Fin-Ag, Inc. v. Watertown Livestock Auction

• Decision Date: 18 June 2008
• Docket Number: No. 24050.,24050.
• Citation: 754 N.W.2d 23,2008 SD 49
• Parties: FIN-AG, INC., Plaintiff and Appellee, v. WATERTOWN LIVESTOCK AUCTION, INC., Defendant and Appellant. and Dacotah Bank, Defendant.
• Court: South Dakota Supreme Court

754 N.W.2d 23

2008 SD 49

FIN-AG, INC., Plaintiff and Appellee, v. WATERTOWN LIVESTOCK AUCTION, INC., Defendant and Appellant. and Dacotah Bank, Defendant.

No. 24050.

Supreme Court of South Dakota.

Argued January 8, 2007.

Decided June 18, 2008.

Appeal from the Circuit Court of the Third Judicial Circuit, Codington County, South Dakota; Robert L. Timm, Judge.

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

Michael A. Henderson of Cadwell, Sanford, Deibert & Garry, LLP, Sioux Falls, SD, for appellant.

ZINTER, Justice.

[¶ 1.] This appeal arises from an action for conversion by Fin-Ag, Inc. against Watertown Livestock Auction, Inc. Fin-Ag alleges it had a perfected security interest in cattle sold at Watertown under the name C & M Dairy. The case involves numerous issues regarding a commission merchant's liability for conversion when the collateral involves farm products covered by the Food Security Act (FSA), 7 USC § 1631 (1985). On cross-motions for summary judgment, the circuit court concluded that Watertown converted Fin-Ag's collateral.

[¶ 2.] This case involves the same debtors¹ and creditor, and the same type of cattle sales considered in Fin-Ag, Inc. v. Cimpl's, Inc., 2008 SD 47, 754 N.W.2d 1, 2008 WL 2469183; Fin-Ag, Inc. v. Pipestone Livestock Auction Market, Inc., and Fin-Ag, Inc. v. South Dakota Livestock Sales of Watertown, Inc., 2008 SD 48, 754 N.W.2d 29, 2008 WL 2469194. In fact, the circuit court's memorandum decision in Fin-Ag, Inc. v. South Dakota Livestock Sales of Watertown was the basis for the circuit court's decision in this case. Because we considered the same core issues² involving virtually identical transactions in the prior cases, we reverse and remand this case for further proceedings in accordance with those decisions.

[¶ 3.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice concur.

[¶ 4.] SABERS and KONENKAMP, Justices, dissent in part and concur in part.

SABERS, Justice (dissenting on all Fin-Ag cases on the FSA issue).³

[¶ 5.] Incredibly, Fin-Ag presents this Court with authority from a neighboring state that is virtually on point to the circumstances of this case; yet, the opinion goes out of its way at every opportunity in its analysis of the issues to arrive at the opposite conclusion of the Hufnagle case. Because I cannot agree with the opinion's analysis and conclusions regarding FSA protection, I dissent.

[¶ 6.] In Hufnagle, the lender, Fin-Ag had a perfected security interest in Buck's corn crops. 720 N.W.2d 579, 580 (Minn. 2006). Fin-Ag also filed an effective financing statement, "which caused the interest to be listed in Minnesota's central filing system." Id. Meschke was a registered farm products dealer and he received the central filing system's list of sellers whose grain was encumbered by security interests. Id. When Meschke bought corn directly from Buck he, with two exceptions, made the checks payable to Buck and Fin-Ag jointly. Id.

[¶ 7.] Later, Meschke bought corn from persons, the Tookers, who claimed they were the sellers. Id. at 583-84. There was no one by the name Tooker on the central filing system list. Id. Meschke bought corn from the Tookers seven different times. Id. The proceeds from these seven transactions were deposited in the debtor's (Buck's) account. Id. Fin-Ag was not made a co-payee on any of these checks. Id.

[¶ 8.] Fin-Ag sued Meschke for conversion after Buck failed to repay Fin-Ag. Id. The Minnesota district court granted summary judgment in favor of Fin-Ag. Id. On appeal, the Minnesota Court of Appeals affirmed. Id.

[¶ 9.] The Minnesota Supreme Court held Meschke was liable for conversion. Id. at 581. In doing so, it noted that it must determine "how section 1631 works in the situation of `fronting' sales. The parties describe `fronting' as being where a seller of farm products that are subject to a security interest has a third party sell them under the third party's name." Id. at 584. The court recognized that "both Meschke and Fin-Ag can be viewed as innocent parties in the sense that they each did everything they were required or expected to do under the FSA." Id.

[¶ 10.] The buyer, Meschke, made arguments that are similar to the Sale Barns' arguments in this case. For instance, Meschke argued that it is difficult for a buyer of farm products to discover a security interest in a fronting situation and lenders are better suited to police these situations. Sale Barns advanced a virtually identical argument.

[¶ 11.] Despite this argument, and the recognition of the difficulty a fronting situation presents for a buyer, the Minnesota Supreme Court found it was "constrained to apply the plain language of the statutes, as enacted by Congress and the Minnesota Legislature, and to follow where they lead." Id. at 585. The court noted that the "created by the seller" language was a serious limitation on the FSA's protections afforded to the buyer. Moreover, the language has come under much criticism, but Congress "essentially incorporated this clause in section 1631 when it attempted to correct some of the other shortcomings, from the perspective of buyers, of UCC section 9-307." Id.

[¶ 12.] Due to this limitation, Meschke could not find protection, even in the fronting situation and even though he was an innocent buyer. The court noted:

The inclusion of the "created by the seller" clause in section 1631 means that the statute does not provide protection for buyers in a fronting situation where the security interest from which protection is sought was not created by the fronting parties. Under the facts of this case, no matter what factual assumptions we make, there are none under which Meschke could take the corn free of Fin Ag's security interest. This is because if we view Buck as the seller, we must conclude that Meschke's rights are subject to Fin Ag's security interest under section 1631 because Fin Ag filed an "effective financing statement" that put Meschke on notice of Fin Ag's security interest in Buck's products. And, if we view the Tookers as the sellers, we must conclude that Meschke's rights are subject to Fin Ag's security interest, under either section 1631 or Minnesota's UCC, because both statutes only protect a buyer from a security interest created by the seller and not from a security interest created by an undisclosed owner, which continues in the product despite the sale.

Id. at 586 (emphasis added). Here, the same result is required, if we view Calvin and Michael Berwald as the seller, then Sale Barns' rights are "subject to Fin-Ag's security interest under section 1631 because Fin-Ag filed an `effective financing statement' that put [Sale Barns] on notice...." Id. Alternatively, if we view C & M Dairy as the seller, then "we must conclude that [Sale Barns]' rights are subject to Fin-Ag's security interest" because under section 1631, a buyer is only protected "from a security interest created by the seller and not from a security interest created by an undisclosed owner." See id.

[¶ 13.] Instead, the opinion distinguishes Hufnagle by declaring "fronting" different than using a d.b.a.⁴ It rationalizes that the Hufnagle court did not "consider the fourth factual scenario that is before this Court, i.e., debtors who created the security interest, and conducted their business under their d.b.a. business name." See Fin-Ag v. Cimpl's, 2008 SD 47, ¶ 31, 754 N.W.2d 1. However, when discussing if C & M Dairy can be a seller under the FSA, the opinion declares that C & M Dairy is an "other business entity," separate and distinct from the Berwalds. Id. ¶ 23 (quoting 7 USC § 1631(c)(10)). The use of a separate and distinct entity to sell cattle subject to a different owner's security interest is factually analogous to Hufnagle, and is fronting. As the Minnesota Supreme Court noted, "[t]he corn [cattle] had been sold to Meschke [Sale Barns] in the names of third persons [separate entity, C & M Dairy] not involved with the debt to Fin-Ag." Hufnagle, 720 N.W.2d at 580. This issue should be decided based on the rationale expressed in Hufnagle.

[¶ 14.] The opinion can call it anything it wants, but it cannot hide what is plain and obvious. In its attempts to decide this case in favor of the Sale Barns, it arrives at some conflicting conclusions. For example, the opinion concludes that C & M Dairy is a "business entity" and therefore separate from Calvin and Michael Berwald and can be a seller under the statute, thus the FSA protects Sale Barns. Then, in the next portion of analysis, C & M Dairy is merely a d.b.a. and cannot be separated from the Berwalds, therefore C & M Dairy created the security interest and again, Sale Barns win. In reality, C & M Dairy is an illegal fiction and definitely a fronting situation. It is not an entity or an alter ego — and certainly not both the "seller" and the "seller who created the security interest."

[¶ 15.] There are two different interpretations of a supposed entity, yet the same strained outcome. When defining "seller," it is inconsistent to say that in one instance C & M Dairy is an entity distinct from the Berwalds, so C & M Dairy can be the seller and claim Sale Barns did not receive notice of Fin-Ag's security interest, and then to say the Berwalds and C & M Dairy are "one and the same" in order to find C & M Dairy is the "seller who created the security interest." In Hufnagle, the Minnesota Supreme Court specifically refused to "define seller two different ways in the same analysis without a significant indication that this was the legislature's intent. No such indication [of legislative intent] exists here." 720 N.W.2d at 588-89. We should not interpret seller two different ways.

[¶ 16.] We certainly should not interpret seller two different ways when many commentators have criticized the limitation "created by the seller" in the context of 9-307, yet the clause has never been amended or eliminated...