Fin Ag, Inc. v. Hufnagle, Inc., No. A04-2176.

Decision Date10 August 2006
Docket NumberNo. A04-2176.
Citation720 N.W.2d 579
PartiesFIN AG, INC., Respondent, v. HUFNAGLE, INC., f/k/a P & H Trucking, et al., Defendants, Kent Meschke Poultry Farms, Inc., Appellant.
CourtMinnesota Supreme Court

John Brakke, Vogel Law Firm, Fargo, ND, for Respondent.

Britton David Weimer, Blackwell Igbanugo, P.A., John G. Berg, Minneapolis, MN, for Appellant.

Paul A. Banker, Esq., Lindquist & Vennum P.L.L.P., Minneapolis, MN, for Amicus Curiae.

Heard, considered, and decided by the court en banc.

OPINION

HANSON, Justice.

This case concerns the impact of grain "fronting" on the respective rights of buyers of farm products and those who hold a security interest in those products. The security interest holder, respondent Fin Ag, Inc., brought suit against the buyer, appellant Kent Meschke Poultry Farms, Inc. (Meschke), for conversion of corn grown by the debtors, Larry and Ronda Buck, doing business as Buck Farms (Buck). The corn had been sold to Meschke in the names of third persons not involved with the debt to Fin Ag. The district court granted summary judgment to Fin Ag, holding that, under 7 U.S.C. § 1631 (2000) — enacted as part of the federal Food Security Act of 1985(FSA) — the registration of Fin Ag's security interest in Buck's name put Meschke on notice of the interest and that the appearance of third persons as the sellers did not protect Meschke from the security interest created by Buck. The court of appeals affirmed, holding that Buck had constructive possession of the corn and Meschke had constructive knowledge of the security interest against Buck's corn. Meschke sought further review, arguing that section 1631 requires actual, not constructive, possession or knowledge and that a buyer from a disclosed seller takes title free of a security interest that is in the name of an undisclosed owner. We affirm.

A. The Statutory Framework.

To develop a proper framework for the analysis of this case, we must consider the interaction between the state and federal statutes that address the conflict between the rights of buyers of farm products and the rights of those who hold a security interest in those farm products. Because the Minnesota statutes governing security interests in farm products have been revised from time to time, it is helpful to first consider what that interaction was when Congress first enacted 7 U.S.C. § 1631 in response to perceived shortcomings in the Uniform Commercial Code (UCC).

Prior to 1985, the UCC generally reflected a policy that favored the rights of the holders of security interests, presumably to promote the availability of credit on reasonable terms. Thus, UCC section 9-201 recognized that "a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors." U.C.C. § 9-201 (1972) (amended 2000), 3A U.L.A. 651-52 (2000). And the general rule embodied in UCC section 9-306 was that a security interest in goods continues despite the sale of those goods by the debtor. U.C.C. § 9-306 (1972) (amended 2000), 3B U.L.A. 33-34 (2002). That general rule was subject to an exception under UCC section 9-307, where a "buyer in the ordinary course of business"1 could take the goods free of some security interests, but only those that were "created by his seller." U.C.C. § 9-307 (1972) (amended 2000), 3B U.L.A. 154 (2002). But that exception did not apply to buyers of "farm products." Id. Thus, the UCC protected buyers in the ordinary course of business only from security interests created by the buyer's seller; and buyers of farm products were excluded from even this narrow protection.2

The practical effect of the exclusion of farm products from UCC section 9-307 was that buyers of farm products became guarantors of their seller's debt. As a result, more than a third of the states amended UCC section 9-307 in various ways, generally attempting to reduce the bias in favor of lenders by providing mechanisms that would assist buyers in protecting their interests. Charles W. Wolfe, Section 1324 of the Food Security Act of 1985: Congress Preempts the "Farm Products Exception" of Section 9-307(1) of the Uniform Commercial Code, 55 UMKC L.Rev. 454, 461-64 (1987).3 The various state amendments were not consistent with one another and diluted the uniformity goals of the UCC. Wolfe, supra, at 455, 461-64.

Congress became concerned with the impact of the UCC on buyers of farm products and with the inconsistent amendments to UCC section 9-307 by many states. Wolfe, supra, at 463. Often, buyers of farm products did not know of a security interest or have any practical way to discover it and thus were required to pay twice for the product — once to the seller and a second time to the security holder if the seller defaulted on the debt. See 7 U.S.C. § 1631(a). To address this situation, Congress in 1985 enacted 7 U.S.C. § 1631 (titled "Protection for purchasers of farm products"). Where it applies, section 1631 preempts all conflicting state laws. See 7 U.S.C. § 1631(d) (prefacing the statutory rule by stating "notwithstanding any other provision of Federal, State, or local law").

The title and congressional findings of section 1631 suggest that it was intended to protect buyers of farm products from having to make "double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender." 7 U.S.C. § 1631(a)(2). But the protection actually provided by section 1631 was not as sweeping as the statement of intent might suggest. As explained below, section 1631 did not provide that the buyer would take free of all security interests, but instead only established a notice system that provided a mechanism for buyers to protect themselves from some, but not all, security interests.

Section 1631 established, contrary to the UCC, that a buyer of farm products in the ordinary course of business takes free of security interests created by the seller. Section 1631(d) provides:

Except as provided in subsection (e) of this section and notwithstanding any other provision of Federal, State, or local law, 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.

7 U.S.C. § 1631(d) (emphasis added). Notably, section 1631(d) adopted the same narrow scope of protection as provided in section 9-307 of the UCC—it only provides protection against a security interest "created by the seller." Therefore, this language provides no protection for a buyer of farm products from any valid security interest that was created by someone other than the immediate seller.

The federal statute does provide exceptions to section 1631(d). 7 U.S.C. § 1631(e). Under these exceptions a buyer of farm products takes subject to a security interest created by the seller when notice has been given by one of three specified notice procedures. Id. Two of the notice procedures apply where states have established central filing systems to provide notice to registered farm product buyers. Id.

Minnesota created such a central filing system in 1992. See generally Act of April 27, 1992, ch. 525, 1992 Minn. Laws 1322, 1322-34 (codified as amended at Minn. Stat. ch. 336A (2004)). Under Minnesota's system, a lender is authorized to register the security interest with the Secretary of State by filing an "effective financing statement." Minn.Stat. § 336A.04, subd. 1 (2004). The Secretary of State compiles a list of debtors whose farm products are subject to security interests and makes this list available to registered farm products dealers and to others on request. Minn.Stat. § 336A.08 (2004). Before purchasing farm products, a buyer is expected to check the list. Cf. 7 U.S.C. § 1631(e)(2, 3).

At the time of the transactions at issue here, Minnesota's version of UCC section 9-307 had been modified from the uniform provision. Between 1986 and 2001, Minnesota's version of that section eliminated the exclusion for buyers of farm products from the buyer in the ordinary course exception, meaning that a buyer of farm products could take free of a security interest "created by his seller" if he qualified as a "buyer in the ordinary course of business." See Act of March 14, 1986, ch. 322, § 2, 1986 Minn. Laws 20, 21 (codified as Minn.Stat. § 336.9-307 (1998)); Act of April 11, 2000, ch. 399, art. I, § 40, 2000 Minn. Laws 569, 610 (codified as Minn. Stat. § 336.9-320 (2004)).4

To summarize, under 7 U.S.C. § 1631 a buyer of farm products in the ordinary course of business (1) takes free of security interests created by the seller, unless notice of the seller-created security interest has been given by one of three specific notice procedures, which include the Minnesota central filing system provided under chapter 336A; but (2) takes subject to security interests created by someone other than the seller. Similarly, under Minnesota's version of the UCC applicable at the time of the subject transactions, a buyer of farm products in the ordinary course of business (1) takes free of security interests created by the seller, but (2) takes subject to a security interest created by someone other than the seller.

B. The Summary Judgment Record.

With this legal framework in mind, we turn to the undisputed facts in this record. In 1999, Fin Ag made an operating loan of $249,995 to Buck. As collateral for this loan, Buck granted Fin Ag a security interest in Buck's corn crops for 1999. Fin Ag filed UCC financing statements in Hubbard and Wadena Counties (where the crops were grown), but not in Itasca County (where the Bucks resided). Fin Ag also filed an "effective financing statement" with the Minnesota Secretary of State, which caused the security interest to be listed in Minnesota's central filing system. See Minn.Stat. §...

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