First State Bank v. Clark

• Citation: 635 N.W.2d 29
• Decision Date: 10 October 2001
• Docket Number: No. 99-1995.,99-1995.
• Parties: FIRST STATE BANK, Nora Springs, Appellant, v. William CLARK and Mike Clark, d/b/a Johnson Chemicals, Appellees.
• Court: United States State Supreme Court of Iowa

635 N.W.2d 29

FIRST STATE BANK, Nora Springs, Appellant, v. William CLARK and Mike Clark, d/b/a Johnson Chemicals, Appellees.

No. 99-1995.

Supreme Court of Iowa.

October 10, 2001.

Ralph A. Smith of Noah, Smith & Schuknecht, P.L.C., Charles City, for appellant.

Brian R. McPhail of Gross & McPhail, Osage, for appellees.

Robert L. Hartwig, Iowa Bankers Association, Des Moines, and Thomas E. Salsbery of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for amicus curiae Iowa Bankers Association.

CADY, Justice.

This appeal requires us to determine whether a creditor's perfected security interest in crop proceeds continues under Iowa Code section 554.9306(2) (1999) when the proceeds were not received by the debtor. We reverse the decision of the district court and remand the case for further proceedings.

I. Background Facts and Proceedings.

First State Bank of Nora Springs financed the farming operation of Daniel Yezek. Yezek was a grain farmer and First State Bank had a perfected security interest in his crop, as well as any proceeds from the crop. First State perfected its security interest by filing a financing statement with the Iowa Secretary of State, giving it a priority status over Yezek's other creditors in the crop and proceeds.

In 1998, First State notified Yezek it would no longer finance his crop production. Yezek subsequently informed First State he intended to sell his corn to the elevator in St. Ansgar. On February 5, 1999, First State gave written notice to Grain Millers, Inc. in St. Ansgar of its security interest in the crop pursuant to Iowa Code section 554.9307(4)(a).

On April 9, 1999, Yezek sold his crop to St. Ansgar Mills, Inc. St. Ansgar Mills is a separate elevator from Grain Millers, Inc., and was not notified of First State's perfected security interest in Yezek's crop. Yezek directed St. Ansgar Mills to pay the proceeds from the sale of the corn to William and Mike Clark, doing business as Johnson Chemicals. Johnson Chemicals was an unsecured creditor of Yezek and was apparently unaware of First State's security interest in the crop proceeds. St. Ansgar Mills paid Johnson Chemicals $6,758.80.

After learning of the transfer, First State promptly notified Johnson Chemicals of its security interest in the proceeds. Johnson Chemicals refused to deliver payment to First State.

First State filed a conversion action against Johnson Chemicals. Both parties filed motions for summary judgment. First State acknowledged it failed to give St. Ansgar Mills notice of its security interest in the corn. However, it claimed this did not release its security interest in the proceeds. Conversely, Johnson Chemicals claimed that First State lost its security interest in the proceeds when St. Ansgar Mills purchased the crops without notice of the First State security interest. Alternatively, Johnson Chemicals claimed any security interest held by First State failed to attach to the proceeds because the proceeds were never actually received by Yezek.

The district court granted Johnson Chemical's motion for summary judgment and dismissed First State's petition. The district court held First State lost its security interest in the collateral when St. Ansgar Mills purchased the crop pursuant to section 554.9307(4)(a). Additionally, the court concluded First State's security interest did not follow the crop proceeds because the proceeds from the sale were never in Yezek's possession.

First State appeals. It acknowledges that the failure to adhere to the notice requirements of section 554.9307(4)(a) effectively extinguished its security interest in the collateral as to St. Ansgar Mills. However, it claims its security interest in the proceeds from the sale continued pursuant to section 554.9306(2).

II. Standard of Review.

Our review is for errors at law. St. Ansgar Mills, Inc. v. Streit, 613 N.W.2d 289, 292 (Iowa 2000). We will uphold the district court's decision to grant summary judgment if there is no genuine issue of material fact. Id. Because the facts are not in dispute, the question we must resolve is whether the district court correctly applied the law to the facts. Id.

III. Proceeds.

Our uniform commercial code establishes the rights of a secured party to the proceeds from the disposition of collateral. Iowa Code section 554.9306(2) provides:

Except where this Article otherwise provides, 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.

Thus, this section describes the general rule for secured parties, subject to exceptions identified in other sections of the Code. See Iowa Code § 554.9307 (protections for buyers of goods). Generally, a security interest not only continues in collateral following its sale or disposition, but it also continues in any identifiable proceeds. Id. § 554.9306(2). This section is identical to Uniform Commercial Code (U.C.C.) section 9-306(2). See Unif. Commercial Code § 9-306(2), 3A U.L.A. 162 (1992).

Section 554.9306(1) broadly defines "proceeds" to include "whatever is received upon the sale, exchange, or other disposition of collateral or proceeds." However, there is a split in authority whether subsection (2) requires the debtor to receive the proceeds before the security interest will continue in the proceeds. As one court has recognized:

[U.C.C. § 9-306(2), ...] is capable of being read to say that proceeds, which include collections, must be received by the debtor, or that the proceeds need not be received by the debtor but the security interest will in any event continue in identifiable proceeds regardless of who receives them and it will also continue in collections received by the debtor.

Eastern Idaho Prod. Credit Ass'n v. Idaho Gem, Inc., 122 Idaho 946, 950, 842 P.2d 282, 286 (1992) (quoting Ray D. Henson, Secured Transactions Under the Uniform Commercial Code § 6-1, at 197 (2d ed.1979)).

Those courts that have determined that a security interest continues in proceeds from the sale of the collateral only if the debtor receives the proceeds construe the phrase "received by the debtor" in U.C.C. section 9-306(2) to modify the phrase "identifiable proceeds" as well as the term "collections." See First Interstate Bank v. Arizona Agrochemical Co., 731 P.2d 746, 748 (Colo.Ct.App.1986)

; Eastern Idaho Prod. Credit Ass'n,

842 P.2d at 286-87; see also Scallop Petroleum Co. v. Banque Trad-Credit Lyonnais (France) S.A., 690 F.Supp. 184, 190 (S.D.N.Y.1988); Norfolk Prod. Credit Ass'n v. Bank of Norfolk, 220 Neb. 593, 597-98, 371 N.W.2d 276, 279 (1985); Lake Ontario Prod. Credit Ass'n v. Partnership of Grove, 138 A.D.2d 930, 932, 526 N.Y.S.2d 985, 986 (N.Y.App.Div.1988). Other courts find a security interest continues in the proceeds regardless of whether the debtor or someone other than the debtor receives the proceeds. See In re Reliance Equities, Inc., 966 F.2d 1338, 1340-41 (10th Cir.1992); Am. Nat'l Bank v. Cloud, 201 Cal.App.3d 766, 775-76, 247 Cal.Rptr. 325, 330 (1988); Producers Cotton Oil Co. v. Amstar Corp., 197 Cal. App.3d 638, 649-651, 242 Cal.Rptr. 914, 920 (1988); Farnum v. C.J. Merrill, Inc., 264 A.2d 150, 156 (Me.1970); Vacura v. Haar's Equip., Inc., 364 N.W.2d 387, 392 (Minn. 1985); Prod. Credit Ass'n v. Melland, 278 N.W.2d 780, 788-89 (N.D.1979); Baker Prod. Credit Ass'n v. Long Creek Meat Co., 266 Or. 643, 650-51, 513 P.2d 1129, 1132-33 (1973); Cent. Washington Bank v. Mendelson-Zeller, Inc., 113 Wash.2d 346, 779 P.2d 697, 704 (1989). These courts have construed the phrase "received by the debtor" as only modifying "collections." This appears to be the majority rule. See Centerre Bank, N.A. v. New Holland Div. of Sperry Corp., 832 F.2d 1415, 1419 (7th Cir.1987) (citing 9 R. Anderson, Uniform Commercial Code § 9-306:24, at 152 (3d ed.1985)). We have not previously considered this issue.¹

We recognize compelling arguments exist on both sides of the issue. On one hand, the Official Comment to U.C.C. section 9-306 indicates the section "states a secured party's right to the proceeds received by a debtor on disposition of the collateral...." Unif. Commercial Code § 9-306, 3A U.L.A. 165 cmt. 1 (emphasis added); see Centerre Bank, N.A., 832 F.2d at 1419

(citing R. Hillman, J. McDonnell & S. Nickles, Common Law and Equity Under the Uniform Commercial Code ¶ 22.05[1][b], at 22-55 (1985)); First Interstate Bank, 731 P.2d at 748 (Official Code Comment indicates drafters' intent to define proceeds as those actually received by the debtor); Eastern Idaho Prod. Credit Ass'n,

842 P.2d at 286 (same). Additionally, if the term "proceeds" in the last clause of section 554.9306(2) takes on its full meaning under section 554.9306(1) so that it is defined without reference to who receives the proceeds, then the definition would necessarily include "collections received by the debtor" and render the phrase superfluous. See 2A Norman J. Singer, Sutherland Statutory Construction § 47.17, at 284-85 (Clark Boardman Callaghan 6th ed.2000). We do not interpret statutes to render any part superfluous. State v. Jennie Coulter Day Nursery, 218 N.W.2d 579, 582 (Iowa 1974); see 2A Singer, Sutherland Statutory Construction § 47.17, at 283-84. These arguments, and others, support a finding that a security interest continues in proceeds under section 554.9306(2) only if received by the debtor.²

See Eastern Idaho Prod. Credit Ass'n,

842 P.2d at 286-87.

On the other hand, the confusion that exists under the statute is essentially due to the placement of the modifying phrase "received by the debtor" in the last clause of section 554.9306(2). This phrase follows the word "collections," and clearly modifies "collections" to mean those "received by the debtor." See Producers Cotton Oil Co.,242 Cal.Rptr. at 920; Farnum, 264...