Lafayette Production Credit v. Wilson Foods Corp.

• Decision Date: 14 October 1987
• Docket Number: No. H 82-603.,H 82-603.
• Citation: 687 F. Supp. 1267
• Parties: LAFAYETTE PRODUCTION CREDIT ASSOCIATION, Plaintiff, v. WILSON FOODS CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of Indiana

687 F. Supp. 1267

LAFAYETTE PRODUCTION CREDIT ASSOCIATION, Plaintiff, v. WILSON FOODS CORPORATION, Defendant.

No. H 82-603.

United States District Court, N.D. Indiana, Hammond Division.

October 14, 1987.

COPYRIGHT MATERIAL OMITTED

Steven R. Pennell, James V. McGlone, Stuart & Branigin, Lafayette, Ind., for plaintiff.

James T. Malysiak, Freeman, Rothe, Freeman & Salzman, Chicago, Ill., for defendant.

AMENDED JUDGMENT ORDER¹

KANNE, Circuit Judge.²

This is a case about conversion — a meat packer's purchase and use of hogs which were subject to a security interest. Hogs raised by an Indiana farmer provided security for a livestock production loan by an agricultural lender, Lafayette Production Credit Association (PCA). The total loan exceeded $1.8 million. The farmer met with PCA over a two day period to discuss the terms of renewing his annual production loan. During these meetings the farmer signed several documents relating to the loan, including a loan closing letter which stated that, as hogs were sold, payment was to be received in the form of checks payable jointly to PCA and the farmer. A joint security agreement/financing statement was filed in accordance with Indiana's Uniform Commercial Code. During an eighteen month period shortly after the loan was renewed, the farmer sold over 12,000 head of hogs to a particular meat packer, Wilson Foods Corporation (Wilson). The farmer obtained payments from Wilson which ignored the joint check requirement provided by the loan agreement. These payments totaled over $1.4 million. During the period of sales to Wilson, PCA made various inquiries about the farmer's hog sales and was frequently advised by the farmer that he was pursuing refinancing for the entire loan. PCA received no proceeds from these sales yet delayed taking any legal action against the farmer. Ultimately the farmer declared bankruptcy.

Following the Nelson bankruptcy PCA brought action against Wilson for conversion. A partial summary judgment was granted in favor of Wilson with regard to PCA's claim for civil damages based on criminal conversion. Later a bench trial was held at which PCA sought compensatory, treble and punitive damages as well as costs, attorney fees and prejudgment interest. This opinion contains findings of fact and conclusions of law as required by FED. R.CIV.P. 52.³

Based on the facts and Indiana law as discussed below, the court finds: (1) that the security agreement filed by PCA incorporated the conditions of the loan closing letter; (2) that Wilson's conduct constituted conversion; (3) the defenses of authorization, estoppel, and avoidable consequences asserted by Wilson are inapplicable; (4) that Wilson is liable for compensatory damages and prejudgment interest; and, (5) that Wilson is not liable for punitive or treble damages or attorney fees.

I. STATEMENT OF FACTS

Howard and Beverly Nelson operated a large-scale hog farm near Rensselaer, Indiana. Beginning in 1964 the Nelsons annually received financing from plaintiff, PCA, by renewing their application for operating funds. Each year PCA would renew the loan and take a security interest in Nelson Farm hogs. The Nelsons would raise and sell hogs, using the proceeds to cover operating expenses and to repay the outstanding PCA debt.

At the end of the 1970's, like other farmers with heavy debt service, the Nelsons began to experience cash flow difficulties. PCA conditioned the 1980 loan on several provisions, including a requirement that all hog sales be paid by checks issued jointly to PCA and Nelson Farms, Inc. PCA instituted this joint check requirement in an effort to gain timely repayment of the loan. The joint check requirement, along with seven other conditions, was encompassed in a loan closing letter signed by both parties and dated February 12, 1980.

With the PCA financing terms completed, a valid security agreement on the hogs was executed. This agreement was then perfected by filing a joint security agreement/financing statement with the Recorder of Jasper County on February 21, 1980, and with the Indiana Secretary of State on February 22, 1980.

PCA advanced a total of $1,817,784.90 to the Nelsons pursuant to their agreement.

Initially, the Nelsons complied with the agreement and had joint checks issued for all hog sales, with part of the proceeds going to PCA. However, times were tough and the Nelsons needed cash. They began violating the joint check requirement by selling hogs without having joint checks issued and without distributing any of the funds to PCA.

As early as June 1980, PCA suspected that Nelson was ignoring the joint check provision. Lawrence Dill, PCA's Rensselaer manager, decided to notify Nelson's customary buyers. Dill wrote to Purchasers Market Association (PMA) and Heinhold Hog Market (Heinhold), on June 27, 1980, advising them of PCA's security interest in the Nelson Farms' hogs as well as of the joint check requirement. Nelson briefly continued sales to his local buyers and PCA again received joint checks from PMA for a few weeks. However, with his local customary buyers apprised by PCA of the lien on the Nelson Farms' hogs, Howard Nelson was stymied in his efforts to sell his hogs and keep the entire proceeds for himself.

Thus, after July 16, 1980, Nelson discontinued selling hogs to PMA. Nor were any sales made to Heinhold during this period.

In the meantime, Nelson's twenty-one year old son-in-law, Jim Misch, sold hogs he owned personally to defendant Wilson at its Monon, Indiana hog buying station. Misch received a single check issued in his name, covering both the price of the hogs and payment for delivery. Although Misch produced very few hogs for sale himself, his contact with Wilson's hog buying station prompted the scheme employed by Nelson.

On July 23, 1980, Misch appeared at Wilson's hog buying station in Monon with a load of Nelson Farm hogs. In contrast to the method of payment in the initial Misch hog sale, Wilson issued two checks per transaction, one made payable solely to Howard Nelson and a smaller check made payable to Misch for the trucking of the hogs. Seven separate sales were made between July 23 and August 18, 1980, with Wilson paying a total of $56,766.37 in Nelson's name. (See Plaintiff's Exhibit 143).

During the time of these sales, PCA suspected that Nelson was violating the joint check provision. However, Nelson informed various PCA representatives that he was seeking refinancing from other lenders to pay them off, and PCA continued to forego any legal action against the Nelsons.

On September 5, 1980, Mr. Dill wrote Wilson informing them of the PCA lien and joint check requirement for Nelson Farm hogs. Although there are factual disputes regarding the exact details of Wilson's internal response after receiving PCA's letter, it is clear that Wilson's legal department was consulted regarding the situation.

On September 8, Mr. Gilmore, a hog buyer employed by Wilson, was instructed by his supervisor, Bill Peterson, that he should refuse to purchase hogs only if he "knew with certaintude" that the person selling them was not the actual owner. Peterson told Gilmore to go ahead and purchase hogs if he was "merely suspicious" as to their actual ownership.

From September 5, 1980, to December 31, 1981, Wilson purchased Nelson Farms' hogs with a fair market value of $1,438,402.64. (See Plaintiff's Exhibit 143). Each check was endorsed by either Howard or Beverly Nelson. From July, 1980 through December, 1981 Nelson sold between 12,000 and 13,000 head of hogs to Wilson. PCA received none of the proceeds from any of these sales to Wilson.

The Nelsons were unable to find a new lender willing to refinance their PCA loan. (Although they apparently made efforts throughout the United States and abroad). With their unmanageable debt to PCA and numerous suppliers, a decline in the market price of hogs, diseased pigs, and plain mismanagement, the Nelsons filed bankruptcy in December of 1981.

PCA then filed a claim against Wilson for tortious conversion in Indiana state court. The case was subsequently removed to federal court and this court properly has jurisdiction pursuant to 28 U.S.C. § 1332.⁴

II. THE ISSUES

PCA alleges that Wilson is liable for conversion as a result of purchasing hogs in which PCA had a valid security interest.

Wilson contends that the joint check agreement was not a part of the security agreement, and asserts several defenses to PCA's charge of conversion. Wilson claims: (1) that PCA authorized the hog sales by not preventing them even though PCA was aware the sales were occurring; (2) that PCA is estopped from recovery because of misrepresentations made by PCA; and (3) the doctrine of avoidable consequences operates to bar PCA's recovery.

III. CONSTRUCTION OF THE SECURITY AGREEMENT

The primary issue is whether Wilson is liable for conversion of hogs as alleged by PCA. However, in order for Wilson to be liable for conversion, PCA must establish an ownership interest in the hogs. PCA bases its right to possession of the hogs on the security agreement/financing statement it entered into with Howard and Beverly Nelson. PCA asserts that the parties agreed that PCA would loan money to the Nelsons in exchange for compliance with certain conditions. The condition crucial to the outcome of this case was contained in a loan closing letter, signed by the parties, which stated:

No. 4 All hogs sold will be sold with understanding checks shall be made payable to Lafayette Production Credit Association and Nelson Farms, Inc.

PCA argues that the Indiana Uniform Commercial Code, and rules regarding the construction of contracts, mandate that all of the documents relating to the loan should be construed together. Thus, PCA would include not only the financing statement and security agreement, but also the loan agreement and loan closing letter as the "agreement" between PCA and the Nelsons.

Indiana's Uniform Commercial Code requires both...