Baker Production Credit Ass'n v. Long Creek Meat Co., Inc.

• Decision Date: 10 September 1973
• Citation: 266 Or. 643,513 P.2d 1129
• Parties: , 13 UCC Rep.Serv. 531 BAKER PRODUCTION CREDIT ASSOCIATION, a corporation, Respondent, v. LONG CREEK MEAT COMPANY, INC., a corporation, Coast Packing Company, a corporation, Defendants, and First State Bank of Oregon, a corporation, Appellant.
• Court: Oregon Supreme Court

Page 1129

513 P.2d 1129

266 Or. 643, 13 UCC Rep.Serv. 531

BAKER PRODUCTION CREDIT ASSOCIATION, a corporation, Respondent, v. LONG CREEK MEAT COMPANY, INC., a corporation, Coast Packing Company, a corporation, Defendants and First State Bank of Oregon, a corporation, Appellant.

Supreme Court of Oregon, In Banc.

Argued and Submitted at Pendleton May 7, 1973.

Decided Sept. 10, 1973.

J. W. Rosacker of McCarty & Rosacker, Portland, argued the cause and filed briefs for appellant.

David C. Silven of Banta, Silven, Young & Marlette, Baker, argued the cause and filed a brief for respondent.

McALLISTER, Justice.

This is an action for converstion of collateral, and proceeds of collateral, in which plaintiff claims an interest by virtue of a security agreement. The collateral consisted of livestock which had been owned by Deer Creek Cattle Feeders ('Cattle Feeders'), a partnership. The defendants in this action are Long Creek Meat Company ('Meat Company'), a corporation which purchased Cattle Feeders' cattle for slaughter, Coast Packing Company, a corporation which purchased carcasses from Meat Company, and the First State Bank of Oregon, which extended credit to Meat Company. The case was tried to the court without a jury, and resulted in a judgment for plaintiff against Meat Company and the Bank; Coast Packing was held not liable. The Bank appeals. Although the only issues on appeal involve the liability of the Bank, it is necessary to an understanding of those issues to describe the dealings among the various parties in some detail.

Cattle Feeders was engaged in the business of buying cattle, feeding and fattening them, and selling them for slaughter. Its operations were financed by plaintiff Baker Production Credit Association ('Baker PCA'). In return for loans and future advances, Baker PCA obtained a security agreement from Cattle Feeders covering, among other things, all livestock owned or thereafter acquired by Cattle Feeders, all products of those livestock, and all proceeds from the sale of such livestock. The security agreement provided that the debtor was not to sell or otherwise dispose of any of the collateral without the consent of the secured party. Financing statements were filed in various counties and there is no contention on appeal that Baker PCA's security interest in Cattle Feeders' livestock was not properly perfected.

Cattle Feeders sold cattle to Meat Company, a corporation in which the partners of Cattle Feders were officers. Meat Company, which was financed by defendant Bank, would pay for Cattle Feeders' cattle by issuing a draft payable to Baker PCA through defendant Bank. The parties' custom, for approximately six months prior to the events here in issue, was that the draft would be made out and mailed to Baker PCA at or about the time the cattle left the feed lot for delivery to Meat Company's plant. The drafts were made out and signed by S. C. Holmes, who was vice-president of Meat Company and a partner in Cattle Feeders. These drafts would be sent to Baker PCA and then transmitted to defendant Bank through normal banking channels and, as part of Bank's financing arrangement with Meat Company, would be paid and the drafts themselves held as evidence of Meat Company's indebtedness to Bank.

The Meat Company would slaughter the cattle and sell the carcasses to Coast Packing under a contract providing that Coast Packing would, with certain limitations, purchase Meat Company's entire output. Meat Company assigned its rights under this contract to defendant Bank and Coast Packing paid for its purchase from Meat Company by checks payable to defendant Bank. These checks were applied by the Bank to Meat Company's indebtedness, retiring first the oldest Meat Company drafts which had been accepted and paid by the Bank.

In October 1969 the Bank discussed with Mr. Troutman, president of Meat Company (and also a partner in Cattle Feeders), the fact that Meat Company's drafts had exceeded the agreed line of credit and, at Troutman's request, Meat Company was given 60 days to reduce its outstanding indebtedness to the agreed amount. This had not been done by January 29, 1970, and on that date defendant Bank notified Mr. Troutman that no more Meat Company drafts would be accepted and paid by the Bank. Thereafter, eight Meat Company drafts, totaling $88,343.96, payable to Baker PCA for purchase of Cattle Feeders' cattle were dishonored by the Bank.

On and after January 29, the Bank continued to receive checks from Coast Packing in payment for carcasses purchased from Meat Company, but applied these checks to Meat Company's indebtedness without continuing to honor its drafts. The issue is whether the Bank, in this way, converted collateral or proceeds in violation of Baker PCA's security interest.

ORS 79.3060 provides:

'(1) 'Proceeds' includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise, disposed of. * * *

'(2) Except where ORS 79.1010 to 79.5070 otherwise provide, 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.'

Certain purchasers of the collateral take free of a perfected security interest under ORS 79.3070(1) which provides:

'(1) A buyer in ordinary course of business as defined in subsection (9) of ORS 71.2010, Other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.' (Emphasis added.)

'Farm products' are defined by ORS 79.1090:

'Goods are:

'(3) 'Farm products' if they are crops or livestock or supplies used or produced in farming operations * * * and if they are in the possession of a debtor engaged in raising, fattening, grazing or other farming operations. If goods are farm products they are neither equipment nor inventory.'

Under ORS 79.1090(3) it is clear that Cattle Feeders was engaged in 'farming operations' and that the cattle were 'farm products.' The trial court, in its memorandum opinion, so found. Therefore, under ORS 79.3070(1), a sale to a buyer in the ordinary course of business would not cut off Baker PCA's security interest in the cattle. The Code, as to farm products, allows the security interest to follow the collateral through a succession of purchases. See Garden City Production Credit Ass'n v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971). Although after slaughtering by Meat Company the cattle were no longer 'farm products' but 'inventory' (see ORS 79.1090(4)), a purchaser from Meat Company would not take free of Baker PCA's security interest because it was not one 'created by his seller' as specified in ORS 79.3070(1). See United States v. Hext, 444 F.2d 804, 814 (5th Cir.1971); Hawkland, The Proposed Amendment to Article 9 of the U.C.C.--Part 1: Financing the Farmer, 76 Comm.L.J. 416, 418 (1971). ¹ Baker PCA's security interest, therefore, continued to cover the carcasses in the hands of Coast Packing. Evans Products v. Jorgensen, 245 Or. 362, 421 P.2d 978 (1966), cited by defendant Bank, did not involve farm products and is not in point.

Baker PCA's security interest also covered the 'proceeds' of those carcasses. 'Proceeds,' as defined in ORS 79.3060(1), includes 'whatever is received when collateral * * * is sold,' and subsection (2) provides that the security interest continues in any identifiable proceeds. Under these provisions, the Coast Packing checks which were received by the Bank were 'proceeds' subject to Baker PCA's security interest, even though they were paid to the Bank rather than to the seller or to the debtor. See Farnum v. C. J. Merrill, Inc., 264 A.2d 150, 165 (Me.1970):

'We find nothing to support Receiver's contention that the words 'whatever is received' in line one of 9--306(1) means 'whatever is received by debtor.' Paragraph (1) does not impose that limitation and the fact that paragraph (2) expressly includes collections received by debtor, argues that the proceeds in paragraph (1) has an independent meaning broad enough to include receipts by a receiver * * *. We are satisfied that paragraph (1) is to be read: "Proceeds' include whatever is received by anyone * * *."

Therefore, unless some other exception applies, the checks received by the Bank from Coast Packing were proceeds which were subject to Baker PCA's security interest.

The Bank contends that the trial court erred in finding for Baker PCA and against the Bank. We have indicated our disapproval of such 'broadside' assignments of error in actions at law. Quillin v. Peloquin,237 Or. 343, 345, 391 P.2d 603 (1964). The Bank's assignments raise, at most, the question whether the trial court was required as a matter of law to decide the case in its favor. We do not retry the facts. Hekker v. Sabre Const. Co., Or., 510 P.2d 347 (1973).

The Bank first argues that Baker PCA consented to the sale of the cattle by Cattle Feeders, and thereby waived its security interest and any right to complain of a conversion of the collateral or proceeds by other parties. The evidence is clear and undisputed that Baker PCA was aware that Cattle Feeders was selling cattle to Meat Company and had no objection to those sales. Under ORS 79.3060(2) a sale by the debtor cuts off a security interest in the collateral if the secured party authorized the debtor's actions 'in the security agreement or otherwise.' The security agreement in this case provides that the collateral will not be sold without the secured party's consent. The trial court found, in its memorandum opinion, that Baker PCA consented to the sale of cattle in return for Meat Company's drafts on the condition that the drafts were honored and paid....