Burlington Nat. Bank v. Strauss

• Decision Date: 02 March 1971
• Docket Number: No. 97,97
• Citation: 184 N.W.2d 122,50 Wis.2d 270
• Parties: , 8 UCC Rep.Serv. 944 The BURLINGTON NATIONAL BANK, a corporation, Plaintiff-Respondent, v. Jules STRAUSS, Defendant-Appellant.
• Court: Wisconsin Supreme Court

Page 122

184 N.W.2d 122

50 Wis.2d 270, 8 UCC Rep.Serv. 944

The BURLINGTON NATIONAL BANK, a corporation, Plaintiff-Respondent, v. Jules STRAUSS, Defendant-Appellant.

No. 97.

Supreme Court of Wisconsin.

March 2, 1971.

Rehearing Denied May 4, 1971.

This is an action by The Burlington National Bank, Burlington, Wisconsin, (bank) against the defendant Jules Strauss for conversion of a grinder mixer and 28 cows, which the bank claimed as security for a loan to one Robert Fleming. Strauss defended on the ground the property was repossessed by virtue of his security interest. The trial court found the bank had a superior claim to the property and awarded judgment of the bank for its value. Strauss appeals.

Byrnes & Bils, Elkhorn, for defendant-appellant.

Kelly & Richter, Burlington, for plaintiff-respondent.

HALLOWS, Chief Justice.

Robert Fleming, a farmer near Lake Geneva, borrowed $14,000 from the bank on August 18, 1965, and secured the loan by a standard farm security agreement, which gave the bank a security interest in 'All farm equipment now owned or heareafter acquired by (Fleming) and * * * all livestock now owned or hereafter acquired by (Fleming) and the yound of such livestock.' A properly executed financing statement was filed with the register of deeds of Walworth county on August 23, 1965. Subsequently, the bank made additional loans to Fleming secured by the same collateral. These loans were later consolidated on December 8, 1965, and secured by a standard security agreement, which was filed. On February 6, 1967, the loans or the balance thereof was again re-evidenced by a note and a financing statement filed April 19, 1967.

Prior to this last note and beginning in August, 1966, Fleming began to purchase cattle from Strauss. The purchases of cattle from Strauss were secured by instalment conditional sales notes, and a copy of each was filed in Walworth county. These purchases were also later secured by a chattel mortgage on a Holland grinder mixer used by Fleming on his farm and the mortgage was filed in Walworth county. Between August 19, 1966, and September 27, 1967, Fleming purchased 43 head of cattle from Strauss under this arrangement. During the same period Fleming sold 31 head of cattle from his herd to others and between September 27, 1967, and December 7, 1967, he sold 23 head.

In January of 1968, Fleming was unable to meet his obligations and on January 5th Strauss took possession of 28 head of cattle and the grinder mixer from the Fleming farm and sold the property. On January 12th the bank took a cognovit judgment on its note against Fleming for $15,658.15. Approximately $4,000 was realized upon execution and this suit was brought for the value of the grinder mixer and the cattle. At the trial the value of the grinder mixer was found to be $1,000 and the value of the cattle to be $300 per head.

This case thus presents a conflict of security interest and the priority of creditors' claims against Fleming.

Did the bank waive its security?

Strauss claims the bank was well aware Fleming was selling secured cattle and replacing them by buying from Strauss. It is contended that since the bank acquiesced in these transactions it waived its lien under its after-acquired clause. Strauss relies on the Bank of Ashippun v. Ells (1957), 274 Wis. 530, 80 N.W.2d 357; but, this case is not in point. Ells involved a chattel mortgage on specific property with no after-acquired-property clause and was decided prior to the adoption of the Uniform Commercial Code. Prior to the code, it was almost impossible for a lender to maintain in farm financing a valid security on a herd of cattle which was being sold or renewed. See Helstad, Wisconsin UCC Handbook, sec. 17.12(2). In order to give more flexibility to such financing, the code freed the debtor from strict accountability to the secured creditor for the property secured, sec. 409.205, Stats., ¹ and recognized the validity of a secured interest in afteracquired property, sec. 409.204(3). ²

Thus a debtor is now able to commingle his property and use it to his best interest, and the acquiescence of the secured creditor under an after-acquired clause in such a program by the debtor does not invalidate the security interest of the creditor. Sec. 409.205, Stats. See Helstad, supra, sec. 17.12(3). Consequently, the bank's knowledge that Fleming was dealing in cattle does not constitute a waiver of its security interest in after-acquired property.

The grinder mixer.

Since the bank has a valid loan and security agreement which was perfected by the filing of financing statements as required by secs. 409.303(1) ³ and 409.302(1), ⁴ Stats., its security, including after-acquired property, has priority under sec. 409.312(5)(a), Stats., ⁵ to an after-perfected security of another creditor. Although the trial court stated Strauss' interest in the grinder mixer was for an antecedent debt and Strauss questions this conclusion on appeal, that is not the controlling issue. Whether a pre-existing debt is or is not a valid consideration for a security interest, see 15 Am.Jur.2d, Chattel Mortgages, p. 231, sec. 41; Bankruptcy Act, sec. 60, 11 U.S.C.A. § 96, the priority rank under the code of a valid security interest is unaffected.

Here, the bank's security is entitled to priority as to the grinder mixer over Strauss' chattel mortgage because it was filed on August 23, 1965, almost two years prior to Strauss' filing his chattel mortgage on May 3, 1967. Although it is true, the bank filed financing statements covering after-acquired property subsequent to its original filing on August 23, 1965, no termination statement was filed pursuant to sec. 409.404, Stats., ⁶ to cut off the bank's interest in the August 23, 1965, filing. Therefore, the original date must be used to determine the priority of the conflicting claims to the grinder mixer.

Eighteen identified head of cattle.

Eighteen head of cattle were identified by eartags as being sold by Strauss to Fleming on conditional sales agreements. Since these conditional sales agreements were taken by Strauss to secure the sale price, he has a purchase money security interest in the cattle. Sec. 409.107(1), Stats. ⁷ Where there is conflict between a purchase money security interest and another security interest, the priority is governed not by sec. 409.312(5), Stats., as was the case with the grinder mixer, but by sec. 409.312(3) and (4), Stats. If the subject of the security interest or collateral constitutes 'inventory' of the debtor, the priority of the security interest is determined by sec. 409.132(3). If the collateral is other than inventory, subsection (4) governs. ⁸ Livestock whether it makes sense to a dairy farmer or not, is classified as 'farm products' and not as inventory by sec. 409.109(3), Stats. ⁹ Consequently, Strauss is protected if he has perfected his security interest by filing financing statements within 10 days after Fleming received the cattle.

We think Strauss did not perfect his security interest by filing the conditional sales notes and is not entitled to the priority protection of sec. 409.312(4), Stats., against the after-acquired clause of the bank's security instrument. To perfect a purchase money security interest, sec. 409.302(1), Stats., requires the filing of a financing statement. There are enumerated exceptions to this requirement but none are applicable to this case. Although Strauss filed copies of his conditional sales notes for financing statements, they bore only the signature of Fleming, the debtor, and sec. 409.402(1)(a), Stats., ¹⁰ requires the document filed, if it is to qualify as a financing statement, to be signed by both parties, give the debtor's mailing address and the address of the secured party, from which information concerning the security interest may be obtained.

Strauss argues his signature does appear in the body of the conditional sales notes and since sec. 401.102, Stats., requires a liberal construction of the code to promote its underlying purposes and policies, he has substantially complied with sec. 409.312(4), Stats. We think Strauss' conditional sales notes are dificient in two respects, in signatures and in lack of address. Only one note (exhibit 16) bears both a name and an address of Strauss and none of the 18 head of cattle is secured by that note.

If only the question of Strauss' signature were involved, his argument finds support in an Annot., Construction and Effect of UCC Art. 9, Dealing With Secured Transactions. Sales of Accounts, Contract Rights and Chattel Paper, 30 A.L.R.3d 9, 57--62. The gist of this annotation is that a signature in the body of the instrument substantially complies with the signature requirement of sec. 409.402(1)(a), Stats. But substantial compliance with this section presupposes the signature fulfills two purposes: (1) Authenticates the existence of the security agreement, and (2) enables subsequent creditors to identify the secured party. Since Strauss' name in the body of the note is in his own handwriting, this might be evidence of his intention to authenticate the conditional sales notes. This view was taken in Benedict v. Lebowitz (2d Cir., 1965), 346 F.2d 120. See also Alloway v. Stuart (Ky., 1964), 385 S.W.2d 41, and Strevell-Paterson Finance Co. v. May (1967), 77 N.M. 331, 422 P.2d 366.

However, we do not think that Strauss' name without an address fulfills the second purpose of identification. In Strevell the lack of signature was held not to be a fatal defect but the lack of an address was because the filing system provided by the code could not perform its intended function of identifying the secured debtor. It is true, three of the notes had the word 'Harvard' after Strauss' name and were dated in Harvard, Illinois. However, unless Harvard, Illinois, is sufficiently small or Strauss is sufficiently well known, two points not covered by the record, a creditor located outside of Harvard,...