Quality Processing, Inc., In re

• Decision Date: 23 November 1993
• Docket Number: HOLD-TRADE,No. 92-2783,92-2783
• Citation: 9 F.3d 1360
• Parties: 22 UCC Rep.Serv.2d 525 In re QUALITY PROCESSING, INC., Debtor.INTERNATIONAL, INC., International Grain Trade, Inc., Rio Del Mar Foods, Inc., Plaintiffs-Appellants, v. ADAMS BANK AND TRUST, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1360

9 F.3d 1360

22 UCC Rep.Serv.2d 525

In re QUALITY PROCESSING, INC., Debtor HOLD-TRADE INTERNATIONAL, INC., International Grain Trade Inc., Rio Del Mar Foods, Inc., Plaintiffs-Appellants, v. ADAMS BANK AND TRUST, Defendant-Appellee.

No. 92-2783.

United States Court of Appeals Eighth Circuit.

Submitted April 12, 1993.

Nov. 23, 1993.

Bartholomew McLeay, Omaha, NE (argued), for plaintiffs-appellants.

Steven Davidson, Omaha, NE (argued), for defendant-appellee.

Before JOHN R. GIBSON, LOKEN, and HANSEN, Circuit Judges.

LOKEN, Circuit Judge.

In this diversity case, plaintiffs Hold-Trade International, Inc., International Grain Trade, Inc., and Rio Del Mar Foods, Inc., appeal a judgment in favor of defendant Adams Bank & Trust ("Adams Bank"). Plaintiffs allege that Adams Bank wrongfully prevented its financially troubled customer, Quality Processing, Inc., ("Quality"), from performing contracts to deliver processed beans to plaintiffs. Following a bench trial, the bankruptcy court and the district court dismissed plaintiffs' Uniform Commercial Code and common law claims on the ground that no goods had been identified to plaintiffs' contracts with Quality at the time of Adams Bank's alleged misconduct. We reverse the dismissal of plaintiffs' tortious interference with contract claim and remand for a new trial on that claim. In all other respects, we affirm.

I.

In early 1989, Quality constructed an edible bean processing plant in Ogallala, Nebraska, financed in part by loans from Adams Bank secured by Quality's equipment, machinery, inventory, and accounts receivable. Plaintiffs are commodities traders who entered into contracts with Quality to purchase approximately 13,000 100-pound bags of Great Northern beans for delivery after the harvest and processing of the 1989 crop.

The 1989 harvest began in late September, and the unprocessed beans were delivered to Quality by early December. Quality had insufficient cash flow to pay farmers for unprocessed beans before delivering processed beans to its customers. To meet this need, Adams Bank agreed to make a $415,000 "operational" loan secured by the same collateral as the prior borrowings. In addition, as is customary in the industry, Quality requested and received prepayments from some of its trader customers for the processed beans they had contracted to purchase. Plaintiffs paid Quality $244,000 for Great Northern beans they had not yet received. Quality advised Adams Bank of these prepayments as part of its explanation of how the Bank's $415,000 operational loan would be repaid in a relatively short time. Quality also advised Adams Bank that it would meet all its Great Northern contract commitments.

In late December, another of Quality's trader customers, Berger Co., requested expedited delivery of a large export contract. Though Berger had not prepaid, and Quality normally gave priority to customers who did, Quality elected to fill the Berger contract before delivering beans to plaintiffs. Quality informed plaintiffs of this decision.

In mid-January 1990, Quality officials advised Adams Bank that Quality's solvency was threatened by newly-discovered problems--a potential $1,500,000 liability on pinto bean futures contracts that Quality could not fill, and insufficient Great Northern beans to meet its contractual commitments. To reduce its exposure, Adams Bank requested and received authorization from Quality to apply all monies paid to Quality at the Bank to repay the operational loan.

The next day, the president of another major trader, Fitzgerald International, Inc., called Adams Bank after speaking to Quality about Fitzgerald's immediate need for processed Great Northern beans. The details of the Quality/Adams Bank/Fitzgerald discussions are shrouded in controversy, but what happened is undisputed. Fitzgerald paid Quality $89,000 for a prior shipment of beans, and that payment went to Adams Bank to reduce Quality's operational loan balance. Quality then filled Fitzgerald's request for 8400 bags of Great Northern beans on a priority basis, even though Fitzgerald had not prepaid this order and it exceeded Quality's inventory. Adams Bank approved or at least acknowledged this arrangement in writing to Fitzgerald and Quality.

By early February 1990, Quality had repaid its operational loan to Adams Bank. Quality remained in business but never filled plaintiffs' prepaid Great Northern bean contracts, despite their repeated demands for delivery. In mid-March, Quality filed for Chapter 11 bankruptcy protection. It could not successfully reorganize, leaving plaintiffs' claims under their prepaid contracts unsatisfied.

Invoking the bankruptcy court's related case jurisdiction, see 28 U.S.C. § 157(c)(2) plaintiffs filed this action to recover their losses from Adams Bank, arguing that the Bank prevented Quality from delivering Great Northern beans under plaintiffs' prepaid contracts. Plaintiffs' amended complaint alleged causes of action under §§ 2-722 and 9-307 of the Nebraska Uniform Commercial Code, Neb.Rev.Stat. §§ 90-2722, 90-9307. ¹ On the eve of trial, however, plaintiffs moved to amend their complaint to assert four additional causes of action--restitution under UCC § 9-318, tortious interference with contractual relations, conversion, and unjust enrichment. Although Adams Bank objected that these theories would inject new fact issues into the case, the bankruptcy court granted this motion on the first day of trial.

Following a three-day bench trial, the bankruptcy court found that Quality, with plaintiffs' knowledge, unilaterally decided to fill the Berger contract first at a time when Quality believed it had enough beans to meet all its contractual commitments. However, the court found that Adams Bank played a significant role with respect to the subsequent Fitzgerald transaction:

The Bank officer was informed by [Quality] that the plaintiffs' contracts should be filled before Fitzgerald because the plaintiffs had prepaid and had requested delivery prior to Fitzgerald. The Bank officer was aware of the prepayment but directed [Quality] to fill the Fitzgerald contract anyway....

The officers of [Quality] followed the advice and direction of the Bank concerning the Fitzgerald contract because the officers believed it was important to bring in as much money as soon as possible to pay down the Bank debt. They felt the Bank held the purse strings and [Quality] could not operate without the Bank agreeing to the use of the funds.

Nevertheless, the bankruptcy court rejected all of plaintiffs' claims and entered judgment for Adams Bank. The court found that Quality never identified Great Northern beans to any of plaintiffs' contracts and concluded that, "[s]ince no beans were designated or identified to the contracts, the plaintiffs did not have a special interest in the beans which could be the basis for damage claims concerning the actions taken by the Bank."

Plaintiffs appealed to the district court. That court affirmed, concluding that the finding that no beans were identified to plaintiffs' contracts was not clearly erroneous; that plaintiffs' claims under UCC §§ 2-722, 9-307, and 9-318 required proof that beans be identified to the contracts; that the common law claims of conversion and unjust enrichment also required identification to the contract; and that plaintiffs' tortious interference claim should be dismissed because "if the beans cannot be identified as 'their' beans, Adams Bank cannot be said to have caused beans that would otherwise have gone to the traders to have been directed elsewhere."

Plaintiffs appeal, and we have jurisdiction under 28 U.S.C. § 158(d). On appeal, plaintiffs argue that the district court erred in concluding (i) that no beans were identified to their contracts; (ii) that plaintiffs failed to establish a claim for unjust enrichment; and (iii) that plaintiffs failed to prove tortious interference with contract. Like the district court, we review the bankruptcy court's legal conclusions de novo, but must uphold its findings of fact unless clearly erroneous. See In re Howell Enter., Inc., 934 F.2d 969, 971 (8th Cir.1991).

II. Identification.

Plaintiffs seek damages from Adams Bank for Quality's non-performance of its contracts with plaintiffs. UCC § 2-722 creates a cause of action against a third party to a contract, such as Adams Bank, who "so deals with goods which have been identified to a contract for sale as to cause actionable injury.... to a party to that contract [that has] a special property or an insurable interest in the goods." UCC § 2-501 provides that buyers, such as plaintiffs, have an insurable interest in goods, and therefore a cause of action under § 2-722, when the goods have been identified to the contract.

When the contract is for the sale of future goods, as in this case, identification occurs "when the goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers." § 2-501(1)(b). Whether a seller has "designated" future goods to a particular contract is a fact intensive inquiry that turns upon the specific manner in which the seller conducts its business. See, e.g., Martin Marietta Corp. v. New Jersey Nat'l Bank, 612 F.2d 745 (3d Cir.1979). Plaintiffs contend that Quality identified Great Northern beans to their contracts when Quality invoiced specific quantities, plaintiffs prepaid those invoices and submitted shipping instructions, and Quality scheduled plaintiffs' contracts for processing and in one case issued a "Certificate of Entitlement" to plaintiff Rio Del Mar.

Much of the trial testimony addressed this issue. The bankruptcy court found that Quality's "[d]esignation of beans to particular contracts took place at the time of processing particular beans for a particular customer and making delivery arrangements." The court credited the testimony of Quality's Operations Manager and President that Quality did not designate beans to...