Atwood-Kellogg, Inc. v. Nickeson Farms

• Decision Date: 23 November 1999
• Docket Number: No. 20902.,20902.
• Parties: ATWOOD-KELLOGG, INC., Plaintiff and Appellant, v. NICKESON FARMS; Jerry Nelson; Doug Medhaug; Jason Medhaug d/b/a Medhaug Farms; Clark Huggett; Roger Hill; Willard Hill; Hill Farms, Inc.; and Clayton Halverson, Defendants and Appellees.
• Court: South Dakota Supreme Court

602 N.W.2d 749

1999 SD 148

ATWOOD-KELLOGG, INC., Plaintiff and Appellant, v. NICKESON FARMS; Jerry Nelson; Doug Medhaug; Jason Medhaug d/b/a Medhaug Farms; Clark Huggett; Roger Hill; Willard Hill; Hill Farms, Inc.; and Clayton Halverson, Defendants and Appellees.

No. 20902.

Supreme Court of South Dakota.

Considered on Briefs September 13, 1999.

Decided November 23, 1999.

James M. Cremer of Bantz, Gosch, Cremer, Peterson & Sommers, Aberdeen, South Dakota, for plaintiff and appellant.

Danny R. Smeins, Britton, South Dakota, for defendants and appellees.

AMUNDSON, J.

[¶ 1.] Atwood-Kellogg, Inc., appeals the granting of summary judgment in favor of the defendant farmers (Farmers). We reverse and remand for trial.

FACTS

[¶ 2.] In 1995 Farmers each contracted to sell corn and soybeans to Farmers Elevator Company of Eden, South Dakota (FEC). The contracts provided that delivery of the commodities was to be made by December 1, 1995. Atwood-Kellogg provided financing to FEC and retained a security interest in FEC's accounts receivables and contract rights.

[¶ 3.] After entering into the contracts, FEC began to suffer serious financial problems and became insolvent. The issue of FEC's insolvency was undisputed by the parties. It was also undisputed that several of the farmers made deliveries after FEC became insolvent.¹ Farmers conceded the fact that not all of the commodities were delivered under the contract, but several farmers do dispute the quantity of commodities that Atwood-Kellogg alleged remained undelivered under the contract.

[¶ 4.] On November 6, 1995, FEC held an annual stockholders meeting. Present at the meeting were FEC's customers, a South Dakota Public Utilities Commission staff member, FEC's Board of Directors, and Farmers. Jim Kolle, a representative of Atwood-Kellogg, announced at the meeting that Atwood-Kellogg would guarantee payment of the grain contracts in writing. The guarantee was retracted on November 20, 1995, when Mr. Kolle told FEC's Board of Directors that Atwood-Kellogg would not provide written guarantees of payment.

[¶ 5.] Next, John Case, President of Atwood-Kellogg, mailed a letter to Myron Steiner, President of FEC, on November 29, 1995, proposing to guarantee payment on the Farmers' contracts.² Steiner claimed in his affidavit that he informed all farmers with outstanding contracts of the Case letter guaranteeing payment. Willard Hill, one of the Farmers and a member of FEC's Board of Directors, claimed that he did receive a copy of this letter, but it did not specifically mention what contract. The remaining Farmers claim they never had knowledge of the existence of the letter until they were advised of its existence by their attorney on August 24, 1998.

[¶ 6.] Farmers refused to deliver their commodities pursuant to the contract due to FEC's insolvency. Farmers suspended delivery under SDCL 57A-2-609 and 2-702, since there was no adequate assurance of payment. As a result of Farmers nondelivery, Atwood-Kellogg claims to have suffered damages.

[¶ 7.] Atwood-Kellogg commenced this action against Farmers for breach of contract by Farmers for failure to deliver under the contract.³ Prior to trial, both parties moved for summary judgment. The trial court granted summary judgment for Farmers, but denied Atwood-Kellogg's motion. Atwood-Kellogg appeals, raising the following issue:

Are the Defendant Farmers relieved from their obligation to deliver corn and soybeans to the insolvent buyer, Farmers Elevator of Eden, when the Plaintiff, the Elevator's financier, offered to pay for the corn and soybeans?

STANDARD OF REVIEW

[¶ 8.] Our standard of review on a motion for summary judgment is well established. A "[s]ummary judgment is appropriate where the pleadings, depositions, answers to interrogatories, and admissions, together with any affidavits, show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." City of Lennox v. Mitek Indus., Inc., 519 N.W.2d 330, 332 (S.D.1994) (citing Breen v. Dakota Gear & Joint Co., Inc., 433 N.W.2d 221, 223 (S.D.1988)). Further, this court has held that:

"We will affirm only when there are no genuine issues of material fact and the legal questions have been correctly decided. All reasonable inferences drawn from the facts must be viewed in favor of the nonmoving party. The burden is on the moving party to clearly show an absence of any genuine issue of material fact and an entitlement to judgment as a matter of law. On the other hand, `[t]he party opposing a motion for summary judgment must be diligent in resisting the motion, and mere general allegations and denials which do not set forth specific facts will not prevent issuance of a judgment.'"

Zuke v. Presentation Sisters, Inc., 1999 SD 31, ¶ 14, 589 N.W.2d 925, 928 (quoting Greene v. Morgan, Theeler, Cogley & Petersen, 1998 SD 16, ¶ 6, 575 N.W.2d 457, 459) (citations omitted). If any basis exists "which supports the ruling of the trial court, affirmance of a summary judgment is proper." Id. (citing Mack v. Kranz Farms, Inc., 1996 SD 63, ¶ 8, 548 N.W.2d 812, 814).

DECISION

[¶ 9.] In contracts for the sale of goods, a general precept exists which states that the seller must make timely delivery and transfer goods to the buyer, while the buyer has a duty to accept the goods and pay the seller. See SDCL 57-4-1. See also Erwin Weller Co. v. Talon Inc., 295 N.W.2d 172, 174 (S.D.1980)

(citing SDCL 57-4-1). It is undisputed that Farmers failed to deliver to buyer all commodities under the contract.

[¶ 10.] Nondelivery by a seller of goods can be justified under certain situations. One such circumstance is if a seller of goods discovers that a buyer has become insolvent, the UCC allows the seller to "refuse delivery except for cash." See SDCL 57A-2-702.⁴ See, e.g., Kunian v. Development Corp. of America, 165 Conn. 300, 334 A.2d 427, 433 (1973) (noting that the plaintiff "informed the defendant that it would deliver the balance of the material only if payment of the entire contract was guaranteed by the defendant's depositing sufficient cash in escrow to pay for the delivered materials."). Farmers contend that under SDCL 57A-2-702, they were "entitled to refuse delivery under the contracts except for cash" because FEC was insolvent. However, Atwood-Kellogg argues that Farmers never made a demand for cash; therefore, they cannot rely on 57A-2-702. The statute, which states that when a seller "discovers" buyer's insolvency "he may refuse delivery except for cash," clearly and unambiguously places the obligation on the seller (Farmers) to condition a refusal to deliver on the payment of cash.

[¶ 11.] Farmers also argue they are entitled to adequate assurances of performance under SDCL 57A-2-609(1) which provides:

(1) A contract for sale imposes an obligation of each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurances of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

SDCL 57A-2-609 (1997) (emphasis added). Under this section, Farmers with knowledge of insecurity may seek adequate assurances from FEC. The purpose of this section is to "obviate the necessity of one party guessing whether or not the other intends to perform when he begins to receive signals that cause him concern." Cole v. Melvin, 441 F.Supp. 193, 203 (D.S.D.1977) (citing J. White & R. Summers, Uniform Commercial Code § 6.2 (1st Ed1972)).

[¶ 12.] Atwood-Kellogg argues that under SDCL 57A-2-609, a written demand for adequate assurances is required. Decisions involving written demands for assurances vary. In Johnson v. Land O' Lakes, 181 F.R.D. 388, 394 (N.D.Iowa 1998), the district court faced a statute, Iowa Code § 554.2609(1), which is analogous to SDCL 57A-2-609(1). The statute provided that "`[w]hen reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance.'" Id. (emphasis added). The court noted that "`[t]his section requires the demand for assurances be in writing.'" Id. (quoting SPS Indus., Inc. v. Atlantic Steel Co., 186 Ga.App. 94, 366 S.E.2d 410, 413-14 (1988)). The court added "absent attenuating circumstances, this written demand is required before the demanding party may proceed with remedies for anticipatory breach[.]" Id. (emphasis added).

[¶ 13.] In SPS Industries, the court was interpreting OCGA § 11-2-609(1), which is identical to SDCL 57A-2-609(1). 366 S.E.2d at 413. The statute provided that "[w]hen reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance[.]" Id. (citing OCGA § 11-2-609(1)) (emphasis added). The court emphasized that section 11-2-609(1) "`clearly requires that when reasonable grounds for insecurity arise, before a party avails himself of the right to suspend his further performance, he must, in writing demand adequate assurance of due performance of the other party.'" Id. (quoting Automated Energy Systems v. Fibers & Fabrics of Ga., 164 Ga.App. 772, 774, 298 S.E.2d 328, 329) (emphasis in original). See also Continental Grain Co. v. McFarland, 29 UCCRep 512, 628 F.2d 1348 (4th Cir.1980) (denying justification for sellers repudiation in the contract for lack of assurances provided by the buyer because the statutorily required written demand was not made). The statutes of Iowa and Georgia both utilize the same phraseology of "may demand" as South Dakota's statutes. Compare Iowa Code § 554.2609(1), OCGA § 11-2-609(1), and SDCL 57A-2-609(1).

[¶ 14.] Other jurisdictions addressing this issue have held that a written demand for adequate...