First Nat. Bank and Trust Co. of Oklahoma City v. Iowa Beef Processors, Inc., s. 78-1301

• Decision Date: 14 July 1980
• Docket Number: 78-1302,Nos. 78-1301,s. 78-1301
• Parties: 29 UCC Rep.Serv. 743 The FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY, Plaintiff- Appellant, v. IOWA BEEF PROCESSORS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 764

626 F.2d 764

29 UCC Rep.Serv. 743

The FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY, Plaintiff- Appellant, v. IOWA BEEF PROCESSORS, INC., Defendant-Appellee.

Nos. 78-1301, 78-1302.

United States Court of Appeals, Tenth Circuit.

Argued Sept. 13, 1979.

Decided July 14, 1980.

George W. Dahnke of Hastie & Kirschner, Oklahoma City, Okl., for plaintiff-appellant.

James T. Malysiak of Freeman, Rothe, Freeman & Salzman, Chicago, Ill. (Edward W. Rothe of Freeman, Rothe, Freeman & Salzman, Chicago, Ill., and Harry H. Selph, II, of Baker, Baker, Wilson, Selph & Ford, Oklahoma City, Okl., with him on the brief), for defendant-appellee.

Before SETH, Chief Judge, LOGAN, Circuit Judge, and BOHANON, District Judge ^*.

LOGAN, Circuit Judge.

First National Bank & Trust Company of Oklahoma City (the bank) brought suit against Iowa Beef Processors, Inc. (IBP), asserting claims under the Oklahoma version of the Uniform Commercial Code. The claims arise from two sales of cattle. ¹ The district court awarded summary judgment for IBP on the first sale claim, and awarded the bank summary judgment in the amount of $252,698 on the second sale claim. The court denied the bank's motion for prejudgment interest. Jurisdiction is based upon diversity of citizenship. Both parties appealed.

We must decide the following issues: (1) Whether the bank's security interest in the cattle sold in the first transaction continued after the sale to IBP; (2) whether IBP may offset $162,640 against the purchase price on the second transaction; and (3) whether prejudgment interest should have been awarded.

The facts are undisputed. Wheatheart, Inc. (Wheatheart) owned and operated feedlots. Under its auspices investor limited partnerships were formed to acquire cattle to be fattened in the lots. Wheatheart Cattle Company (Cattle Company), a wholly owned subsidiary of Wheatheart, was a managing partner in these partnerships. Four of these partnerships Wheatheart Cattle Feeding Funds 4, 11, 12 and 13 (Funds) borrowed money from the bank to purchase cattle. The bank took a perfected security interest in the cattle. These cattle were fed out in the Wheatheart lots until they reached the desired weights and were sold by Wheatheart.

Under the financing arrangement with the bank, Wheatheart would receive payment for the cattle in its own name directly from the purchaser. Wheatheart would then deposit this check or draft in its account and write its own check for that amount, payable jointly to the Funds and the bank. A bonded warehouseman, Lawrence Systems, Inc., was used to control the delivery of the cattle to the purchasers and to monitor the transfer of the payment check to the bank.

In 1974 Wheatheart began experiencing severe financial trouble. During December 1974 and January 1975, Wheatheart sold almost all the cattle in its feedlots without notifying the bank of the sales or remitting any of the proceeds to the bank or the Funds. On January 22 Wheatheart filed for bankruptcy, leaving the bank with a large outstanding loan balance and no collateral in the hands of the debtor or its agents. Consequently, the bank sought to recover some of its loss from IBP which had bought Wheatheart cattle in two transactions during this period. There is no contention that IBP was not a good faith purchaser.

The circumstances surrounding the sales are these: IBP had made the first purchase in December. On January 9, Wheatheart mailed sight drafts of $162,640 to IBP's bank to obtain advances on the final purchase price for the last carloads. The next day the cattle were slaughtered and a final price of $183,676 was set. ² IBP paid this amount by check on January 13. Wheatheart deposited this check. It nevertheless asked IBP to honor the drafts, which Wheatheart asserted it had already sent through for collection; Wheartheart promised to send a check immediately to cover that amount. IBP agreed to this arrangement and, after receiving Wheatheart's check, instructed its bank to honor the drafts. The drafts were honored on January 16; Wheatheart's check, however, was dishonored by its bank on January 20. Meanwhile, IBP made a second purchase of cattle on January 15, and the price was determined on January 20 and 21 to be $252,698. On January 22 IBP was notified the Wheatheart check had been dishonored and Wheatheart had filed for bankruptcy. IBP never sent payment for the second purchase of cattle.

I

The district court granted summary judgment on the first sale in favor of IBP. It ruled the bank had given express consent to the sale, which cut off any continuing security interest in the collateral pursuant to Okla.Stat.Ann. tit. 12A, § 9-306(2) (West 1963). ³ The bank attacks this decision, arguing that whether consent was given is in issue and therefore not properly a matter for summary judgment.

Section 9-306(2) authorization can be given "in the security agreement or otherwise." The security agreement here contained no reference to sales and therefore, of course, gave no authorization for sales. Thus, we must look elsewhere for authorization. Under Oklahoma law, authorization to sell collateral can be both express and implied. See Poteau State Bank v. Denwalt, 597 P.2d 756, 760 (Okl.1979). Here the revolving credit agreement between the Funds and the bank provides only that "all proceeds of the sale of cattle" are to be applied to reduce the loan balances, and that the Funds "will not dispose of any of its assets except for full, fair and reasonable compensation." Also, the bank made the following statement in response to an interrogatory: "(T)he borrowers had standing consent to sell cattle. However, such consent was conditioned upon prompt remission of the proceeds of such sale to plaintiff." Further, depositions in the record contain the following responses by bank officers to questions concerning the authority to sell:

A. (Bank Vice President for agricultural loans Samuel Gilmore) I guess he has, I guess Lawrence has the implied consent from the bank to release those cattle, so long as they get me the money for the cattle.

Q. Where is that implied consent?

A. In the delivery instructions.

Q. Did the Lawrence people have the authority from the bank to open the gate and let the cattle out into the chute to be loaded onto the truck without checking with the bank?

A. So long as they got me the check for the proceeds within seven days.

and

Q. Now, that security agreement, and I'm talking about the standard printed agreement, ⁴ did provide that the collateral could not be sold without the consent of the bank, did it not?

A. (Bank Senior Vice President Ronald Bradshaw) I believe that's right.

Q. But in fact that was not required of your borrowers?

A. In the trade itself, I've never seen I haven't seen it done that way. I mean in the trade, I don't I haven't seen it a requirement that the bank give permission that the cattle be sold.

Q. Prior to the time of sale you mean?

A. Right.

Q. That is not customary in the cattle business, is it?

A. Not to my knowledge, no.

Q. And you, in making your cattle loans, did not require that, did you?

A. We didn't, no.

Plaintiffs point to no contrary evidence in the record. Based on the documents and admissions by the bank officers that consent to sell was given, we conclude there is no disputed issue of fact.

The bank contends, however, that even if consent was given, it was conditioned on the bank receiving the proceeds from the sale a condition not performed here. Assuming the authorization was so qualified, we must decide whether the bank could condition its consent in this way.

The normal rule is that a buyer in ordinary course of business cuts off the security interest in collateral sold. Okla.Stat.Ann. tit. 12A, § 9-307 (West 1963). Cattle feeding arrangements are unusual in at least two respects, however. First, they may be sales of "farm products from a person engaged in farming operations," which are excepted from the usual rule of section 9-307. This exception permits the secured party to reach the collateral in the hands of a good faith purchaser unless consent to the sale has been given pursuant to section 9-306(2). Second, because a feeding operation entails the continuing process of acquisition and, after only a short feeding period, sale, the cattle are more like inventory than farm crops, which might be harvested only once each year. The reality of cattle financing arrangements is that the secured party expects and wants the collateral to be sold continually in order for it to receive payment on the line of credit it has extended. At the same time, however, the secured party is reluctant to give blanket consent to the sales because it would lose its right to go against the purchaser should the debtor default. Consequently, secured parties in this area have tried to protect themselves by placing conditions on sales authorizations.

Courts have recognized the validity of certain of these conditions. See, e. g., North Central Kan. Prod. Credit Ass'n v. Washington Sales Co., 223 Kan. 689, 577 P.2d 35, 38 (1978) (authorization to sell if payment made jointly to seller and bank); Baker Prod. Credit Ass'n v. Long Creek Meat Co., 266 Or. 643, 513 P.2d 1129, 1134 (1973) (authorization to sell on condition buyer's drafts drawn on defendant bank were honored and paid); Farmers State Bank v. Edison Non-Stock Coop. Ass'n, 190 Neb. 789, 212 N.W.2d 625, 628 (1973) (consent to sell so long as no prior default has occurred). In all these cases the condition was either a condition precedent ascertainable by the purchaser prior to the sale or a matter within the control of the buyer.

There are a few cases involving conditions like the one imposed here. In Southwest Washington Prod. Credit Ass'n, 92 Wash.2d 30, 593 P.2d 167, 169 (1979), the court, after concluding consent was conditioned on the secured party receiving the proceeds, found that violation of the condition left the secured par...