Frazier Nuts, Inc. v. American Ag Credit

• Decision Date: 02 August 2006
• Docket Number: No. F047759.,F047759.
• Citation: 46 Cal.Rptr.3d 869,141 Cal.App.4th 1263
• Court: California Court of Appeals Court of Appeals
• Parties: FRAZIER NUTS, INC., et al., Plaintiffs and Appellants, v. AMERICAN AG CREDIT, Defendant and Respondent. J. Baxter Knight et al., Plaintiffs and Appellants v. American AG Credit, Defendant and Respondent.

46 Cal.Rptr.3d 869

141 Cal.App.4th 1263

FRAZIER NUTS, INC., et al., Plaintiffs and Appellants, v. AMERICAN AG CREDIT, Defendant and Respondent.

J. Baxter Knight et al., Plaintiffs and Appellants v. American AG Credit, Defendant and Respondent.

No. F047759.

Court of Appeal, Fifth District.

August 2, 2006. Certified for Partial Publication.^*

Drummond & Associates, Bridget B. Laurent and Donald F. Drummond, San Francisco, for Plaintiffs and Appellants.

Abbey, Weitzenberg, Warren & Emery, Patrick W. Emery, Santa Rosa, John W. Alden, Los Angeles, and Rachel K. Nunes, for Defendant and Respondent.

OPINION

DAWSON, J.

Creditors of a bankrupt almond processor each claim superior rights to proceeds generated by the processor's sale of almonds. The processor paid the proceeds to its secured lender to reduce its loan balance. Unpaid almond growers who sold their crops to the processor on credit sued the secured lender to recover the proceeds. The growers claimed California's producer's lien statute gave them rights to the proceeds that were superior to the lender's security interest.

The trial court ruled in favor of the secured lender by (1) sustaining a demurrer to the growers' claims of conversion and unfair business practices and (2) granting summary judgment on the growers' remaining claims for intentional interference with contractual relations, unjust enrichment, and money had and received.

The growers appeal and ask this court to resolve a question of law that has not been addressed by a California appellate court—to wit, whether California's producer's lien statute grants a producer rights to the proceeds from a processor's sale of farm products that have priority over the rights of other claimants.

We conclude that the provision in Food and Agricultural Code section 55638¹ that imposes a legal obligation on processors to use the proceeds of sales of farm products to pay producers necessarily creates a correlative right in producers to be paid from the proceeds generated by such sales. The producer's right to be paid from the proceeds meets the ordinary definition of "lien." As a lien granted to producers, the right to be paid from the proceeds constitutes a "producer's lien" for purposes of the priority provisions contained in section 55633. As a result, the growers' claims to the proceeds from the processor's sale of almonds are prior in dignity to the lender's claim based on its security interest.

Therefore, the judgment will be reversed. The growers may pursue theories of recovery for money had and received, conversion, unjust enrichment (quasi-contract), and unfair business practices.

FACTS

Each of the numerous plaintiffs in this case is an almond grower (collectively, Growers). Central Valley Processing, Inc. (Processor), a California corporation, was a processor of almonds with facilities located in Merced, California. Defendant American Ag Credit (Secured Lender) is a production credit association² that acts as an agricultural lender and has an office in Merced, California.

Growers delivered almonds from the 2002-2003 harvest to Processor. Each Grower delivered its almonds pursuant to a contract with Processor and in return received a promise of payment by Processor.

On April 5, 2000, Processor began a lending relationship with Secured Lender's predecessor in interest, Central Valley Production Credit Association, which extended a $4 million revolving line of credit to Processor. The initial disbursement under the line of credit was approximately $2.3 million used by Processor to pay off a preexisting loan from California Federal Bank. In November 2000, Processor paid the balance on its line of credit with Central Valley Production Credit Association to zero and maintained that zero balance until another draw was taken on January 4, 2001.

On June 25, 2001, Processor executed documents reflecting a $4,001,000 line of credit with Secured Lender. Processor paid the line of credit balance to zero in late November 2001, and drew against the line of credit on January 22, 2002. When the line of credit matured on April 1, 2002, the balance Processor owed was $4 million. Secured Lender renewed the line of credit on July 9, 2002, and established a new maturity date of November 1, 2002. The principal sum of the renewed line of credit was $4 million. The collateral securing Secured Lender's line of credit included Processor's inventory, accounts receivable, and the equipment at the facility Processor operated in Merced, California.³

The line of credit also was secured by the personal guarantees of five of Processor's shareholders. The five persons were the general partners of Merced Almond Venture, a California general partnership, which held title to the real estate where Processor's facility was located.⁴

Processor did not pay the line of credit to zero by the November 1, 2002, maturity date. As a result, the loan officer sent Processor a letter dated December 11, 2002, that (1) described an earlier discussion between the loan officer and Processor about sources of funds for the repayment of the line of credit and (2) stated "[i]t is imperative that this loan pay to $0 as agreed."

On February 21, 2003, Processor filed a chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of California. Processor's bankruptcy case was converted to a chapter 7 proceeding on November 26, 2003.

Between the July 2002 renewal of Processor's line of credit and its filing for bankruptcy, Processor paid Secured Lender (1) $94,448.21 on July 26, 2002, (2) $300 on August 20, 2002, (3) $51,550.68 on October 1, 2002, and (4) $243,024.64 on December 12, 2002.⁵ Secured Lender asserts that the only payment of principal it received under the line of credit was in the amount of $200,000, thus implying that the other amounts received were for interest and fees.

Pursuant to an order of the bankruptcy court dated June 2003, additional funds were paid to Secured Lender subject to any claims that Growers might have had to those funds.

PROCEEDINGS

Two groups of Growers filed complaints against Secured Lender. The cases were consolidated. All Growers assert claims against Secured Lender based on the same five legal theories—(1) intentional interference with economic relations, (2) money had and received, (3) conversion, (4) unjust enrichment, and (5) unfair business practice in violation of section 17200 of the Business and Professions Code.⁶

Secured Lender filed a demurrer contending that the five legal theories asserted by Growers all failed to state a claim. The superior court sustained the demurrer without leave to amend as to the third cause of action, for conversion, and the fifth cause of action, for violation of the unfair competition law, and otherwise overruled it.

In December 2004, Secured Lender moved for summary judgment or, in the alternative, for summary adjudication as to the remaining claims asserted by Growers. Secured Lender contended that Growers could not show (1) that it engaged in any conduct that induced Processor to breach its contracts with Growers, (2) that Secured Lender received any money to which Growers were entitled, or (3) that Secured Lender was enriched at the expense of Growers.

The superior court granted Secured Lender's motion for summary judgment on the grounds that (1) Secured Lender's mere acquiescence in Processor's decision not to pay Growers was insufficient to create a triable issue of fact whether Secured Lender intentionally interfered with the contractual relationships between Processor and Growers and, (2) Growers' statutory lien did not extend to the accounts receivable or sale proceeds arising out of the sale of the 2002 crop by Processor.

Judgment in favor of Secured Lender was filed on March 28, 2005. Growers filed a notice of appeal on April 5, 2005.

DISCUSSION

The fundamental dispute between Growers and Secured Lender concerns Growers' claims to the proceeds generated by Processor's sale of almonds to third parties.

Growers contend they are entitled "to recover the wrongfully diverted proceeds of the sale of their almonds." First, they contend, they had clear contractual rights to those proceeds; second, they had rights under those provisions of the producer's lien statute that address proceeds from the sale of processed farm products.

In contrast, Secured Lender contends that all of Growers' legal theories fail because Growers had no lien or other right, at any time, in the almond sale proceeds. Secured Lender also contends that its rights as the holder of a security interest in Processor's inventory, accounts receivable, and proceeds lawfully entitled it to collect the proceeds from the almond sales.

These contentions can be reduced to two specific issues. First, did Growers have any rights to the proceeds from the almond sales? Second, if Growers had rights to the proceeds, are those rights superior to a security interest?⁷

I. Growers Held Rights to the Proceeds

A. Background on Statutory Producer's Lien

Producer's liens in farm products held by processors are the subject of division 20 (Processors, Storers, Dealers, and Distributors of Agricultural Products), chapter 6 (Processors of Farm Products), article 9 (§§ 55631-55653) of the Food and Agricultural Code.

The producer's lien improves the position of a farmer who sells his or her farm products to a processor under an express or implied contract that provides for the processor to pay the producer later. (§ 55631; Note, The California Agricultural Producer's Lien, Processing Company Insolvencies, and Federal Bankruptcy Law: An Evaluation and Alternative Methods of Protecting Farmers (1985) 36 Hastings L.J. 609, 612 (Agricultural Producer's Lien).) The lien covers the full amount owed to the producer or, if a price or method of determining it was not set by the contract, the value of the farm product on the date of delivery. (§ 55631.) The lien attaches and is given...