Lone Oak Farm Corp. v. Riverside Fertilizer Co.

• Citation: 428 N.W.2d 175,229 Neb. 548
• Decision Date: 19 August 1988
• Docket Number: No. 86-990,86-990
• Parties: LONE OAK FARM CORPORATION, a Nebraska Corporation, Appellee, v. RIVERSIDE FERTILIZER CO., a Nebraska Corporation, Appellant.
• Court: Supreme Court of Nebraska

Page 175

428 N.W.2d 175

229 Neb. 548

LONE OAK FARM CORPORATION, a Nebraska Corporation, Appellee, v. RIVERSIDE FERTILIZER CO., a Nebraska Corporation, Appellant.

No. 86-990.

Supreme Court of Nebraska.

Aug. 19, 1988.

Syllabus by the Court

1. Trusts: Equity: Appeal and Error. An action for constructive trust is one in equity and is reviewed de novo on the record in this court.

2. Trusts: Proof. The burden is on the party seeking to establish a constructive trust to do so by evidence which is clear, satisfactory, and convincing in character.

3. Leases: Landlord and Tenant: Crops: Tenancy in Common. Where land is leased and rent is to be paid by a share or specified amount of the crops to be raised, the landlord and tenant are tenants or owners in common of the growing crops until such time that the crop is harvested and divided.

4. Leases: Landlord and Tenant: Crops: Tenancy in Common: Mortgages. Where a landlord and tenant are tenants in common of growing crops, the tenant may mortgage or sell his interest in the crops, but his mortgagee is charged with notice of the landlord's interest. The tenant's interest is determined by the terms of the lease, and his mortgagee can take no greater interest in the crop as against the landlord than could be asserted by the tenant himself.

5. Leases: Landlord and Tenant: Crops: Security Interests. Where land is leased and rent is to be paid in cash rather than a share of the growing crops, the landlord's only recourse in the crops would be through an agreement with the tenant to give a security interest in the crops.

6. Contracts. A contract is ambiguous when, considered as a whole, it is capable of being understood in more senses than one.

7. Contracts. When a contract is ambiguous, courts will consider all the facts and circumstances leading up to the contract's execution, the nature and situation of the subject matter, and the apparent purpose of the contract.

8. Contracts. Forfeitures will be enforced only when the strict letter of the contract requires it.

9. Uniform Commercial Code: Liens: Security Interests: Words and Phrases. An equitable lien is an unperfected security interest under the Uniform Commercial Code.

10. Uniform Commercial Code: Security Interests. A perfected security interest takes priority over an unperfected security interest. Neb.U.C.C. §§ 9-301 and 9-312 (Reissue 1980).

11. Uniform Commercial Code: Security Interests. Neb.U.C.C. § 9-312(5) (Reissue 1980) is a "pure race" type statute, and a secured party who was first to perfect or file a security interest will have priority over all unperfected security interests in the same collateral, even though such party had actual or constructive knowledge of a prior unperfected security interest.

William A. Francis, of Cunningham, Blackburn, Livingston, Francis, Cote, Brock & Cunningham, Grand Island, for appellant.

Michael L. Johnson, of Luebs, Dowding, Beltzer, Leininger, Smith & Busick, Grand Island, for appellee.

BOSLAUGH, WHITE, and SHANAHAN, JJ., and SPRAGUE and THOMPSON, District Judges.

WHITE, Justice.

The plaintiff, Lone Oak Farm Corporation, brought this action to impose a constructive trust on crops, or the proceeds thereof, received by Riverside Fertilizer Co. (Riverside) allegedly in breach of a subordination agreement between the plaintiff and the defendant. The district court ruled that the subordination agreement entered into between the parties was clear and unambiguous, was controlling over the priority provisions of the Nebraska Uniform Commercial Code, and imposed a constructive trust on proceeds of crops held by the defendant in favor of the plaintiff. Riverside appeals. We affirm in part and reverse in part.

On March 19, 1984, Lone Oak Farm Corporation (landlord) leased two tracts of land to Dennis L. Land (tenant). The first tract was leased in exchange for 6,500 bushels of corn or, at the landlord's option, $20,000. The second tract was leased in exchange for 50 percent of the total crop yield. It was the tenant's responsibility to deliver the grain to the market of the landlord's choice. In addition, the landlord was to receive $3,850 from the proceeds of an insurance settlement for damage to a wheat crop. Sometime near the end of November or early December of 1984, the landlord notified the tenant that it elected to receive $20,000 for rent on tract 1. The lease further provided that the landlord was to file a security agreement covering the crops in the appropriate place and manner; however, no such security agreement was filed.

On March 21, 1984, the tenant entered into an agreement with appellant, Riverside, for the sale of goods and services necessary to produce the crops on the two tracts. On March 30 Riverside filed a financing statement and security agreement covering all crops and proceeds of crops to be grown on the subject property, and also covering crop insurance proceeds. The security agreement named the tenant and his wife as debtors. Riverside ultimately provided fuel, fertilizer, chemicals, and services to the tenant in the amount of $27,495.77.

On April 14 Riverside and the landlord entered into a subordination agreement. If the crops or crop proceeds due the tenant were not sufficient to pay the advances made by Riverside, then the landlord was to be responsible for up to $7,000 in charges for fertilizer and chemicals used upon its ground. The subordination agreement acknowledged that the landlord had a "lien or interest" in the amount of crops or proceeds set forth in the lease. The agreement was subject to the limitation that it "shall be in effect from the period of April 1, 1984 until December 1, 1984 after which eight month period previously described, no valid claim shall be made against the [landlord]."

Riverside became involved with the harvest on tract 1, apparently at the tenant's request. No one representing the landlord was present during the harvest. A representative of Riverside testified that Riverside hauled only one of every three loads of corn from tract 1 to the elevator. Neither party was able to establish conclusively what became of the rest of the corn. The tenant filed for bankruptcy prior to the trial and was not called as a witness. The record indicates that on November 1 and 2 of 1984 approximately 8,750 bushels of corn were delivered to Boilesen Grain Company from tract 1. Several days later approximately 757 bushels of beans were delivered to another grain company from tract 2. On December 13 Riverside credited the tenant's account in the amount of $27,030.05, representing corn from tract 1 and beans and crop insurance from tract 2. At the time of this lawsuit the landlord had received no crops, proceeds, or insurance money from the two tracts.

The trial court held that the landlord was not indebted to Riverside under the subordination agreement, because by its terms it had expired. The trial court further ruled that by stating in the subordination contract "no valid claim shall be made against the [landlord]" after December 1, 1984, the parties agreed that after such date Riverside's interest became subordinate to the landlord's interest. The court awarded to the plaintiff those amounts due under the lease, that is, $20,000 of the proceeds from tract 1, half of the crop proceeds ($265.42) from tract 2, and $3,850 of insurance proceeds, or a total of $24,115.42.

Riverside contends that the trial court erred (1) in failing to grant its motion for directed verdict at the close of the landlord's case; (2) in finding that the subordination agreement was not ambiguous; (3) in finding that its written agreement to provide materials and services to the landlord's tenant was not relevant and refusing to admit the same in evidence; and (4) in that the decision of the trial court was not sustained by sufficient evidence because the landlord had not perfected a lien in the crop as required by Neb.U.C.C. § 9-401 (Cum.Supp.1984).

An action for constructive trust is one in equity and is reviewed de novo on the record in this court. Knoell v. Huff, 224 Neb. 90, 395 N.W.2d 749 (1986); Neb.Rev.Stat. § 25-1925 (Reissue 1985). The burden is on the party seeking to establish a constructive trust to do so by evidence which is clear, satisfactory, and convincing in character. Knoell v. Huff, supra.

The appellant's first assignment appears to be directed only at the dispute over the corn from tract 1. The appellant asserts that "[a]t the time of [the landlord's] rest, the record did not substantiate the fact that the grain delivered to Boilesen Elevator was grown on the [landlord's] land, or that [the landlord] had any interest in the same." Brief for appellant at 12. The fact that this grain came from tract 1 of the landlord's land was stipulated to before the trial began. Riverside's real argument here seems to be that the landlord failed to establish an interest in the crop because it was unable to establish how much corn was harvested from tract 1. Riverside asserts that the proceeds from 8,750 bushels of corn it received came from the tenant's share of the crop and not the landlord's share.

Riverside's assertion necessitates a discussion of the law in Nebraska relating to this subject. The rule in this state is that where land is leased and rent is to be paid by a share or specified amount of the crops to be raised, the landlord and tenant are tenants or owners in common of the growing crops until such time that the crop is harvested and divided. Anest v. Chester B. Brown Co., 169 Neb. 330, 99 N.W.2d 615 (1959); Chalupa v. Tri-State Land Co., ...