Consolidated Nutrition, LC v. IBP, Inc.

• Decision Date: 27 August 2003
• Docket Number: No. 22456.,22456.
• Citation: 669 N.W.2d 126,2003 SD 107
• Parties: CONSOLIDATED NUTRITION, L.C., Plaintiff and Appellant, v. IBP, INC., a Delaware Corporation, Defendant and Appellee.
• Court: South Dakota Supreme Court

669 N.W.2d 126

2003 SD 107

CONSOLIDATED NUTRITION, L.C., Plaintiff and Appellant, v. IBP, INC., a Delaware Corporation, Defendant and Appellee.

No. 22456.

Supreme Court of South Dakota.

Considered on Briefs November 19, 2002.

Reassigned June 4, 2003.

Decided August 27, 2003.

Robert W. Klimisch of Goetz & Klimisch, Yankton, South Dakota, Attorneys for plaintiff and appellant.

Roger W. Damgaard of Woods, Fuller, Shultz & Smith, Sioux Falls, South Dakota, Attorneys for defendant and appellee.

ZINTER, Justice (on reassignment).

[¶ 1.] IBP, Inc. (IBP), entered into a hog procurement contract with livestock producers, David and Kim Bloch (Blochs). Blochs also gave Tri County Ag Service a security interest in their hogs. This security interest was later assigned to Consolidated Nutrition, L.C. (Consolidated). IBP subsequently purchased hogs from the Blochs under the contract, but without notice of Consolidated's security interest. After the sale, IBP applied part of the proceeds to satisfy Blochs' preexisting debt under a "deficiency account" that was created by the procurement contract. Consolidated then commenced this action to recover the hog sale proceeds from IBP. The circuit court held that under the federal Food Security Act (FSA),¹ IBP took the hogs and the proceeds free of Consolidated's security interest. Consolidated appeals. We agree that under the FSA, IBP took the hogs free of Consolidated's security interest. However, we hold that this priority dispute over proceeds is governed by the Uniform Commercial Code rather than the FSA. We also hold that under the UCC, Consolidated's security interest was subject to IBP's contractual right of setoff.

FACTS AND PROCEDURAL HISTORY

[¶ 2.] IBP purchased hogs from farm producers for IBP's hog processing plants. IBP had hog procurement contracts with approximately 130 hog producers/farmers. IBP was also registered as a buyer of farm products with the South Dakota Secretary of State's Office pursuant to the FSA. [¶ 3.] The Blochs were engaged in a farming and hog production operation. On May 22, 1998, the Blochs entered into the hog procurement contract with IBP. Consolidated, a feed supply company, subsequently extended credit to, and took a security interest from the Blochs for feed supplies.

[¶ 4.] The hog procurement contract created a price stabilization mechanism for hog producers. Under the contract, IBP agreed to pay a "floor price" calculated by a formula. Under the formula, if the market price was higher than the floor price, IBP kept a portion of the excess and applied it to a "reserve account." The remaining portion was paid to the seller. If the market price was lower than the floor price, IBP agreed to pay the floor price by supplementing the market price with proceeds from the reserve account. If the reserve account had a zero balance, IBP still paid the floor price, but it then created a "deficiency account" to cover the difference. If subsequent sale prices exceeded the floor price, the excess was applied to satisfy the deficiency account. When the agreement terminated, the seller remained liable for any balance in the deficiency account.²

[¶ 5.] In 2001, the Blochs sold hogs to IBP under the contract. On April 6, Blochs sold 590 hogs to IBP for over $70,000. Because Blochs had a deficiency account at that time, IBP applied approximately $62,000 of the proceeds to Blochs' deficiency account. On April 13, Blochs sold 321 hogs to IBP for over $30,000. Blochs received the entire proceeds of that sale.

[¶ 6.] Prior to the April 2001 hog sales, IBP was not on notice from Tri County Ag Service, Consolidated, the Blochs, or by a filed financing statement,³ that Consolidated had a security interest in the hogs. Tri County Ag Service did not file its "Nutrition Feeder Credit Application" with the Secretary of State's office until May 7, 2001. Furthermore, Tri County Ag Service did not file a Form UCC-3, noting an assignment of its security interest to Consolidated, until May 21, 2001. Finally, Consolidated did not send a written notice to IBP informing it of Consolidated's security interest until July 9, 2001, and Consolidated failed to file an "effective financing statement" under the FSA.

[¶ 7.] Nevertheless, Consolidated initiated this action to recover the proceeds of the hog sales from IBP. IBP filed an answer and a motion for summary judgment. Following a hearing, the court granted summary judgment in favor of IBP. The trial court concluded that, under the FSA, IBP took the hogs (farm products⁴) and the proceeds free of Consolidated's security interest because IBP was a "buyer in the ordinary course" and it had not received the notice required by the FSA. The court also granted the motion because Consolidated did not offer to file a criminal complaint against the Blochs as required by SDCL 57A-9-609.1. Consolidated appeals.

DECISION

Under the FSA, IBP took the hogs free of Consolidated's security interest, and under the UCC, Consolidated's security interest in the proceeds was subject to IBP's contractual right of setoff.

[¶ 8.] The standard of review of summary judgments is well settled:

In reviewing a grant or a denial of summary judgment under SDCL 15-6-56(c), we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and [established] entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party[,] and reasonable doubts should be resolved against the moving party.... Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied.

Braun v. New Hope Township, 2002 SD 67, ¶ 8, 646 N.W.2d 737, 739 (citing South Dakota State Cement Plant Comm'n v. Wausau Underwriters Ins. Co., 2000 SD 116, ¶ 9, 616 N.W.2d 397, 400-01).

[¶ 9.] The undisputed facts of this case reveal that neither Consolidated nor Tri County Ag Service gave timely notice to IBP of their security interest in the hogs. Consolidated did not file with the Secretary of State's office until nearly one month after the final hog transaction. Consolidated also failed to give the notice required to protect its security interest under the FSA. Therefore, because IBP was a "buyer in the ordinary course," it took the hogs and was entitled to pay Blochs free of Consolidated's security interest under the FSA.⁵See Farmers and Merchants State Bank v. Teveldal, 524 N.W.2d 874, 878 (S.D.1994).

[¶ 10.] Although IBP took the hogs free of Consolidated's security interest under the FSA, we must next determine whether the FSA applies to the priority dispute over the proceeds applied to the Blochs' deficiency account with IBP. We begin the analysis by reiterating the distinction between claims to the hogs and claims to the proceeds of that collateral. That well recognized distinction was mentioned in Teveldal. Id. at 876 (noting that bank "brought suit [against a feed supplier] to determine the priority of the competing security interests in ... hogs and the proceeds from the sale to [a meat packer]") (emphasis added).

[¶ 11.] We must also consider the different priority analysis that applies to farm products and their proceeds. With respect to the taking of farm products:

The FSA provides that "a buyer, who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected [,] and the buyer knows of the existence of such interest."⁶

Teveldal, 524 N.W.2d at 878 (quoting 7 USC § 1631(d)).

[¶ 12.] However, "[o]ther than eliminating double payment liability for a `buyer in ordinary course' in farm products, Congress did not intend to preempt state law relating to the creation, perfection, or priority of security interests." Id. at 878-79 (citing 9 CFR § 205.202; Food Servs. of America v. Royal Heights, 69 Wash.App. 784, 850 P.2d 585, 588 (1993)). Therefore, we have implicitly recognized that the application of proceeds to a preexisting contractual debt would not be protected by the priority rules of the FSA. We did so by denying "buyer in the ordinary course" status to such buyers.

"Buying" does not include receiving goods or document of title under a preexisting contract as security "for or in total or partial satisfaction of a money debt," SDCL 57A-1-201(9), thereby excluding "attaching creditors and others who take goods in satisfaction of preexisting debts" from the definition of a "buyer in ordinary course."

Teveldal, 524 N.W.2d at 878 (citing 2 James White & Robert Summers, Uniform Commercial Code § 26-13, at 533 n. 2 (3rd ed. 1988)) (emphasis added).

[¶ 13.] Other courts explicitly hold that a buyer or commission merchant entitled to priority for a purchase under the FSA, who also extends credit and then seeks to retain proceeds from the sale as repayment, is not protected by the FSA. A party who "retain[s] ... the ... proceeds from the sale of the [farm products]" is acting as a lender instead of a party protected by the FSA. Food Servs. of America v. Royal Heights, Inc., 123 Wash.2d 779, 871 P.2d 590, 593 (1994). Therefore, a party who seeks to retain the proceeds from the sale of farm products in repayment of an obligation as a lender, must look to state law to determine the priority of interests. Id. The rationale for this rule is that the FSA was designed to protect "buyers and commission merchants ... [but not] to reorder the normal priority of liens in farm products with regard to competing lenders."⁷ Id. at 595.

[¶ 14.] Therefore, IBP was entitled to "buyer in the ordinary course" priority under the FSA to the extent that it purchased the hogs and paid Blochs. However, IBP was not entitled to that priority to the extent that it acted as a creditor and setoff the sale proceeds to satisfy Blochs preexisting debt under the hog procurement contract.

[¶ 15.] Having...