Fin-Ag v. Pipestone Livestock Auction

• Decision Date: 18 June 2008
• Docket Number: No. 23984.,No. 23982.,23982.,23984.
• Citation: 754 N.W.2d 29,2008 SD 48
• Parties: FIN-AG, INC., Plaintiff and Appellee, v. PIPESTONE LIVESTOCK AUCTION MARKET, INC., Defendant and Appellant, and Dacotah Bank, Defendant. Fin-Ag, Inc., Plaintiff and Appellee, v. South Dakota Livestock Sales of Watertown, Inc., Defendant and Appellant, and Dacotah Bank, Defendant.
• Court: South Dakota Supreme Court

754 N.W.2d 29

2008 SD 48

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

Fin-Ag, Inc., Plaintiff and Appellee, v. South Dakota Livestock Sales of Watertown, Inc., Defendant and Appellant, and Dacotah Bank, Defendant.

No. 23982.

No. 23984.

Supreme Court of South Dakota.

Argued November 29, 2006.

Order Granting Rehearing Pursuant to SDCL 15-24-4 December 17, 2007.

Argued on Rehearing March 28, 2008.

Decided June 18, 2008.

Jason W. Shanks of May & Johnson, P.C. Sioux Falls, SD and Jonathan K. Van Patten, Vermillion, SD, Attorneys for appellees.

Tim R. Shattuck of Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, SD for appellant in No. 23982.

Michael J. Schaffer of Schaffer Law Office, Prof. L.L.C. Sioux Falls, SD; E. Lawrence Oldfield, Oldfield Fox & Sarna, P.C., Oak Brook, IL, Attorneys for appellant in No. 23984.

ZINTER, Justice.

[¶ 1.] These consolidated appeals arise out of separate but related actions for conversion. Both actions were commenced by Fin-Ag, Inc., an agricultural lender, against two public livestock auction barns: Pipestone Livestock Auction Market, Inc. (Pipestone) and South Dakota Livestock Sales of Watertown, Inc. (SD Livestock) (collectively referred to as Sale Barns).¹ Fin-Ag alleged that it had a perfected security interest in cattle sold at Sale Barns under the name C & M Dairy, and that Sale Barns converted the collateral by failing to remit the sale proceeds to Fin-Ag. In the action against Pipestone, the circuit court (Judge Kean, Retired) granted summary judgment in favor of Fin-Ag on some sales and in favor of Pipestone on other sales. In the action against SD Livestock, the circuit court (Judge Timm) granted summary judgment in favor of Fin-Ag. The principal difference between the courts' rulings involves different interpretations of the Food Security Act (FSA), 7 U.S.C. § 1631 (1985). We agree with the Pipestone court's view of the FSA. Nevertheless, because a SDCL 57A-9-609.1 statute of limitation question prevents a majority decision in favor of Fin-Ag on some FSA seller issues, and because of a number of conversion issues, both decisions are affirmed in part, reversed in part, and remanded for reconsideration consistent with this opinion.

I.

[¶ 2.] On June 27, 2002, Fin-Ag entered into an Agricultural Security Agreement (ASA) with Berwald Brothers,² 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 no provision of the ASA could be interpreted to authorize non-inventory sales of collateral unless authorized by Fin-Ag in writing.

[¶ 3.] On July 2, 2002, Fin-Ag filed a UCC Financing Statement with the Secretary of State. The parties agree that this qualified as an effective financing statement (EFS) under the FSA. The EFS identified Berwald Partnership, Calvin Berwald, Michael Berwald, Kimberly Berwald, and Sokota Dairy, LLC as debtors. Although all livestock and farm products were listed as collateral on the UCC-1, the EFS portion of the financing statement only 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 collateral identified in the ASA. On August 23, 2004, Berwalds defaulted on the promissory notes and filed Chapter 11 bankruptcy.

[¶ 5.] 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. Fin-Ag accepted this plan, and Fin-Ag receives monthly payments of $35,034.09. In the event Berwalds default on those payments, Fin-Ag has the right to immediately liquidate and sell its collateral to satisfy the remaining debt. Fin-Ag acknowledges that the value of its collateral, including livestock, crops, equipment and real estate, exceeds the balance of the debt.

[¶ 6.] These cases were commenced as a result of several pre-default sales of cattle at the Sale Barns. Both Sale Barns are public auction barns (commission merchants) registered with the Secretary of State's central filing system for effective financing statements. Therefore, each month they received portions of the master list identifying Fin-Ag's debtors and collateral subject to an EFS. Most of the cattle at issue were, however, sold under the name C & M Dairy, which is a d.b.a. for Calvin and Michael Berwald, and Fin-Ag did not include C & M Dairy on its EFS.

[¶ 7.] The Sale Barns' business practices were quite similar. When cattle were delivered to each facility, a "yard man" asked the delivery person the name of the seller. SD Livestock also requested the identity of the owner. For each of the sales at issue except two,³ the yard man was informed that the seller and/or owner of the cattle was C & M Dairy. Based on this information, the yard man completed a consignment ticket or "dock-in sheet" identifying the seller as C & M Dairy. Office personnel then reviewed the most recent Secretary of State's master list to determine if C & M Dairy's name appeared. Because C & M Dairy was not listed as a debtor, Fin-Ag was not made a co-payee on the proceeds checks from the cattle sales. Instead, SD Livestock generally issued checks to C & M Dairy alone. Pipestone generally issued checks to either C & M Dairy or to itself on C & M Dairy's account to pay for C & M Dairy's cattle purchases at that facility.⁴ Ultimately, none of the proceeds at issue were remitted to Fin-Ag by C & M Dairy, Berwalds or Sale Barns.

[¶ 8.] The following sales and purchases, involving the following sellers and payees, are involved in these appeals:

Transactions at Pipestone

February 5, 2004: C & M Dairy sold five head of cattle through Pipestone for $3,348.06. Pipestone then issued a check to C & M Dairy for $3,348.06.

February 10, 2004: Calvin Berwald sold one head of cattle through Pipestone for $851.99. Pipestone then issued one check to Calvin Berwald for $351.99 and one check to C & L Farms for $500.⁵

February 19, 2004: C & M Dairy purchased four head of cattle for $4675.

February 24, 2004: C & M Dairy sold nine head of cattle through Pipestone for $5,221.51. Pipestone then issued one check to C & M Dairy for $546.51 and one check to itself for $4,675 to pay for cattle previously purchased by C & M Dairy.

March 18, 2004: C & M Dairy purchased six head of cattle for $7,575.

March 30, 2004: C & M Dairy sold twelve head of cattle through Pipestone for $8,045.79. Pipestone then issued one check to C & M Dairy for $470.79 and one check to itself for $7,575 to pay for cattle previously purchased by C & M Dairy.

April 15, 2004: C & M Dairy purchased fifteen head of cattle for $19,925.

April 20, 2004: C & M Dairy sold thirteen head of cattle through Pipestone for $12,538.20. Pipestone then issued a check to itself for $12,538.20 to pay for cattle previously purchased by C & M Dairy.

April 27, 2004: C & M Dairy sold ten head of cattle through Pipestone for $6,724.42. Pipestone then issued a check to itself for $6,724.42 to pay for cattle previously purchased by C & M Dairy.

Transactions at SD Livestock

July 24, 2002-June 16, 2004: C & M Dairy, on forty-eight separate occasions, sold a total of 546 head of cattle for $272,581.85 through SD Livestock. SD Livestock issued checks to C & M Dairy for that amount.

July 28, 2004: Michael Berwald sold thirteen head of cattle through SD Livestock for $12,007.60. SD Livestock then issued a check for $12,000.60 jointly payable to Michael Berwald and Dacotah Bank.

[¶ 9.] Fin-Ag initially sued Pipestone on December 17, 2004, and SD Livestock on January 4, 2005. In both cases, Sale Barns raised SDCL 57A-9-609.1 as a defense. That statute requires a lender such as Fin-Ag to "offer" to file a criminal complaint against its debtor before commencing a conversion action against an innocent third party. After apparently realizing that it had not offered to file a complaint before commencing the suits, Fin-Ag sent counsel for Sale Barns and Berwalds a letter, dated February 22, 2005, stating, "pursuant to SDCL 57A-9-609.1, Fin-Ag, Inc. hereby offers to file against the debtors, Berwald Partnership, Calvin Berwald, Michael Berwald, Kimberly Berwald, Sokota Dairy, LLC, a complaint as defined [in] SDCL 23A-2-1." After sending this letter, Fin-Ag re-filed and re-served identical summons and complaints on Sale Barns on March 10, 2005.

[¶ 10.] The parties filed cross-motions for summary judgment in both cases.

The Pipestone court (Judge Kean)

[¶ 11.] The Pipestone court held that: (1) Fin-Ag's offer complied with SDCL 57A-9-609.1; (2) C & M Dairy was the seller under the FSA; (3) because C & M Dairy was not a listed debtor on Fin-Ag's EFS, Pipestone took the cattle free of Fin-Ag's security interest under the FSA for the February 5, 2004 sale in which Pipestone acted as a commission merchant; (4) for the remaining sales, the FSA did not protect Pipestone because Pipestone was acting as a lender when it applied sale proceeds to C & M Dairy's account at Pipestone for prior purchases; and, (5) Pipestone's application of the proceeds to its account interfered with Fin-Ag's security interest, rendered Pipestone liable for conversion, and Fin-Ag suffered compensable damages.

SD Livestock court (Judge Timm)

[¶ 12.] The SD Livestock court held that: (1) Fin-Ag's offer complied with SDCL 57A-9-609.1; (2) Berwalds, not C & M Dairy, were the sellers under the FSA; (3) because Berwalds were listed as debtors on the EFS, SD Livestock had notice of, and was subject to, Fin-Ag's security...