Eastern Idaho Production Credit Ass'n v. Idaho Gem, Inc.

• Decision Date: 24 November 1992
• Docket Number: No. 18827,18827
• Citation: 122 Idaho 946,842 P.2d 282
• Parties: , 20 UCC Rep.Serv.2d 347 EASTERN IDAHO PRODUCTION CREDIT ASSOCIATION, Plaintiff-Respondent, v. IDAHO GEM, INC., formerly an Idaho corporation, Robert W. Shawver and Peggy Shawver, husband and wife, Defendants-Appellants, and John Does I Through X, Defendants. Boise, September 1991 Term
• Court: Idaho Supreme Court

Page 282

842 P.2d 282

122 Idaho 946, 20 UCC Rep.Serv.2d 347

EASTERN IDAHO PRODUCTION CREDIT ASSOCIATION, Plaintiff-Respondent, v. IDAHO GEM, INC., formerly an Idaho corporation, Robert W. Shawver and Peggy Shawver, husband and wife, Defendants-Appellants and John Does I Through X, Defendants.

No. 18827.

Supreme Court of Idaho,

Boise, September 1991 Term.

Nov. 24, 1992.

Steven A. Hoskins, Idaho Falls, for defendants-appellants.

Hansen, Beard, Martin & St. Clair, Idaho Falls, for plaintiff-respondent. John G. St. Clair, argued.

BISTLINE, Justice.

Beginning in 1983, EIPCA lent money for the purpose of crop production to Blair W. Heinz ("Heinz"). All of Heinz's crops were subject to EIPCA's perfected security interest. ¹ In the crop year 1985, Heinz raised a crop which included certain seed potatoes. In June of 1986, Heinz sold seed potatoes from his 1985 crop to W.L. Baker, Inc., an Idaho corporation ("Baker"), and Baker agreed to give Heinz $24,095, or in the alternative, a prescribed amount of commercial potatoes, as payment for the seed potatoes. In the same year, Baker planted those seed potatoes along with seed potatoes purchased from other growers.

However, in April of 1986, two months prior to his purchase from Heinz, Baker had filed for relief under Chapter 11 of the United States Bankruptcy Code. From that date forward, Baker operated as a debtor-in-possession. In May of 1986, the bankruptcy judge issued a cash collateral order allowing Baker to use certain cash proceeds and providing First Security Bank of Utah ("First Security") with a first lien on all of Baker's 1986 crops, including any crop raised from the seed potatoes Baker had purchased from Heinz. A second cash collateral order was entered in March of 1987, also granting to First Security a first lien in Baker's crops grown in 1986 and all subsequent years.

In August of 1986, Heinz filed a seed lien against Baker in the Oneida County recorder's office. Heinz did not obtain an order from the United States Bankruptcy Court lifting the automatic stay protecting Baker which was in effect as a result of 11 U.S.C. § 362, or authorizing Baker to grant him a security interest in the seed potatoes Heinz had sold to Baker.

In June of 1987, Baker consigned certain potatoes, including a portion of Baker's 1986 potato crop (grown from Heinz's seed potatoes), to Idaho Gem for sale. Idaho Gem sold the potato crop for Baker, resulting in a $52,876 payment to Baker. Due to the existence of the cash collateral orders issued by the bankruptcy court, Idaho Gem made the check payable to Baker, First Security, and Heinz. The check was negotiated by First Security and Baker and was paid by West One Bank and Key Bank without the signature of Heinz. Baker subsequently failed to pay Heinz for the seed potatoes received or to give him the amount of commercial potatoes previously agreed upon, and Heinz failed to pay EIPCA. Following default by Heinz, EIPCA obtained an assignment of Heinz's rights against Baker. EIPCA then initiated the present action against Idaho Gem for the value of the potato crop consigned to it by Baker and for which Idaho Gem had made payment to Baker, First Security, and Heinz.

EIPCA's only alleged security interest in the potato crop of Baker is by virtue of the assignment of Heinz's rights against Baker or by virtue of EIPCA's perfected security interest in Heinz's crops continuing from Heinz to Baker to Idaho Gem.

The first method does not elevate EIPCA to the position of secured creditor because EIPCA must stand in the shoes of its assignor, Heinz. The seed lien Heinz filed in August of 1986 was inadequate to transform him into a secured creditor of Baker because Baker was under the protection of the bankruptcy court at the time of the filing.

Thus, EIPCA's recourse against Idaho Gem must lie with finding a continuing security interest in the collateral or its proceeds. If EIPCA does not have an effective security interest in the proceeds from the crops Idaho Gem sold for Baker, EIPCA is not a secured creditor of Idaho Gem and thus cannot recover.

I. BECAUSE IT AUTHORIZED HEINZ TO SELL THE CROP TO BAKER, EIPCA LOST ITS SECURITY INTEREST IN COLLATERAL CONSISTING OF HEINZ'S SEED POTATO CROP

The district court did not explicitly determine whether EIPCA's security interest in Heinz's seed potatoes (the collateral for EIPCA's loan to Heinz) continued in spite of Heinz's sale of them to Baker stating only that, "[p]laintiff's security interest continues in the collateral ... unless the disposition was authorized...." R. at 62. Idaho Gem alleges that EIPCA did authorize Heinz to sell the seed potatoes, thereby cutting off EIPCA's security interest in them, pursuant to I.C. § 28-9-306. ² EIPCA contends that it did not unconditionally authorize Heinz's sale of the collateral to Baker, and that in any case, the commercial grade potatoes consigned to Idaho Gem by Baker are traceable either as "proceeds" of the Heinz seed potato crop or as a "farm product" as defined by I.C. § 28-9-109. ³

The parties in this action stipulated to several facts relevant to the issue of authorization:

On more than one occasion, Heinz was permitted by EIPCA to sell crops as he saw fit provided that the crops were sold for fair market value and that the proceeds from the sale of said crops were applied to the loan balance due EIPCA. This arrangement was applied by EIPCA to most of its agricultural loan customers and is typical in the industry.

EIPCA requires its agricultural borrowers to have proceeds checks drawn payable to both the borrower and EIPCA. If the checks were not drawn jointly to [the] borrower and EIPCA, EIPCA required [the b]orrower to remit the proceeds to EIPCA.

In practice, EIPCA did not require Heinz or other agricultural borrowers to obtain written consent from the EIPCA prior to the sale of crops.

EIPCA did not restrict Heinz in how he disposed of his crops in which EIPCA maintained a security interest other than to require that the crops be sold at fair market value and payments made jointly payable to Heinz and EIPCA. EIPCA also required Heinz to advise EIPCA of all sales.

Heinz would from time to time report to EIPCA the sale that he had or was planning to make for his crops. EIPCA was informed of the sale to Baker.

R. at 32.

From our review of this factual scenario, we determine that this Court's decision in Western Idaho Product. Credit [WIPCA] v. Simplot Feed, 106 Idaho 260, 678 P.2d 52 (1984), requires us to find that EIPCA, by authorizing Heinz's sale of the crops to Baker, thereby forfeited its security interest in the seed potato crop collateral. In that cited case, WIPCA financed crop production of three farming entities ("the debtors") and held perfected security interests in the growing crops. The written security agreement provided that the debtors would not sell the collateral without the consent of WIPCA. In practice, however, WIPCA allowed the debtors to sell the crops as long as WIPCA received the sales proceeds. WIPCA knew that the debtors sold the secured crops without prior notice, and on that particular occasion, knew that the debtors were selling barley to Martin. The barley was shipped to Martin where it was commingled with barley from other sources. Shortly thereafter, Simplot purchased barley from Martin, and fed the barley to cattle at the Simplot Feed Lot. Martin failed to pay the debtors, and WIPCA attempted to enforce its security interest in the barley against Simplot.

We held that when a secured party authorizes a disposition of the collateral, the party purchasing the collateral takes free of the security interest. WIPCA had authorized the debtors to sell the crops in which it had a security interest, and therefore, it lost its security interest in the collateral under the provisions of I.C. § 28-9-306(2). WIPCA, 106 Idaho at 263, 678 P.2d at 55; see also Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (1967) (secured party may consent to sale of collateral and thereby waive his rights in same). A similar situation is presented in the case before us. As the stipulated facts amply demonstrate, EIPCA allowed Heinz to dispose of the collateral without obtaining its prior written consent, on the condition that EIPCA was notified, and the crops were sold for fair market value, with EIPCA receiving the proceeds. In the instant case, it is clear than EIPCA was aware of the Heinz sale to Baker.

EIPCA claims that "the better-reasoned authority suggests that where the [creditor] ⁴ is not paid, the authorization to sell is conditional." We dealt with a similar argument in WIPCA, and found it unpersuasive, holding that I.C. § 28-9-306(3) makes no distinction between conditional or any other kind of authorization. We reasoned in WIPCA:

As between a third party purchaser who agreed to no condition and the security holder which permitted the goods to be placed on the market, clearly the third party has superior right to the goods. Lisbon Bank & Trust Co. v. Murray, 206 N.W.2d 96 (Iowa 1973). In First Nat. Bank, Etc. v. Iowa Beef Processors, supra, [626 F.2d 764 (10th Cir.1980) ] at 769, the Court held:

'We conclude that the policy of the Uniform Commercial Code to promote ready exchange in the marketplace, see Riverside Nat'l Bank v. Law, 564 P.2d 240, 243 (Okl.1977), outweighs the secured party's interest in the collateral under these circumstances. Therefore, we hold that even though the secured party conditions consent on receipt of the proceeds, failure of this condition will not prevent that consent from cutting off the security interest under section 9-306(2).' See also United States v. Hansen, 311 F.2d 477 (8th Cir.1963); Lisbon Bank & Trust Co. v. Murray, supra [206 N.W.2d 96 (Iowa 1973) ].

WIPCA, 106 Idaho at 264, 678 P.2d at 56; see also Trustee Servs. Corp. v. East River Lumber Co. (In re Hodge Forest Indus., Inc.), 59 B.R. 801 (Bankr.D.Idaho 1986) (a secured party's perfected...