PUBLISHED OPINION
Case No.: 95-0004
†Petition for Review Filed
Complete Title
of Case:
HOUGHTON WOOD PRODUCTS, INC.,
†Plaintiff-Respondent,
v.
BADGER WOOD PRODUCTS, INC.,
Defendant,
ASSOCIATED BANK GREEN BAY
NATIONAL ASSOCIATION,
Defendant-Appellant.
Oral Argument: July 17, 1995
COURT COURT
OF APPEALS OF WISCONSIN
Opinion Released: August 22, 1995
Opinion Filed: August
22, 1995
Source of APPEAL Appeal from a judgment
Full Name JUDGE COURT: Circuit
Lower Court. COUNTY: Brown
(If "Special", JUDGE: William M. Atkinson
so indicate)
JUDGES: Cane, P.J., LaRocque and Myse, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSFor
the defendant-appellant there were briefs and oral argument by Charles H.
Wheeler of Nelson & Schmeling of Green Bay.
Respondent
ATTORNEYSFor
the plaintiff-respondent there was a brief and oral argument by James B.
Connell of Crooks, Low & Connell, S.C. of Wausau.
COURT OF APPEALS DECISION DATED AND RELEASED August 22, 1995 |
NOTICE |
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62, Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 95-0004
STATE
OF WISCONSIN IN COURT OF
APPEALS
HOUGHTON WOOD
PRODUCTS, INC.,
Plaintiff-Respondent,
v.
BADGER WOOD PRODUCTS,
INC.,
Defendant,
ASSOCIATED BANK GREEN
BAY,
NATIONAL ASSOCIATION,
Defendant-Appellant.
APPEAL from a judgment
of the circuit court for Brown County:
WILLIAM M. ATKINSON, Judge. Reversed
and cause remanded with directions.
Before Cane, P.J.,
LaRocque and Myse, JJ.
MYSE, J. Associated Bank Green Bay appeals a summary
judgment in favor of Houghton Wood Products, Inc., in the amount of
$25,572.16. Associated contends that
the circuit court erred by concluding that a transaction between Houghton and
Badger Wood Products, Inc., was a sale on approval under § 402.326, Stats.
Because we conclude the transaction was not a sale on approval, we
reverse the judgment and remand to the circuit court with directions to enter
judgment for Associated Bank.
The facts are
undisputed. Badger was a manufacturer
of wood products. Associated Bank held
Badger's three notes totaling over $3.7 million dollars secured with a security
agreement dated August 31, 1992, which was filed with the Wisconsin Secretary
of State. The security agreement
covered a variety of assets belonging to Badger, including all raw materials
and work in process. On September 15,
1993, Badger was in default on all of the notes. Badger surrendered all of its assets to Associated Bank,
including three shipments of wood for making cabinets that had been delivered
to Badger from Houghton in July and August.
Associated Bank disposed of the wood and other assets and applied the
funds realized to cover the indebtedness evidenced by the three notes.
Houghton commenced an
action against Badger on September 21, 1993, seeking replevin of the wood or,
alternatively, judgment in the amount of $25,572.16, the purchase price of the
wood. On November 16, 1993, Houghton
filed an amended complaint adding Associated Bank as a defendant. Houghton did not dispute Associated Bank's
security agreement and right to assets Badger owned. However, Houghton maintained that it owned the wood because it
was delivered pursuant to a sale on approval under § 402.326, Stats., Wisconsin's version of Uniform
Commercial Code § 2‑326.[1]
Both parties moved for
summary judgment. The circuit court
granted summary judgment in Houghton's favor, concluding that the transaction
between Houghton and Badger was a sale on approval under § 402.326, Stats.
The court recognized that under § 402.326(2), goods held on
approval are not subject to the claims of the buyer's creditors until acceptance. The invoice accompanying the wood stated
that acceptance could be accomplished only by payment of the purchase
price. The circuit court held that
because Badger did not pay any part of the purchase price, Houghton remained
the owner of the wood and Associated Bank wrongfully converted it.
Our review of summary
judgment is de novo. Green
Springs Farms v. Kersten, 136 Wis.2d 304, 314-15, 401 N.W.2d 816, 820
(1987).
The
judgment sought shall be rendered if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there
is no genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law.
Section
802.08(2), Stats. We will reverse a circuit court's grant of
summary judgment only where the court incorrectly decided an issue of law or
where material facts are in dispute. Martin
v. Milwaukee Mutual Ins. Co., 146 Wis.2d 759, 766, 433 N.W.2d 1, 3
(1988). In this case, there is no
genuine issue of material fact. Thus,
we turn to our examination of the circuit court's conclusion that the delivery
of the wood to Badger was a sale on approval.
The characterization of
the transaction between Houghton and Badger involves applying ch. 402, Stats., to undisputed facts, which is a
question of law this court reviews independently of the circuit court's
conclusions. State v. Williams,
104 Wis.2d 15, 21-22, 310 N.W.2d 601, 604-05 (1981).
Houghton contends that
its sale of wood to Badger was a sale on approval and is governed by
§ 402.326, Stats., which
provides in part:
(1)
Unless otherwise agreed, if delivered goods may be returned by the buyer even
though they conform to the contract, the transaction is:
(a)
A "sale on approval" if the goods are delivered primarily for use;
and
(b)
A "sale or return" if the goods are delivered primarily for resale.
(2)
Except as provided in sub. (3), goods held on approval are not subject to the
claims of the buyer's creditors until acceptance; goods held on sale or return
are subject to such claims while in the buyer's possession.
Initially, we note that
every presumption runs against a delivery to a merchant for resale being a sale
on approval. Official U.C.C. comment
cited in Wis. Stat. Ann.
§ 402.326, para. 1 (West 1963).
This presumption attends commercial transactions because of the need to
facilitate commercial interchange between buyers and sellers. Sales on approval place inventory in
possession of one who does not have title to that inventory. Creditors, lenders and others could be
misled as to the nature and value of a company's assets because of its
possession of large quantities of inventory that it does not in fact own. Thus, while the code recognizes a sale on
approval can exist in a commercial setting, there is a presumption based upon
sound public policy against categorizing a commercial relationship as a sale on
approval.
The code authorizes
parties to agree that a transaction is a sale on approval. Section 402.326(1), Stats.; see also 3A Ronald
A. Anderson, Anderson on the Uniform Commercial Code, § 2-326:3 at 413
(3d ed. 1995) (parties may expressly determine whether the transaction is a
sale on approval or a sale or return).
We conclude it is appropriate to examine the agreement and the parties'
actions to determine whether the transaction was a sale on approval as viewed
by a reasonable creditor. This approach
is consistent with our supreme court's recent holding in Armor All Prods.
v. Amoco Oil Co., 194 Wis. 2d 35, 533 N.W.2d 720 (1995), addressing §
402.326(3).[2]
In Armor All,
the Wisconsin Supreme Court held that the test for whether § 402.326(3), Stats., applies is whether an objective
analysis of the transaction documents, the course of performance between the
parties and the actions taken by the bailee could lead a reasonable creditor to
conclude that a consignment existed. Id.
at 56, 533 N.W.2d at 728. The parties'
subjective intent does not control. Id. We see no reason to apply a standard other
than the objective standard demanded by our supreme court for interpreting
subsec. (3) of § 402.326 to interpret subsecs. (1) and (2) of the same statute. We therefore conclude that the nature of the
transaction between Houghton and Badger is to be determined by an examination
of the transaction documents and the parties' performance, rather than by an
examination of the parties' subjective intent.
Not only is an objective
analysis consistent with our supreme court's recent ruling, it will also
protect the rights of creditors who rely on transaction documents when
determining whether to extend credit.
If the parties' subjective intent controlled, creditors would be forced
to look beyond document language to determine what the parties intended. This would wreak havoc in the commercial
arena as creditors struggled to determine the intent behind every
contract. Use of an objective analysis
will minimize these problems.
Our objective analysis
begins with an examination of the invoices sent with the three deliveries of
wood. The front of each invoice
contains the following statements:
PAST
DUE ACCOUNTS WILL BE CHARGED 1 1/2% INTEREST PER MONTH.
ANY
SALES OR USE TAX TO BE ASSUMED BY THE PURCHASER.
CLAIMS
FOR DEDUCTION MUST BE MADE WITHIN TEN DAYS AFTER RECEIPT OF SHIPMENT.
....
Lumber
is to be inspected according to the rules and regulations of THE NATIONAL
HARDWOOD LUMBER ASSOCIATION. In case of
dispute, Inspection by NHLA inspector and terms and conditions of the NHLA
SALES CODE shall govern.
The
terms and conditions contained on the reverse side of this invoice are
expressly incorporated into the contract of sale for the goods described herein
between Houghton Wood Products, Inc. and the Customer named herein.
The
reverse side of each of the three invoices contains the following language:
Houghton
Wood Products, Inc. (Seller) and the Customer hereby agree the contract of sale
for all wood and wood products for which this invoice is issued, incorporates
the following terms and conditions:
(a)
All wood, wood products and other goods of any kind (Goods) delivered by Seller
to Customer shall remain titled to Seller until approval of the Goods by
Customer. Customer shall approve of the Goods by making payment in full of all
charges invoiced for said Goods. No other method of approval is
acceptable. Partial payment shall be
deemed as approval for part of the Goods allocated to the partial payment, or
on a proportional basis, whichever is applicable.
(b)
Seller's title in the Goods and the sale of Goods on approval are intended to
be, and shall constitute a purchase money security interest in the Goods.
Seller shall be entitled to possession of the Goods upon default in payment
thereof.
(c)
Customer expressly agrees that the Goods are not subject to Customer's
creditors until payment in full to Seller at which time title shall transfer to
Customer.
(d)
Delivery and shipping terms agreed to by Customer and Seller will not adversely
affect Seller's title nor Seller's security interest, irrespective of which
party assumes the risk of loss during transit.
(e)
The above terms and conditions shall supersede and be controlling over any term
or condition contained in any other instrument delivered between Customer and
Seller which conflicts herewith, all other statements and representations
having been merged herein.
(f)
The terms and conditions contained in this contract for sale between Seller and
Customer shall be governed by and construed in accordance with the laws of the
State of Wisconsin.
Upon examination of
these invoices, we conclude that the agreement between Houghton and Badger did
not create a sale on approval. We reach
this conclusion because when the agreement is examined objectively, there are a
number of terms that are inconsistent with a sale on approval.
First, paragraph (b) on
the reverse side of the invoice provides that "Seller's title in the Goods
and the sale of Goods on approval are intended to be ... a purchase money
security interest in the Goods."
The possession of a security interest by one who retains title in the
same goods is an anomaly. See 3A
Anderson supra, §
2-326:13, at 418 (sale on approval is not a secured transaction because there
is no intent to create a security interest).
If title had not transferred to Badger, there would be no need to retain
a security interest because the seller would continue to own the goods and have
rights in the goods superior to any creditors.
Thus, this provision is inconsistent with Houghton retaining title in
the goods as in a sale on approval.
Another provision states
that if there is a dispute about the delivered lumber, the dispute will be
arbitrated through use of a National Hardware Lumber Association inspector and
the NHLA Sales Code. This provision is
inconsistent with a sale on approval because the purchaser in a sale on
approval has the right to return the goods even though they conform to the
contract. Section 402.326(1), Stats.
The requirement that the buyer arbitrate a dispute as to the grade of
lumber is inconsistent with a sale on approval because the buyer "on
approval" can simply return products that it finds to be of unsatisfactory
quality. In this agreement the buyer is
provided no option besides dispute resolution.
By compelling the purchaser to arbitrate any dispute rather than to
return goods with which it is not satisfied, the invoice imposes terms and
conditions in conflict with a sale on approval.
The
invoice is also inconsistent with a sale on approval because it provides an
assessment of interest for delayed payment.
A purchaser in a sale on approval does not purchase the goods until it
accepts them. The invoice in this case
specifically limited acceptance to payment of the purchase price. Therefore, until the purchase price was
paid, Houghton retained title and Badger owed nothing. The fact that the invoice provides for the
payment of interest for delayed payment suggests the sale was not on approval.
An additional provision
inconsistent with a sale on approval can be found in a document titled
"Acknowledgement of Order" that was sent to Badger in May 1993. This provision states: "All complaints must be made to us in
writing within ten days after receipt of material." This provision is inconsistent with a sale
on approval where a purchaser reserves the absolute right to return the goods
to a seller. To restrict the nature and
timing of a complaint is to suggest that title has passed to the purchaser and
that the purchaser has ten days to complain about goods it has already
purchased.
The second part of our
objective examination requires us to look at the parties' course of
conduct. In this case, there is little
conduct that sheds light on the nature of the transaction. However, two specific facts suggest the
transaction, viewed objectively, was not a sale on approval. First, Badger in its records identified the
contract price for two of the three invoices as an account payable. Second, Badger surrendered all of the wood
to Associated Bank, rather than asserting it belonged to Houghton. These acts, viewed by a reasonable creditor,
suggest the sale was not on approval.
While we have noted a
variety of invoice provisions and party actions inconsistent with a sale on
approval, we recognize that paragraph (a) of the invoice specifically uses the
word "approval" when it states that all goods delivered by the seller
to the customer "shall remain titled to Seller until approval of the Goods
by Customer." This suggests the
parties may have intended that the sale be on approval. Additionally, Houghton has advanced
explanations of the intent behind other inconsistent provisions. While these explanations would be helpful if
we were examining the intent of the parties, they are not determinative here
because the appropriate analysis examines the documents and course of conduct
objectively, not subjectively. Because
several invoice provisions, as well as the parties' course of conduct, viewed
objectively, are inconsistent with and antagonistic to a sale on approval, we
conclude the transaction was not a sale on approval.
Our determination that
the transaction did not constitute a sale on approval is reinforced by the
definition of sale on approval found in § 402.326(1), Stats. Under
§ 402.326(1)(a), the sale is on approval if the goods are delivered primarily
for use. The U.C.C. does not define
"use." In this case,
Associated Bank would have us interpret "use" to apply only to goods
that are consumed by the purchaser for its own purposes. For example, the floor wax used to polish
the purchaser's floor would be for use while floor wax intended for resale
would not be "use" as that term is used in § 402.326(1)(a). While we do not believe such a narrow
construction of this statute is justified because the statute itself does not
limit the word "use" to personal use, we conclude that the wood in
this case was not for Badger's use.
We base our decision in
part on the U.C.C. comment that explains the situation contemplated by a sale
on approval transaction:
The
type of "sale on approval," "on trial" or "on
satisfaction" dealt with involves a contract under which the seller
undertakes a particular business risk to satisfy his prospective buyer with the
appearance or performance of the goods in question. The goods are delivered to the proposed purchaser but they remain
the property of the seller until the buyer accepts them. The price has already been agreed. The buyer's willingness to receive and test
the goods is the consideration for the seller's engagement to deliver and sell.
Wisconsin Stat. Ann. § 402.326 cmt. 1 (West
1963).
In this case, the wood
delivered to Badger was to be made into cabinets that Badger would then sell to
customers. Once the wood is made into
cabinets, it undergoes substantial transformation and cannot be returned, as
Houghton conceded at oral argument.
Yet, if the sale was on approval, title in the transformed wood would
remain with Houghton until payment is made without regard to the
transformation. It violates common sense
and the rules of commerce to permit transformed goods to remain titled to the
seller. We conclude that when a good is
used in the manufacturing process where it undergoes transformation and is
subsequently resold, it is not delivered for "use" as that term is
used in the code. Because this
transaction cannot be a delivery for "use" contemplated by
§ 402.326(1), Stats., it was
not a sale on approval.
Our conclusion is
consistent with other jurisdictions that have determined whether goods were
delivered on approval, on sale or return, or for sale under U.C.C. Sales
§ 2-326 (§ 402.326, Stats.). In Medalist Forming Systems v. Malvern
Nat'l Bank, 832 S.W.2d 228, 230-31 (Ark. 1992), the Supreme Court of
Arkansas held that where one company delivered raw materials to another company
and the materials were processed and sold to customers, the materials had been
delivered "for sale" and were therefore subject to § 2‑236(3). In Houghton's case, the wood was delivered
to be processed into cabinets and sold by Badger. Applying the Medalist analysis, this wood was
delivered for sale, not for use. Thus,
the sale was not on approval. See
also In Re Pearson Indus., Inc., 142 B.R. 831, 841 (Bankr. C.D. Ill.
1992) (where one company delivered truck chassis to second company to be
modified and resold, the arrangement was a sale or return under § 2‑326(2)).
Because the transaction
was not a sale on approval and Houghton has not alleged it has superior rights
in the wood for any other reason, we reverse the judgment and remand to the
circuit court with directions to enter judgment in Associated Bank's favor.[3]
By the Court.—Judgment
reversed and cause remanded with directions.
[1] Houghton concedes that if the transaction was not a sale on approval, it had no right to the wood because it failed to perfect a purchase money security interest in the wood and therefore, its interests are inferior to Associated Bank's perfected security interest.
[2]
Section 402.326(3), Stats.,
states:
Where goods are delivered to a person for sale and such person maintains
a place of business at which the person deals in goods of the kind involved,
under a name other than the name of the person making delivery, then with
respect to claims of creditors of the person conducting the business the goods
are deemed to be on sale or return.
This subsection is applicable even though an agreement purports to
reserve title to the person making delivery until payment or resale or uses
such words as "on consignment" or "on memorandum". However, this subsection is not applicable
if the person making delivery:
(a) Complies with an applicable law providing for a consignor's interest
or the like to be evidenced by a sign; or
(b) Establishes that the person conducting the business is generally
known by that person's creditors to be substantially engaged in selling the
goods of others; or
(c) Complies with the filing provisions of ch. 409.
[3] Because Houghton has conceded that it has rights in the wood only if the sale was on approval, we need not address whether the transaction would be properly governed by other provisions of § 402.326 or ch. 402, Stats., because the result is the same: Associated Bank has superior rights in the wood.