FS Credit Corp. v. Troy Elevator, Inc.

• Decision Date: 17 December 1986
• Docket Number: No. 86-199,86-199
• Citation: 397 N.W.2d 735
• Parties: 2 UCC Rep.Serv.2d 1704 FS CREDIT CORPORATION, Appellant, v. TROY ELEVATOR, INC., Appellee.
• Court: Iowa Supreme Court

Page 735

397 N.W.2d 735

2 UCC Rep.Serv.2d 1704

FS CREDIT CORPORATION, Appellant, v. TROY ELEVATOR, INC., Appellee.

No. 86-199.

Supreme Court of Iowa.

Dec. 17, 1986.

Allan C. Orsborn of Dull, Keith, Beaver & Orsborn, Ottumwa, for appellant.

John B. Martin of Stephens & Martin, Bloomfield, for appellee.

Considered by REYNOLDSON, C.J., and HARRIS, SCHULTZ, LAVORATO and NEUMAN, JJ.

SCHULTZ, Justice.

This appeal presents a dispute between a lienholder with a security interest, perfected under the Uniform Commercial Code, in a farmer's corn crop and the purchaser of the corn. FS Credit Corporation (FS) extends credit to farmers through its member companies to finance crop production expense. Prior to the 1982 crop season, FS approved the extension of credit to farmer Kenneth Green by one of its members, Big Three Farm Service (Big Three). Big Three then assigned its interest in the account to FS. Green signed three separate security agreements and financing statements giving the creditor a lien on all crops of the farm. Green sold his corn crop to the Troy Elevator, Inc. (Troy). FS commenced this conversion suit against Troy claiming a superior lien on the purchased corn up to the amount of Green's outstanding debt.

In its ruling the trial court relied heavily on the prior course of dealings between FS and Green; therefore, we briefly review this history. In 1980 and 1981, Green had obtained credit through FS and its member company to finance his growing of crops. Although the security agreements Green signed provided that Green would not sell the collateral without prior written approval of the creditor, FS never enforced that provision or objected to Green selling his crops without approval. Each year Green sold the crops without permission and paid off his obligation to FS.

In 1982, FS provided Green credit in the amount of $86,000 in exchange for notes, security agreements and financing statements. Prior to extending credit, however, FS required a subordination agreement from the Exchange Bank, which held a prior security interest over the same property. In November and December, Green apparently considered obtaining a government commodity credit loan on his beans and corn. The government requires that the farmer obtain a written lien waiver from the lienholder as a prerequisite to obtaining such a loan.

On November 30, an agent of Big Three executed such a waiver on Green's 1982 bean crop, authorizing payment to Green alone rather than by check payable jointly to Green and Big Three. Prior to executing the lien waiver FS agreed that the proceeds could be paid to the Exchange Bank; however, the bank guaranteed payment to FS in the amount of $40,000. The beans were later sold to Troy for the sum of $62,240 and the bank applied $40,000 on Green's obligation to FS.

On December 10, Green sought and obtained a similar waiver applicable to the 1982 corn crop allowing the payment to be made to Green, but there was an irregularity in the authorizing signature. In the appropriate place for the lienholder's signature, Big Three Farm Service was typed in and below this the plant supervisor, as agent for Big Three, signed in longhand "Big Three Farm Service." The agent did not sign his own name as agent. The plant supervisor testified that he executed this lien waiver but did not realize he was supposed to put his name on it. However, he testified it was his intention to execute and deliver to Mr. Green the lien waiver.

Again Green did not obtain the government commodity credit loan. Green sold his corn to Troy Elevator. He was paid $85,082.32, but only $34,484.53 of that amount was applied to the FS loan, leaving an outstanding balance of $32,188,51. Green had not obtained written permission from FS or its member company to sell his corn to Troy.

Following a trial to the court, the trial court dismissed FS's action. In concluding that FS impliedly waived its security interest in the Green corn by its course of dealing in 1980 and 1981, the trial court relied on our holdings in Lisbon Bank & Trust Co. v. Murray, 206 N.W.2d 96 (Iowa 1973), Hedrick Savings Bank v. Myers, 229 N.W.2d 252 (Iowa 1975), and Ottumwa Production Credit Association v. Keoco Auction Co., 347 N.W.2d 393 (Iowa 1984). These cases interpret Iowa Code section 554.9306(2), embodying section 9-306(2) of the Uniform Commercial Code, which 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.

In each of the cited cases we held that the lender authorized the disposition of the collateral and waived its lien as against third parties.

In Lisbon Bank & Trust Co. v. Murray, 206 N.W.2d 96 (Iowa 1973), we affirmed the trial court's holding that a lender, who on previous loans had permitted the debtor to sell collateral without authorization, established a course of dealing impliedly authorizing the sale of collateral and waiving its security interest in the collateral after sale. This waiver was not affected by the debtor's failure to live up to his part of the bargain, that is, to apply the proceeds to his loan. The waiver was effective as to the third party purchaser of the collateral. Id. at 99.

The holding in Lisbon Bank & Trust, however, was limited in that there was no express contract provision in the security agreement which provided that the debtor could not sell the collateral without permission of the creditor. The question of the effect of such a contract provision was reached by the court in Hedrick Savings Bank v. Myers, 229 N.W.2d 252 (Iowa 1975), because the security agreement involved in that case contained a provision which required written authorization before the debtor could sell the collateral. Id. at 253-54. We held that, despite the violation of an express contract provision, the facts concerning previous sales without permission were sufficient to establish a course of dealing from which the trial court found implied authority to sell. Thus, we held that a prior course of dealing may constitute authority to sell pledged collateral under section 554.9306(2). Id. at 256. We recognized that there was a split of authority on this proposition among other jurisdictions. Id. at 255. We adopted the policy that as between the two parties who trusted the debtor to handle correctly the proceeds from the sale of pledged collateral, the creditor must bear the risk of loss. See Lisbon Bank & Trust, 206 N.W.2d at 99.

This policy was reiterated in Ottumwa Production Credit Association v. Keoco Auction Co., 347 N.W.2d 393 (Iowa 1984), when we reflected that it was an unfortunate result when an innocent party must bear the loss of a debtor's defalcation, but reasoned that, as between the creditor and an auctioneer who sold the collateral, the creditor must bear the loss that was a result of its own lax collection procedure. Id. at 397. We held that the creditor, in telling the farmer to liquidate the collateral and pay off his loan, orally authorized the sale, thus waiving the condition in the security agreement that required written consent. Id. at 396-98.

In the present case, FS maintains the trial court was wrong in relying on the parties' course of dealing in the previous years because of a new provision in the 1982 security agreement. All of the security agreements signed by Green contained an express provision that the debtor could not dispose of or encumber the collateral without the express written consent of the secured party. The 1982 security agreement, however, contained an additional provision which goes on to state, "[A]ny waiver by the company of this paragraph or failure to require prior written consent shall in no way operate as a waiver of patron's obligations hereunder for any future sale, transaction, or event." FS urges that this additional language precludes the court from considering prior course of dealings between the parties and finding a waiver based upon that prior course of dealing. The trial court rejected this contention reasoning that the additional language "is merely an attempt by FS to continue its inadequate practices concerning collateral and at the same time avoid the sound public policy behind the rulings" in the previously cited cases.

On appeal we first must determine whether the additional language can affect a debtor's reliance on a previous waiver, by course of dealing, of a contract clause requiring written consent to sell collateral. Because we believe the new terms interrupt the debtor's reliance on past dealings, we cannot agree with the trial court's holding that the condition was waived. The remaining issue is whether there has been implied waiver by subsequent conduct or express waiver.

I. Effect of additional language on previous course of dealing waiver. We believe that the trial court's failure to give any consideration to the additional and new language in the 1982 agreements is error. One who has waived a condition in a contract may withdraw the waiver, so long as the other party is afforded a reasonable opportunity to perform the conditions of the contract that had been waived. See Dunn v. General Equities of Iowa, Ltd., 319 N.W.2d 515, 517 (Iowa 1982); Bettis v. Bettis, 228 N.W.2d 193, 195 (Iowa 1975). Thus, the condition of the contract that was waived by a course of dealing may be reestablished by giving...