Ensminger v. Burton, No. WD

• Decision Date: 15 January 1991
• Docket Number: No. WD
• Citation: 805 S.W.2d 207
• Parties: 14 UCC Rep.Serv.2d 900 Ira E. ENSMINGER and Esther Ensminger, Appellants, v. Elroy BURTON, E.H. Fowler and Warsaw Auction Co., Respondents. 42594.
• Court: Missouri Court of Appeals

Page 207

805 S.W.2d 207

14 UCC Rep.Serv.2d 900

Ira E. ENSMINGER and Esther Ensminger, Appellants, v. Elroy BURTON, E.H. Fowler and Warsaw Auction Co., Respondents.

No. WD 42594.

Missouri Court of Appeals Western District.

Jan. 15, 1991.

Motion for Rehearing and/or Transfer to

Supreme Court Denied March 5, 1991.

Application to Transfer Denied April 9, 1991.

Kenneth O. McCutcheon, Jr., Versailles, for appellants.

Peggy D. Richardson, Jefferson City, for respondents.

Before KENNEDY, P.J., and SHANGLER and GAITAN, JJ.

SHANGLER, Judge.

The plaintiffs Ensminger brought an action for the conversion of their cattle against the defendants livestock auction facilities, Warsaw Auction Company and the partnership Burton and Fowler, doing business as Central Missouri Sales Co. The claim was tried to the court and was determined in favor of the defendants. The court entered findings of fact and conclusions of law with the judgment. The plaintiffs Ensminger appeal.

The Ensmingers are cattle breeders, and in January of 1980 sold $27,000 worth of cattle to one Lawrence Arnold, and took a security interest in the cattle. They did not know Arnold, who also raised livestock and bought and sold cattle on a regular basis. The Ensmingers assumed that Arnold was a farmer and that the cattle were to be used in the farming operation. The security agreement prohibited the sale of any of the secured cattle without the prior consent of the Ensmingers and entitled them to immediate possession of the cattle upon default.

In the fall of 1980, Arnold sold a portion of the cattle and offspring to a third party. The Ensmingers financed the purchase and Arnold was given credit for the selling price. The balance of the note was not paid when due in January of 1981, but was renewed for another year. In February of 1981, the Ensmingers sold additional cattle and a truck and trailer to Arnold for $40,000, and took a promissory note for the purchase price and a security interest in the property. In December of 1981 the two notes were consolidated into a new one-year obligation for $56,499.11. The Arnolds, husband and wife, then executed a security agreement and financing statement, and listed as collateral the cattle, truck, trailer and "all other cattle now owned and hereafter acquired plus increase." The financing statement was duly recorded on January 8, 1982, in Pettis County, where the Arnolds lived and the cattle were to be kept.

The defendants Warsaw Auction Co. and the Central Missouri Sales Co. partnership were in the business of selling livestock on consignment for a fee. Between March 1, 1982, and May 23, 1983, Arnold sold $22,116.39 worth of cattle through the defendant Central Missouri Sales Co. Between January 26, 1982, and April 12, 1983, Arnold sold $3,359.20 worth of cattle through defendant Warsaw Auction Co. The defendants each received a commission fee for the service. Arnold was given a receipt from each auction house upon the delivery of the cattle for sale, which described him as seller of cattle, described the cattle to be sold and the charges to be assessed against the auction price. The net proceeds of the sales were issued to Arnold. The cattle were sold without the knowledge or consent of the Ensmingers. They received none of the proceeds. The defendant auction houses had no actual knowledge that the Ensmingers claimed a security interest in those cattle and made no investigation to determine if any security interest existed.

The promissory note for $56,499 became due in December of 1982, and no payments had been made. Arnold was given an extension of time, and the grants of extension continued through June of 1983. The Ensmingers brought an action in replevin against the Arnolds for the return of the secured cattle or money damages. Sometime thereafter, the Arnolds filed a petition in bankruptcy, and listed the Ensmingers as creditors. They then learned that the Arnolds did not have the secured cattle. Of the debt owed them by the Arnolds, $25,800 was non-dischargeable. The Ensmingers brought a criminal charge against Arnold for selling secured property. Arnold returned the secured truck to them, and they sold the vehicle for $2500. The trailer had been wrecked by Arnold and abandoned. After the criminal charge was brought, Arnold paid the Ensmingers $10,000 in cash.

The trial court denied the Ensminger claim for conversion. The conclusions of law that elaborated the judgment acknowledged the principle of Farmers State Bank v. Stewart, 454 S.W.2d 908, 915 (Mo. banc 1970), that

[A]n agent, factor, commission merchant or auctioneer who receives property from his principal and sells it and pays the proceeds of the sale to him is guilty of conversion if the principal has no right to sell the property, even though the agent acts without the knowledge of the defect in title.

The court determined nevertheless that Stewart does not discuss or apply the Uniform Commercial Code to come to opinion, and so was irrelevant to the adjudication of the Ensminger claim. The court concluded that the Uniform Commercial Code governed the action, particularly as expounded in United States v. Hext, 444 F.2d 804 (5th Cir.1971) and as applied to selling agents.

The rationale of judgment rests upon a progression of legal premises that intermix the provisions of the Uniform Commercial Code and extra-Code tort principles. The rationale commences with the fact that the transfer by Arnold of the cattle to the auction houses for sale without consent of the Ensmingers constituted a default under the security agreement, and proceeds on the proposition of law that under its terms the Ensmingers as secured parties had the right to take possession of the collateral. § 400.9-503, RSMo 1986. The Ensmingers accordingly had the legal right to possession of the cattle at the time of their removal for sale and the sale constituted a conversion. Stewart, 454 S.W.2d at 915. The rationale also adopts the holding that an auctioneer, who without authority from the secured party sells the collateral delivered by a debtor and turns the proceeds over to the debtor, is liable to the secured party in conversion even though the auctioneer acted in good faith and without knowledge of the secured interest. Id.

The court concluded nevertheless that the Uniform Commercial Code so impinged as to foreclose any liability for conversion against the auction house marketing agent.

The court derived its judgment from the interplay of numerous provisions of Article 9. Section 400.9-109(3), RSMo 1986, defines farm products as "crops or livestock or supplies used in farming operations...." Farm products become inventory "if they are held by a person who holds them for sale or lease...." § 400.9-109(4), RSMo 1986. A buyer in ordinary course of business other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller. ¹ § 400.9-307(1), RSMo 1986. Farm products transferred by a farmer to a marketing agency for sale--that is, to a person not engaged in farming operations--"cease to be 'farm products' [and] become inventory." § 400.9-109 Comment 4, RSMo 1986.

The court reasoned from these provisions and the facts found to a judgment of the non-liability of the defendant auction houses to the secured parties. It reasoned that Arnold was a farmer, "a debtor in possession, who bred livestock," goods that were farm products in his hands. § 400.9-109(3). The security agreement specified that the cattle--the collateral goods--were to be used for farming, and so not meant to finance an inventory. As farm products in the hands of Arnold, notwithstanding a sale, a security interest continued in the collateral and identifiable proceeds received by the debtor. § 400.9-306(2). The security interest continued in the collateral even as against a buyer in ordinary course of farm products from a person engaged in farm operations. § 400.9-307(1). Arnold, however, delivered the cattle to the defendant commission merchants for sale. The auction houses were in the business of selling goods of that kind, and the cattle were sold in the regular course of that business. Thus [the progression to judgment concludes], the farm products in the hands of Arnold became inventory in the hands of the defendants, "taken by a buyer in ordinary course of business free of any security interest created by the seller."

This analysis validly explains the Code mechanism whereby an ordinary course buyer of agricultural goods, once farm products but then inventory, takes them free of any security interest. It does not, however, explain any comparable Code mechanism whereby an auctioneer who markets for a debtor agricultural goods that are subject to a security interest is exempted from liability to the creditor for conversion of those goods. Indeed, Hext --the authority that the defendant auction houses argue to relieve them of liability for conversion of the secured cattle and adopted by the trial court as the law of the case--acknowledges that the Code does not deal with the tort law of conversion. Hext, 444 F.2d at 811, n. 21. Nor does the Code deal with the conversion liability of commission agents. First Nat'l Bank v. Southwestern Livestock, Inc., 859 F.2d 847, 849 (10th Cir.1988). It is a remedy, rather, as may be provided by other state law.

Conversion is the wrongful exercise of dominion or ownership over a chattel. Commercial Credit Corp. v. Joplin Auto. Auction Co., 430 S.W.2d 440, 443 (Mo.App.1968). The gist of the modern action, whatever the actual variety, is tortious interference with the right of possession. St. Louis Fixture & Show Case Co. v. F.W. Woolworth Co., 232 Mo.App. 10, 88 S.W.2d 254, 263[8-11] (1935); Prosser & Keeton on The Law of Torts § 19, pp. 93-100 (5th ed. 1984). The most common manner in which the tort is committed is by the unauthorized transfer or disposal of possession of the chattel to one...