American National Bank v. Cloud

• Decision Date: 26 May 1988
• Docket Number: No. F007749,F007749
• Citation: 247 Cal.Rptr. 325,201 Cal.App.3d 766
• Court: California Court of Appeals Court of Appeals
• Parties: , 6 UCC Rep.Serv.2d 8 AMERICAN NATIONAL BANK, a National Banking Association, Plaintiff and Respondent, v. Ronald CLOUD et al., Defendants and Appellants.

Page 325

247 Cal.Rptr. 325

201 Cal.App.3d 766, 6 UCC Rep.Serv.2d 8

AMERICAN NATIONAL BANK, a National Banking Association, Plaintiff and Respondent, v. Ronald CLOUD et al., Defendants and Appellants.

No. F007749.

Court of Appeal, Fifth District, California.

May 26, 1988.

Certified for Partial Publication ^*

McCormick, Barstow, Sheppard, Wayte & Carruth, Fresno, for defendants and appellants.

Jory, Peterson & Sagaser, John E. Peterson and John T. Seyman, Fresno, for plaintiff and respondent.

FRANSON, Presiding Justice.

THE CASE

Appellants Ronald Cloud, Jasmine Cloud, Steve Volpe, Gloria Volpe, Madera Raisin Company, and Madera Raisin Packing Company (all referred to herein as appellants or MRC) appeal from a money judgment rendered against them in an action for conversion of crop proceeds. Because of a fraud perpetrated by the debtor-farmer, MRC mistakenly paid crop proceeds to a third party in derogation of American National Bank's (ANB) security interest in the proceeds. The major issues on appeal are whether appellants were buyers in the ordinary course of business under California Uniform Commercial Code section 9307 ¹ and, if so, whether such status provided a defense to the bank's conversion claim.

We conclude appellants were not buyers in the ordinary course of business, but even if they were, such status provided no defense to ANB's action for conversion of crop proceeds.

THE FACTS

Kirpal Singh Sidhu (Kirpal), a farmer, gave ANB a demand promissory note in the amount of $284,930 on December 27, 1982, in exchange for financing for crop year 1983. Kirpal also signed a security agreement, financing statement and assignment in ANB's favor which covered his 1983 raisin crop and the proceeds of the crops then growing or to be grown on his 180-acre property at the corner of Swanson and Brawley in Caruthers. ANB duly perfected the security interest, and its validity is not challenged.

ANB gave MRC written notice of the assignment, and MRC acknowledged receipt of the assignment on March 28, 1983.

In 1983 Kirpal produced a raisin crop on his land, the proceeds of which crop were subject to the assignment to ANB. In June, Kirpal signed a Raisin Bargaining Association agreement by which he agreed to sell an estimated 400 tons of raisins to MRC for the 1983 crop year.

On the same day, Kirpal represented to MRC that his son Balwinder was leasing (a nonexistent) 120 acres from him and expected a raisin crop of 200 tons. MRC then entered into a grower-packer agreement with Balwinder to purchase his raisins. In October 1983, Kirpal's other son Mohinder, with Kirpal's help, convinced MRC that Mohinder was a neighbor of Kirpal on a 100-acre vineyard (nonexistent) and had 100 tons of raisins to sell. MRC agreed to purchase Mohinder's raisins. MRC did not verify that Balwinder actually leased a portion of Kirpal's land or that Mohinder was farming 100 acres of grapes.

G & L Trucking picked up raisins from Kirpal's yard for delivery to MRC in 1983. Shipments were made in the names of Kirpal, Balwinder and Mohinder, all from the same location. When the drivers picked up the loads, Kirpal told them which loads were to be delivered under each name.

MRC ascertained whose raisins were being delivered by asking the driver of the delivery truck. MRC felt the drivers were a reliable source of information because they picked up the raisins in the field. On October 4, 1983, 82.574 tons of raisins were delivered in Kirpal's name to MRC. There were 195.0845 tons of raisins delivered in Balwinder's name on October 5, 6, and 7, 1983, and 119.657 tons of raisins were delivered in Mohinder's name on October 18, 20, and 21, 1983. An MRC employee asked Kirpal where the remainder of his raisins were. He replied that he had let his son have his delivery dates, and he would resume deliveries later.

In October 1983, MRC paid Balwinder $84,432.50 and Mohinder $51,553.34 for "their" raisins.

Between July and September 1983, MRC advanced Kirpal a total of $34,000 for crop harvesting. Kirpal deposited each of the three checks into his checking account at ANB. An officer at ANB knew of each deposit and had the right and opportunity to apply each deposit to Kirpal's loan, but did not do so. At the conclusion of the 1983 harvest, MRC owed Kirpal $37,571.17 for raisins he delivered minus the $34,000 advanced and other routine costs and deductions. MRC retained Kirpal's raisin proceeds as payment for the money Kirpal owed MRC.

In fact, Kirpal's 180 acres produced all of the raisins shipped from Kirpal's loading dock. Neither Balwinder nor Mohinder owned or leased any land from which raisins could be harvested at that time. On November 9, 1983, MRC learned from an ANB employee that the raisins delivered in Balwinder's and Mohinder's names were Kirpal's raisins. This sort of "scheme" had never happened before.

Kirpal defaulted on his note to ANB and he, along with Balwinder and Mohinder, apparently left the country with the crop proceeds.

The Contentions and Holding Below

ANB claimed it was entitled to the monies MRC paid Kirpal's sons and to the proceeds of Kirpal's crops retained by MRC by virtue of its security interest and the assignment of crop proceeds under causes of action for conversion, breach of assignment agreement and negligence. MRC denied liability on the grounds that ANB's own negligence in failing to apply the crop advance checks to the loan while the money was on deposit at ANB was the proximate The trial court found appellants had breached the assignment contract and had converted crop proceeds when they mistakenly paid Balwinder and Mohinder for Kirpal's raisins and when they set off their own claim for money advanced to Kirpal for crop harvesting from Kirpal's proceeds. Judgment was entered against MRC in the amount of $173,557.55, plus interest and costs.

cause of ANB's loss of that amount; that Kirpal's fraud excused MRC's performance under the assignment contract; and that because Kirpal was a fiduciary and had breached his fiduciary obligation to [201 Cal.App.3d 771] ANB, ANB as opposed to MRC was required to take the loss caused by the breach of obligation.

DISCUSSION

I.

Appellants are not protected by the "buyers in ordinary course of business" language of section 9307.

Appellants do not dispute that ANB had a valid perfected security interest in the crop and proceeds before Kirpal sold his crop to MRC. Appellants contend they were authorized to disperse the crop proceeds to Balwinder and Mohinder because, as buyers in ordinary course under section 9307, subdivision (1), they took the crop free of the security interest created by Kirpal. Thus, they argue section 9307 provides a defense to ANB's conversion cause of action because it negates the wrongful disposition element.

Section 9307, subdivision (1) states that a buyer in ordinary course of business takes free of a security interest created by his seller even though the security interest is perfected and the buyer knows of its existence.

Section 1201, subdivision (9) defines "buyer in ordinary course of business" as one who in good faith and without knowledge that the sale to him is in violation of the ownership rights of a third party in the goods "buys in ordinary course from a person in the business of selling goods of that kind...." "Buying" may be for cash or on unsecured credit but it does not include a transfer in bulk or as security for, or in total or partial satisfaction of, a money debt.

Read together, the sections provide that the buyer takes free of the security interest which covers the goods but takes subject if he knows, in addition, that the sale is in violation of some term in the security agreement not waived by the words or conduct of the secured party. (Cal.Law Revision Com. com., West's Ann. Com.Code, § 9307 (1988 pocket supp.) p. 138.)

The trial court found that appellants were not entitled to buyer in ordinary course protection, but did not explain the basis for its decision. MRC argues they were buyers in ordinary course because they purchased the raisins from Balwinder and Mohinder and paid for them without knowledge that the sale violated ANB's security interest. Thus, they took those raisins free of ANB's security interest. ANB responds that the record "amply" supports the court's finding that appellants were not entitled to the protection of section 9307 or, in the alternative, even if MRC were buyers in ordinary course, the result would be the same.

A. Appellants did not prove they were buyers in ordinary course as to the raisins delivered by Balwinder and Mohinder.

Appellants submit they were buyers in ordinary course as to all the raisins purchased. ANB disagrees for several reasons. First, MRC did not prove that Balwinder and Mohinder were "persons in the business of selling" raisins as required by section 1201, subdivision (9). MRC responds that regardless of what MRC was told as to ownership of the raisins, the "seller" of the raisins was Kirpal, and the record is clear that he was in the business of selling raisins. In the alternative, Balwinder and Mohinder were acting as Kirpal's agents and to that extent were in the business of selling raisins.

We have failed to find any California case which addresses in detail the "person in the business of selling" language. However, several out-of-state cases as well as the annotations at 73 A.L.R.3d 338 discuss the concept. According to Sindone v. Farber (1980) 105 Misc.2d 634, 432 N.Y.S.2d 778, the critical question is whether the seller was in the regular business of selling the particular product on a systematic basis, not merely an isolated transaction. (Id. 432 N.Y.S.2d at p. 781.) Examples of nonqualifying sales might be a bulk sale, a sale in distress at an obvious loss price, or a sale in liquidation. In other words, if the sale involved the type of chattel which would ordinarily alert a buyer to protect himself against a possible security interest, the...