First Nat. Bank of Omaha v. Pleasant Hollow Farm, Inc.

• Decision Date: 10 May 1995
• Docket Number: Nos. 18751,18752,s. 18751
• Parties: 30 UCC Rep.Serv.2d 355 FIRST NATIONAL BANK OF OMAHA, a Nebraska corporation, Plaintiff and Appellee, v. PLEASANT HOLLOW FARM, INC., Min-Go Partnership, Robert Woldt, and Dennis Jacobson, Defendants, and Ceres, Inc. and Horace Seixas, Defendants and Appellants, and SVO Specialty Products, Inc., successor to SVO Enterprises, a Division of the Lubrizol Corporation, Intervenor, Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 60

532 N.W.2d 60

30 UCC Rep.Serv.2d 355

FIRST NATIONAL BANK OF OMAHA, a Nebraska corporation Plaintiff and Appellee, v. PLEASANT HOLLOW FARM, INC., Min-Go Partnership, Robert Woldt, and Dennis Jacobson, Defendants and Ceres, Inc. and Horace Seixas, Defendants and Appellants and SVO Specialty Products, Inc., successor to SVO Enterprises a Division of the Lubrizol Corporation, Intervenor, Defendant and Appellant.

Nos. 18751, 18752.

Supreme Court of South Dakota.

Argued Nov. 30, 1994.

Decided May 10, 1995.

Brent A. Wilbur of May, Adam, Gerdes & Thompson, Pierre, for appellee First Nat. Bank of Omaha.

Mark R. Hanson of Nilles, Hansen & Davies, Ltd., Fargo, for appellants Ceres and Seixas.

Drew C. Johnson of Kolker, Fritz, Hogan & Johnson, Aberdeen, for appellant SVO.

MILLER, Chief Justice.

Appellants SVO Specialty Products, Inc. (SVO), Ceres, Inc. and Horace Seixas appeal the trial court's grant of summary judgment to Appellee First National Bank of Omaha (Bank). The central issue on appeal is appellants' assertion that Bank's perfected security interest is ineffective against their claimed superior ownership interests in certain crops. We affirm.

FACTS

In January, 1991, Ceres, which acts as the agent of Seixas, contracted with Sigco Research Inc. to produce a crop of high oleic sunflowers. Sigco entered into this contract for the benefit of SVO, a company which markets sunflower oil and meal. Under the contract, Sigco agreed to advance money to Ceres for the payment of expenses incurred in growing the crop. Ceres agreed to deliver the crops to Sigco in exchange for a percentage of the profits from the sale of the crops, and Ceres granted Sigco a security interest in the growing crop to secure the repayment of advances, plus interest.

In February, 1991, in order to satisfy his contractual obligations with Sigco, Seixas contracted with Pleasant Hollow Farms, Inc. (Pleasant Hollow). Under this contract, Pleasant Hollow agreed to plant, raise and harvest 13,000 acres of high oleic sunflowers for Seixas. In turn, Seixas promised to reimburse Pleasant Hollow for crop production expenses as they were incurred and verified. Additionally, once the crops were sold, Pleasant Hollow would receive twenty-five percent of the difference between the income received from the sale minus the costs incurred for producing the crop. David Zehringer (Zehringer), president of Pleasant Hollow, negotiated and signed the contract on behalf of Pleasant Hollow. Some time in the spring of 1991, Seixas and Zehringer agreed to the assignment of Pleasant Hollows' rights and duties under the contract to Min-Go Farms (Min-Go), a partnership in which Zehringer is a partner.

Having received satisfactory results from the 1991 crop production agreement, Sigco and Ceres renewed the agreement for the production of a sunflower crop in 1992. Likewise, Seixas extended its contract with Min-Go for the 1992 production of sunflowers. Seixas also contracted with Min-Go for the production of safflowers and soybeans. In accordance with the contract between Seixas and Min-Go, Seixas reimbursed Min-Go for approximately $1,500,000.00 in farming expenses reported by Min-Go for the 1992 crop. Seixas never filed a financing statement in South Dakota's central filing system to perfect a security interest in any of the crops produced or the proceeds thereof.

To satisfy his 1992 crop production requirements with Seixas, Zehringer leased land from farms located in eastern and central South Dakota. These leases were not in Min-Go's name, but instead listed either Zehringer or Pleasant Hollow as the lessee. On April 4, 1992, Pleasant Hollow executed a sublease of 8,215 acres in South Dakota to Min-Go for the sum of $410,750.00, payable on or before April 15, 1992. On May 5, 1992, Pleasant Hollow executed a second sublease of 2,700 acres in South Dakota to Min-Go for the sum of $86,900.00, due upon the completion of the lease. Finally, in August 1992, Pleasant Hollow executed a sublease for 9,458 acres in South Dakota to Min-Go for $613,232.85. On all three leases, Zehringer was the sole signatory, signing as both the president of Pleasant Hollow and as a partner in Min-Go. To secure performance, all three subleases granted Pleasant Hollow a security interest "in all crops of every kind which have been planted or are growing, or which may hereafter be planted or growing on the above-described land." None of these subleases were ever recorded with the register of deeds. Seixas received a copy of each of the subleases as verification of land lease expenses.

In the spring of 1992, Zehringer approached Bank about obtaining a loan for Pleasant Hollow. On May 14, 1992, Zehringer took Bank officials on a tour of his Minnesota farming operation. He also arranged for Bank officials to meet Seixas in North Dakota. According to Seixas, he met Bank officials for the purpose of explaining the work he did for Zehringer and the work Zehringer did for him. Seixas understood that Bank was considering a loan to Pleasant Hollow. Seixas informed Bank officials that he worked as a marketing consultant for Zehringer and that Zehringer farmed approximately 13,000 acres of sunflowers as well as some soybeans and safflowers for Seixas. Seixas does not recall whether he ever mentioned Min-Go to Bank officials, or the fact that Seixas contracted for crop production with Min-Go rather than with Pleasant Hollow or Zehringer individually. Later, Zehringer took Bank officials to Brookings, South Dakota, to observe farming operations in that area. Zehringer led the officials to believe that the property was leased and the crops were owned by Pleasant Hollow. In fact, this land was among the property Pleasant Hollow subleased to Min-Go, and the crops growing on the land were promised to Seixas under the crop production agreement between Seixas and Min-Go.

Bank checked the state filing system and determined there were no financing statements or other lien documents evidencing superior security interests in the crops at issue. ^* Consequently, on June 10, 1992, Bank agreed to loan the sum of $1,350,000.00 to Pleasant Hollow to finance its farming operations. The four officers of Pleasant Hollow, including Zehringer, also signed the loan agreement in their individual capacities. On August 21, 1994, this loan amount was increased to $1,500,000.00. To secure the loan, Bank and Pleasant Hollow executed a security agreement whereby Bank took a security interest in all crops grown in South Dakota by Pleasant Hollow. Bank filed a financing statement in South Dakota's central filing system to perfect this security interest. Unbeknownst to Bank, its security interest covered the same crops which Seixas claimed under his contract with Min-Go.

In October, 1992, Bank and Seixas became aware of the other's claims to the crops. Bank filed a claim for declaratory relief, requesting a determination that it held a valid, first security interest in all crops grown and in the proceeds thereof as described in the security agreements and financing statement. Seixas filed a counterclaim, alleging Bank had tortiously interfered with its contractual relationship with Min-Go and that Bank should be denied priority to the crops on the grounds of unjust enrichment.

The trial court ultimately granted summary judgment in favor of Bank. The court concluded that the flow of money from Sigco/SVO to Ceres/Seixas and on to Min-Go/Pleasant Hollow reflected lending relationships. Consequently, the court reasoned that to claim priority, Sigco, SVO, Ceres and Seixas should have perfected their interests in the crops once they attached. Furthermore, the court ruled that Pleasant Hollow or Zehringer had rights in the crops which allowed Bank's security interest to attach and later gain priority upon perfection. The trial court rejected Seixas' tortious interference claim on the grounds that Bank had no notice of any specific claim against the crops pledged by Pleasant Hollow. Similarly, the trial court rejected the...