Security Nat. Bank v. Belleville Livestock Com'n Co., s. 76-2113

• Citation: 619 F.2d 840
• Decision Date: 04 May 1979
• Docket Number: Nos. 76-2113,s. 76-2113
• Parties: 26 UCC Rep.Serv. 528 SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. BELLEVILLE LIVESTOCK COMMISSION CO., INC., and Lowell Darcey, an Individual d/b/a Belleville Livestock Commission Co., Defendants-Appellants, and SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. GLASCO LIVESTOCK EXCHANGE, INC., a corporation, Defendant-Appellant, and SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. OSBORNE LIVESTOCK COMMISSION, INC., a Corporation, Defendant-Appellant. to 76-2115.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 840

619 F.2d 840

26 UCC Rep.Serv. 528

SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. BELLEVILLE LIVESTOCK COMMISSION CO., INC., and Lowell

Darcey, an Individual d/b/a Belleville Livestock

Commission Co., Defendants-Appellants, and SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. GLASCO LIVESTOCK EXCHANGE, INC., a corporation, Defendant-Appellant, and SECURITY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. OSBORNE LIVESTOCK COMMISSION, INC., a Corporation,

Defendant-Appellant.

Nos. 76-2113 to 76-2115.

United States Court of Appeals Tenth Circuit.

May 4, 1979.

Rehearing Denied May 30, 1980.

Maureen E. McGrath, Omaha, Neb. (Kutak, Rock, Cohen, Campbell, Garfinkle & Woodward, Omaha, Neb., and John Q. Royce of Hampton, Royce, Engleman & Nelson, Salina, Kan., on brief), for plaintiff-appellee.

Gerald Sawatzky, Wichita, Kan. (James D. Oliver, Wichita, Kan., and Foulston, Siefkin, Powers & Eberhardt, Wichita, Kan., of counsel, on brief), for defendants-appellants.

Edward W. Rothe and James T. Malysiak of Freeman, Rothe, Freeman & Salzman, Chicago, Ill., on brief, for Iowa Beef Processors, Inc., as amicus curiae.

Before HOLLOWAY, BARRETT and McKAY, Circuit Judges.

HOLLOWAY, Circuit Judge.

Defendant-appellant livestock auctions ("Belleville," "Glasco," and "Osborne") have taken these timely appeals to review a summary judgment for the plaintiff Bank in three conversion cases brought by the Bank, claiming conversion by the auction companies of cattle covered by its security agreements. The primary issues are (1) whether the Bank impliedly waived its security interest in cattle sold by its debtor by its course of conduct, custom, usage or procedure in accepting proceeds of unauthorized sales of cattle covered by security agreements without remonstrating with the debtor for violating the agreements, and (2) whether the Bank gave express consent to the sales in question, without requiring arrangements to protect its security interests. Other contentions will also be treated.

We will first outline the basic facts which underlie the controversy. ¹

I

THE FACTUAL BACKGROUND

Larkins' transactions with the Bank

In May, 1969, the Security National Bank of Superior, Nebraska, commenced lending money to one Dale E. Larkins, who, with his father, Clarence Larkins, owned a 120 acre farm across the state line in Republic County, Kansas. The principal purpose of these periodic loans was to finance Larkins in purchasing cattle weighing from 300 to 400 pounds. Larkins generally fed the cattle for three months and sold them at a weight of 600 to 700 pounds, at which point the cattle were ready to enter regular feed lots for feeding by others in preparation for slaughter.

On May 14, 1969, the Bank filed a financing statement with the Register of Deeds, Republic County, Kansas, listing Dale E. Larkins, Clarence Larkins and Paralee Larkins as debtors. The financing statement, however, was signed only by Dale Larkins and a Bank officer. (Defs, Ex. 2; Ex. A. 122). The financing statement covered:

All equipment, all farm products including but not limited to crops, livestock, supplies used or produced in farming operations, contract rights, and accounts.

Presumably a security agreement was signed at that time, but, if so, it is not available, having been replaced by later security agreements, including agreements on November 2, 1972, May 10, 1973, and November 10, 1973. (Defs. Exs. 7, 8, 1; Ex. A. 126, 128, 120). The last of these three agreements governs the rights which the Bank seeks to assert in this lawsuit. ² That agreement described the collateral as 986 cattle, consisting of "mixed steers" of varying weights, having an estimated value of $327,737.00. A cattle count taken at Larkins' ranch on November 23, 1973, roughly verified this number of cattle and their value. (Ex. A. 131-32). The security agreement also covered all proceeds of the collateral, and secured payment of existing and future indebtedness of Dale Larkins to the Bank.

In the agreement Larkins covenanted that (A. 121):

Borrower will not sell, lease, mortgage, pledge or encumber the Collateral, permit its identity to be lost, permit it to be levied upon or attached under any legal process, create any security interest therein (except that created hereby), or otherwise dispose of the same or any of Borrower's rights therein.

Borrower will not remove the Collateral from the county where it is now or hereafter located without the prior written consent of Bank, will give to Bank a complete description of the location to which the Collateral is moved, and will permit Bank to inspect the Collateral at any time.

The agreement provided that the following occurrences would constitute events of default which would entitle the Bank to invoke certain sanctions:

It is agreed that each of the following events or occurrences shall be an "Event of Default" under this Agreement: (1) failure of Borrower to pay any indebtedness or to perform any obligation secured by this Agreement; (2) breach by Borrower of any of the covenants, conditions, warranties or agreements contained herein . . .

Upon the occurrence of any Event of Default, all indebtedness secured by this agreement shall become immediately due and payable in full without demand or notice, and Bank may proceed to exercise one or more of the rights and remedies accorded by the Uniform Commercial Code or otherwise by law . . .

Each year the Bank took an inventory of the cattle located on Larkins' farm. On occasion, when his loan needs were under review Larkins advised the Bank of his plans for selling cattle from time to time in the future. Despite the provision forbidding Larkins to sell livestock, on several occasions he sold cattle without the Bank's advance knowledge. When he made these sales, Larkins listed himself as owner and consignor of the cattle. He received payment for the cattle consigned and sold on his behalf in his own name. He then deposited the proceeds of the cattle sales in a checking account held jointly with his father, Clarence Larkins. When the Bank subsequently learned of these sales, it did not reprimand Larkins in any way.

On March 7, 1974, the Bank discovered that Larkins had apparently disposed of several hundred cattle in the preceding months, without replacing them with other cattle purchased by him. (A. 264 et seq.). Instead, Larkins had, at some point, decided to go into the contract feeding business and was then feeding several hundred cattle owned by others. At this time, Larkins was indebted to the Bank in a substantial amount, and the remaining cattle which he owned were insufficient to pay his indebtedness.

Immediately after the March 7, 1974, discovery, the Bank sold the cattle on Larkins' premises claimed by him. Cattle not claimed by Larkins were returned to their owner, Omar Miller, and thirty head, whose ownership was in doubt, were sold and the proceeds divided evenly between the Bank and Mr. Miller. The Bank then obtained from Larkins all his other unsecured property, including machinery, his farm, and farmhouse and all improvements, life insurance policies, etc., as substitute collateral for the cattle disposed of by Larkins prior to March 7, 1974.

Thereafter, on August 5, 1974, the Bank, for the first time, wrote to the defendant livestock auction companies contending that defendants converted cattle because Larkins' sales of various cattle through the defendants were "not authorized by the bank nor were the proceeds realized forwarded to the Bank." (Pls. Ex. 26; Ex. A. 27).

The Defendant Livestock Auction Companies

The defendant livestock auction companies are located in three towns in northern Kansas: Belleville, Osborne, and Glasco. Dale Larkins had bought and sold cattle at all three auctions frequently for several years prior to March 7, 1974. Livestock auctions are held each week by each company, on different days. Almost all the livestock sold arrive at the auction pens the same day as the sale. When cattle arrive, a state form is filled out showing the owner or consignor, and under state law (K.S.A. 47-1007) the sales proceeds must be paid to the person or persons so listed. This, in fact, is what the auction companies do. They pay the seller (owner or consignor) the same day of the sale, and collect from purchasers promptly. (A. 80, 110, 133).

Larkins was known to the personnel of all three auction companies, although none of the defendants had any actual knowledge that the Bank claimed a security interest in cattle consigned for sale by Larkins. He had always indicated he owned the cattle he Although the Bank knew that Larkins had regularly bought and sold cattle at the defendants' auctions and that sales proceeds were paid to Larkins who deposited them into the joint account with his father, the Bank at no time advised any of the defendants of its claimed security interest in the cattle sold by Larkins, and never requested either Larkins or defendants to list its name as an interest holder on the checks or any other document; nor did it ever request Larkins to endorse proceeds checks directly over to the Bank. Rather, the Bank trusted Larkins to make periodic payments on his debt as he was able. This normally occurred after cattle were sold. (A. 218-19).

brought in, and he listed himself as owner and consignor on all auction sales. None of the livestock auction companies ever checked any UCC filings either at the county level or at the state Secretary of State's office.

Glasco Livestock Exchange, Inc.

Roland Nothern and his father, Leon, started this livestock auction in 1959, and incorporated in 1972. On November 21, 1973, Larkins purchased 99 Colorado yearlings, not at the weekly Glasco auction but through Nothern's dealer operation. On November 24, 1973, Larkins gave Nothern two checks in payment for the cattle, one for $28,000.00 and one for $9.56. Larkins...