Continental Grain Co. v. Brandenburg

• Decision Date: 09 December 1998
• Docket Number: Nos. 20357,20358,s. 20357
• Citation: 587 N.W.2d 196,1998 SD 118,37 UCCRep.Serv.2d 779
• Parties: 37 UCC Rep.Serv.2d 779, 1998 SD 118 CONTINENTAL GRAIN COMPANY, Plaintiff and Appellee, v. Margery BRANDENBURG, Western Cattle, Inc., and Louis J. Welte, Defendants, and Heritage Bank and Western Video Cattle, Inc., Defendants and Appellants.
• Court: South Dakota Supreme Court

Page 196

587 N.W.2d 196

37 UCC Rep.Serv.2d 779, 1998 SD 118

CONTINENTAL GRAIN COMPANY, Plaintiff and Appellee, v. Margery BRANDENBURG, Western Cattle, Inc., and Louis J.

Welte, Defendants,

and

Heritage Bank and Western Video Cattle, Inc., Defendants and

Appellants.

Nos. 20357, 20358.

Supreme Court of South Dakota.

Argued Sept. 15, 1998.

Decided Dec. 9, 1998.

Dennis H. Hill of Costello, Porter, Hill, Heisterkamp & Bushnell, Rapid City and David Lebas of Gibson, Ochsner & Adkins, Amarillo, TX, for appellee Continental Grain.

Terry L. Hofer of Bangs, McCullen, Butler, Foye and Simmons, Rapid City, for appellant Heritage Bank.

Robert M. Nash of Wilson, Olson, Nash & Becker, Rapid City, for appellant Western Video.

GILBERTSON, Justice.

¶1 This action arises out of a consolidation of three lawsuits involving Continental Grain Company (Continental), Heritage Bank (Heritage) and Shasta Livestock Auction Yard (Shasta). The parties requested a determination of priorities of security interests in cattle. The circuit court, granted Continental's motion for summary judgment and the other creditors appealed. This Court, held that genuine issues of material fact precluded summary judgment and remanded the case to the circuit court. After a trial on the merits, the trial court granted a declaratory judgment for Continental. Again, Heritage and Shasta appeal. We affirm.

FACTS AND PROCEDURE

¶2 Bud Brandenburg (Bud) is a cattle order buyer. His purchases were financed by a number of sources, including Louis Welte (Welte), through Heritage. ¹ Welte authorized Bud to sign checks on Welte's Heritage account. In the normal course of business, Bud would buy cattle by writing a check on Welte's account to the seller. The cattle were then sold to a third party and the money from the sale was used to repay Welte. In return for the use of Welte's money, Bud paid a commission or interest.

¶3 Western Cattle, Inc. (Western), a cattle buying corporation, is owned by Bud's spouse, Margery Brandenburg (Margery) and her daughter. Margery had an agreement with Continental wherein Continental would lend money on cattle delivered to Fall River Feedlot in Hot Springs, South Dakota. Continental would charge her interest on the loan as well as for feed and costs. Margery, individually, signed a security agreement with Continental in October 1991 and a financing statement for livestock she placed "on feed" at the Fall River Feedlot in 1994. The security agreement contained an after-acquired property clause. Generally, Continental would lend money by sending a check to either Margery or Western when a load of cattle arrived. Continental would send a promissory note for Margery's signature once the cattle had been sorted and placed on the lot. Continental fed the cattle until they were ready and then sold them, usually to a packer. Then, Continental would pay off its loan and its bill for feed and costs and forward any profits to Margery's personal bank account. ²

¶4 In April 1994, Bud bought 650 heifers from Shasta's video auction, which were branded with a hoofprint on the right rib. Shasta gave Bud a receipt that indicated he was the buyer of the cattle. Bud presented two checks to pay for the cattle. One check was written by Western and signed by Margery. This check was returned for non-sufficient funds. The other check was written by Bud on Welte's account. Welte or his bank, Heritage, stopped payment on the check.

¶5 Before the checks cleared the bank, the cattle were shipped to Continental's Fall River Feedlot. A California brand inspection certification identified Bud as the consignor, or shipper, of the cattle. A South Dakota brand inspector's tally identified Bud as the "owner of the brand." Bud called and told Continental the cattle would be placed on its feedlot for Margery. Based on several years of past dealings, Continental mailed Western a loan check for $252,437.17 on May 2, 1994. Continental prepared a promissory note and sent it to Margery. She received the note after the parties realized both checks had been returned. Under the advice of counsel, she refused to sign the note.

¶6 After Shasta discovered the checks did not clear the banks, its employees called the Fall River Feedlot and requested the cattle be returned. Continental refused to return the cattle, claiming it had a security interest from Margery.

¶7 From February to April of 1994, Bud bought a number of cattle using Welte's account without having a buyer. The evidence establishes Bud sent the cattle to the Fall River Feedlot, put them in Margery's name and Fall River issued advances on the equity. Bud took the advances and instead of paying Welte, squandered the money speculating in the commodities market. ³ Because of Bud's misuse of Welte's account, Welte now owes his bank over $700,000.00.

¶8 On May 18, 1994, Continental filed a declaratory judgment action. According to the complaint, Continental held approximately 1,500 cattle for the Brandenburgs at that time. Continental requested the trial court declare its security interest in the 1,500 cattle valid and enforceable and declare that Continental could sell the cattle. Continental also requested the trial court determine its security interest had priority over the security interests of Shasta, Welte and Heritage. In response, Heritage filed a declaratory judgment action. ⁴ On June 15, 1994, Shasta counterclaimed for rescission of its contract with Bud and for a declaratory judgment that Margery never owned any interest in the livestock. The trial court consolidated the lawsuits on October 6, 1994.

¶9 Continental held the cattle and sold them in the fall of 1994. Continental paid itself $252,437.17 for the loan, plus additional sums for feed, care, trucking and interest. Approximately $80,000 remained as a credit on Margery's account after the sale.

¶10 Continental, Shasta and Heritage filed motions for summary judgment. After Continental was granted summary judgment, it applied to the trial court for payment of its attorney fees. The trial court allowed the attorney fees against Margery and permitted Continental to apply the $80,000 balance from her account. Heritage and Shasta appealed to this Court and we reversed the grant of summary judgment. Continental Grain Co. v. Heritage Bank, 1996 SD 61, 548 N.W.2d 507.

¶11 In the remanded case, the trial court granted a declaratory judgment in favor of Continental, ruling Heritage and Shasta were estopped from alleging any claim against Continental. Continental again applied to the trial court for payment of its attorney fees totaling $144,712.10. The trial court awarded the fees against Margery and permitted Continental to apply the $81,078.87 balance from her account to its attorney fees.

¶12 On appeal, Heritage and Shasta raise several issues. We combine them as follows:

1. Whether the trial court erred in its finding Margery had sufficient rights in the cattle to support attachment of Continental's security interest.

2. Whether the trial court erred in the award of attorney fees and if not, were the fees reasonable.

STANDARD OF REVIEW

¶13 "Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses." SDCL 15-6-52(a). We review findings based on documentary and deposition evidence de novo and do not apply the clearly erroneous rule set forth in SDCL 15-6-52(a). Watertown v. Dakota, Minn. & Eastern R. Co., 1996 SD 82, p 11, 551 N.W.2d 571, 574 (citing First Nat. Bank of Biwabik v. Bank of Lemmon, 535 N.W.2d 866, 871 (S.D.1995)). "We review conclusions of law under a de novo standard." Jasper v. Smith, 540 N.W.2d 399, 401 (S.D.1995) (citing Cordell v. Codington County, 526 N.W.2d 115, 116 (S.D.1994)). "Under this standard we give no deference to the trial court's conclusions of law." Id.

ANALYSIS AND DECISION

¶14 1. Whether the trial court erred in its finding Margery had sufficient rights in the cattle to support attachment of Continental's security interest.

¶15 The South Dakota version of Article 9 of the Uniform Commercial Code provides in order for the creditor to receive maximum protection in a secured transaction it must follow the steps of attachment and perfection. See generally SDCL 57A-9-101 through 57A-9-507. As neither Shasta nor Heritage dispute that Continental's security interest was prior in time to any other perfected security interest in the livestock, the primary question Heritage and Shasta raise stems from the Article 9 concept of attachment.

¶16 SDCL 57A-9-203(1) provides three requirements that must be met before a security interest will attach and be enforceable against a debtor or a third party:

(a) The collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral ...; and

(b) Value has been given; and

(c) The debtor has rights in the collateral.

(Emphasis added). Heritage and Shasta claim the trial court erred in finding Margery had rights in the collateral sufficient for Continental's security interest to attach. These parties contend Margery lacked these rights because she had no control over the cattle. They claim Bud was using Margery as a pawn in his cattle order buying transactions.

¶17 "The phrase 'rights in the collateral' as used in [§ 57A-9-203] has no clear definition." First Nat. Bank v. Feeney, 393 N.W.2d 458, 460 (S.D.1986). In an Article 9 transaction, the rule is mere possession of the collateral by the debtor is not enough to grant sufficient rights for the security interest to attach. Pleasant View Farms, Inc. v. Ness, 455 N.W.2d 602, 604 (S.D.1990). See generally White & Summers, Uniform Commercial Code § 31-6, at 127 (4th ed 1995). Yet, as with many rules, there are exceptions. This Court has found formal title is not required for a debtor to have sufficient 'rights in...