Allison-Kesley Ag Center, Inc. v. Hildebrand

• Decision Date: 13 May 1992
• Docket Number: ALLISON-KESLEY,No. 90-1090,90-1090
• Parties: 19 UCC Rep.Serv.2d 480 AG CENTER, INC., Plaintiff, v. Scott HILDEBRAND and Hildebrand Brothers Farms, Defendants.AG CENTER, INC., Appellant, v. FIRST STATE BANK OF GREENE, Iowa, Defendant, and Farmers Cooperative Elevator Company, Appellee.
• Court: Iowa Supreme Court

Page 841

485 N.W.2d 841

19 UCC Rep.Serv.2d 480

ALLISON-KESLEY AG CENTER, INC., Plaintiff, v. Scott HILDEBRAND and Hildebrand Brothers Farms, Defendants.

ALLISON-KESLEY AG CENTER, INC., Appellant, v. FIRST STATE BANK OF GREENE, Iowa, Defendant, and Farmers Cooperative Elevator Company, Appellee.

No. 90-1090.

Supreme Court of Iowa.

May 13, 1992.

Rehearing Denied June 18, 1992.

Roger L. Sutton of Sutton Law Office, Charles City, for appellee.

Bruce Johnson of Gamble, Riepe, Webster, Davis & Green, Des Moines, for appellant.

Considered by McGIVERIN, C.J., and CARTER, NEUMAN, SNELL, and ANDREASEN, JJ.

SNELL, Justice.

The appellee, Farmers Cooperative Elevator Company (hereinafter "Farmers Coop"), seeks further review of a court of appeals decision that reversed a district court decision which found Farmers Coop to be a holder in due course with respect to $218,000 worth of United States government payment-in-kind (PIK) certificates. The appellant, Allison-Kesley Ag Center, Inc., contends that Farmers Coop took possession of the PIK certificates and subsequently honored a draft issued in payment therefor with "actual or constructive knowledge" that the PIK certificates had been obtained from Allison-Kesley by fraud; consequently, Allison-Kesley argues that its right, title and interest in the PIK certificates is superior to any right, title or interest claimed by Farmers Coop. Allison-Kesley also maintains that the district court erroneously failed to allow it to amend the complaint against Farmers Coop to include breach of an implied-in-fact contract, the nature of which will be described below. We conclude that the district court's decision was sound in each of these respects, and, therefore, vacate the decision of the court of appeals and reinstate the district court's decision.

I. Background Facts.

On Saturday, October 3, 1987, at approximately 9:00 a.m., Scott Hildebrand appeared at Allison-Kesley's office in Allison, Iowa. During the previous week he had indicated to Gary Abbas, Allison-Kesley's general manager, that he wanted to buy approximately $200,000 worth of PIK certificates to redeem government corn. In their earlier discussion, Abbas told Hildebrand that he would have to pay 109% of the face amount of these certificates. Accordingly, on the morning of October 3, Hildebrand presented Abbas with a "certified draft" drawn on the International Credit Exchange, Acapulco, Mexico, in the amount of $218,000. In exchange, Abbas gave Hildebrand PIK certificates with a total face value of $199,999.96.

Shortly after leaving Allison-Kesley's office, Hildebrand, his brother, Skipper, and his father, Quentin, appeared at Farmers Cooperative in Marble Rock, Iowa. The Hildebrands offered to sell the recently purchased PIK certificates to C.T. Moser, Farmers Coop's general manager, for 106% of the certificates' face value. Moser countered with an offer of 105% of face value, and the Hildebrands accepted. The certificates were thus sold for 105% of their face value, or $210,062.95, which was $7937.05 less than they had been purchased for earlier that day. Moser issued a check in the amount of $210,062.95, payable to Hildebrand Brothers. Scott Hildebrand said that he was going to take the check to the First State Bank of Greene, Iowa.

At the time of the Hildebrand sale, Moser examined the certificates and noted that they had not expired and were bearer certificates. However, after the Hildebrands had left and the transaction was complete, Moser further examined the certificates and noted that all of them had been endorsed by either Farmers Coop of Iowa Falls or Allison-Kesley on either October 2 or October 3 and that Farmers Coop's endorsement was stamped rather than handwritten. This caused Moser to become suspicious of a possible theft so he called the Iowa Falls branch office and spoke with Carroll Spangler. During the course of Moser's conversation with Spangler, which took place approximately one hour after the Hildebrands had left, Moser was told that the certificates were "legitimate" and had been sold to Allison-Kesley on October 2, 1987, for 108% of face value. Later the same morning, Spangler telephoned Moser and stated that he had spoken with Abbas, who indicated that the Hildebrands had purchased the certificates from Allison-Kesley earlier that morning for 109% of face value. Shortly before noon of the same day, Abbas telephoned Moser and expressed concern about the draft given to him by the Hildebrands as payment for the certificates. In addition, Abbas requested that Moser stop payment on the check that Farmers Coop had issued to Hildebrand Farms. Since both Farmers Coop and the bank closed at noon on Saturday, Moser did not speak with anyone at the bank on Saturday, October 3.

On the following Monday, October 5, Moser had further discussions with Abbas and Dan Castle, the vice president for the First State Bank of Greene, Iowa. At their meeting, Castle indicated that the Hildebrands--Scott, Skipper and Quentin--had appeared at the bank on Saturday, October 3, at which time they requested payment in cash for the full amount of the check they had received from Farmers Coop. Castle declined to cash the check for its full amount, but did pay out $50,000-$10,000 in cash, a $25,000 bank draft payable to Smith Implement and a $15,000 draft payable to Scott Hildebrand. Castle kept the remaining funds on deposit. At the conclusion of their October 5 meeting, Moser stopped payment on the Farmers Coop check as was requested by Abbas. As a consequence, the Hildebrands contacted Moser on the same day to express their displeasure with the stop-payment order. Moser responded that the stop payment would be lifted when the International Credit Exchange Draft given by the Hildebrands finally cleared. At a later conversation on the same day, Scott Hildebrand threatened to initiate a lawsuit against Farmers Coop if the stop payment was not lifted immediately.

Beginning on or about October 6, 1987, Moser began having discussions with Maurice Hyde, vice president of United Suppliers, Inc., the parent company of Allison-Kesley. Hyde told Moser that the International Credit Exchange Draft was being held as evidence and was not being processed for payment pursuant to advice from United Supplier's counsel. Within a week thereafter, Moser received a copy of an "urgent notice" issued by the Federal Reserve Bank of Chicago concerning drafts drawn on the International Credit Exchange of Acapulco, Mexico. The notice warned its readers to beware of fraudulent checks drawn on the International Credit Exchange, which does not exist. Moser forwarded a copy of this notice to both Hyde and Castle.

On October 21, 1987, after consultation with Farmers Coop's attorney, Moser decided to lift the stop-payment order and borrow money to cover the proceeds of its outstanding check. Farmers Coop's attorneys attempted, albeit unsuccessfully, to contact Allison-Kesley's attorney prior to lifting the stop-payment order. On October 22, funds were wire-transferred to make good on the Farmers Coop draft, and the stop-payment order was lifted.

Upon receiving notice that the stop-payment order was to be lifted, the First State Bank of Greene covered its earlier cash disbursements totaling $50,000. The balance of the check proceeds were disbursed as follows: $1000 cash to Skipper Hildebrand; $6500 was deposited in Hildebrand Brothers Farms checking account; $15,000 was wired to Scott Hildebrand; a certificate of deposit was purchased for $72,000; and the balance, $65,562.95, was deposited in a savings account. Most of the funds in the savings account were disbursed on October 23 when Skipper Hildebrand withdrew $7500 in cash and acquired eight bank drafts totaling $50,000. Nevertheless, on October 27, Allison-Kesley, through a court order, was able to attach funds on deposit with the bank, totaling approximately $85,000.

As a consequence of the foregoing series of events, Allison-Kesley initiated lawsuits against Scott Hildebrand, Skipper Hildebrand, Hildebrand Brother's Farms, Farmers Coop, and other parties not relevant to the dispute herein. The claims lodged against the Hildebrands have resulted in judgments for $218,000 against Scott, Skipper and Hildebrand Brothers Farms as well as exemplary damages totaling $20,000 against Scott and Skipper.

Allison-Kesley's claim against Farmers Coop is essentially one of conversion: Allison-Kesley alleges that Farmers Coop "took possession of the PIK certificates and released payment of the $210,000 check [issued to the Hildebrands] with knowledge of the fraud" perpetrated against Allison-Kesley by the Hildebrands. The district court concluded that inasmuch as Farmers Coop "acquired the certificates as a good faith purchaser for value," Farmers Coop cannot be guilty of conversion. The district court chose to characterize Farmers Coop as a "good faith purchaser for value." See Iowa Code § 554.2403. However, since the PIK certificates are negotiable instruments issued by the United States government, it seems more appropriate to utilize a holder-in-due-course analysis. This approach was adopted by the parties in their briefs, and it will produce the same result as a good-faith-purchaser-for-value analysis under Iowa Code section 554.2403.

II. Farmers Coop as a Holder in Due Course.

Allison-Kesley's first contention is that the district court's determination regarding Farmers Coop's holder-in-due-course status was not supported by substantial evidence. Our review of this assertion is for errors at law. Iowa R.App.P. 4. "[F]indings of fact by the trial court in [a] law case are the equivalent of a jury verdict. If supported by substantial evidence and justified as a matter of law, they are binding on us." Gere v. Council Bluffs Community Sch. Dist., 334 N.W.2d 307, 309 (Iowa 1983); Iowa R.App.P. 14(f)(1). We have defined substantial evidence as follows:

A finding of fact is supported by...