Anon, Inc. v. Farmers Production Credit Ass'n of Scottsburg

• Decision Date: 29 March 1983
• Docket Number: No. 1-682A148A,1-682A148A
• Citation: 446 N.E.2d 656,37 A.L.R.4th 776
• Court: Indiana Appellate Court
• Parties: , 35 UCC Rep.Serv. 1383 ANON, INC. (formerly known as M & R Livestock Co., Inc.), Defendant-Appellant, v. FARMERS PRODUCTION CREDIT ASSOCIATION OF SCOTTSBURG, Plaintiff-Appellee, Benny L. Flynn, Shirley Y. Flynn, Defendants-Appellees.

Page 656

446 N.E.2d 656

37 A.L.R.4th 776, 35 UCC Rep.Serv. 1383

ANON, INC. (formerly known as M & R Livestock Co., Inc.) Defendant-Appellant, v. FARMERS PRODUCTION CREDIT ASSOCIATION OF SCOTTSBURG Plaintiff-Appellee Benny L. Flynn, Shirley Y. Flynn, Defendants-Appellees.

No. 1-682A148A.

Court of Appeals of Indiana First District.

March 29, 1983.

Thomas L. Mattix, S. Gregory Zubek, Kunz & Kunz, Indianapolis, for defendant-appellant.

Steven K. Robison, Montgomery, Elsner & Pardieck, Seymour, for plaintiff-appellee.

NEAL, Judge.

STATEMENT OF THE CASE

Defendant-appellant Anon, Inc. (formerly known as M & R Livestock Co., Inc.) (Anon) appeals from an adverse judgment for conversion of hogs in a suit brought by plaintiff-appellee Farmers Production Credit Association of Scottsburg (FPCA), a creditor owning a security interest in the hogs. Anon claims that FPCA lost its security interest in the hogs by giving the debtor authority to sell them in his own name.

We reverse.

STATEMENT OF THE FACTS

Much of the evidence is uncontroverted. The trial court made findings of fact and conclusions of law upon which it based its judgment. The evidence shows that FPCA financed Benny L. and Shirley Y. Flynn's (Flynns) hog production enterprise and took a valid security agreement on the hogs. The agreement was perfected by filing in the Recorder's Office in Lawrence County on March 28, 1979. The agreement contained the usual prohibition against the sale of hogs by Flynns without FPCA's prior written permission, and a provision that the security interest attached to the proceeds of any sale.

Between October 1979, and October 1980, Flynns sold shipments of the secured hogs to Anon on ten occasions without disclosing the security interest. Anon, located near Logootee, Martin County, did not investigate the recording. The checks were issued to Benny Flynn alone as payee and contained a stamped certification which the payee endorsed by which the payee guaranteed that he was the unconditional owner of the hogs and there were no liens. Some checks were endorsed by Flynn to FPCA for application on the loan, and other payments traceable to the ten transactions were made to FPCA by Flynn by his own check. However, payments totaling $12,430.33 were kept by Flynns and never reported. The trial court found that Anon had constructive knowledge of the security interest of FPCA, but there is no contention that it had actual knowledge at the time of the purchases.

In findings 14, 15, 16, 17, 18, 19 and 20, the trial court found that at no time did FPCA give written consent to Flynns to sell hogs, and none of the sales was authorized by FPCA. The court found that any consent or authorization given by FPCA to Flynns to sell hogs was conditioned upon Flynns' applying the proceeds to the debt, and that any sale from which the proceeds were not applied was not authorized. The court also found that FPCA did not intend to waive its security interest in the hogs or the proceeds therefrom and did not impliedly waive the security interest by the manner in which it did business. It found that FPCA had no knowledge of the sales until after they were completed.

The issue at trial and on appeal is whether legal authorization to sell hogs was given Flynns by FPCA in a manner other than written authorization. The managing officer of FPCA, Jerry Lambreck, testified to the course of dealing between FPCA and Flynns, as well as dealings with other members of FPCA. He expected the hogs to be sold by Flynns and had no objection. He knew of a number of sales by Flynn in his own name and knew of the false endorsement which guaranteed the hogs to be lien free. He never rebuked or criticized Flynn, or otherwise policed FPCA's collateral. On this point his testimony is revealing. On direct examination he stated:

"Q. What was said, if anything, at that time regarding the sale of the feeder pigs?

A. O.K. It was our policy when we loaned money to a member to purchase feeder pigs, that when they were finished and sold they were to bring the money to Production Credit and pay the loan. We'd set up money for feed and hogs. We expected the full proceeds."

On cross-examination that area of inquiry was pursued further.

"Q. O.K. So when you and Benny [Flynn]--did you at the time of the A. Right.

March 13, 79--you sat down with Benny and discussed the operation, the hog operation he was going to operate didn't you?

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Q. O.K. So there was no doubt in your mind that Benny was going to sell hogs?

A. That's right.

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Q. Now in your security agreement and financing statement there is a section, I believe it is section # 6, that states that Benny is not supposed to sell any livestock that is pledged under that particular agreement without the prior written consent of PCA. Is that correct?

A. Yes.

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Q. Did you ever require Benny Flynn to--during the course of this particular loan that we are talking about ... did you require Benny Flynn to get your prior written consent to make a sale of hogs?

A. No.

Q. You never did?

A. No.

Q. Even in spite of what your agreement said you didn't feel that was necessary?

A. O.K. We normally trusted our members to do this and did not.

Q. OK. So you trusted Benny Flynn as you stated. He could go out and sell his hogs whenever he wanted but you expected him to bring the proceeds in to you.

A. That's correct.

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Q. Once again to sum up your, what I understand your testimony to be, you were aware that Benny was selling hogs and you in fact wanted him to sell hogs. You just expected him and trusted him to come in and bring you the proceeds. Is that correct.

A. That's correct."

He further testified that FPCA did not intend to forgo its liens because of the above practice.

The trial court found that Anon by purchasing the hogs did not take them free of the lien and conversion occurred, and entered judgment accordingly.

ISSUES

Anon presents the following issues:

I. Whether FPCA, by its statements or actions, authorized Benny Flynn to sell the collateral; and

II. Whether such authorization, if given, cut off FPCA's security interest under Ind.Code 26-1-9-306(2).

DISCUSSION AND DECISION

Anon challenges the trial court's judgment on the grounds that: (1) FPCA gave express authorization to sell, (2) FPCA expressly waived the written permission requirement, (3) authorization to sell could not be revoked after the sale based on Flynns' failure to fulfill the "condition" of remitting the proceeds, (4) FPCA is estopped from claiming a security interest, and (5) authority to sell may be implied from Flynns and FPCA's course of dealing.

FPCA defends the judgment by contending: (1) Indiana recognizes an action for conversion against a buyer of goods which are subject to a valid security agreement, (2) a course of dealing cannot be used to contradict a blanket prohibition against sale by the debtor without the written consent of the secured party, (3) consent by a secured party can be made conditional on the debtor's remittance of the proceeds to the secured party, and (4) the conduct of FPCA was not a waiver.

These arguments are interrelated, and we will discuss them together. No Indiana case has been found that is dispositive of the question raised.

Ind.Code 26-1-9-307(1) of the UCC provides that:

"A buyer in ordinary course of business ... other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller ...." (Emphasis added.)

Ind.Code 26-1-9-306(2) provides:

"Except where this Article [chapter] otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor."

The parties concede that a cause of action for conversion lies for the purchase of property in which a perfected security interest exists. The parties concede that no written authorization to sell was given Flynn by FPCA, and that Flynns were engaged in a farming operation.

No basis exists in the case at bar for the application of the doctrine of estoppel because there was no detrimental reliance due to Anon's lack of knowledge of the FPCA's conduct. North Central Kansas Production Credit Association v. Washington Sales Company, Inc., (1978) 223 Kan. 689, 577 P.2d 35; Clovis National Bank v. Thomas, (1967) 77 N.M. 554, 425 P.2d 726; Wabasso State Bank v. Caldwell Packing Company, (1976) 308 Minn. 349, 251 N.W.2d 321; Community Bank v. Jones, (1977) 278 Or. 647, 566 P.2d 470.

As indicated by Ind.Code 26-1-9-306(2), where a sale of the collateral has been authorized unconditionally either in the instrument or otherwise, the security interest does not survive the sale. Baker Production Credit Association v. Long Creek Meat Company, Inc., (1973) 266 Or. 643, 513 P.2d 1129; Farmers State Bank, Aurora v. Edison Non-Stock Cooperative Assn., (1973) 190 Neb. 789, 212 N.W.2d 625; Lisbon Bank and Trust Company v. Murray, (1973) Iowa, 206 N.W.2d 96. Where a secured party gives express consent and authority to a debtor to sell contrary to the terms of a security agreement, the security interest is cut off. In North Central Kansas, supra, the court found express authorization to sell where the secured party told the debtor he could sell the collateral in his own name provided he applied the proceeds on the debt. The security agreement forbade sale without written consent, but permitted sale if payment was made jointly to the debtor and the secured party. A like result was reached in The First National Bank and Trust Company of Oklahoma City v. Iowa Beef Processors, Inc., (10th Cir.1980) 626 F.2d 764. In the latter case the secured party admitted that the debtor had a standing consent to sell cattle,...