Concord Co-op v. Security State Bank of Claremont, CO-O

• Decision Date: 29 November 1988
• Docket Number: CO-O,No. C5-88-1095,R,C5-88-1095
• Citation: 432 N.W.2d 195
• Parties: 9 UCC Rep.Serv.2d 390 CONCORDespondent, v. SECURITY STATE BANK OF CLAREMONT, Appellant.
• Court: Minnesota Court of Appeals

Page 195

432 N.W.2d 195

9 UCC Rep.Serv.2d 390

CONCORD CO-OP, Respondent, v. SECURITY STATE BANK OF CLAREMONT, Appellant.

No. C5-88-1095.

Court of Appeals of Minnesota.

Nov. 29, 1988.

Syllabus by the Court

1. Genuine issues of material fact remain which preclude summary judgment.

2. The trial court erred in its application of Minn.Stat. Sec. 336.9-316 (1986).

3. Whether the Bank properly exercised the right of set-off is dependent on the resolution of material facts.

William Oehler, Ward & Oehler, Ltd., Rochester, for respondent.

Mark L. Torgrimson, Michaels, Seeger, Rosenblad & Arnold, Rochester, for appellant.

Heard, considered and decided by SCHUMACHER, P.J., and FOLEY and HUSPENI, JJ.

OPINION

HUSPENI, Judge.

Security State Bank of Claremont (Bank) appeals from a $90,152.74 summary judgment award to respondent Concord Co-op (Co-op). Co-op initiated this lawsuit alleging that it had "leapfrogged" the Bank's prior perfected security interest in crop proceeds and that the Bank's retention of those proceeds was a conversion. Both Co-op and the Bank had statements of subordinated interest from an earlier interest holder, Production Credit Association (PCA) in Walter Laue's crops. Co-op claimed because PCA gave them their subordination first, Co-op's security interest had priority over the Bank's in farmer Laue's crop proceeds. The court held that because Co-op's subordination preceded the Bank's, "first in time" controlled and therefore awarded the Bank's funds to Co-op. We reverse and remand.

FACTS

Walter Laue, a farmer, was indebted to several creditors in the crop year 1985. On March 3, 1980, the PCA had received a first security interest in Laue's crops by filing a financing statement with the Dodge County Recorder. This statement was continued by filing on January 16, 1985. On March 22, 1985, the Bank loaned $35,000 to Laue and Laue in turn gave a security interest in his crop proceeds to the Bank. The Bank perfected its security interest by filing on March 25, 1985. On April 24, 1985, Laue granted a third security interest in his 1985 crops to Co-op. Co-op perfected its interest the same day.

PCA granted a subordination of its security interest in Laue's crops to Co-op on April 23, 1985, and to the Bank on April 26, 1985. The Crop Lien Subordination agreement between PCA and Co-op reads in relevant part:

Pursuant to the terms of an Agreement between [PCA] * * * and Walter E. Laue * * * [PCA] hereby subordinates its lien on the 1985 crop of Walter E. Laue * * * in favor of a lien granted by Walter E. Laue to [Co-op].

After the subordinations, Co-op supplied Laue with $148,963.64 for crop supplies and the Bank supplied $50,285.99 to pay farm rents due under existing rent contracts. Whether the subordinations were exclusive or non-exclusive was an issue before the trial court.

According to an affidavit submitted by Mark Schmidt, Senior Loan Officer of Farm Credit Services, the successor of PCA, Laue's loan with a principal unpaid balance of $750,000 was in substantial arrears. Schmidt claimed PCA never agreed to give an exclusive first lien to Co-op and received no consideration for the subordination agreement. Rather, according to Schmidt, PCA agreed with Laue to provide subordinations to any lenders providing new loans because PCA acknowledged that

lenders having a perfected security interest in crops for new value given to enable Mr. Laue to produce crops during the season had a priority over any indebtedness owing by Walter Laue to the Production Credit Association that was overdue more than six (6) months of the time when crops began to grow.

After Laue's 1985 crop harvest, the proceeds checks from various crop purchasers totaled $167,601.64. On December 30, 1985, Laue, a representative of Co-op, the Bank and certain creditors met. The Bank alleges that Co-op made various verbal representations at this meeting, including giving its consent to the disbursals made by Laue to the Bank and to certain creditors.

Co-op drafted an agreement which was presented and signed on December 30, 1985, stating that $90,152.74 would be distributed to the Bank and $77,448.90 would be distributed to Co-op. The agreement provided that this distribution was without prejudice to each party's right to sue any other parties for a different distribution of the proceeds and also stated that "objections to this agreement, must be notified in writing prior to Jan. 16, 1986."

Co-op never objected verbally or in writing before January 16, 1986. Pursuant to the December 30th agreement, the Bank received $90,152.74 from the crop proceeds. The Bank subsequently distributed funds as follows: ¹

Co-op brought suit against the Bank in June 1986, alleging Co-op's prior security interest. The Bank argues that its disbursements were made with Co-op's approval. The trial court held that nothing in the agreement entitled the Bank to make subsequent disbursements to unsecured creditors. Summary judgment was awarded to Co-op in the amount of $90,152.74.

ISSUES

1. Did any genuine issues of material fact remain which should have precluded summary judgment?

2. Did the trial court err in its application of Minn.Stat. Sec. 336.9-316 (1986)?

3. Did the Bank properly exercise a right of set-off?

ANALYSIS

I. SCOPE OF REVIEW

In Betlach v. Wayzata Condominium, 281 N.W.2d 328, 330 (Minn.1979), the court held:

On appeal from a summary judgment it is the function of this court only to determine (1) whether there are any genuine issues of material fact and (2) whether the trial court erred in its application of the law.

Rule 56.03 of the Minnesota Rules of Civil Procedure provides that summary judgment should be granted only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that either party is entitled to a judgment as a matter of law."

Evidence presented upon a summary judgment motion must be taken in the light most favorable to the non-moving party. Nord v. Herreid, 305 N.W.2d 337, 339 (Minn.1981). The Bank argues that the trial court violated this rule of application by finding against the non-moving party, the Bank, relative to the issue of exclusivity of the subordinations. We agree with the Bank that a genuine issue of material fact exists regarding the exclusivity of these subordinations.

Mark Schmidt, the PCA loan officer, stated in his affidavit that PCA never agreed to exclusivity with Co-op, nor intended that the granted subordinations be exclusive. Schmidt stated that PCA was simply removing itself from a secured party position in any and all priority disputes.

Nothing on the face of the Crop Lien Subordination statement indicates that the subordination is exclusive. The trial court resolved the factual issue of exclusivity as a matter of law stating, "first in time, first in right controls." However, that is only true if the subordination granted was an exclusive one. "On appeal, it is for us to determine whether the trial court was correct in holding that there was no ambiguity * * *." North Central Public Service Co. v. Village of Circle Pines, 302 Minn. 53, 58, 224 N.W.2d 741, 744 (1974) (quoting Employers Liability Assurance Corp. v. Morse, 261 Minn. 259, 263, 111 N.W.2d 620, 624 (1961)). We find the Crop Lien Subordination agreement ambiguous, and therefore the trial court's resolution of the issue of exclusivity by summary judgment was inappropriate.

The Bank also argues that there is a material fact issue regarding whether Co-op consented to disbursement of escrowed funds. The December 30, 1985, agreement, which Co-op drafted, imposed the limitation that "objections to this agreement, must be notified in writing prior to Jan. 16, 1986." Co-op made no written or oral objections until June 1986 when it brought this suit. This issue of consent was resolved in Co-op's favor as a...