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March 20, 1961


The opinion of the court was delivered by: John E. Miller, Chief Judge.

This is a replevin action brought by the plaintiff, Associates Discount Corporation, hereinafter designated as Associates or plaintiff, against the defendant, Tune Construction Company, Inc., hereinafter referred to as Tune or defendant, to recover possession of a 1960 Allis-Chalmers tractor with dozer, model HD-11E, together with damages for retention of the tractor.

The plaintiff is an Indiana corporation, having its principal place of business at South Bend, Indiana. The defendant, Tune, is a corporation organized and existing under the laws of the State of Arkansas, with its principal place of business at Fayetteville, Arkansas. The matter in controversy exceeds the jurisdictional amount exclusive of interest and costs.

The plaintiff alleges that the defendant purchased the tractor in question from Kern-Limerick, Inc., hereinafter referred to as Kern-Limerick, an Allis-Chalmers dealer in Little Rock, Arkansas, and that as partial consideration for the tractor, the defendant executed its promissory note in the sum of $14,620.78 due May 13, 1960, and that Kern-Limerick retained title to the tractor pursuant to the terms of the conditional sales contract executed by the defendant. It is further alleged that the note and sales contract were transferred and assigned for consideration to the plaintiff, that the plaintiff notified the defendant of such an assignment, and that the defendant has failed to make such payment although demand has been made.

The defendant admits the execution of the note and conditional sales contract, but alleges that it paid the balance due on the note to Kern-Limerick; that Kern-Limerick was an agent of the plaintiff for the purpose of receiving such payment, and that the action of Kern-Limerick in collecting the balance due was ratified and confirmed by the plaintiff.

The case was tried to the court on February 16, 1961, and at the conclusion of the trial the case was submitted and briefs were requested from each side. The briefs have been received and considered by the court, along with the pleadings, testimony, exhibits and entire record. Findings of fact and conclusions of law are included in this opinion in accordance with the provisions of Rule 52(a), Fed.R.Civ.P. 28 U.S.C.A.

The material and relevant facts of the transaction between Tune, Kern-Limerick, and Associates are not in conflict. Tune is a leading contracting firm in northwest Arkansas. Mr. Carl Tune is the founder, president, and chief executive officer of the corporation. Tune had done business for many years with Kern-Limerick, purchasing at various times almost its entire fleet of heavy equipment from Kern-Limerick. Prior to the purchase of the equipment in question here, Tune had paid cash for all equipment purchased from Kern-Limerick.

In March 1960, Carl Tune was in Little Rock at the offices of Kern-Limerick and examined the tractor with dozer, model HD-11E, which was in stock. Mr. Tune discussed the price of the equipment with R.C. Limerick, Jr., President of Kern-Limerick. The price quoted was in excess of $21,000 and Mr. Tune felt this was excessive. In negotiating with Kern-Limerick, Tune stated that if he decided to purchase the tractor, he would pay cash, but before doing so desired to make certain that it would satisfactorily perform the tasks for which he intended to use it, and that he would only pay upon delivery $5,000 of the agreed purchase price and would pay the remainder in thirty days if the machine proved satisfactory. Mr. Limerick agreed to such terms if they were able to agree on the price.

Mr. Tune returned to Fayetteville, and several weeks later received a telephone call from Ray Harrison, a salesman for Kern-Limerick. Harrison called at the direction of R.C. Limerick, Jr. Harrison quoted Tune a price of $19,500 for the tractor and Tune agreed to purchase it. At that time it was specifically understood that Tune would pay $5,000 upon delivery and the balance of $14,500 in thirty days, and that Tune would not be charged any finance fees or delivery charges. R.C. Limerick explained to Tune that Kern-Limerick was required to make payment to Allis-Chalmers of the total amount due them on the tractor within two weeks from the date of the sale, and that it would be necessary for some sort of financing arrangement to be worked out. Tune agreed to such arrangements upon condition that the Tune Construction Company would not have to pay any finance charges. This was agreed to by Kern-Limerick.

Limerick contacted the plaintiff through its local office in Little Rock, and after conducting a credit investigation of Tune, plaintiff agreed to finance the balance of the cost of the tractor on a 30-day loan.

The tractor was delivered to Tune in Fayetteville, Arkansas, on April 14, 1960. Ray Harrison accompanied the truck which delivered the tractor. Upon arrival at Fayetteville, Harrison went to the Tune office, but Carl Tune was at a job site so Harrison discussed the matter with Jack Burge, the Secretary-Treasurer of Tune. Mr. Burge supervises all of the office work for Tune, and in addition is a licensed attorney. Harrison presented Burge with the conditional sales contract which had been signed by R.C. Limerick the day before, and to which was attached a promissory note that had been prepared by Kern-Limerick. Burge did not read the conditional sales contract or the attached note. He knew the transaction was to be for cash, and testified that he thought the contract was an invoice and delivery receipt at the time he signed. Simultaneously therewith he issued a check for $5,000, dated April 14, 1960, and marked "down payment on HD-11E#5867," and expected to pay the balance in two or three weeks after the equipment had been fully tested and found satisfactory. As heretofore stated, the note was for $14,620.78, but it is admitted that $120.78 finance charges had been added to the note. After the papers had been signed, the tractor was delivered to Tune at a nearby job site.

The conditional sales contract and the note were subsequently assigned by Kern-Limerick to the plaintiff with full recourse. Following the assignment, the Little Rock office of the plaintiff corporation sent the information to the home office at South Bend, Indiana, and two weeks later the home office of the plaintiff sent an undated form letter to Tune, advising it that the conditional sales contract and note had been assigned to Associates. Accompanying the form letter was a coupon book containing one coupon in the amount of $14,620.78. On the front of the coupon book was the notation that payment should be made to Associates at its Little Rock office.

Upon receipt of the letter and the coupon book, Jack Burge placed a long distance telephone call to R.C. Limerick, Jr., inquiring about the additional $120.78 which the coupon reflected was owed. Limerick informed Burge that the additional charge was a finance fee and that it would be borne by Kern-Limerick. Later, on May 10, 1960, Burge again called Limerick and asked how to handle the payment. Limerick told him to send a check for $14,500 to Kern-Limerick, and that Kern-Limerick would pay the additional $120.78 finance charge. Burge then sent a Tune check in the amount of $14,500 to Kern-Limerick on May 10, 1960. The check was marked "balance on HD-11E."

Associates received the check and credited it to the Tune account, marking the account paid in full. The plaintiff deposited the Kern-Limerick check in the Worthen Bank and Trust Company of Little Rock, and on May 16, 1960, the Worthen Bank endorsed the check. The check was returned to the Worthen Bank and to Associates on May 18, 1960, marked "not sufficient funds."

At the time R.C. Limerick, Jr., drew the check, payable to Associates, he realized that another check was outstanding payable to the Allis-Chalmers Company, and that Kern-Limerick did not have sufficient funds in the bank to cover both the Allis-Chalmers check and the Associates check. However, Limerick had made arrangements with Allis-Chalmers to advance Kern-Limerick additional credit, and so Limerick called the First National Bank and directed them not to honor the Allis-Chalmers check but to honor the Associates check. No stop-payment order was made. However, when the check payable to Allis-Chalmers reached the bank, it was paid, leaving insufficient funds in the Kern-Limerick account to cover the Associates check.

On May 19, 1960, Kern-Limerick closed the doors of its place of business, and a few days later filed its petition in voluntary bankruptcy. The bankruptcy proceedings are currently pending in the United States District Court for the Eastern District of Arkansas.

When it became apparent that Kern-Limerick was in serious financial difficulty, Eugene Lusk, Collection Manager of the Commericial Division of the plaintiff, came to Little Rock from its principal office in South Bend, Indiana. Upon the return of the Kern-Limerick check, the plaintiff changed its account books to reflect a balance due on the Tune account of $14,620.78. On May 21, 1960, Lusk called Carl Tune in Fayetteville demanding payment of that amount. This was the first information that Carl Tune received relative to the financial status of Kern-Limerick, and he declined to pay the amount demanded, stating that the account had been paid through Kern-Limerick.

The testimony relative to the relationship between Associates and Kern-Limerick is somewhat in dispute. After reviewing and considering all the testimony, the court finds the facts on this issue to be as follows.

On September 13, 1957, Associates and Kern-Limerick entered into a written contract, in which Kern-Limerick, inter alia, agreed:

    "In consideration of the purchase by you of such
  Notes as may be acceptable to you, all of which shall
  be endorsed `without recourse', we hereby agree that
  if you repossess or recover any equipment covered by
  said Notes, for any reason, we will, upon tender of
  delivery to us at the place of repossession or
  recovery, repurchase such equipment, as is, from you,
  for cash at a price equal to the then unpaid balance
  owing on the Notes relating thereto plus all
  reasonable costs and expenses, including attorney's
  fees, incurred by you in effecting such repossession
  or recovery. Until repurchased by us, you may store
  such repossessed equipment on our premises without
  cost, and our possession of such equipment will be
  merely as a bailee with the duty to safely store for
  you and redeliver such equipment to you on demand.
    "It is understood that we will have one hundred
  twenty (120) days from date of repossession to
  repurchase such repossessed equipment, however, we
  will pay to you, at the time of repossession, a
  sufficient amount to bring the account into a current

  position, and we will make monthly payments until
  paid in full."
    "7. We waive presentment, demand, notice and
  protest on all paper, and all other demands and
  notice, and consent that you may grant extensions of
  time, make compromises with and release the obligor
  and other person liable on the paper, and otherwise
  handle the making of collections in accordance with
  your business judgment, without affecting our
  liability hereunder. You may hold and apply any
  money, profit or instruments of ours which come into
  your possession for any amounts owing by us to you."

Amendment No. 1 to the basic contract was added on November 25, 1959, and in which plaintiff agreed in part as follows:

    "At your request and in consideration of your
  continuing to offer to sell to us time payment paper
  under the Industrial Equipment Plan executed between
  us as of the 13th day of September, 1957, we hereby
  agree that your liability to us under said Plan for
  the repurchase of all paper purchased by us up to and
  including December 31, 1959, shall be limited to a
  maximum aggregate amount equal to 50% of the sum of
  the outstanding time balances on all paper purchased
  by us up to and including December 31, 1959, or the
  sum of $250,000.00, whichever amount is greater.
  Thereafter, the maximum aggregate amount of your
  liability under said Plan for the repurchase of paper
  during each succeeding twelve month period shall be
  an amount equal to the sum of (1) 50% of the sum of
  the original time balance on all paper purchased by
  us before January 1, 1960, which was outstanding on
  the first day of such period, provided however, that
  your liability for the repurchase of paper shall not
  be less than $250,000.00 during each twelve month

The plaintiff maintained a branch office in Little Rock, of which C.F. Rice was the Manager. The business relationship between the plaintiff and Kern-Limerick was very satisfactory, and as time passed Kern-Limerick sold larger amounts of its paper to the plaintiff. During the last 18 months of the business operations of Kern-Limerick, 80 percent of all its paper was sold to the plaintiff. Between September 1957 and May 1960, some 376 conditional sales contracts and accompanying notes were assigned by Kern-Limerick to the plaintiff for financing purposes.

The customary procedure followed in these transactions was for Kern-Limerick to first make a tentative agreement with the prospective equipment buyer. Kern-Limerick would then call the plaintiff and explain the terms of the tentative agreement, including such information as the name of the prospective purchaser, the type of equipment to be purchased, the length of time desired for payment, and any other pertinent information. The plaintiff would then conduct its independent credit investigation of the prospective buyer, and if it appeared that the prospective purchaser was a good credit risk, would notify Kern-Limerick to proceed with the transaction. Kern-Limerick would then take a down payment from the buyer and a note for the balance, plus interest. A conditional sales contract was the usual security device employed; however, on occasions a chattel mortgage would be used. The forms for the note, conditional sales contract and ...

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