First Nat. Bank In Lenox v. Lamoni Livestock Sales Co.

• Decision Date: 23 December 1987
• Docket Number: No. 86-1370,86-1370
• Citation: 417 N.W.2d 443
• Parties: 5 UCC Rep.Serv.2d 23 FIRST NATIONAL BANK IN LENOX, Appellant, v. LAMONI LIVESTOCK SALES CO. and First National Bank in Creston, Appellees.
• Court: Iowa Supreme Court

Page 443

417 N.W.2d 443

5 UCC Rep.Serv.2d 23

FIRST NATIONAL BANK IN LENOX, Appellant, v. LAMONI LIVESTOCK SALES CO. and First National Bank in Creston, Appellees.

No. 86-1370.

Supreme Court of Iowa.

Dec. 23, 1987.

Edgar F. Hansell, W. Don Brittin, Jr., and James C. Wine of Nyemaster, Goode, McLaughlin, Emery & O'Brien, P.C., Des Moines, and David L. Christensen of Wilson, Bonnett & Christensen, P.C., Lenox, for appellant.

Robert C. Rouwenhorst of Davis, Grace, Harvey, Horvath, Gonnerman & Rouwenhorst, Des Moines, for appellee Lamoni Livestock Sales Co.

Jon P. Sullivan of Dickinson, Throckmorton, Parker, Mannheimer & Raife, Des Moines, for appellee First Nat. Bank in Creston.

Considered by McGIVERIN, C.J., and HARRIS, SCHULTZ, LAVORATO and NEUMAN, JJ.

McGIVERIN, Chief Justice.

Plaintiff bank appeals from the trial court's ruling granting summary judgment to both defendants on identical legal grounds. The court held that plaintiff's security interest in its debtor's livestock was extinguished pursuant to Iowa Code section 554.9307(1)(1983) ¹ upon consignment sale of the livestock by the debtor through a marketing agent of the debtor to a livestock purchaser. Reviewing only the summary judgment ruling and the grounds stated in that ruling, we reverse and remand the case for further proceedings.

I. Background facts and proceedings. The record in this summary judgment proceeding reveals the following. Plaintiff First National Bank in Lenox (Lenox) began financing the farming operations of Jerry Parker as early as 1967. The loans made to Parker from time to time as requested were secured by the goods Parker planned to buy with the borrowed money, frequently including livestock. In 1976, Parker signed a blanket security agreement with Lenox which covered his present and future livestock among other farm assets as collateral for any loans Lenox made or would make to Parker. Lenox perfected the security interest. See Iowa Code § 554.9401(1)(c).

In January 1982, Parker's outstanding loans with Lenox were consolidated into one master promissory note totaling $155,000 with payment due January 19, 1983. At some point undeterminable from the record, but near the beginning of 1982, Parker also began borrowing from defendant First National Bank in Creston (Creston) to finance cattle purchases. When the master note to Lenox became due the next year, Parker executed a new note with Lenox in the principal amount of $160,000. The new note referred to a jointly executed security agreement dated January 24, 1983, which gave Lenox a security interest in Parker's assets including:

[A]ll farm products including but not limited to all crops, livestock and supplies used or procured in farming operations whether now or hereafter existing or acquired.... In claiming proceeds, the secured party does not consent to the sale or other disposal of the collateral.

Parker acknowledged that at some point between 1982 and 1983, Lenox bank began requiring him to have checks for the sale of livestock in which Lenox had a security interest made out jointly to Lenox and to him. Additionally, the bank began sending out lists of its borrowers to sale barns and elevators in the area requesting that checks to its borrowers be made payable jointly to the borrower and the Lenox bank. On November 2, 1983, Lenox sent written notice to defendant Lamoni Livestock Sales Co. (Lamoni) advising it of Lenox's security interest in farm products of numerous local borrowers including Parker, and requesting that a check to any of these borrowers be made payable jointly to include the bank as a payee.

Parker defaulted on the $160,000 note when it came due in January 1984. Without informing Lenox, Parker sold a substantial portion of his cattle through Lamoni on April 26, 1984. He received a check made out to him alone by Lamoni in the amount of $39,646.38 which he delivered to the Creston bank to apply to his debts there. None of that money was paid to Lenox.

Thereafter, Lenox bank filed a petition asserting that the defendants converted Parker's cattle in violation of Lenox's prior security interest in the cattle.

After answering the petition, Lamoni filed a motion for summary judgment on the ground that Lenox's security interest in Parker's livestock was extinguished pursuant to Iowa Code section 554.9307(1) upon Parker's delivery of the livestock to Lamoni. The record consisted of the pleadings, the deposition of Parker and certain exhibits.

During arguments on the motion for summary judgment, Creston joined Lamoni's motion on identical legal grounds. Creston's position was that if Lenox's security interest was extinguished upon delivery of the cattle to Lamoni, the security interest could not follow the proceeds deposited in Creston bank.

The trial court sustained the motion and dismissed Lenox bank's claims against Lamoni and Creston. The court stated in substance it believed that under Iowa Code section 554.9307(1) a buyer purchasing through a marketing agency in the ordinary course took free of a security interest in farm products regardless of whether he knew of that interest. Concluding that Iowa Code section 554.9307(1)(1983) does not authorize extinguishing Lenox bank's security interest under this record, we reverse the trial court's ruling and remand for further appropriate proceedings.

II. Application of Iowa Code section 554.9307(1). Summary judgment is appropriate when the moving party shows there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Iowa R.Civ.P. 237(c). In reviewing this grant of a summary judgment motion, we are guided by the same principles relied upon by the trial court. Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. Adam v. Mount Pleasant Bank & Trust Co., 355 N.W.2d 868, 872 (Iowa 1984). The parties agree that the relevant facts on which the court based its ruling are undisputed.

The issue raised in this case requires us to construe and apply portions of Article 9 of the Uniform Commercial Code (UCC), codified in Iowa Code chapter 554, and decide whether the trial court properly applied those statutes. We must determine whether a farmer-debtor extinguishes a creditor's security interest in that farmer's livestock by selling his livestock through a marketing agency. At the center of this controversy is Iowa Code section 554.9307(1) which reads:

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.

Lenox argues that because of the "farm products" exception embodied in section 554.9307(1), its security interest in Parker's livestock remained intact after Lamoni, as Parker's agent, sold the cattle to the eventual buyer.

Generally, a security interest in collateral follows those goods upon sale or disposition of the collateral. The secured party may then redeem or retrieve those goods from the hands of the buyer if the debtor fails to repay the loan for which the goods served as collateral. See Iowa Code § 554.9306(2). The creditor may also have a perfected security interest in the proceeds of the collateral sold if its original financing statement covered proceeds or if the creditor perfects a security interest in the proceeds within ten days of the sale. See Iowa Code § 554.9306(3).

Iowa Code section 554.9307(1) is an exception to the general rule for situations in which goods are sold in the "ordinary course of business" as that phrase is defined in section 554.1201(9). The "farm products" exception relied upon by Lenox is, in essence, an exception to the exception which refers back to the general rule of section 554.9306(2). A security interest in "farm products," as that term is defined in section 554.9109(3), continues after the farm products are sold if they are purchased from one engaged in farming operations even if the sale is in the ordinary course of business.

It is undisputed by the parties that Parker is engaged in farming operations. Further, the definition of "farm products" in the classification provision of Article 9 includes "livestock." See Iowa Code § 554.9109(3). Lenox contends that because the sale of Parker's livestock fits within the farming exception, its security interest in the livestock was not extinguished and summary judgment was improperly granted against Lenox.

Defendants disagree. While they concede that Parker's livestock are "farm products" in Parker's hands, they argue that the livestock became "inventory" as that term is defined in section 554.9109(4) when the cattle were transferred to Lamoni for sale. ² Their argument is grounded in this portion of official comment 4 to section 9-109 in the 1972 official text of the UCC (contained in Iowa Code Annotated section 554.9109):

Goods are "farm products" only if they are in the possession of a debtor engaged in farming operations.

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When crops or livestock ... come into the possession of a person not engaged in farming operations they cease to be "farm products." If they come into the possession of a marketing agency for sale or distribution ..., they become inventory.

Defendants argue that once the livestock "came into the possession" of Lamoni, the livestock became inventory. Being inventory, the livestock no longer fit within the farm products exception and Lenox's security interest did not continue in the livestock or their sale proceeds after Parker's livestock was sold. Defendants cite as support for their position the decision of the Eighth Circuit Court of Appeals in United States v. Progressive Farmers Marketing Agency, 788 F.2d 1327 (8th Cir.1986).

Saying it was applying Iowa law, the court in Progressive held in a similar factual...