First Nat. Bank of Amarillo v. Southwestern Livestock, Inc., 86-1906

• Citation: 859 F.2d 847
• Decision Date: 17 October 1988
• Docket Number: No. 86-1906,86-1906
• Parties: 7 UCC Rep.Serv.2d 277 The FIRST NATIONAL BANK OF AMARILLO, Plaintiff-Appellee, v. SOUTHWESTERN LIVESTOCK, INC., Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 847

859 F.2d 847

7 UCC Rep.Serv.2d 277

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

No. 86-1906.

United States Court of Appeals, Tenth Circuit.

Oct. 17, 1988.

Rehearing Denied Nov. 14, 1988.

James T. Malysiak of Freeman, Freeman & Salzman, Chicago, Ill. (Jim H. Goering of Foulston, Siefkin, Powers & Eberhardt, Wichita, Kansas, and E. Lawrence Oldfield, Chicago, Ill., with him, on the briefs), for defendant-appellant.

Don D. Sunderland (John Huffaker of Gibson, Ochsner & Adkins, Amarillo, Tex., and Donald W. Bostwick of Adams, Jones, Robinson & Malone, Wichita, Kan., with him, on the brief), for plaintiff-appellee.

Before LOGAN, McWILLIAMS, and TIMBERS ^*, Circuit Judges.

LOGAN, Circuit Judge.

In this diversity action, plaintiff First National Bank of Amarillo, Texas (the Bank) sued defendant Southwestern Livestock, Inc. (Southwestern), a Kansas livestock auction house, for conversion of certain cattle in which the Bank had an interest as an unperfected secured creditor. The district court entered judgment for the Bank based on the parties' stipulation of facts and the court's earlier order denying Southwestern's motion for summary judgment. See First Nat'l Bank v. Southwestern Livestock, Inc., 616 F.Supp. 1515 (D.Kan.1985). In the stipulation Southwestern reserved the right to appeal the denial of its summary judgment motion. On appeal, we must decide whether an auction house, which acts as the livestock owner's agent, is liable in conversion to a secured creditor of the owner, whose agreement denied the owner authority to sell the livestock; and, if so, whether the fact that the buyers of the auctioned cattle took free of the security interest, or that the creditor's failure to perfect its security interest in Kansas, should change the result.

The Bank loaned money to Dean and Moeta Newman of Mutual, Oklahoma, to help finance their cattle operation and took a security interest in the cattle as collateral for the loans. The Bank properly perfected the security interest in Oklahoma. Subsequently, in September and October 1983, the Newmans sold some of the cattle in Kansas without the Bank's consent and in violation of the security agreement. These sales were conducted by Southwestern through its auction barn in Dodge City, Kansas. Southwestern sold the cattle on a commission basis and did not have actual knowledge of the Bank's security interest. Southwestern deducted its commission and paid the net sales proceeds by check to Mutual Feeders, a business operated by the Newmans. Neither the Newmans nor Mutual Feeders remitted the proceeds to the Bank. At no time did the Bank file a financing statement in Kansas.

I

The Uniform Commercial Code (UCC) does not address the conversion liability of commission agents. Thus, as the district court recognized, Southwestern's liability must be determined by an analysis of the Kansas common law concerning liability for conversion. ¹ See Kan.Stat.Ann. Secs. 84-1-103; United States v. Hext, 444 F.2d 804, 811 n. 21 (5th Cir.1971); United States v. New Holland Sales Stables, Inc., 619 F.Supp. 1162, 1163, 1164 (E.D.Pa.1985); Kershen & Harden, Congress Takes Exception to the Farm Products Exception of the UCC: Retroactivity and Preemption, 36 Kan.L.Rev. 1, 67-68 (1987).

According to the Kansas Supreme Court,

"a factor or commission merchant who receives property from his principal, sells it under the latter's instructions and pays him the proceeds of the sale, is guilty of a conversion if his principal had no ... right to sell the property, and generally the factor may not escape liability to the true owner for the value of the property by asserting he acted in good faith and in ignorance of his principal's want of title. The basis for the factor's liability if he assists in a conversion, even though innocent, is the fact he stands in the shoes of his principal."

DeVore v. McClure Livestock Comm'n Co., 207 Kan. 499, 503, 485 P.2d 1013, 1016-17 (1971) (addressing conversion liability of a livestock auction house) (citations omitted); see also Nelson v. Hy-Grade Constr. & Materials, Inc., 215 Kan. 631, 634, 527 P.2d 1059, 1062 (1974) ("The intent required [for conversion liability] is simply to use or dispose of the goods, and knowledge or ignorance of the actor as to their ownership has no influence in deciding the question of conversion."); Watkins v. Layton, 182 Kan. 702, 707, 324 P.2d 130, 134 (1958) (same). This rule has been applied consistently to determine the conversion liability of commission agents who sold cattle that were subject to UCC security interests. See, e.g., North Cent. Kan. Prod. Credit Ass'n v. Washington Sales Co., 223 Kan. 689, 697-98, 577 P.2d 35, 41-42 (1978); First Nat'l Bank & Trust Co. v. Atchison County Auction Co., 10 Kan.App.2d 382, 389, 699 P.2d 1032, 1038 (1985); accord Sanborn County Bank v. Magness Livestock Exch., 410 N.W.2d 565, 567 (S.D.1987); see also Production Credit Ass'n v. Equity Coop Livestock Sales Ass'n, 82 Wis.2d 5, 261 N.W.2d 127, 128 (1978).

Kansas courts have recognized only two exceptions to the general rule that a commission agent is liable in conversion, even if it has no knowledge of competing interests, if its principal was without authority to sell the collateral: the secured party either consented to the sale or misled the auctioneer about the debtor's authority to sell. See DeVore, 207 Kan. at 504, 485 P.2d at 1017. These exceptions are reflected in Kan.Stat.Ann. Sec. 84-9-306(2), which provides that "a security interest continues in collateral notwithstanding sale ... thereof unless the disposition was authorized by the secured party in the security agreement or otherwise." (emphasis added). Neither exception is applicable to the case at bar.

Instead of specifically arguing that this case fits into one of the established exceptions, Southwestern contends that the district court's imposition of liability upon it when it had no knowledge of competing interests creates a form of strict liability for auctioneers unknown to Kansas law. This argument fails to recognize that conversion is a strict liability tort. See Centerre Bank v. New Holland Div. of Sperry Corp., 832 F.2d 1415, 1423 (7th Cir.1987); United States v. Gallatin Livestock Auction, Inc., 448 F.Supp. 616, 621 (W.D.Mo.), aff'd per curiam, 589 F.2d 353 (8th Cir.1978); United States v. Topeka Livestock Auction, Inc., 392 F.Supp. 944, 948 (N.D.Ind.1975); 1 F. Harper, F. James & O. Gray, The Law of Torts Sec. 2.10 (2d ed. 1986). Although subjecting an innocent commission agent to conversion liability may seem harsh, ² Kansas courts consistently have declared that the agent's good faith or lack of knowledge of the security interest is not a defense. See, e.g., DeVore, 207 Kan. at 503, 485 P.2d at 1016-17; Atchison County Auction, 10 Kan.App.2d at 389, 699 P.2d at 1038.

The Bank's security agreement prohibited the Newmans from selling the cattle without the Bank's consent. Southwestern does not allege that the Bank waived its security interest or authorized the sales in question. Because the Newmans were not authorized to sell the cattle, Southwestern, acting as the Newmans' agent, also had no authority. Southwestern, then, is liable for conversion under Kansas law unless other factors in this case relieve it of liability.

II

Southwestern argues that it is relieved from conversion liability because the buyers of the cattle took free of the Bank's security interest. ³ In Kansas, however, whether the buyer of secured property takes free of the underlying security interest is irrelevant to the conversion liability of the auctioneer. The liability of an auctioneer depends solely on the authority of its principal (the secured party's debtor) to sell the collateral. See Washington Sales Co., 223 Kan. at 697-98, 577 P.2d at 41-42; Atchison County Auction, 10 Kan.App.2d at 389, 699 P.2d at 1038. Simply put, if the sale was authorized, the auctioneer is not liable; if the sale was not authorized, the auctioneer is liable.

Southwestern, however, argues that the Kansas Supreme Court would adopt the apparent limitations on an auctioneer's liability embodied in Restatement (Second) of Torts Sec. 233(1) (1965) [hereinafter Restatement ], which provides as follows:

"Except as stated in Subsection (4), one who as agent or servant of a third person disposes of a chattel to one not entitled to its immediate possession in consummation of a transaction negotiated by the agent or servant, is subject to liability for a conversion to another who, as against his principal or master, is entitled to the immediate possession of the chattel."

(emphasis added); see also id. Sec. 235(1). Southwestern asserts that because the buyers of the cattle in question took free of the Bank's security interest and thus were entitled to immediate possession, Southwestern cannot be liable for conversion. See Hext, 444 F.2d at 815-16. No Kansas court has ever discussed Restatement Sec. 233 and our task is to predict whether the Kansas Supreme Court would apply this provision in a case like that at bar. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574 (10th Cir.1984).

Under Southwestern's interpretation of Restatement Sec. 233, a commission agent's liability depends on whether the buyers from the auction house would be liable for conversion. As noted above, Kansas law focuses exclusively on the authority of the agent's principal to sell the collateral; whether the buyer would take free of the security interest is irrelevant. Application of this section in the instant case would mark a dramatic departure from well-established Kansas law, and Southwestern has offered no reason why the Kansas Supreme Court would take this step.

Moreover, we doubt that the phrase "one not entitled to its immediate possession" was intended to limit the liability of auctioneers based on whether the transferee obtained good title. Restatemen...