm. Code Ann. § 9.203 (West Supp. 1989). Crocker’s

right to the engines as holder of a perfected security

interest was superior to Ideco’s claim as an unpaid seller

no longer in possession. Matter of Samuels & Co., 526

F.2d 1238 (Sth Cir.), cert. denied, 429 U.S. 834, 97

S. Ct. 98, 50 L.Ed.2d 99 (1976); Villa v. Alvarado State

Bank, 611 S.W.2d 483- (Tex. Civ. App.—Waco 1981,

no writ). Ideco does not challenge the district court’s

holding that it surrendered its possessory interest at the

time of delivery.

Instead, Ideco argues that T.O.S.’s alleged sale to Con-

tinental or its return of the engines to Ideco or both,

were sales authorized by the security agreement that

extinguished Crocker’s security interest under § 9.306(b).

The security agreement authorized T.O.S. to sell the col-

lateral in the ordinary course of its business.

We are not persuaded that either transaction was suf-

ficient to extinguish Crocker’s security interest. There was

insufficient evidence of a sale between T.O.S. and Con-

tinental. The Code defines a sale as the passing of title

from a seller to a buyer for a price. Tex. Bus. & Comm.

A-6

Code Ann. § 2.106 (Vernon 1968). The engines were

delivered to T.O.S. at Owentown and they were never

moved. Continental never paid for them. The only evi-

dence of a sale was the set of invoices T.O.S. sent to

Continental, and the notation on Ideco’s shipping docu-

ments that indicated delivery was to be made to Conti-

nental. This is not fatally inconsistent with there being a

sale. See Tex. Bus. & Comm. Code Ann. § 2.401(c)

(providing that unless the parties otherwise agree, where

delivery is to be made without moving the goods, the

goods are already identified to the contract, and no docu-

ments of title are to be delivered, title passes at the time

and place of contracting). But T.O.S. transferred the

engines back to Ideco. It could only have done that if

it had title. This evidence persuades us that title never

passed from T.O.S. to Continental.

Finally, the transfer of the engines back to Ideco was

not in the ordinary course of T.O.S.’s business. The par-

ties agree that the U.C.C. and the security agreement

definition of sales in the ordinary course of business are

the same. Section 1.201(9) excludes from the definition

of “buyer in ordinary course of business” one who re-

ceives the property “in total or partial satisfaction of a

money debt.” Ideco received the engines in satisfaction

of the money debt T.O.S. owed, so this sale does not

qualify. See Chrysler Credit Corperation v. Malone, 502

S.W.2d 910 (Tex. Civ. App.—Fort Worth 1974).

Therefore, we reverse the judgment of the district court

and remand to the district court for entry of judgment

for Crocker. Compensatory damages for conversion in

Texas are measured by the market value of the property

at the place and on the day of the conversion. Branham

A-7

v. Prewitt, 636 S.W.2d 507 (Tex. App.—San Antonio

1982), writ ref'd, n.r.e. 643 S.W.2d 122 (Tex. 1983):

Hupp v. Brownsville Shipyard, Inc., 515 F.Supp. 546

(S.D. Tex. 1981). The district court valued the engines

at $1,332.340.00 on the date they were sent back to

Ideco. It made this determination based on the invoices

Ideco sent T.O.S. and on testimony that this figure

represented the value of the engines on the date of the

transfer. There was contrary evidence but we do not find

the district court’s determination to be clearly erroneous.

REVERSED and REMANDED.

APPENDIX B

CROCKER NATIONAL BANK,

Plaintiff,

Vv.

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant.

Civ. A. No. H-83-2988.

United States District Court.

S.D. Texas,

Houston Division.

Dec. 29, 1988.

Creditor with security interest in after-acquired inven-

tory of buyer of drilling rigs and diesel engines brought

action against seller, after buyer petitioned for bankruptcy

relief, to determine relative priority of security interest.

The District Court, 660 F.Supp. 186, granted summary

judgment for seller, and creditor appealed. The Court of

Appeals, 839 F.2d 1104, affirmed judgment and remand-

ed in part. On remand, the District Court, Hughes, J.,

held that: (1) buyer never had possession of engines to

allow creditor’s security interest to attach; (2) assuming

that buyer had actual possession of engines, any interest

creditor had terminated at return of engines to seller; and

(3) seller correctly intercepted delivery of engines to

bailee when buyer informed seller that it was impecunious.

So ordered.

B-2

Tim Leonard, Houston, Tex., for plaintiff.

James R. O'Donnell, Houston, Tex., for defendant.

MEMORANDUM ON SUMMARY JUDGMENT

HUGHES, District Judge.

This court previously granted summary judgment in

favor of Ideco Division of Dresser Industries, holding that

its pOssessory security interest prevailed over the security

interest of Crocker National Bank in drilling rigs and in

several Caterpillar diesel engines. On appeal, this court’s

judgment was affirmed on the drilling rigs, and it was

remanded on the engines. Crocker Nat'l Bank v. Ideco

Div., 839 F.2d 1104 (Sth Cir. 1988). The court of

appeals ruled that it was necessary to determine the

relationship of Continental Drilling Company to the par-

ties in this litigation specifically about the engines be-

cause the crucial issue was whether Ideco retained pos-

session.

Crocker’s security interest in T.O.S. inventory does not

attach to the engines. First, the engines were never in

the possession of T.O.S. Second, if Crocker had a security

interest in the engines, the interest terminated when the

engines were returned for full credit to the original vendor.

Last, if Continental acted as a bailee at the time the

contract was repudiated, Ideco had never relinquished

possession of the engines to T.O.S. Accordingly, Ideco’s

motion for summary judgment will be granted.

Facis.

Crocker National Bank was the holder of a security

interest in all of T.O.S.’s inventory wherever located,

accounts receivable, general intangibles, and returned

B-3

goods. Ideco is the unpaid seller of the engines sold to

T.O.S. Ideco invoiced T.O.S. on 30-day terms, noting a

tax exempt sale for resale. Simultaneously, T.O.S. in-

voiced its customer Continental for the engines. In De-

cember 1981, Ideco shipped the engines directly to Con-

tinental at a storage facility used jointly by T.O.S. and

Continental.

The engines remained at the storage facility until July

1982, when Ideco issued credit memoranda, executed a

mutual release of contract with T.O.S., and retook pos-

session of the engines.

Possession and Placement.

[1] According to Ideco’s invoice, which also was in-

corporated into T.O.S.’s invoice to Continental, the en-

gines were shipped to Continental Drilling Company at

Highway 155 North, Tyler, Texas. The actual delivery

of the engines was to Continental, not to TOS: TASS.

did not have possession of the engines to allow Crocker’s

security interest to attach. The engines were never a part

of T.O.S.’s inventory.

The engines were shipped to Continental at a storage

facility used jointly by T.O.S. and Continental. The de-

livery of the engines to a dual capacity yard does not

produce a possessory interest in T.O.S. to which Crocker’s

security interest can attach.

Return.

[2] Assuming T.O.S. had actual possession of the

engines, making them a part of T.O.S.’s inventory, the

security interest still does not subsist. The security and

loan agreement states that all of T.O.S.’s inventory is to

B-4

be stored at specific locations and that T.O.S. will not,

without first obtaining Crocker’s written consent, remove

the inventory from that location except for the purposes

of sale in the regular course of its business. The return

to the original vendor of the engines for full credit is a

sale or exchange in the ordinary course of business.

T.O.S. did not need Crocker’s consent to return the

engines to the original vendor for full credit. The exchange

of the engines for full credit was authorized by the

Crocker security agreement because the return of the

engines was in the ordinary course of business. Inventory

adjustment is a normal business operation which has only

minimal potential for abuse to the detriment of the in-

dividual lender. Any interest Crocker had terminated at

the return of the engines to Ideco. When Ideco obtained

possession of the engines, Crocker and T.O.S. relinquished

any claim to the engines.

Bailment.

[3, 4] Alternatively, if Continental was the bailee for

the engines, Ideco had the right to stop delivery of the

six engines from Continental to T.O.S. Delivery of the

goods to T.O.S. was required before title passed to it.

A seller has the right to stop delivery of goods that are

in the possession of a carrier or other bailee when the

buyer repudiates the contract. Tex. Bus. & Comm. Code

§ 2.703. When T.O.S. informed Ideco that it was im-

pecunious Ideco correctly intercepted the delivery of the

engines. Neither T.O.S. nor Crocker acquired any interest

in the engines superior to Ideco’s interest.

Value.

The actual value of the engines is a fact disputed by

Crocker and Ideco. It will become useful only if Crocker

is held on appeal to have obtained a security interest in

the engines. Since on remand the evidence has already

been taken, the finding of their value is made to obviate

another remand. On the day they were returned to Ideco,

the Caterpillar engines had an aggregate fair market value

of $1,332,340.

Judgment will be granted for Ideco.

APPENDIX C

CROCKER NATIONAL BANK,

Plaintiff-Appellant,

and

T.O.S. Industries, Inc.,

Intervenor-Appellant,

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant-Appellee.

No. 87-2634.

United States Court of Appeals,

Fifth Circuit.

March 15, 1988.

Creditor with security interest in after acquired inven-

tory of buyer of drilling rigs brought suit against seller,

after buyer petitioned for bankruptcy relief, to determine

relative priority of security interests. The United States

District Court for the Southern District of Texas, Lynn

N. Hughes, J., 660 F.Supp. 186, granted summary judg-

ment for seller, and creditor appealed. The Court of

Appeals, Bright, Circuit Judge, sitting by designation,

held that: (1) seller retained perfected security interest

in rigs by its continued possession of them, and (2) where

seller has never relinquished possession of goods, special

property right acquired when goods are identified to con-

tract in and of itself does not constitute sufficient right

n collateral to enable buyer who has not paid for those

ds to transfer security interest in them to third party.

C-2

Affrimed and remanded in patt.

Ann Spiegel, Tim §. Leonard, H. Victor Thomas,

Kirklin, Boudreaux & Joseph, Houston, Tex., for T.O.S.

Industries, Inc. & Crocker Nat. Bank.

James R. O'Donnell, Kevin F. Risley, Butler & Binion,

Houston, Tex., for defendant-appellee.

Appeals from the United States District Court for the

Southern District of Texas.

Before CLARK, Chief Judge, BRIGHT,* Senior Cir-

cuit Judge, and Gee, Circuit Judge.

BRIGHT, Senior Circuit Judge:

I. BACKGROUND

In this case we determine the security interests, and

their relative priority, of appellee Ideco Division of Dresser

Industries, Inc. (Seller), the unpaid seller-manufacturer

of drilling rigs; appellant T.O.S. Industries, Inc. (Buyer),

who agreed to purchase the drilling rigs: and appellant

Crocker National Bank (Bank), the holder of a security

interest in the Buyer’s inventory.

Sometime in 1981, the Buyer agreed to purchase forty

drilling rigs, their engines and control units, from the

Seller. In January 1982, the Buyer informed the Seller

that it did not need the rigs. The Seller, however, in-

formed the Buyer that it was too far along in the manu-

facture of six of the rigs to cancel the order and that the

* Senior Circuit Judge of the Eighth Circuit, sitting by designa-

tion.

C-3

Buyer would have to purchase these six rigs. The Seller

continued to send invoices for the goods to the Buyer.

These invoices stated that the goods were to be “held for

shipping instructions” and contained an F.O.B. point of

shipment term. The Seller retained possession of the rigs.

The Seller accounted for the rigs as a sale and, accord-

ingly, its records showed an increase in accounts receiv-

able and a decrease in inventory.

In July 1982, the Seller stopped sending invoices for

the six rigs and issued credit memoranda reflecting the

cancellation of the Buyer’s indebtedness and executed a

mutual release with the Buyer whereby each party re-

leased the other from all contractual obligations arising

from the sale of the six rigs.’ At that time the Seller’s

books showed an increase in inventory and a decrease in

accounts receivable. Approximately one month later, the

Buyer filed for reorganization under Chapter 11 of the

Bankruptcy Code, 11 U.S.C. §§ 1101, ef seq.

In May of the following year, the Bank filed its com-

plaint in the district court, based on diversity of citizen-

ship, 28 U.S.C. § 1331, asserting that it is entitled to

recover the rigs, engines and control units from the Seller

on the basis of a security interest in the inventory of the

Buyer which it had perfected by the filing of financing

statements. The Buyer moved to intervene, asserting that

as debtor in possession it might avoid its transfer of the

goods to the Seller.

Both the Bank and the Seller filed motions for summary

judgment, each asserting a perfected security interest in

the goods entitled to preference. The Honorable Lynn N.

o »

1. The Seller apparently sought a clear title in order to resell

the rigs.

C-4

Hughes, United States District Judge for the Southern

District of Texas, 660 F.Supp. 192, granted summary

judgment in favor of the Seller, holding that the Seller's

perfected purchase money security interest prevails over

any interest held by the Bank. The court further held

that the Buyer never possessed sufficient rights in the

goods to convey a security interest to the Bank. Finally,

the district court concluded that neither the Buyer nor

the Bank acquired any interest superior to that of the

Seller in the engines, which had been shipped to a third

party, Continental Drilling Company.

This appeal followed.

Il. DISCUSSION

Summary judgment shall be granted only when the mov-

ing party establishes that there is no genuine issue of

material fact and that he is entitled to judgment as a

matter of law. Fed. R. Civ. P. 56(c). In reviewing an

order granting summary judgment we must consider the

evidence in the light most favorable to the party opposing

the motion, AfcPherson v. Rankin, 736 F.2d 175, 177-78

(Sth Cir. 1984), aff'd, US. 10. Ch. Sot,

97 L.Ed.2d 315 (1987), and resolve all reasonable in-

ferences in his favor, Galindo v. Precision Am. Corp., 754

F.2d 1212, 1216 (5th Cir. 1985). In this case, the rele-

vant facts are not disputed but the parties reach differing

legal conclusions on those facts.

(A) The Rigs

The Seller contends that it retained an interest in the

rigs superior to any interest possessed by the Buyer or

the Bank by virtue of its continued possession of the rigs.

C-5

[1] A seller who retains title to goods retains a se-

curity interest in those goods. § 2.401.7 A security interest

in goods obtained through continued possession by a seller

for the purpose of securing the purchase price of the goods

Ils a purchase money security interest. § 9.107. This se-

curity interest is perfected by the seller’ Ss continued pos-

Session of the goods. § 9.305." Thus, so long as the Seller

retains possession of the rigs in order to secure payment

by the Buyer, its security interest remains perfected.

The Buyer and the Bank argue, however, that while

the Seller retained physical possession of the rigs, the

Buyer acquired constructive possession of them which

served to oust the Seller of its security interest.

(1) Present Sale

[2] The Buyer and the Bank rely on the Code’s

“present sale” concept to support their argument,

Unless otherwise explicitly agreed, title to goods gen-

erally passes to the buyer when the seller completes his

performance with reference to physical delivery of the

goods. § 2.401(b). Section 2.401(c) contemplates an

agreement that delivery shall take place without moving

the goods. See Bore-Warne rb ACE CPltance Corp. v. Massey-

Ferguson, 713 S.W.2d 351, 353 (Tex. Ct. App. 1985)

The Buyer and the Bank rely on this latter section. They

argue that the notation on the rig invoices to “hold for

# All references to sections are to the Texas Business &

Code Annotated (Vernon 1968 and Supp. ]

noted. We have reproduce

to this opinion

3. Section 9.113 recognizes the seller security interest

under Article 2 of the Code. W

possession oO! the voOod

interest. § 9.113(2

C-6

shipping instructions” evidence the agreed intent of Buyer

and Seller that title shall pass at the time the rigs are

identified to the cortract and without physical delivery

of them.

We reject this contention. The record unequivocally

demonstrates that the parties never agreed to transfer title

other than by delivery. The Code makes clear that the

F.O.B. term is a delivery term, § 2.319(a), and that

F.O.B. point of manufacture indicates that the seller must

place the rigs in the hands of a common carrier at the

point of manufacture. § 2.319(a)(1). Thus, the terms

of the invoice oblige the Seller to deliver the rigs to a

carrier. Title, therefore, passes only when that delivery

obligation is met. § 2.401(b).*

The notation “hold for shipping instructions” does not

conflict with the F.O.B. term. Whenever a sales agreement

contains an F.O.B. term, except when the term is F.O.B.

destination, the buyer must seasonably provide the seller

with any needed shipping instructions. § 2.319(c). The

“hold tor shipping instructions” notation simply recog-

nizes the buyer's “obligation of cooperation,” comment 3

to $ 2.319 with the seller. Those instructions, without

more, do not effect the transfer of title of the goods to

the Buyer.

4 [he circumstances here differ from those discussed by Donald

L. Kreindler in his article The Unitorm Commercial Code and

Priority Rights Between the Seller in |! ton and a Good Faith

Third-Party Purchaser, 82 Comm. L.J. 86, 88 (1977), relied upon

appellants. Kreindler comments that “[iJn the absence of any

cle contrary [contractual] provision, it would appear that the

nal commercial understanding of an invoice denotes that title

passed upon ( he invoice notwithstanding the

seller's retention of possession As we have discussed, the F.O.B

lear Sell livery obligation and title

“ . ° . ‘*.

C-7

The Buyer and the Bank attempt to negate the effect

of the F.O.B. term by pointing to the Buyer’s business

practice of storing its inventory with its seller until a

resale buyer is found. This practice, they contend, at least

Creates a genuine issue of material fact as to Whether a

present sale was intended. The proffered evidence, how-

ever, relates to circumstances surrounding the Buyer's

transactions with other parties, not the arrangement be-

tween these parties. Thus. we reject this contention of

the Buyer and the Bank.

[3] The Buyer and the Bank also attempt to negate

the F.O.B. term by referring to the Seller's accounting

records reflecting an increase in its accounts receivable

and a decrease in its inventory upon invoicing. These

record transactions do not determine title. They represent

bookkeeping procedures performed by the accounting de-

partment which do not negate the express delivery term

of the agreement.

The district court therefore properly concluded under

the undisputed evidence that no present sale occurred and

that title to the rigs remained with Buyer.

(2) Rights in the Collateral]

The Buyer and the Bank argue in the alternative that

the Buyer obtained rights in the rigs sufficient to transfer

a security interest to the Bank.

A security interest attaches and is enforceable against

the debtor and third Parties when (1) the collateral js

in the possession of the secured party or the debtor has

signed a security agreement containing a description of

the collateral; (2) value has been given; and (3) the

debtor has rights in the collateral. & 9.203(a). Here Buyer

signed a security agreement with the Bank whereby the

C-8

Bank obtained a security interest in the Buyer’s inventory.

In return, the Bank advanced funds to the Buyer.

When goods are identified to a contract, a buyer ac-

quires a special property and insurable interest in those

goods. §§ 2.401(a), 2.501. The Buyer and the Bank

argue that the special property interest which the Buyer

acquired by identification of the six rigs to the contract

constitutes a sufficient right in the collateral to permit

the Bank’s security interest to attach to the rigs.

The Uniform Commercial Code does not define the

term special property interest. However, comment 3 to

$ 2.401 indicates that the special property interest is not

a security interest but essentially relates to a purchaser's

remedial rights. “[I]ts incidents are defined in provisions

of the Article such as those on the rights of the seller's

creditors, on good faith purchase, on the buyer's right to

goods on the seller’s insolvency, and on the buyer’s right

to specific performance or replevin.”

The Buyer and the Bank argue that because § 9.203

does not specify any minimum quantum of rights in the

collateral that must be held by a debtor before a security

interest can attach, the special property interest 1s suf-

ficient for a security interest to attach. The parties rely

on L.B. Smith, Inc. v. Foley, 341 F.Supp. 810 (W.D.

N.Y. 1972) and In re County Green Lid. Partnership,

438 F.Supp. 693 (W.D. Va. 1977), but miss the im-

portant distinction in both of those cases that the buyer

had physical possession of the goods to support the attach-

ment of a security interest.

The court in In re County Green held that “the mere

delivery of the appliances to the construction site for use

on the construction project gave the debtor rights in the

collateral for purposes of § [9.203].” 438 F.Supp. at 696.

C-9

In County Green, the buyer actually possessed the goods

and thus the case is distinguishable from the present facts.

L.B. Smith, Inc. v. Foley arises in a different factual

framework. There the Internal Revenue Service asserted

a tax lien on two trailers delivered by the seller to the

buyer pursuant to a conditional sales agreement. The

buyer never made any payment to the seller for the trailers.

The district court was called upon to determine the rela-

tive priorities of the IRS’s tax lien and the unperfected

interest of the unpaid seller. In determining whether or

not the IRS’s lien was perfected, the court examined the

issue “whether and to what extent the taxpayer-conditional

vendee had property and rights to property in the two

Coastal Trailers to which the federal tax lien could at-

tach.” 341 F.Supp. at 813. The court concluded that

“[w]hatever the full nature of this ‘special property’ in-

terest in the buyer, it is of a nature sufficient to permit

attachment of a lien by the buyer’s creditor.” Jd. Although

the court did not discuss the buyer’s possession of the

trailers, that change of possession to the buyer did occur

and the opinion must be read and construed in light of

the buyer’s possession.°

5. L.B. Smith, Inc. v. Foley is the basis for the statement that

“a debtor has rights in the collateral if he * * * is a buyer with

special property rights in goods by virtue of U.C.C. § 2-501. even

though he has not yet acquired title under U.C.C. § 2-401 * * *.”

8 ANDERSON, UNIFORM COMMERCIAL CODE § 9-203.45. The

other case relied upon by Anderson for this proposition, Holstein +

Greenwich Yacht Sales, Inc., 122 R.I. 211, 404 A.2d 842 (1979),

is also distinguishable from this case. There the Rhode Island court

held that the special property interest acquired by the buyer of an

undelivered sailboat was superior to the security interest of the seller's

floor-plan financer. Holstein, however, is distinguished because it did

not determine the rights of the buyer as against the seller holder of

a purchase money security interest in the goods. Retention of posses-

sion was not an issue in Holstein, while it is central to the rights of

the parties here.

C-10

In In the Matter of Samuels & Co., 526 F.2d 1238

(5th Cir.) (en banc), cert. denied, 429 U.S. 834, 97

S. Ct. 98, 50 L.Ed.2d 99 (1976), this court focused on

the importance of possession in determining the relative

rights of parties claiming a security interest in property.

The opinion addressed the following question: is the in-

terest of an unpaid cash seller in goods already delivered

to a buyer superior or subordinate to the interest of a

bank. the hclder of a perfected security interest in those

same goods? Jd. at 1241. This court held that the buyer

had the right to encumber the goods upon their delivery

having obtained that right upon acquiring possession of

the goods. The decision rested upon possession. Indeed,

as the opinion made clear, the bank’s security interest

attached only as a direct result of the seller's voluntary

act of delivery of the cattle to the buyer without reserving

any written security interest. Id. at 1247. See Interfirst

Bank of Abilene, N.A. Vv. Lull Mfg., 778 F.2d 228, 233

(5th Cir. 1985).

This case is different from Samuels. The Seller never

delivered the rigs to the Buyer. Nevertheless, the analysis

in Samuels is important here because it demonstrates the

important role of possession 1n determining rights in col-

lateral. See Kinetics Technology Int'l Corp. v. The Fourth

Nat'l Bank of Tulsa, 705 F.2d 396 (10th Cir. 1983),

where the court held that for a security interest to attach,

a debtor must have some degree of control or authority

over collateral placed in the debtor's possession.

The Seller in this case retained possession of the rigs

at all times, thus preserving a purchase money security

interest in them. The Buyer never paid for the rigs and

never acquired any control over them. A holding that the

C-11

Buyer could transfer a security interest to the Bank would

contravene the general principle that one cannot encumber

another person’s property. See Kinetics Technology Int'l

Corp., 705 F.2d at 398. As the district court noted, “[iJt

would astonish the sellers of the world to discover that a

seller who has not parted with goods nor received pay-

ment for them has an interest in the goods inferior to the

creditor of a holder of an executory contract to buy them.”

Such a holding would offend the commercial expectations

of all sellers who retain possession of goods to protect

themselves against a defaulting buyer.°

[4] We thus hold that where the seller has never re-

linquished possession of the goods the special property

right of § 2.401 in and of itself does not constitute a

sufficient right in the collateral to enable a buyer who

has not paid for those goods to transfer a security interest

in them to a third party.

Accordingly, the district court properly entered sum-

mary judgment in favor of the Seller with respect to the

rigs.

(B) The Control Units

The district court failed to address the control

units. However, the record before us indicates that the

control units remained at the Ross Hill Company where

they had been stored since the Ross Hill Company manu-

factured them for the Seller. There is no evidence that

6. One of a seller’s remedies for non-payment by the buyer is to

withhold delivery of the goods. § 2.703(a). The clear implication of

§ 2.703(a) is that the seller’s right to withhold delivery under such

circumstances is superior to any right held by the buyer or the

buyer’s creditors.

C-12

the control units were ever delivered to the Buyer. Thus,

the above analysis with respect to the rigs applies to the

control units and the summary judgment as granted in-

cluded those items.

It appears from the record that the Caterpillar

engines were delivered to a third party vendor Continental

Drilling Company. However, the record is bare of ex-

planation concerning the relationship of Continental Drill-

ing Company to the Buyer and the Seller. Regardless, the

Seller asserts that it exercised its right to reclamation of

the rigs under § 2.705. The lack of evidence on this

matter requires a remand of this portion of the case to

the district court for further development of the record

and appropriate disposition. As we have discussed, the

crucial issue between the Seller and the Bank relates to

whether or not the Seller retained a possessory interest

in the goods.

III. CONCLUSION

For the foregoing reasons, we affirm the judgment of

the district court as applied to the drilling rigs and control

units, but remand to the district court for further pro-

ceedings relating to the engines and the entry of an ap-

propriate judgment as to these engines.

AFFIRMED AND REMANDED IN PART.

C-13

APPENDIX

§ 2.319. F.O.B. and F.AS. Terms

(a) Unless otherwise agreed the term F.O.B. (which

means “free on board”) at a named place, even though

used only in connection with the stated price, is a

delivery term under which

(1) when the term is F.O.B. the place of shipment,

the seller must at that place ship the goods in

the manner provided in this chapter (Section

2.504) and bear the expense and risk of putting

them into the possession of the carrier: or

(2) when the term is F.O.B. the place of destination,

the seller must at his own expense and risk

transport the goods to that place and there ten-

der delivery of them in the manner provided in

this chapter (Section 2.503);

(3) when under either Subdivision (1) or (2) the

term is also F.O.B. vessel, car or other vehicle.

the seller must in addition at his own expense

and risk load the goods on board. If the term

is F.O.B. vessel the buyer must name the vessel

and in an appropriate case the seller must

comply with the provisions of this chapter on

the form of bill of lading (Section 2.323).

(b) Unless otherwise agreed the term F.A.S. vessel

(which means “free alongside”) at a named port, even

though used only in connection with the Stated price,

is a delivery term under which the seller must

(1) at his own expense and risk deliver the goods

alongside the vessel in the manner usual in that

a ~ Tr)

A C *

< =o <

~4«" ‘ . . . ~ 5 ~

sSu b f lading

~s | ~ T " | 4

z C * VICC . S & .

2 S + + 9 ,

1 i CC :

r > , > Lliad Ants + 7 f

SO aS y Ave 1 LLULCU iiS UL S i

. ‘

y sriann t1'har tha + + i

_~ Y =>* = Vv i en . . ‘\ 5 \ >)

] } +} ] ] y

¢ . North f tha >] 7 r

. = “4 < Ol i Vessel a ei a

¢ nam an 1 yiling lata I le ce ’

Last S LIALLIC ae Sdalillikx Uate c C .

+ a + + dad tr ~t1 > +o,] y

eC ure OF needed instructions aS a Taliure

, , , —“ maean .

r) ne r th} Kh tp aot r) 4 }

1 ULIUC (nis Chapte.©r (Section fae il iC

it his option move the goods in any reas

‘fr preparatory to delivery or shipment

;

read sCliment na hoa or

. ~ AGL A UULU nents aiid \ - <

_ + . ~~ ] nand 1a] r f ¢L, . |

. L Ui £lits ULI Ve y - .

f 7 ‘ _

~ ~~ ~ >

. AN ONL Ya .

, ' ’ ' ‘ ;

~ } | y > sTnar avr t % ) ranari THe Ay 7

ye ali U LSS = | CAVIICILTY aPrTeed tne u

: , ;

> . jantié + . . srt

r ~ rm tr} DIT r ) or 1 CT) ; nrone rty 1

as 4 . Y Willi VALIVII c r+. ci \ At a

_ > 1 Wey +h, trtla — ratant n rere rr +; nm hx thea

s Q)T) ©) \ rs | ()

‘LU ‘ i . il Viv iili il AV OL 1 cat Li y tli

’ ] , '

C _- + thea +. ’ nroneart ) ca cTOOdS cninned \T ’ 7

~ iil i \ . \ = Ji WILY il — Si bilP7OUU i Ul

i I o E I

ran ¢ +h, iN - 4 mitan > tt ant ¢ racar, + a

) , > . ) ) )

~iCU LLic MYCi iS i CU Ab CLICK | a CSI Val i

> . y , ntarsa + S h + + + . — _ 9 ;

) Cc) )

1 SLL U y btLL CS i = ‘ LOL \ VIS S 4 i

+} a a * hy WMtor S ’ ] | ‘ .

~A4 _ 5 ‘ . — — s} _ ~~ \ ~~ \ ‘ 5 ‘\ 5

( . mter O +. + . ] ~ ‘ +l, . - ¢ .

) x SSeS \

AJ LL . ae i . . = .

_ / ’ thea nortisa

4 ane y bi PGAILIL

sy = _— ~ s — \~ rv - ~

_ C cfr y , ’ r y ,

‘; ‘ or ? , .

Te A . y < eas . 4 . bs

“++ Ator ‘ , ] , + . t *¢

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eS Ui . . 1 A - A 1 — Li .

. . . . 4

C-16

(2) if the goods are at the time of contracting al-

ready identified and no documents are to be

delivered, title passes at the time and place

of contracting.

(d) A rejection or other refusal by the buyer to

receive or retain the goods, whether or not justified,

or a justified revocation of acceptance revests title to

the goods in the seller. Such revesting occurs by opera-

tion of law and is not a “sale”.

$2501. Insurable Interest in Goods; Manner of Identi-

fication of Goods

(a) The buyer obtains a special property and an

insurable interest in goods by identification of existing

goods 2s goods to which the contract refers even though

the goods so identified are non-conforming and he has

an option to return or reject them. Such identification

can be made at any time and in any manner explicitly

agreed to by the parties. In the absence of explicit

agreement identification occurs

(1) when the contract is made if it is for the sale

of goods already existing and identified;

(2) if the contract is for the sale of future goods

other than those described in Subdivision (3),

when goods are shipped, marked or otherwise

designated by the seller as goods to which the

contract refers;

(3) when the crops are planted or otherwise become

growing crops or the young are conceived if the

contract is for the sale of unborn young to be

born within twelve months after contracting or

for the sale of crops to be harvested within

C-17

twelve months or the next normal harvest season

after contracting whichever is longer.

(b) The seller retains an insurable interest in goods

so long as title to or any security interest in the goods

remains in him and where the identification is by the

seller alone he may until default or insolvency or

notification to the buyer that the identification is final

substitute other goods for those identified.

interest recognized under any other statute or rule of

law.

~ 2.703. Seller's Remedies in General

Where the buyer wrongfully rejects or revokes accept-

ance of goods or fails to make a payment due on or before

delivery or repudiates with respect to a part or the whole,

then with respect to any goods directly affected and, if

the breach is of the whole contract (Section 2.6i2), then

also with respect to the whole undelivered balance, the

aggrieved seller may

(1) withhold delivery of such goods;

(2) stop delivery by any bailee as hereafter provided

(Section 2.705);

Dro pa j ahe lor Th "2a + > alate r; rm: a = /

pis LOOCU UllUCl ine next section L©>} CLI UUS

, :

Ti ry? ar tified ¢ thea ntr +

still unidentified LO the CONUact,

{ rp +1] d rea ar } * y rp > > |

+ ) iCscil an eco Wailia med aod [ . i r ULU

a ~~

ar r

(Section 2./U0)

S rs r + + ,

recove Udllidy Cs ~LL =< oe

+ Q “a

“Fr

- j } ( . = SL ~ 4 ~ Sec

~ -

(6) cancel.

§ 2.705. Seller's Stoppage of Delivery in Transit or

Otherwise

(a) The seller may stop delivery of goods in the

possession of a carrier or other bailee when he discovers

the buyer to be insolvent (Section 2.702) and n

lay

stop delivery of carload, truckload, planeload or larger

shipments of express or freight when the buyer repud!

ates or fails to make a payment due before delivery or

if for any other reason the seller has a right to with

hold Or reclaim the goods.

(b) As against such buyer the seller may stop de

ivery until

) lo ven ? 5 | > a | >| .1 " . 7

2) acknowledgment to the buyer by any bailee ol

the goods except a carrier that the bailee holds

the goods for the buyer; o!

saan L, Laas

} ‘ or cknowledg Lit iI to tne Wu ef b adWw<«

+ + ‘o

yy reshipment or as warehouseman, or

+ * | I 8 to t! L bu Ll oT any negotl ab . CG .

y ? | tit y\ 1 y he ‘ rd

L if it wv verins Ul ” OOdCS

Io stop delivery the seller must so notify

, | Lea } ra La liaan .

ys iC I L ) ilee D\ reasonapvdie diligence to

—-

} event delivery Ol the coods.

) \f ’ tif ala’ the ha yIICT ] na

Fa iv not Lal LIA I) it GaiiCe TIUSt OIG dallU

er t soods according to the directions ol!

C t se , s liable to the baiulee

C-19

‘we

——

If a negotiable document of title has been is-

sued for goods the bailee is not obliged to obey

a notification to stop until surrender of the

document.

(4) A carrier who has issued a non-negotiable

of lading is not obliged to obey a notification

to stop received from a person other than the

consignor.

$ 9.107. Definitions: “Purchase Money Security Interest”

A security interest is a “purchase money security

terest” to the extent that it is

(1) taken or retained by the seller of the collateral to

secure all or part of its price: or

(2) taken by a person who by making advances or

incurring an obligation gives value to enable the

debtor to acquire rights in or the use of collateral

if such value is in fact so used.

3 9.113. Security Interests Arising Under Chapter on

Sales

A security interest arising solely under the chapter on

Sales (Chapter 2) is subject to the provisions of this

chapter except that to the extent that and so long as the

debtor does not have or does not lawfully obtain posses-

sion of the goods

(1) no security agreement is necessary to make the

security interest enforceable; and

(2) no filing is required to perfect the security interest:

and

C-20

(3) the rights of the secured party on default by the

debtor are governed by the chapter on Sales

(Chapter 2).

$ 9.203. Attachment and Enforceability of Security In-

terest; Proceeds. Formal Requisites

(a) Subject to the provisions of Section 4.208 on

the security interest of a collecting bank, Section 8.321

on security interests in securities, and Section 9.113

on a security interest arising under the chapter on

Sales, a security interest is not enforceable against the

debtor or third parties with respect to the collateral

and does not attach unless:

(1) the collateral is in the possession of the secured

party pursuant to agreement or the debtor has

signed a security agreement which contains a

description of the collateral and in addition,

when the security interest covers crops growing

or to be grown or timber to be cut, a description

of the land concerned;

(2) value has been given; and

(3) the debtor has rights in the collateral.

(b) A security interest attaches when it becomes

enforceable against the debtor with respect to the coi-

lateral. Attachment occurs as soon as all of the events

specified in Subsection (a) have taken place unless

explicit agreement postpones the time of attaching.

c) Unless otherwise agreed a security agreement

= ' tins roar ’ rrr tings yi t ? > Pp ; r

ves the secured party the rights to proceeds provided

C-21

(d) A transaction, although subject to this chapter,

is also subject to Title 79, Revised Civil Statutes of

Texas, 1925, as amended, and in the case of conflict

between the provisions of this Chapter and any such

Statute, the provisions of such statute control. Failure

to comply with any applicable statute has only the

effect which is specified therein. [footnote omitt

$ 9.305. When Possession by Secured Party Perfects

Security Interest Without Filin

vo. - fara le .Y - y lie — ] .

A security interest in letters of credit and advices

credit (Subsection (b)(1) of Section 5.116), goods,

struments (other than certificated securities), money, ne

gotiable documents or chattel paper may be perfected by

the secured party’s taking possession of the collateral. If

such collateral other than goods covered by a negotiable

document is held by a bailee, the secured party is deemed

to have possession from the time the bailee receives noti-

fication of the secured party’s interest. A security interest

is perfected by possession from the time possession is

taken without relation back and continues only so long

as possession is retained, unless otherwise specified in this

chapter. The security interest may be otherwise perfected

as provided in this chapter before or after the period of

possession by the secured party.

APPENDIX D

CROCKER NATIONAL BANK.

Plaintiff,

and

| O.S. Industries. Inc..

Intervenor.

Vv.

IDECO DIVISION OF DRESSER INDUSTRIES. INC..

Defendant.

Civ. A. No. H-83-2988

United States District Court.

S.D. Texas.

Houston Division

April 29, 1987.

Creditor with security interest in after-acquired inven-

tory of buyer of drilling rigs brought suit against seller,

and buyer intervened. Creditor and seller moved for sum-

mary judgment. The District Court, Hughes, J., held that:

(1) seller retained purchase money security interest in

rigs in its possession superior to any interest of buyer or

secured creditor, and (2) once seller of drilling rigs to

buyer was told that buyer would not be able to pay for

rigs, seller had right to stop delivery of rigs to buyer, and

right included stopping of delivery of rigs from buyer’s

bailee to buyer.

Creditor’s motion denied and seller’s motion granted.

D-2

Arlen Driscoll, Atty. in Charge, Gilpin, Maynard, Par-

sons, Pohl & Bennett, Houston, Tex., for plaintiff.

Stephen R. Kirklin, Kirklin, Boudreaux & Joseph, Hous-

ton, Tex., for intervenor.

James R. O'Donnell, Butler & Binion, Houston. Tex..

for defendant.

MEMORANDUM

HUGHES, District Judge.

TOS Industries, Inc., agreed to buy six drilling rigs

from the Ideco Division of Dresser Industries, Inc. Betore

the six rigs were delivered, TOS told Ideco that it would

be unable to pay for them, and Ideco kept the rigs.

Crocker National Bank had a security interest in all after-

acquired inventory of TOS.

Crocker and TOS contend that (1) TOS acquired title

to the drilling rigs when Ideco sent TOS invoices of the

sale, and that (2) Crocker’s security interest attached

to the drilling rigs. Ideco contends that (1) the title to

the drilling rigs did not pass from Ideco to TOS because

[deco retained possession of the rigs and (2) Crocker’s

security interest does not encompass the drilling rigs so

that even if title had passed, Crocker has no claim to the

drilling rigs or their value. Ideco’s nossession of the drill-

ing rigs and the engines gives it priority.

Background.

In late 1981, Ideco began to send TOS invoices for

Six rigs. The invoices identified which rigs in Ideco’s

possession were to be shipped. The payment and delivery

terms in the invoices are: (1) thirty or ninety days net

D-3

and (2) F.O.B. manufacturer or F.O.B. Beaumont, hold

for shipping instructions. Ideeo sent TOS a letter con-

firming the agreement in January of 1982. Later, TOS

told Ideco that it would not be able to pay for the rigs.

In June of 1982, Ideco stopped sending invoices and

issued credit memoranda to TOS in the amounts of the

purchase prices of the rigs.

Ideco never shipped the drilling rigs. Six Caterpillar

engines were sent to the Continental Drilling Company.

These engines were components of the drilling rigs. Ideco

asked Continental to return the engines to Ideco, and

Continental did.

Before the invoicing began, Crocker loaned TOS

money. Crocker received a security interest in all TOS

after-acquired tubular goods, wellhead equipment, and

oilfield supplies.

Claims.

Ideco has moved for summary judgment claiming that

the Crocker security interest in all TOS after-acquired

inventory did not attach to the rigs it had contracted to

sell to TOS. Ideco argues that, if a contract was created,

its terms required delivery according to TOS’s instruc-

tions before title to the rigs passed to TOS. Without

delivery, TOS never acquired title. Without title having

passed to TOS, Crocker’s security interest could not

attach to the rigs. Even if title passed, Crocker’s security

interest could not attach since it did not encompass the

drilling rigs.

Crocker has also moved for summary judgment claim-

ing that, by the terms of the invoices and by the intention

of the parties, a present sale was effected. A present sale

D-4

C .

C ‘ ( ‘ C LOS

D-5

that security interest. For purposes of this motion, the

court assumes that these rigs and engines are part of

TOS’s inventory covered by the security interest.

The Contract.

There is an issue whether there was a contract for sale

of the rigs between Ideco and TOS. A contract results

when an offer has been presented and accepted, with

consideration flowing between the parties. Ideco contends

that no contract existed between TOS and it.

Some of the facts suggest the existence of a contract.

Ideco issued invoices for the sale of six drilling rigs,

identified by serial number. On January 27, 1982, the

president of Ideco sent a letter confirming the existence

of the Ideco-TOS agreement for these rigs. When TOS

told Ideco that it could not pay for the rigs, Ideco issued

credit memoranda to reverse its accounting entry of the

sale.

The existence of a contract is a question of fact; how-

ever, if there was no contract, TOS and Crocker have

no basis for asserting an interest in the rigs. The court

will assume that a contract existed.

Ideco’s Possessory Interest.

[1] Ideco retained an interest in the goods through

possession, superior to any interest TOS or Crocker could

have acquired. Two relevant code provisions place the

interest of the possessing party above all others.

A seller may retain the title to goods shipped or de-

livered to the purchaser; this is a security interest. Tex.

Bus. & Comm. Code §§ 2.401(a) and 2.505. This se-

D-6

curity interest is a purchase money security interest. Tex.

Bus. & Comm. Code § 9.107(1). A purchase money

security interest is superior to a prior interest in the

inventory held by a third party if the purchase money

security interest is perfected either by retained possession

in the seller or if the conflicting interest holder is notified

of the purchase money security interest before the pur-

chaser receives possession of the collateral. Tex. Bus. &

Comm. Code §§ 9.305 and 9.312(c). Here, Ideco re-

tained possession of those drilling rigs it had completed.

Those rigs not yet completed were not possessed by any

party. But, if Ideco has the superior interest in the com-

pleted rigs, it must have the superior interest in the un-

completed rigs. Ideco’s interest prevails over Crocker’s.

[2] If Crocker’s present sale argument were to be

accepted and title to the drilling rigs passed to TOS

upon invoicing, Ideco would have been the bailee of

TOS'’s goods. Possession by a bailee cannot be stopped

unless strict requirements are met. Tex. Bus. & Comm.

Code § 2.705; In re Samuels & Co., 526 F.2d 1238 (5th

Cir. 1976). That code section, however, does not pertain

to a situation where the bailee is also the seller, like here.

Ideco, as bailee, perfected its security interest by inform-

ing itself it had possession of TOS’s goods. See Tex. Bus.

& Comm. Code §§ 9.304(c) and 9.305. Again, this se-

curity interest would be a purchase money security in-

terest since the bailee’s possession allows TOS to do with

the goods as it wished. Tex. Bus. & Comm. Code § 9.107

(2). This purchase money security interest would also be

superior-to Crocker’s security interest since Crocker had

received notice of Ideco’s interest prior to TOS’s receiving

possession of the drilling rigs. Tex. Bus. & Comm. Code

$ 9,312(c).

D-11

delivered to sustain a claim for possession against Ideco.

TOS would be relegated to a breach of contract claim.

Conversion would not lie for Ideco’s refusal to ship the

rigs to TOS without payment because, whatever special

property it may have, TOS would not have an unqualified

right to possession.

Even if Ideco is considered the bailee of the drilling

rigs tor TOS, Ideco’s right to retain possession is superior

to Crocker’s security interest. Ideco retained possession

of the rigs in whatever capacity and that possession per-

fected its superior security interest. Ideco needed to do

no more.

The Caterpillar Engines.

[10] If Continental was TOS’s bailee, Ideco had the

right to stop delivery of the six engines from Continental

to TOS. Delivery of the goods to TOS was required before

title passed to it. A seller has the right to stop delivery

of goods that are in the possession of “a carrier or other

bailee’” when the buyer repudiates the contract. Tex. Bus.

& Comm. Code § 2.703. When TOS informed Ideco that

it was impecunious, Ideco correctly intercepted the de-

livery of the engines. Neither TOS nor Crocker acquired

any interest in the engines superior to Ideco’s interest.

Conclusion.

Since Ideco, whether it is viewed as a bailee for TOS

Or as an owner, retained and perfected a purchase money

security interest in the goods superior to Crocker’s con-

flicting security interest in TOS’s inventory, Ideco prevails.

Even if a present sale were effected, the security interest

of Crocker in after-acquired inventory of TOS is inferior

D-12

to Ideco’s security interest as a possessory unpaid seller.

The passage of title and the existence of a special property

are not determinative of the priority of claims question.

No present sale occurred here since the invoices show a

credit sale with delivery required before title would pass.

Once Ideco was told that TOS would not be able to

pay for the rigs, Ideco also had the right to stop delivery

of these rigs to TOS. This right included stopping the

delivery of the engines from Continental to TOS. with

Continental the bailee of TOS.

Crocker’s motion for summary judgment will be denied.

Ideco’s motion for summary judgment will be granted,

quieting title to the six rigs and engines in Ideco.

FINAL JUDGMENT

Crocker National Bank and TOS Industries, Inc., take

nothing against the Ideco Division of Dresser Industries,

Inc. Costs are taxed against Crocker and TOS.

APPENDIX E

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 89-2149

D.C. Docket No. H-83-2988

CROCKER NATIONAL BANK,

and

T.O.S. INDUSTRIES, INC, d/b/a

TEXAS OILFIELD SUPPLY,

Intervenor-Appellant Cross-Appellee,

Versus

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant-Appellee Cross-Appellant.

Appeals from the United States District Court for the

Southern District of Texas

(Filed February 2, 1990)

Before WISDOM, JOHNSON, and HIGGINBOTHAM,

Circuit Judges.

E-2

JUDGMENT

This cause came on to be heard on the record on appeal

and was argued by counsel.

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment of

the District Court in this cause is reversed, and the cause

is remanded to the District Court for further proceedings

in accordance with the opinion of this Court.

IT IS FURTHER ORDERED that defendant-appellee

cross-appellant pay to plaintiff-appellant cross-appellee the

costs on appeal to be taxed by the Clerk of this Court.

November 29, 1989

ISSUED AS MANDATE: | January 31, 1990

APPENDIX F

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 89-2149

CROCKER NATIONAL BANK,

Plaintiff-Appellant Cross-Appellee,

and

T.O.S. INDUSTRIES, INC., d/b/a

TEXAS OILFIELD SUPPLY,

Intervenor-Appellant Cross-Appellee,

versus

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant-Appellee Cross-Appellant.

Appeal from the United States District Court for the

Southern District of Texas

ON PETITION FOR REHEARING

(January 11, 1990)

Before WISDOM, JOHNSON and HIGGINBOTHAM,

Circuit Judges.

F-2

PER CURIAM:

IT IS ORDERED that the petition for rehearing filed

in the above entitled and numbered cause be and the

same is hereby DENIED.

ENTERED FOR THE COURT:

/s/ PATRICK E. HIGGINBOTHAM

United States Circuit Judge

CLERK’S NOTE:

See FRAP and Local Rules 41 for Stay of the Mandate.

APPENDIX G

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CIVIL ACTION NO. H-83-2988

CROCKER NATIONAL BANK

IDECO DIVISION OF DRESSER INDUSTRIES, INC.

(Filed May 10, 1983)

COMPLAINT

The Complaint of CROCKER NATIONAL BANK

(“CROCKER”), Plaintiff, against the IDECO DIVISION

OF DRESSER INDUSTRIES, INC. (“DRESSER”), De-

fendant, states the following:

Jurisdiction of this civil action is founded on diversity

of citizenship and amount. CROCKER is a national bank-

ing association having its principal place of business in

the State of California. DRESSER is a corporation in-

corporated under the laws of the State of Delaware, hav-

ing its principal place of business in a state other than

the State of California. The matter in controversy exceeds,

exclusive of interest and costs, the sum of Ten Thousand

and No/100 Dollars ($10,000.00).

IT.

On or about August 10, 1981, T.O.S. INDUSTRIES,

G-2

INC., a Texas corporation (“TOS”), sometimes doing

business under the name of “Texas Oilfield Supply”, en-

tered into a security and loan agreement with CROCKER

providing for a secured loan by CROCKER to TOS. The

amount of the indebtedness of TOS to CROCKER for

such loan is now, and at all times material to this suit,

has been more than Thirty Million and No/100 Dollars

($30,000,000.00).

IIT.

As security for its indebtedness to CROCKER, TOS

granted CROCKER a security interest, among other

things, in all of its accounts receivable, general intangibles,

returned goods, and its inventory. That security interest

was perfected by a financing statement duly filed August

3, 1981, under File No. 81-152713, as Amended by

Financing Statement duly filed August 31, 1981, under

File No. 81-15296 with the office of the Secretary of State

of the State of Texas. CROCKER at that time became

and is now the holder of a security interest in the returned

goods and inventory of TOS that is perfected and enforce-

able against third parties, such as and including DRESSER.

IV.

On August 10, 1982, TOS filed a petition under Chap-

ter 11 of Title 11 of the United States Code. Pursuant to

the provisions of Section 362(a) of Title 11, the filing

of such petition operates as a stay of the commencement

Or continuation, including the issuance or employment of

process, of a judicial proceeding against TOS that could

have been commenced before the filing of such petition.

For that reason, TOS could not be joined as a party

G-3

hereto. but TOS is not a person whose joinder herein is

required by law.

DRESSER. from time to time, has sold goods to TOS,

including drilling rigs and related accessory products.

Such goods were sold to TOS for resale by TOS or to

be held by TOS for sale or lease to its customers. In any

event. TOS became heavily indebted to DRESSER in

amounts which apparently exceeded Nine Million, Four

Hundred Sixty-Three Thousand, Two Hundred Sixty-T wo

and No/100 Dollars ($9,463,262.00).

VI.

DRESSER made arrangements with TOS for the collec-

tion of the indebtedness owed by TOS to DRESSER.

Pursuant to these arrangements, on or about July 12,

1982. in cancellation of indebtedness owed by TOS to

DRESSER. TOS transferred drilling rigs and related ac-

cessory products to DRESSER out of the TOS inventory,

and DRESSER issued credit memoranda reflecting the

cancellation of such indebtedness. Such TOS transfers to

DRESSER reflected in the credit memoranda on or about

July 12, 1982, included the following:

(a) TOS transferred to DRESSER rig components and

accessory products under Sales Return No. D1/

B0091 through D1/B0091-6. The components are

described and have serial numbers as follows:

SCR System

UTB-360-5-42 Block 370

LR-275 Rotary 683

TL-300 Swivel 280

G-4

2 Caterpillar D-398 Power Units 35Z01139

35201140

1 Caterpillar D-379 Power Unit 34Z00864

ED-1200 Hoist 227

Dretech Model 3550 Brake 8116

2 GE-752 Electric Motors 7544015,

7544168

TOS was issued a credit memorandum for return

of the components in the total amount of One

Million, Four Hundred One Thousand, One Hun-

dred Sixteen and No/ 100 Dollars ($1,401,116.00)

(b) TOS transferred to DRESSER rig components and

accessory products described under Sales Return

No. D1/B0128 through D1/B0128-7. The com-

ponents are described and have serial numbers as

follows:

1 Foster Model 24-AH Breakout 1876

Cathead

1 Foster Model 37-AH Spinning 1555

Cathead

LR-275 Rotary 58 |

1 Caterpillar D-399 Power Unit 36Z01204

| Caterpillar -D-398 Power Unit 35Z01143

Caterpillar D-379 Power Unit 34 ZUUS6E

SCR System

E-1700 Hoist MM245

Dretech Model 525U Brake SU86

2 GE-752 Electric Motors 75433866

TL-400 Swivel 181

UTB-525-6-50 Block 63

2 T-1300 Pumps 199, 204

2 T-1300 Pump Drives 167, YO

4 GE-752 Electric Motors 7543852

G-9

the only interest of DRESSER in such goods ts ec

erest that t perfected as required by lav

enforceable against CROCKER. CROCKER 1s

determination and judgment that its sec

erest and claims to such goods are first, prior and supe

ms held by DRESSER to such goods

ther claims against DRESSER. including but not limited

» claims for conversion of Its collateral. If so. CROC KER

ll amend this Complaint after sufficient discovery has

proceeded to er » CROCKER to discover the tacts re

irding what om SSI R has done with the collateral fo

the TOS indebtedness to CROCKER.

WHEREFORE, PREMISES CONSIDERED, Plainufi

CROCKER NATIONAL BANK, prays that summons Is

sue to Defendant, IDECO DIVISION OI DRE SSER IN

DI STRIES. INC.: that the Court issue such writs

other orders prior to trial as are appropriate; that upon t

P | I] have jigemen I ) recover Ol l] UOUS i [ .

IOSSeSSION 2) | 1) Jet nda Su = to the LL 4 { nte ests

favor of the Plaintiff. for damages for any such goods

converted to the use or benefit of the Defendant, and that

thea ’ + ove) )) , ‘ . | ; a ‘1 ’ sf

the Claim oT tne Plaintiff to such goods 1s first. priot and

ry ' . y ‘ sfioy nt , h Jlagn

superior to any claim of Defendant; and that Plaint

i‘. . ] ] vs r

I SUCT) Hel biG rurther eliel ne | ind spec

i iW equil O wnicn il i \ selr t C

\ iW AG

OF COUNSEI

GILPIN, MAYNARD

POHL & BENNETT

G-]

JOHN

Apr

BENNI

]

APPENDIX H

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CIVIL ACTION NO. H-83-2988

CROCKER NATIONAL BANK, and

T.O.S. INDUSTRIES, INC. d/b/a

TEXAS OILFIELD SUPPLY,

Plaintiff,

IDECO DIVISION OF DRESSER INDUSTRIES, INC.,

Defendant.

PLAINTIFFS’ FIRST AMENDED COMPLAINT

To The Honorable United States District Judge:

COME NOW, CROCKER NATIONAL BANK

(“Crocker”) and T.O.S. INDUSTRIES, INC. d/b/a

TEXAS OILFIELD SUPPLY (“T.O.S.”), as Plaintiffs,

and file this their First Amended Complaint against

IDECO DIVISION OF DRESSER INDUSTRIES, INC.

(“Ideco”), Defendant, and in support of this Amended

Complaint state the following:

Jurisdiction in this civil action is based on 28 U.S.C.

S 1331. and 11 U.S.C. $8 547, 549. The matter in con-

troversy, exclusive of interests and costs, exceeds the sum

of Ten Thousand Dollars ($10,000.00) and arises under

the laws of the United States.

H-2

II.

Plaintiffs Crocker and T.O.S. hereby file this Amended

Complaint pursuant to Federal Rules of Civil Procedure

15 such that Plaintiffs’ pleadings will conform to the

evidence and the opinion of Crocker National Bank vy.

Ideco Division of Dresser Industries, Inc., 839 F.2d 1104

(Sth Cir. 1988).

IIT.

Ideco, from time to time has sold goods to T.O.S.

Such goods were sold to T.O.S. for resale by T.O.S. or to

be held by T.O.S. for sale or lease to its customers.

Ideco sold to T.O.S. and shipped to Continental Drill-

ing Company (“Continental”) a total of thirteen cater-

pillar engines. Continental in turn purchased these said

engines from T.O.S. The thirteen engines in question are

listed as follows:

Caterpillar D-399 Packaged

Electric Set

Cat D-399 Engine 35B06578

KATO Generator 84425-4

O & M Radiator 130-263

Caterpillar D-398 Packaged

Electric Set

Cat D-398 Engine 66B09262

KATO Generator §4476-10

O & M Radiator 129-19]

Caterpillar D-379 Packaged

Electric Set

Cat D-379 Engine 34Z00784

KATO Generator 84426-19

O & M Radiator 129-23]

H-3

Caterpillar D-399 Packaged

Electric Set

Cat D-399 Engine

KATO Generator

O & M Radiator

Caterpillar D-399 Packaged

Electric Set

Cat D-399 Engine

KATO Generator

O & M Radiator

Caterpillar D-398 Packaged

Electric Set

Cat D-398 Engine

KATO Generator

O & M Radiator

Caterpillar D-379 Packaged

Electric Set

Cat D-379 Engine

KATO Generator

O & M Radiator

Caterpillar D-398 Packaged

Electric Set

Cat D-398 Engine

KATO Generator

O & M Radiator

Caterpillar D-398 Packaged

Electric Set

Cat D-598 Engine

KATO Generator

O & M Radiator

Caterpillar D-379 Packaged

Electric Set

Cat D-379 Engine

KATO Generator

O & M Radiat

35B06584

94425-5

128-834

35B6582

R661 2-]

128-836

66B9263

84426-11

129-192

o4 >

§$4420-12

129.93)

HHBY

Te? Fe! ry

129 WS

66B927

84426-17

; s

347774

H-4

Caterpillar D-398 Packaged

Electric Set

Cat D-398 Engine 66B9272

KATO Generator 84426-2

O & M Radiator 129-007

Caterpillar D-398 Packaged

Electric Set

Cat D-398 Engine 66B9273

KATO Generator 844276-3

O & M Radiator 129-006

Caterpillar D-379 Packaged

Electric Set

Cat D-379 Engine 34Z783

KATO Generator §$4426-2

O & M Radiator 128-972

Ideco first attempted to reclaim the said engines on

} nit : ] 5

or about mid-July. 1982?

Security and Loan Agreement with Crocker pr

a secured loan by Crocker t TOS I

debtedness of T.O.S. to Crock

rh t a seme matar ‘ L,

; ; "

aiiuu ad aii i > “tt Al > Su

Iwenty Million Dollars and No/! 52

5 | : | ,

\) Yiict +] TOR] mn lor hia nimNnyear \* 15906 with thea

MLUSL sLiUicl bhi PAULL i

7 ’ "

++ > . 9 ‘ “1 + > + + hy + ts ; .

\ t} > . ’ ' \S tp . t " ‘S \ | )

\ ‘ ~~. \ i ‘ \ SEC . + & y \ ‘ a. ~\ ee — ‘ eae \ CXAS

;

Crocker at that time he .° and ic now the haider ai

PLL AL rea \ Al ‘ bi WEL GLLIL aii bY LEER il bh |

1 ’ r '

ea nmtoaract ry) ) th , nror + S ther , ,

d SCCU! y ALLL LOSE Lil cil iv YELL i ¥ LI i () WI Vit VL

la ited that nortoerctead 7.Ts rt rile ve, net third.

KV GIO cil » WMLELILLIU ail VibiXIQN ad L ana 4 il

i .

! ]

m~ort na nr ry | .

“Milits SUA as i Liu a UL’

Ide . ] ‘ ’ 1 «lL, | thir? starn tf nome ,

UL’ Ue rv . ~ Oc =< —=_eaae 4 . _ > s

H-6

Seven Dollars and No/100 ($1,708,127.00), that Plain-

tiffs have pre- and post-judgment interest at the maximum

rate allowable by law, and for such other and further

relief, general and special, at law or in equity, to which

Plaintiffs may show themselves justly entitled.

Respectfully submitted,

s/ TIM S. LEONARD

Tim S. Leonard

State Bar No. 12211200

Federal ID No. 1756

1800 InterFirst Plaza

Houston, Texas 77002

(713) 757-0000

Attorney-in-Charge for Plaint

OF COUNSEL:

KIRKLAND & BOUDREAUX

Robert J. Ward. Jr.

1800 InterFirst Plaza

Houston. Texas 770 )?

she ed

3) 757-0000

APPENDIX I

U.S. CONST amend. \

AMENDMENT \ GRAND JURY INDICTMENI

FOR CAPITAL CRIMES; DOUI

+t rT DARD

Dif } rs A IN

SELF-INCRIMINATION DUT PROCESS

LAW; JUST COMPENSATION FOR PROPI

APPENDIX J

Rp ‘

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ane _ ‘

2 \Vi.W K Lt

inc

2 :

, 7

‘ ‘ \

> * .

‘5

P l) ¥

i ( \

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, 7

Pp \\

(yj ]

5 "

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, 7

J-4

State or Other

Sovereign Under

The Laws Of Which

Name Organized

IRI International Corporation Delaware

Magcobar Abu Dhabi, Ltd. Abu Dhabi

Manufacturas Petroleras Venezolanos,

S.A. Venezuela

Nile Oilfield Engineering Limited Sudan

Petroleum and Industrial Maintenance

Company Limited Cayman Islands

(Parent—Kellogg International

Services Limited)

Productos Magcomex S.A. de C.V. Mexico

Riese Consolidated Industrial C.A. Venezuela

Shah Magcobar Chemicals Sdn. Bhd. Brunei

Wayne (West Africa) Limited Nigeria

(Parent—SWOL )

Western Atlas International, Inc. Delaware

(and subs)

Worthington Pump India Limited India

(Parent—Pump Investments, Inc.)

MIDCO

Bartil, Inc. North Carolina

(Parent—MIDCO)

China Nanhai-Magcobar Mud

Corporation, Ltd. China

(Parent—MIDCO)

Dresco Pte. Ltd. Dubai

(Parent—MIDCO)

Dresser (Cyprus) Limited Cyprus

(Parent—M-I Great Britain Ltd. )

Drescon Produtos de Perfuracao S.A. Brazil

Melbar Produtos de Lignina Ltda. Brazil

(Partnership)

(Parent—Dresser do Brasil, Ltda. )

Global Chemicals, Inc. Cayman Islands

(Parent—MIDCO)

Name

Kayoee Bentonite ( Partnership)

(Parent-MIDCO)

Minerals Supply, Inc.

(Parent—MIDCO)

Oman Drilling Products Co.

(Parent—MIDCO)

Dresser-Rand Company

Turbodyne S.A. de C.V.

Frontier Energy Associates, L.P.

Martel Cogeneration Limited

Partnership

Thermal Energy Development

Partnership

(Parent—Turbodyne Electric

Power Company )

Unicord Power Associates G.P.

(Parent—TEPCO/Pembroke Power)

Komatsu Dresser Company

Komatsu Dresser Brazil S.A.

(Parent—Dresser Finance

Corporation )

State or Other

Sovereign Under

The Laws Of Which

Organized

Wyoming

Texas

Oman

Mexico

Delaware

Washington

Delaware

New Hampshire

Brazil

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.