First Nat. Bank of Amarillo v. SW Livestock, Inc., 85-1021-K.

• Decision Date: 09 September 1985
• Docket Number: No. 85-1021-K.,85-1021-K.
• Citation: 616 F. Supp. 1515
• Parties: The FIRST NATIONAL BANK OF AMARILLO, Plaintiff, v. SOUTHWESTERN LIVESTOCK, INC., Defendant.
• Court: U.S. District Court — District of Kansas

616 F. Supp. 1515

The FIRST NATIONAL BANK OF AMARILLO, Plaintiff, v. SOUTHWESTERN LIVESTOCK, INC., Defendant.

No. 85-1021-K.

United States District Court, D. Kansas.

September 9, 1985.

Don Sunderland of Gibson, Ochsner & Adkins, Amarillo, Tex., and Don W. Bostwick of Adams, Jones, Robinson & Malone, Wichita, Kan., for plaintiff.

Jim H. Goering of Foulston, Siefkin, Powers & Eberhardt, Wichita, Kan., E. Lawrence Oldfield, Ltd. and Jim Malysiak of Freeman, Freeman, & Salzman, Chicago, Ill., for defendant.

MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

This is a conversion action against a Kansas auction house for the wrongful sale of livestock in which plaintiff held a security interest. Defendant filed a motion for summary judgment on the ground plaintiff failed to perfect its security interest in Kansas within four months after the livestock were brought into this state from Oklahoma. The Court concludes, however, an unperfected secured creditor may maintain an action for conversion against its debtors' agent. Defendant's motion for summary judgment is denied.

Plaintiff First National Bank of Amarillo (FNB) is a Texas bank. In June and July, 1983, it loaned a total of $875,000.00 to Dean and Moeta Newman, individually and d/b/a Newman Farms, and to Larry Paul, all of Oklahoma. Plaintiff perfected its security interest in Oklahoma, in all cattle owned or thereafter acquired by the debtors. In September, 1983, contrary to the security agreements and without informing FNB of their plans, the Newmans transported 76 steers and 70 heifers across the state line into Kansas, where the cattle were sold at auction by defendant Southwestern Livestock, Inc. (Southwestern). Defendant sold the livestock purely on a commission basis and did not have actual notice of the security agreements or the Oklahoma financing statements covering the cattle. The net proceeds of the sale, $47,974.70, were paid by check to Mutual Feeders, Inc., another business run by the Newmans, but the money was never in turn remitted to the bank. At no time within the four months after the cattle were brought into Kansas did FNB perfect its security interest in this state.

I. The Four-Month Rule

Whenever collateral subject to a perfected security interest in one jurisdiction is brought into Kansas, K.S.A. 84-9-103(1)(d) requires that the secured creditor perfect its security interest in this state within four months after the transfer or before expiration of the perfected security interest in the former jurisdiction, whichever period first expires. Where the secured creditor fails to act within the appropriate time period, "the security interest becomes unperfected at the end of that period and is thereafter deemed to have been unperfected as against a person who became a purchaser after removal."

Southwestern initially contended that because FNB failed to perfect its security interest in Kansas within four months after the cattle entered this state, plaintiff was not a secured creditor and could not maintain this suit for conversion. The bank correctly countered that even though it failed to comply with the four-month rule, it was as a result merely an unperfected secured creditor, not an unsecured creditor. In response, Southwestern then argued that even an unperfected secured creditor may not recover from an auctioneer damages for conversion.

Commenting on a similar situation, Professor Barkley Clark notes:

It is clear by the four-month rule that a bona fide purchaser would have priority, assuming that the collateral was bought for value and without actual knowledge of the Bank's security interest. The purchaser need not qualify as a buyer in the ordinary course of business. Bank's perfection lapsed four months after removal to the new state. Bank is left with a cause of action against its debtor for conversion. Failure to police the defalcating debtor would be fatal in such a situation. And the same result would obtain if the competitor were the debtor's trustee in bankruptcy, a levying creditor, or the competing secured creditor in the state of removal.

Clark, The Law of Secured Transactions Under the Uniform Commercial Code, ¶ 9.41 (1980). Noticeably absent from the list of persons entitled to priority over the bank's interest are auctioneers, brokers, commission merchants, and the like. That is the issue in this case: may an unperfected secured creditor maintain an action against, and recover damages for conversion from, an auction company which sells livestock subject to a security interest created by plaintiff's debtors?

Before turning to the merits of defendant's motion, we note the parties agree Kansas law applies to this case. K.S.A. 84-9-103(1)(b) states "perfection and the effect of perfection or non-perfection of a security interest in collateral are governed by the law of the jurisdiction where the collateral is when the last event occurs on which is based the assertion that the security interest is perfected or unperfected." Under this rule, where the security interest is perfected in one jurisdiction and the collateral is then removed to another, the failure to maintain perfection in the latter jurisdiction is the "last event" to which the rule refers. Id., Official UCC Comment 1. As a result of FNB's failure to perfect its security interest in Kansas, the bank's claims are controlled by Kansas law governing priorities and liability for conversion.

II. The Auction House as a "Purchaser"

Southwestern argues it qualifies as a "purchaser" of the livestock under K.S.A. 84-9-103(1)(d), entitled to priority over plaintiff's unperfected security interest. A "purchaser" is one who takes

... by sale, discount, negotiation, mortgage, pledge, lien, issue or reissue, gift or any other voluntary transaction creating an interest in property.

K.S.A. 84-1-201(32), (33) (emphasis added). This broad definition encompasses any voluntary transaction creating an interest in property whether or not there is a price or other consideration. Id., 1983 Kansas Comment (32).

Defendant's authorities for the proposition it qualifies as a "purchaser" are either distinguishable from this case or provide little guidance. In United States v. Burnette-Carter Co., 575 F.2d 587 (6th Cir. 1978), cert. denied 439 U.S. 996, 99 S.Ct. 596, 58 L.Ed.2d 669 (1979), the Court faced similar facts regarding sale of livestock brought across state lines, followed by the secured creditor's failure to perfect in the removal state within four months. Under the 1962 Official Text of the UCC, the Court held the defendant livestock auctioneer, who had unauthorizedly sold property subject to plaintiff's security interest, was liable for conversion because plaintiff's security interest remained perfected in the removal state during that four-month period. The Court went on to opine that a different result would be required under the 1972 Official Text of the UCC, then under consideration by the states, because plaintiff's unperfected status at the end of the four-month period would relate back. Burnette-Carter Co., 575 F.2d at 592. The statement regarding the consequences of plaintiff's unperfected status is mere dicta, however, because the case was not decided under the 1972 Text. Southwestern also relies on United States v. Squires, 378 F.Supp. 798 (S.D.Ia.1974), which held under similar facts that the party who fails to perfect its security interest in the "removal" state within four months has a junior interest to a buyer for value who has no knowledge or notice of the security interest after the lapse of four months without perfection in the removal state. Squires provides defendant no support for its position in this case because Southwestern does not qualify as a buyer for value. Lastly, Southwestern points to three cases from the federal district court of Minnesota holding sales agents qualify as "purchasers" of the cattle after removal of the collateral to the new jurisdiction. United States v. Kost Security, Inc., No. 3-79-12 (D.Minn. 1981) (order for summary judgment); Swift County Bank v. Siouxland Farmers Livestock Sales, Inc., No. 3-76-305 (D.Minn. 1980) (order for summary judgment); and United States v. Kost Security, Inc., No. 3-76-474 (D.Minn.1978) (order for summary judgment). Those cases, however, are barren of any analysis supporting that Court's bald conclusions, and they provide us no help in resolving the issue in this case.

Southwestern correctly contends that to qualify as a "purchaser" under K.S.A. 84-9-103(1)(d) one need not give value for the collateral. Nevertheless, one does need to acquire some interest in the property. K.S.A. 84-1-201(32), (33); 1983 Kansas Comment (32). The flaw in Southwestern's argument is that it fails to show what "interest" it acquired in the cattle, as that term is used in these Code sections. Defendant makes no showing it ever acquired title to the livestock in its own name. Southwestern does suggest it acquired an agister's lien under K.S.A. 58-207 and 58-220, which lien qualifies as the requisite interest to raise defendant to the status of purchaser. But the primary requirement for priority of a statutory lienor is that he retain possession of the property rather than return possession or control to the owner; thus the right to a statutory lien is waived as to all property other than that which remains in actual possession of the party. Northeast Kansas Prod. Cred. Ass'n v. Ferbache, 236 Kan. 491, 494, 693 P.2d 1152 (1985). Any claim Southwestern may have had to a statutory agister's lien was waived when it surrendered possession of the cattle to the buyer, and the lien cannot now be relied on as a right superior to an unperfected security interest.

At best, Southwestern acquired a mere possessory interest in the cattle by holding them for sale. The clear thrust of the Kansas UCC is that one must at least acquire a property interest in the collateral to qualify as a purchaser. Mere possession of...