Swift & Company v. Jamestown National Bank

• Decision Date: 21 May 1970
• Docket Number: 19644.,No. 19643,19643
• Parties: SWIFT AND COMPANY, a Corporation, Appellant, v. JAMESTOWN NATIONAL BANK, a Corporation, and Alvin Hornbacher, Doing Business as Jamestown Livestock Sales, Appellees. SWIFT AND COMPANY, a Corporation, Appellee, v. JAMESTOWN NATIONAL BANK, a Corporation, and Alvin Hornbacher, Doing Business as Jamestown Livestock Sales, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

426 F.2d 1099 (1970)

SWIFT AND COMPANY, a Corporation, Appellant, v. JAMESTOWN NATIONAL BANK, a Corporation, and Alvin Hornbacher, Doing Business as Jamestown Livestock Sales, Appellees.

SWIFT AND COMPANY, a Corporation, Appellee, v. JAMESTOWN NATIONAL BANK, a Corporation, and Alvin Hornbacher, Doing Business as Jamestown Livestock Sales, Appellants.

Nos. 19643, 19644.

United States Court of Appeals, Eighth Circuit.

May 21, 1970.

Armond G. Erickson, of Tenneson, Serkland, Lundberg & Erickson, Fargo, N.D., on brief for Swift and Co.

John Hjellum, of Hjellum, Weiss, Nerison, Jukkala & Vinje, Jamestown, N.D., on brief for Jamestown National Bank, and others.

Before BLACKMUN, MEHAFFY and LAY, Circuit Judges.

LAY, Circuit Judge.

Swift and Company (hereinafter Swift) appeals from a judgment entered upon a jury verdict in favor of Jamestown National Bank, a corporation (hereinafter Bank), as well as from a dismissal of its claim brought against Alvin Hornbacher, d/b/a Jamestown Livestock Sales. Swift brought suit against the Bank and Hornbacher for wrongful conversion of 85 head of cattle, which had been maintained in pens in Jamestown, North Dakota by one Donald Sholts. Counterclaims were filed by the defendants against Swift. These were dismissed by the court without submission to the jury. Cross appeals as to these dismissals are lodged by the defendants-counterclaimants.

The facts may be briefly summarized.

Donald Sholts was a cattle buyer, trader and feeder in Jamestown, North Dakota. Since January 1963 Sholts had been engaged primarily in purchasing and fattening cattle on behalf of Swift. He sometimes purchased as many as 500 to 600 cattle at one time. Over the years, various contracts had been entered into between Swift and Sholts covering the cattle purchased. Two of the more recent contracts, dated December 15, 1966, and April 1, 1967, were received into evidence. Each contract recited that title to the cattle should remain in Swift at all times. There exists no definite proof as to how many of the 85 cattle in question were identifiable to either of these contracts.¹ Since 1963, Sholts purchased, fed and sold cattle for himself as well as Swift. He usually maintained his cattle in separate pens from those purchased for Swift. When Sholts purchased cattle for Swift he would take the bill of sale, health certificate and brand clearance in his own name. He would be reimbursed by Swift and receive for his services a commission of twenty-five cents per hundred weight. In his many transactions with Swift, Sholts never gave a bill of sale on the cattle to Swift.

In order to cover checks he had written to purchase cattle, Sholts customarily borrowed money from the Bank on a short term basis with the understanding that the Bank would be paid when he was reimbursed by Swift. To insure Sholts' loans, over the years the Bank took various chattel mortgages and, finally in 1965, with the advent of the Uniform Commercial Code, the Bank took a security agreement covering Sholts' livestock, feed and inventory.

In September 1967, the Bank inspected Sholts' pens and learned that they were 215 to 245 head of cattle short of their expected security. They found only 85 head in the pens. At this time, Sholts owed the Bank approximately $25,000. The Bank decided to exercise the power of sale under the security agreement over the 85 head of cattle. Sholts gave his consent but told the Bank representatives that they would probably have trouble with Swift since the cattle belonged to Swift. The Bank president responded that they would deal with Swift later. On the same evening the Bank picked up the cattle and had them hauled to the defendant Alvin Hornbacher's place of business. The Bank sold the cattle to Hornbacher and gave a bill of sale. When Swift received knowledge of the sale, it attempted to block Hornbacher's further resale of the cattle. The latter action, as will be discussed, constituted the basis of Hornbacher's claim against Swift.

The trial court dismissed Swift's claim against Hornbacher, but submitted to the jury, as determinative of the issue of the Bank's alleged conversion, the questions whether Swift had title to the cattle; and whether the Bank had a valid lien on the cattle entitling it to repossession, or whether the Bank waived the same.

The evidence is undisputed that sometime prior to September 22, 1967, the date of repossession by the Bank, Swift had actually bought and paid for the 85 head of cattle and that they were being maintained by Sholts (who had been paid his commission as well as the cost of the cattle) in his pens on that date. Therefore, the primary question to be resolved is whether the Bank's security interest in the cattle, as of September 22, 1967, was subordinated to Swift's claim of ownership.

Resolution of this issue may be approached in various ways. We are satisfied, however, that its ultimate determination is governed by the Uniform Commercial Code.^* We conclude that as of September 22, 1967, Swift owned the cattle free of the Bank's security interest and the Bank wrongfully repossessed and sold the cattle.

We should observe that it is extremely questionable under the evidence whether Sholts at the time of the original purchase of the cattle involved, ever possessed more than a bare legal title. The testimony of Sholts himself established that he purchased the cattle on behalf of Swift. He paid for the cattle by borrowing from the Bank, and was later reimbursed by Swift. Sholts' testimony was competent to prove his agency. Motley v. Standard Oil Co., 61 N.D. 660, 240 N.W. 206 (1931). In the event Sholts took legal title as an agent in order to hold the cattle in trust for Swift, he could not pass on any equitable interest to the Bank. See Gussner v. Hawks, 13 N.D. 453, 101 N.W. 898 (1904); Odegard v. Haugland, 40 N.D. 547, 169 N.W. 170 (1918). As Professor Williston says, "Where the agent buys goods for his undisclosed principal title passes at once to the latter, and the agent acquired no title therein." 2 Williston on Contracts, § 286 n. 13 (3d ed. 1959); cf. Kert v. Endelman, 202 Mich. 289, 168 N.W. 423 (1918); Foley v. Nimocks, 175 Iowa 464, 157 N.W. 178 (Iowa 1916); Restatement (Second) of Agency, § 14K (1958).

However, for purposes of argument, we will assume the question of title was properly submitted to the jury, and that the jury resolved the question against Swift,² finding that Sholts had sufficient ownership, at the time of the original acquisition of the cattle, in order to convey an equitable interest in them to the Bank under the security agreement.

Assuming that the cattle were covered by the security agreement, the controlling issue then becomes whether Swift's purchase of the cattle was protected against the prior security interest of the Bank. The answer to this depends upon the terms of the security instrument itself and the application of the Uniform Commercial Code.

We find that the Bank, in recording the security instrument with the Secretary of State, failed to properly perfect its lien interest against a subsequent bona fide purchaser. In North Dakota under § 9-401(1) (N.D. Cent. Code § 41-09-40), the proper place to file, in order to perfect a security interest on "farm products," is with the register of deeds. On all other personalty, except fixtures, the proper place of filing is with the Secretary of State.

"Farm products" are defined in § 9-109(3) (N.D. Cent. Code § 41-09-09) as follows:

"`Farm products\' if they are crops or livestock or supplies used or produced in farming operations or if they are products of crops or livestock in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk and eggs), and if they are in possession of a debtor engaged in raising, fattening, grazing or other farming operations. If goods are farm products they are neither equipment nor inventory;"

Sholts' "fattening" of livestock falls within the explicit terms of the above statutory provisions. Cf. Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (N.M.1967). We hold the trial court erred in submitting the validity of the Bank's lien interest to the jury since we find as a matter of law that the Bank did not perfect its lien interest as required under the Uniform Commercial Code.³

Assuming Sholts had sufficient ownership to the cattle to "pledge" them as collateral, the Bank's security agreement of July 1966 was effective then only as long as the Bank itself required a regular accounting by Sholts. The Bank was fully aware of this. Once the cattle were sold and Sholts misused the proceeds, the Bank's failure to require an immediate accounting led directly to its loss. The Bank's records show that Sholts at all times was cooperative and that the Bank officials trusted him. This blind trust was brought to an abrupt end when the Bank found the gross discrepancy in the cattle maintained by Sholts in September 1967.

There exists an even stronger reason why the Bank's interest cannot prevail against Swift's ownership. The security agreement is an "inventory" contract which passes a security interest in "personal property now owned or hereafter at any time acquired" by Sholts. The terms of the instrument itself are not ambiguous. It includes all of Sholts' inventory and "all livestock and feed." It provides that the collateral will not be removed from Sholts' place of business unless Sholts gives written notice of the intention to remove the collateral and the Bank has given its written consent for its removal. Under the agreement, the borrower retains the title to the collateral with the understanding that he will account to the Bank for all proceeds upon the latter's request. Paragraph 6 of the security agreement recites:

"Borrower will not sell, lease or otherwise dispose of the Collateral other than in the ordinary course of its business at prices constituting the then fair market value thereof, or at the

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