Fin-Ag, Inc. v. Cimpl's, Inc., No. 24172.

• Court: Supreme Court of South Dakota
• Writing for the Court: Zinter
• Citation: 2008 SD 47,754 N.W.2d 1
• Decision Date: 18 June 2008
• Docket Number: No. 24172.
• Parties: FIN-AG, INC., Plaintiff and Appellant, v. CIMPL'S, INC., Defendant and Appellee, and Dacotah Bank, Defendant.

754 N.W.2d 1 2008 SD 47 FIN-AG, INC., Plaintiff and Appellant,
v.
CIMPL'S, INC., Defendant and Appellee, and
Dacotah Bank, Defendant. No. 24172. Supreme Court of South Dakota. Argued January 8, 2007. Decided June 18, 2008.

[754 N.W.2d 3]

Jason W. Shanks of May & Johnson, PC, Sioux Falls, SD, and Jonathan K. Van Patten, Vermillion, SD, for appellant.

Michael J. Schaffer, Paul H. Linde of Schaffer Law Office, Prof. LLC, Sioux Falls, SD, for appellees.

ZINTER, Justice.

[¶ 1.] This appeal arises from an action for conversion by Fin-Ag, Inc. against Cimpl's, Inc. Fin-Ag alleges that it had a security interest in cattle Cimpl's purchased, and that Cimpl's converted Fin-Ag's collateral by failing to remit cattle sale proceeds to Fin-Ag. On cross-motions for summary judgment, the circuit court granted summary judgment to each party according to the timing of and participants in each sale. Fin-Ag appeals adverse rulings on those sales in which the circuit court concluded that Cimpl's took free of Fin-Ag's security interest. The principal issue we address is the nature of the protection provided to buyers of farm products under the Food Security Act (FSA), 7 USC § 1631(1985). We affirm.

I.

[¶ 2.] On June 27, 2002, Fin-Ag entered into an Agricultural Security Agreement (ASA) with Berwald Brothers,¹ Calvin Berwald, Michael Berwald, Kimberly Berwald, and Sokota Dairy, LLC (collectively Berwalds). The ASA granted Fin-Ag a security interest in collateral owned by Berwalds, including farm products (cattle). Under the ASA, all proceeds of cattle sales were to be jointly payable to Berwalds and Fin-Ag. The ASA also provided that, except for inventory, no provision of the ASA could be interpreted to authorize any sale of collateral unless authorized by Fin-Ag in writing.

[¶ 3.] On July 2, 2002, Fin-Ag filed a Uniform Commercial Code (UCC) financing statement with the Secretary of State. The parties agree that this qualified as an "effective financing statement" (EFS) under

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the FSA. The UCC financing statement listed Berwalds² as debtors and identified all livestock and farm products as collateral. The EFS portion described the covered farm products as dairy cattle and milk.

[¶ 4.] On August 26, 2002, Fin-Ag and Berwalds executed a promissory note in the amount of $460,000, and on January 8, 2003, they executed a second promissory note in the amount of $4,110,000. The notes were secured by the cattle, as well as the other property described in the ASA. On August 23, 2004, Berwalds defaulted on the promissory notes and filed a Chapter 11 bankruptcy. Berwalds ultimately filed an amended plan of reorganization, which required Berwalds to pay Fin-Ag the entire balance of its loans plus interest, costs, and Fin-Ag's attorney fees. This dispute arose as a result of several pre-default cattle purchases by Cimpl's.

[¶ 5.] Cimpl's is a meat packing plant that purchases cattle for slaughter in the ordinary course of business. It was registered with the South Dakota Secretary of State's central filing system for effective financing statements. Therefore, each month Cimpl's received portions of the master list identifying Fin-Ag's debtors and collateral subject to security interests.

[¶ 6.] When Cimpl's purchased cattle, the person delivering the cattle signed a "Cattle Receiving Ticket" showing the delivery information. The receiving ticket specifically identified the seller, as well as the number, condition, and weight of the cattle. The cattle at issue were delivered by Austin, Calvin, Michael, or Arlen Berwald. Cimpl's was informed the cattle were being sold by "C & M Dairy."³ Cimpl's was not aware that C & M Dairy was a d.b.a. used by Calvin and Michael Berwald to buy and sell cattle.⁴

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[¶ 7.] Because C & M Dairy was the only entity identified as the seller at the time of sale, Cimpl's reviewed the most recent master list to determine if C & M Dairy was subject to an EFS. C & M Dairy was not on the master list, and therefore Fin-Ag was not made a co-payee on the proceeds checks. Instead, Cimpl's issued the checks to C & M Dairy in care of Arlen Berwald.⁵ Ultimately, the sales proceeds were not remitted to Fin-Ag by C & M Dairy, Arlen Berwald or the Berwalds.⁶ The sales at issue involve approximately 650 head of cattle sold between April 13, 2003, and July 23, 2004, for $283,973.55.⁷

[¶ 8.] On April 13, 2005, Fin-Ag commenced this action against Cimpl's. Fin-Ag alleged that Cimpl's converted Fin-Ag's collateral by not remitting the proceeds to Fin-Ag or listing Fin-Ag as a co-payee on the checks. The parties filed cross-motions for summary judgment. The circuit court entered summary judgment in favor of Fin-Ag in the amount of $3,298.14 for proceeds Cimpl's remitted to Cal Berwald Dairy because Cal Berwald was on the master list. The court granted summary judgment in favor of Cimpl's for sales occurring prior to April 13, 2003, as they were barred by the statute of limitations in SDCL 57A-9-609.1. These two rulings have not been appealed. The court finally granted summary judgment in favor of Cimpl's for its remaining purchases from C & M Dairy. The essence of the court's ruling was that: (1) C & M Dairy was the seller for purposes of notice under the FSA; (2) C & M Dairy was not on the master list and therefore Cimpl's did not receive written notice of Fin-Ag's security interest as required by the FSA; and as a result, (3) the FSA protected Cimpl's as a buyer in the ordinary course for those remaining purchases. Thereafter, Cimpl's filed an affidavit and notice of taxation of costs (disbursements). Fin-Ag objected to portions of Cimpl's claim. The circuit court granted Cimpl's disbursements in the amount of $1,848.62.

[¶ 9.] Fin-Ag appeals, raising two issues:

Whether the FSA protected Cimpl's from liability for conversion.

Whether the circuit court abused its discretion in awarding Cimpl's disbursements.

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II. A. FSA Protection from Conversion in Purchasing Farm Products in the Ordinary Course of Business

[¶ 10.] Fin-Ag argues that FSA protection for the buyers of farm products was not available to Cimpl's for two reasons. First, Fin-Ag argues that for purposes of notice, and despite the fact that C & M Dairy was the only identified seller in each instance: (1) Berwalds were the sellers; (2) Berwalds were listed as sellers on the master list; and therefore, (3) Cimpl's had written notice of Fin-Ag's security interest thereby disqualifying Cimpl's from protection under the notice exception of the FSA. Second, Fin-Ag points out that the FSA limits Cimpl's protection to take free of security interests "created by [Cimpl's] seller." See 7 USC § 1631(d). Therefore, Fin-Ag argues that even if C & M Dairy was the "seller" for purposes of the notice exception of the FSA, C & M Dairy did not create the security interest, Berwalds did. Accordingly, Fin-Ag argues that FSA protection was unavailable under the "created by the seller" limitation of the FSA, and Cimpl's was liable for the state law claims of conversion.

[¶ 11.] Our standard of review of the circuit courts summary judgment 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.

Consol. Nutrition, L.C. v. IBP, Inc., 2003 SD 107, ¶ 8, 669 N.W.2d 126, 129 (citations omitted) (alterations in original).

[¶ 12.] To develop a proper framework for the analysis of the issues, we restate the history and purpose of the FSA. "Prior to 1985, the UCC generally reflected a policy that favored the rights of the holders of security interests." Fin Ag, Inc. v. Hufnagle, Inc., 720 N.W.2d 579, 581 (Minn.2006). Under the UCC, a security interest in goods continued despite sale of those goods by the debtor. Id. (citing UCC § 9-306) (1972) (amended 2000); 3B ULA 33-34 (2002). Although the UCC recognized an exception for "buyers in the ordinary course of business," that exception did not apply to buyers of farm products. Id. (citing UCC § 9-307) (1972) (amended 2000); 3B ULA 154 (2002). Therefore, buyers of farm products were not protected from security interests created by their sellers. Id. Congress noted that this "farm products exception ... force[d] innocent buyers of farm products to become unwilling loan guarantors, in essence assuming the credit supervision responsibilities that rightly belong with the lender who [was] making the profit off the loan to begin with." H.R. Rep. No. 99-271(I) at 108-9 (1985), U.S.Code Cong. & Admin.News 1985 at 1103, 1209-10.

[¶ 13.] Because Congress was concerned with this impact of the UCC on buyers of farm products, it enacted the FSA. Hufnagle, 720 N.W.2d at 582. The Congressional findings for enactment of the FSA are particularly relevant in this case:

Congress finds that —

(1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser

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does not know that the sale of the products violates the lender's security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender;

(2) these laws subject the purchaser of farm products to double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender;

(3) the exposure of purchasers of farm products to double payment inhibits free competition in the market for farm products; and

(4) this exposure...