First Bank v. Eastern Livestock Co., Civ. A. No. J92-0469(L)(C).

• Decision Date: 27 July 1993
• Docket Number: Civ. A. No. J92-0469(L)(C).
• Citation: 837 F. Supp. 792
• Parties: FIRST BANK, Plaintiff, v. EASTERN LIVESTOCK CO., Defendant.
• Court: U.S. District Court — Southern District of Mississippi

837 F. Supp. 792

FIRST BANK, Plaintiff, v. EASTERN LIVESTOCK CO., Defendant.

Civ. A. No. J92-0469(L)(C).

United States District Court, S.D. Mississippi, Jackson Division.

July 27, 1993.

Dennis Horn, Horn & Payne, Jackson, MS, for plaintiff.

Edward P. Lobrano, Jr., Jackson, MS, for defendant.

MEMORANDUM OPINION AND ORDER

TOM S. LEE, District Judge.

This cause is before the court on the motion of plaintiff First Bank and the cross motion of defendant Eastern Livestock Company (Eastern) for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Each party has responded to the motion of the other and the court has considered the memoranda of authorities, together with attachments, submitted by the parties. The court concludes, based on its review of applicable authorities and its evaluation of the parties' evidence, that both parties' motions must be denied.

FACTS

Eastern is a company which is engaged in the day-to-day purchase of farm products (cattle). Beginning in January 1989, Eastern engaged in cattle purchase and sales transactions with one Harry Wells, an individual in the business of buying and selling cattle. Through a series of cattle purchase confirmation contracts between Wells and Eastern, Wells took delivery of cattle from Eastern over a period of months and, after "fattening" the cattle, resold the cattle to Eastern by a date agreed upon by those parties in their contracts and at a prearranged price per pound. On May 23, 1989, Eastern tendered to Wells a check in the amount of $253,647.92, representing payment for the fatted cattle that Wells resold to it under the contracts.

First Bank, contending that it held a prior perfected security interest as to the cattle involved in these transactions, brought this action for conversion against Eastern seeking to recover the full amount paid by Eastern to Wells. On its present motion for summary judgment, First Bank alleges that it did all that was necessary under the law to perfect its security interest in the cattle which Eastern purchased from Wells and that Eastern, despite having both actual and constructive notice of the Bank's lien, paid the entire purchase price for the cattle to Wells alone, in violation of the Bank's security interest. Finally, First Bank avers that Wells, though indebted to it for a sum in excess of the $253,647.92 paid to him by Eastern, has never accounted to or paid First Bank any of the money which Eastern paid to him. Thus, First Bank argues that it is entitled to summary judgment against Eastern on its complaint for conversion. Eastern denies that First Bank is entitled to judgment in its favor, and claims, to the contrary, that judgment should be entered for Eastern since First Bank did not have a perfected security interest in the subject cattle.

One who violates a valid security interest of a financial institution by not accounting to that financial institution for its security interest is subject to liability for conversion of the institution's funds. See Oxford Production Credit Ass'n v. Dye, 368 So.2d 241 (Miss. 1979); United States v. Harrell's Stockyards, Inc., 652 F.Supp. 452 (S.D.Miss.1987). The issue presented by this case is whether Eastern purchased cattle from Wells subject to a prior perfected security interest by First Bank. The answer to the question depends, ultimately, on whether First Bank had a valid security interest in the cattle that was the subject of the Eastern/Wells transaction and if so, whether it complied with the requirements of state and federal law pertaining to the giving of notice of its alleged security interest to prospective buyers of the cattle, including Eastern.

THE FOOD SECURITY ACT AND MISSISSIPPI'S CENTRAL FILING SYSTEM

In 1985, Congress, finding that certain State laws allowed a secured lender to "enforce liens against a purchaser of farm products even if the purchaser did not know that the sale of the products violated the lender's security interest in the products, lacked any practical method for discovering the existence of the security interest, and had no reasonable means to ensure that the seller used the sales proceeds to repay the lender," 7 U.S.C. § 1631(a), passed the 1985 Farm Bill, popularly known as the Food Security Act (the FSA), "to remove the burden on and obstruction to interstate commerce in farm products" caused by such State laws, 7 U.S.C. § 1631(b). In order to make information more readily available to purchasers of farm products, the FSA provides for the establishment by each state of a "central filing system" in order that lenders may file "effective financing statements ... on a statewide basis." 7 U.S.C. § 1631(c)(2). This is accomplished by the lender's filing of the prescribed financing statement with the office of the State's Secretary of State. Under the FSA, the State's Secretary of State is required to maintain a master list of all financing statements filed by lenders, and to make that list available on a regular basis to buyers of farm products who register to receive information concerning debtors. 7 U.S.C. § 1631(c)(2)(D). Buyers who do not register pursuant to subsection (c)(2)(D) may nevertheless receive information concerning a debtor by requesting such information of the Secretary of State in accordance with the procedures established by the FSA.

On December 24, 1986, following Congress' enactment of the FSA, Mississippi's Secretary of State prescribed regulations for the implementation of a central filing system in conformity with the requirements set forth in the FSA for the centralized filing of security interest documents covering farm products. See Miss.Code Ann. § 75-9-319 (directing Secretary of State to issue regulations).¹ The FSA provides that "in the case of a farm product produced in a State that has established a central filing system," a buyer of farm products will take such products subject to a security interest created by the seller if

(A) the buyer has failed to register with the Secretary of State of such State prior to the purchase of farm products; and (B) the secured party has filed an effective financing statement or notice that covers the farm products being sold....

7 U.S.C. § 1631(e)(2).² Unless these conditions are satisfied, then,

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).³ Mississippi law similarly provides:

A secured party may not enforce a security interest in farm products against a buyer ... who purchases or sells farm products in the ordinary course of business from or for a person engaged in farming operations unless the secured party has complied with the regulations issued by the Secretary of State under Section 75-9319 or unless the buyer ... has received from the secured party or seller written notice of the security interest which complies with the requirements of Section 1324 of the Food Security Act of 1985....

Miss.Code Ann. § 75-9-307(4). And the state regulations explain:

Upon filing in the system, buyers ... not registered with the system are subject to the security interest in that product whether or not they know about it, even if they are outside the state.

Miss. Central Filing Sys. Reg. § 2.05(B).

In the case at bar, it is undisputed that Eastern was not registered with the Secretary of State under Mississippi's central filing system.⁴ Consequently, Eastern would be subject to a security interest by First Bank reflected in any "effective financing statement" filed by First Bank with the Secretary of State. The issue is whether First Bank filed an "effective financing statement" which covered the cattle that was the subject of the Wells/Eastern transaction. In this regard, the evidence shows that on April 2, 1987, First Bank filed a financing statement (a UCC-1F)⁵ with the Secretary of State which showed Harry Butler Wells as the debtor and which, following the space on the form providing, "This Financing Statement covers the following types (or items) of property," recited:

All Beef and Dairy Cattle, branded or unbranded, including cows, calves, heifers, steers, and bulls, now owned by Debtor or hereafter acquired, and all farm supplies and farm equipment now owned by Debtor or hereafter acquired. Livestock to be kept on real estate owned by Bobby Caston and located on HWY 569, Amtie sic County, Ms. and leased by Debtor.

The FSA prescribes the information which an "effective financing statement" must contain:

(i) the name and address of the secured party;

(ii) the name and address of the person indebted to the secured party;

(iii) the social security number of the debtor or, in the case of a debtor doing business other than as an individual, the Internal Revenue Service taxpayer identification number of such debtor;

(iv) a description of the farm products subject to the security interest including the amount of such products where applicable; and a reasonable description of the property, including county or parish in which the property is located .

7 U.S.C. § 1631(c)(4) (emphasis supplied). Mississippi's regulations similarly require that an effective financing statement include a "description of farm products subject to the security interest to include county where collateral produced and amount of such product where applicable." Miss. Central Filing Sys. Reg. § 1.00(D). The regulations also provide for the inclusion in an effective financing statement of

further details of the farm product subject to the security interest if needed to distinguish it from other such product owned by the same person but not subject to the particular security interest.

Miss. Central Filing Sys.Reg. § 2.01(H). Finally, as is pertinent here,...