In re Western Iowa Limestone, Inc.

• Decision Date: 13 August 2008
• Docket Number: No. 07-1968.,07-1968.
• Citation: 538 F.3d 858
• Parties: In re WESTERN IOWA LIMESTONE, INC., Debtor. United Bank of Iowa, Appellee, v. Independent Inputs; Leinen, Inc.; Paul Leinen, Appellants, Western Iowa Limestone, Inc., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

538 F.3d 858

In re WESTERN IOWA LIMESTONE, INC., Debtor.

United Bank of Iowa, Appellee, v. Independent Inputs; Leinen, Inc.; Paul Leinen, Appellants, Western Iowa Limestone, Inc., Appellee.

No. 07-1968.

United States Court of Appeals, Eighth Circuit.

Submitted: January 17, 2008.

Filed: August 13, 2008.

Kirk E. Goettsch, argued, Council Bluffs, IA, for appellant.

James J. Niemeier, argued, Robert J. Bothe, Michael Eversden, on the brief, Omaha, NE, for appellee.

Before LOKEN, Chief Judge, HANSEN and MURPHY, Circuit Judges.

HANSEN, Circuit Judge.

This case involves a dispute between a secured lender (who held a security interest in its debtor's inventory) and subsequent purchasers of that inventory (who left their purchased goods on the debtor's premises) over whose interest took priority when the debtor filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The bankruptcy court¹ determined that the subsequent purchasers were buyers in the ordinary course of business, as defined in Iowa Code § 554.1201(9) (2005),² by virtue of their constructive possession of the goods, giving the buyers priority under Iowa Code § 554.9320(1) (2005). The Eighth Circuit Bankruptcy Appellate Panel (BAP) reversed, concluding that the buyers did not have constructive possession of the goods under Iowa law. United Bank of Ia. v. Indep. Inputs (In re W. Ia. Limestone, Inc.), 375 B.R. 518 (8th Cir.BAP2007). We now reverse the BAP's judgment and reinstate the decision of the bankruptcy court.

I.

Western Iowa Limestone, Inc. (WIL) owned several quarries throughout Iowa, and it began marketing agricultural lime as a by-product of its operations in 2004. It marketed the ag lime through six fertilizer and chemical dealers, who resold the ag lime at retail. In January 2005, one of WIL's dealers, Independent Inputs, LLC, purchased 5,000 tons of ag lime from WIL, and in February 2005, two other dealers, Paul Leinen and Leinen, Inc. (collectively "Leinen" and hereinafter, together with Independent Inputs, referred to as "Dealers"), purchased a total of 13,400 tons of ag lime. The Dealers paid for the ag lime at the time of the purchases, and each of the bills of sale noted that the ag lime would remain at the quarry until the Dealers sold the ag lime to their ultimate customers. This arrangement was beneficial to WIL, which also provided trucking services. WIL maintained its ag lime in a single fungible pile on its premises. The ag lime that the Dealers purchased likewise remained in the fungible pile until resold to their customers and removed from the premises.

WIL filed a petition under Chapter 11 of the Bankruptcy Code on December 12, 2005. At that time, Independent Inputs had resold and removed 416 tons of ag lime from WIL's premises, and Leinen had removed 1,406 tons. United Bank of Iowa is WIL's largest secured creditor, and it had a security interest in all of WIL's assets, including its inventory, accounts receivable, and proceeds, to secure a $6 million loan. The ag lime remaining on WIL's premises was sold in the bankruptcy proceedings as part of its inventory, and the Dealers filed a joint objection to the proposed distributions from the sale of the inventory, claiming priority over United Bank as buyers in the ordinary course of business (BIOC) to the extent of the value of the ag lime they had purchased but had not yet removed from WIL's premises. Independent Inputs' claim was for $35,522, and Leinen's claims were for $89,508.

The bankruptcy court initially determined that the Dealers failed to establish BIOC status under Iowa law because they did not take physical possession of the ag lime or have a right to recover the goods under Article 2 of the Iowa Uniform Commercial Code (Iowa UCC) as required by Iowa Code § 554.1201(9). On a motion to alter or amend, the bankruptcy court reversed itself, concluding that the Dealers had taken constructive possession of the ag lime and had satisfied the requirements for BIOC status under § 554.1201(9). United Bank appealed, and the BAP reversed, concluding that the Dealers did not constructively possess the ag lime under Iowa law for purposes of a priority contest between a secured creditor and a purchaser. Because the BAP concluded that the Dealers did not have constructive possession of the ag lime, it avoided the separate issue of whether constructive possession satisfies the requirement of "tak[ing] possession" contained in § 554.1201(9). The Dealers appeal from the BAP's decision.

II.

"In an appeal from the BAP, this court sits as a second court of review, reviewing [the bankruptcy court's] findings of fact for clear error and [its] conclusions of law de novo." Capital One Auto Fin. v. Osborn, 515 F.3d 817, 821 (8th Cir.2008). Whether the Dealers constructively possessed the ag lime under Iowa law is a mixed question of fact and law, which is subject to de novo review. DeBold v. Case, 452 F.3d 756, 761 (8th Cir.2006). We likewise review de novo the interpretation and application of state law. Nolles v. State Comm. for Reorganization of Sch. Dists., 524 F.3d 892, 901 (8th Cir.2008) (citing Salve Regina Coll. v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991)).

Under Iowa's UCC law, "a buyer in ordinary course of business ... takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence." Iowa Code § 554.9320(1). Thus, the Dealers take free of United Bank's prior security interest if they meet the definition of a BIOC. "Buyer in ordinary course of business" is defined by the Iowa UCC as

a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person ... in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices.... Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. `Buyer in ordinary course of business' does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.

Iowa Code § 554.1201(9).

Relevant to this appeal, BIOC status requires that the sale comport with the usual or customary practices for the kind of business involved and that the buyer take possession of the goods. (The Dealers do not claim that they had a right to recover under Article 2.) We begin with the central issue of this case—that is, whether a buyer who purchases fungible goods from a seller but leaves the goods at the seller's premises satisfies the requirement that the buyer "take[] possession of the goods." Id. We must determine whether constructive possession is within the meaning of the statute, and if so, whether the circumstances of this case amount to constructive possession sufficient to confer BIOC status.

The penultimate sentence of the definition of a BIOC requires that the buyer either "take[] possession" or "ha[ve] a right to recover the goods from the seller under Article 2." Id. The requirement was added to the Uniform Commercial Code (UCC) in 1999, and the Iowa legislature adopted the revised UCC provision verbatim in 2000. The term "possession" is not defined in the Iowa UCC, and § 554.1201(9) does not elaborate on what is meant by "tak[ing] possession." Iowa courts "determine legislative intent from the words chosen by the legislature.... Absent a statutory definition or an established meaning in the law, words in the statute are given their ordinary and common meaning by considering the context within which they are used." City of Waterloo v. Bainbridge, 749 N.W.2d 245, 248 (Iowa 2008) (internal marks omitted). Iowa courts look beyond the statute's express terms only when the language is ambiguous. "A statute ... is ambiguous if reasonable minds could differ or be uncertain as to the meaning of the statute." Id. Language that is "plain, clear, and susceptible to only one meaning" is unambiguous. Id.

Section 554.1201(9) refers only to "possession," not to "physical possession" or "constructive possession." In the context of § 554.1201(9), both physical possession and constructive possession are plausible meanings of the bare term "possession," and we conclude that the term is ambiguous as used in § 554.1201(9). See First Nat'l Bank in Lenox v. Lamoni Livestock Sales Co., 417 N.W.2d 443, 447 (Iowa 1987) ("`Ambiguity in the word possession dates from the introduction into the law of the concept of constructive possession.'") (quoting Jacobson v. Aetna Cas. & Sur. Co., 233 Minn. 383, 46 N.W.2d 868, 871 (1951)). We therefore apply the rules of statutory interpretation to ascertain the Iowa legislature's intent in requiring a buyer to take possession before being considered a BIOC.

In interpreting a statute, the Supreme Court of Iowa looks to the common law to construe undefined terms. See Lamoni Livestock Sales, 417 N.W.2d at 447-48; S & S, Inc. v. Meyer, 478 N.W.2d 857, 860 (Iowa Ct.App.1991) ("Unless displaced by the UCC, ... the common law supplement[s] its provisions."). In Lamoni Livestock Sales, the court interpreted the term "possession" in the context of comment 4 to Iowa UCC § 554.9109, which distinguished between the characterization of goods as farm products or inventory depending on whether the goods were "in the possession of a debtor engaged in farming operations" or had "come[] into the possession of a marketing agency." Iowa Code § 554.9109, cmt. 4 (1987).³ The court relied on the concept of constructive possession to hold that livestock in the physical possession of a sale barn (or marketing agency) was nonetheless constructively possessed by the...