First Nat. Bank and Trust Co. of Oklahoma City v. Atchison County Auction Co., Inc.

• Decision Date: 02 May 1985
• Docket Number: No. 56678,56678
• Citation: 699 P.2d 1032,10 Kan.App.2d 382
• Parties: , 41 UCC Rep.Serv. 219 FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY, Oklahoma, Appellee, v. ATCHISON COUNTY AUCTION COMPANY, INC., Atchison, Kansas, Appellant.
• Court: Kansas Court of Appeals

Page 1032

699 P.2d 1032

10 Kan.App.2d 382, 41 UCC Rep.Serv. 219

FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY Oklahoma, Appellee, v. ATCHISON COUNTY AUCTION COMPANY, INC., Atchison, Kansas, Appellant.

No. 56678.

Court of Appeals of Kansas.

May 2, 1985.

Review Denied June 28, 1985.

Syllabus by the Court

1. Under the Kansas Uniform Commercial Code, a description of collateral in a security agreement or financing statement is sufficient if it reasonably identifies what is described. K.S.A. 84-9-110.

2. Unless the location of the security appears in and is an integral part of the section of a security agreement describing the collateral affected by the agreement, a debtor's covenant to keep collateral covered by a security agreement at a specific location does not limit the security interest to collateral at that location.

3. Where a description of the location of the collateral is not required by the Kansas Uniform Commercial Code, inclusion of a description of the location in the language granting the security interest will not limit the security interest unless the language of the agreement is unambiguous.

4. Where ambiguity in a security agreement results from inclusion of a description of the location of collateral, parol evidence is admissible to determine the intent of the parties.

5. Under the Kansas Uniform Commercial Code, a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. K.S.A. 84-9-307(1), following Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, Syl. p 1, 695 P.2d 444 (1985).

6. A security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. K.S.A. 84-9-306(2), following Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, Syl. p 2, 695 P.2d 444 (1985).

7. A secured party may attach conditions or limitations to its consent to the sale of collateral by a debtor. An unauthorized sale in violation of those conditions will not defeat the security interest.

8. Conditions to sale may be explicitly or implicitly waived by a secured party.

9. A livestock auctioneer who without authorization sells property subject to a third party's security interest is liable in conversion to that third party even if the auctioneer has no knowledge of the security interest.

Steve R. Fabert, of Fisher, Patterson, Sayler & Smith, Topeka, for appellant.

William Hergenreter, of Shaw, Hergenreter & Quarnstrom, Topeka, for appellee.

Before FOTH, C.J., and SWINEHART and BRISCOE, JJ.

SWINEHART, Judge:

Atchison County Auction Company (Atchison Auction) appeals from the judgment of the district court which found it liable to the First National Bank & Trust Company of Oklahoma City (Bank) for the proceeds from an unauthorized sale of seventy-five head of cattle covered by the Bank's perfected security interest.

In September 1981, Dr. Wilbur Hilst, a Topekan, sought financing for the purchase of 1,955 calves to expand his ranching operation. At the time he was negotiating a loan with the Oklahoma Bank, he owned approximately 780 head of cattle, a majority of which were purchased with loans from the First National Bank of Wamego and subject to its perfected security interest. One hundred seventy-eight head of the cattle were purchased from Jim and Russell Winsor on credit, and subject to their security interest which was unperfected at the time the Oklahoma Bank perfected its security interest.

The Oklahoma Bank inspected Hilst's holdings and agreed to grant Hilst a line of credit up to $950,000 for the purchase of the calves. In return they required Hilst sign a security agreement, a financing statement, and a loan agreement granting them a security interest in "all livestock ... now owned or hereinafter acquired" by Hilst. The Oklahoma Bank paid the loans at the Wamego Bank, and its security interest was assigned to the Oklahoma Bank. The financing statement was properly filed with the Shawnee County Register of Deeds on September 28, 1981.

Shortly after the loan was consummated the Bank learned of the Winsor security interest with an outstanding debt of approximately $66,000. An agisters' lien of $16,000 had also been filed by the owners of the pasture in which these cattle were kept. Hilst was instructed by the Oklahoma Bank to clear up the liens on the Winsor cattle with funds other than those he had received from the Bank. The Winsor security interest was finally released in December 1981.

In April or May of 1982 the Oklahoma Bank learned that Hilst had sold seventy-five head of cattle at Atchison Auction on October 24, 1981. Hilst admitted to the Bank in writing that he sold the cattle without the knowledge of the Oklahoma Bank and without forwarding the proceeds of the sale to it.

The Oklahoma Bank then brought action against Atchison Auction, alleging conversion. The trial court found that the Oklahoma Bank had a valid security interest in the cattle, that it had not consented to the sale as required by the security agreement, and that Atchison Auction was liable to the Bank for $20,406.65 with interest at the rate of 10% per annum from October 24, 1981.

On appeal Atchison Auction contends the trial court erred in finding that the Oklahoma Bank had a perfected security interest in the seventy-five head of cattle sold, or, in the alternative, erred in concluding the security interest was not waived by the Oklahoma Bank's consent to the sale.

Initially, Atchison Auction contends that the Oklahoma Bank failed to prove that the cattle sold were cattle covered by the security agreement. The following description of the collateral is found in the security agreement:

"ALL LIVESTOCK, FEED, FEED GRAIN AND FEED COMMODITIES NOW OWNED OR HEREINAFTER ACQUIRED BY THE DEBTOR AND ALL WAREHOUSE RECEIPTS, BANKING ACCOUNTS, DEPOSITS, COMMODITY FUTURES CONTRACTS, MARGIN ACCOUNTS, DOCUMENTS OF TITLE, INSTRUMENTS, CONTRACT RIGHTS, ACCOUNTS RECEIVABLE, GENERAL INTANGIBLES AND OTHER TANGIBLE AND INTANGIBLE PERSONAL PROPERTY RELATING THERETO, ALL INSURANCE POLICIES AND PROCEEDS PAYABLE WITH RESPECT TO ANY OR ALL OF THE FOREGOING, TOGETHER WITH ALL PROCEEDS, PRODUCTS AND INCREASES THEREOF."

The security agreement further included the debtor's covenant that

"Said Goods are now in possession of Debtor, and are or when acquired by Debtor will be located at MAN RANCH; MAN RANCH; and WESTERN FEEDYARD, INC. in Shawnee; Wabaunsee; and Stanton County, State of Kansas." (See Appendix 1, copy of security agreement.)

The description in the financing statement echoes the security agreement description, but contains no reference to the location of the livestock.

Atchison Auction contends that the language of the security agreement covers only those cattle in the stated location, that Hilst had cattle in other counties, and that the Bank failed to show that these cattle were covered by the security agreement. The district court found that the security agreement granted the Bank a security interest in "all livestock" owned by Hilst and that the cattle sold were subject to the security agreement. We agree.

Two provisions of the Uniform Commercial Code speak to the sufficiency of a description of collateral in a security agreement or financing statement.

K.S.A. 84-9-110 provides:

"[F]or purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described."

K.S.A. 84-9-402(1) further provides, in part:

"A statement of collateral in a financing statement is adequate if it generally identifies goods by one or more of the classifications listed in K.S.A. 84-9-109, or generally identifies other collateral by one or more of the following classifications: fixtures, documents, instruments, general intangibles, chattel paper or accounts. A statement of collateral in a financing statement shall not be deemed inadequate solely because it is broader than, or otherwise differs from, that found in the security agreement. A description of the location of the collateral is not necessary to an adequate statement except insofar as a description of location is specifically required by the uniform commercial code."

The Code does not require that a description of livestock include a description of the location of the collateral. Furthermore, we find that the word "livestock," one of the items included within the K.S.A. 84-9-109(3) definition of "farm products," reasonably identified the covered collateral and was sufficient to create a security interest in all livestock owned by Hilst.

The debtor's covenant to keep the collateral at a specific location is not part of the language granting the security interest, but merely a promise on the part of the debtor to restrict the physical location of his livestock. As such it does not act as a limitation on the grant of the security interest. Cf. In re Little Brick Shirthouse, Inc., 347 F.Supp. 827 (N.D.Ill.1972).

Even if the covenant could be read as part of the language granting the security interest, a review of case law in other jurisdictions reveals that in a majority of cases where a description of the location of the collateral is not required by the code, inclusion of a location in the description does not limit the security interest unless the language of the agreement is unambiguous. See, e.g., Matter of California Pump & Mfg. Co., Inc., 588 F.2d 717 (9th Cir.1978); Matter of Metzler, 405 F.Supp. 622 (N.D.Ala.1975); In re Lee, 14 B.R. 804 (Bankr.E.D.Tenn.1981); Cf. First State Bank of Nora Springs v. Waychus, 183...