MAINE FARMERS EXCH. v. FARM CREDIT OF MAINE

• Decision Date: 05 February 2002
• Citation: 789 A.2d 85,2002 ME 18
• Parties: MAINE FARMERS EXCHANGE, INC. v. FARM CREDIT OF MAINE, A.C.A.
• Court: Maine Supreme Court

789 A.2d 85

2002 ME 18

MAINE FARMERS EXCHANGE, INC. v. FARM CREDIT OF MAINE, A.C.A.

Supreme Judicial Court of Maine.

Submitted on briefs: June 12, 2001.

Decided: February 5, 2002.

David A. Dunlavey, Esq., Phillips, Olore, Dunlavey & York, P.A., Presque Isle, for plaintiff.

Michael S. Heann, Esq., Bangor, for defendant.

Panel: SAUFLEY, C.J., CLIFFORD, RUDMAN, DANA, ALEXANDER, and CALKINS, JJ. DANA, J.

CLIFFORD, J.

[¶ 1] Farm Credit of Maine appeals from a judgment entered in the Superior Court (Aroostook County, Pierson, J.) in favor of the Maine Farmers Exchange (MFX) on its setoff claim against Farm Credit's security interest in Nightingale Enterprises, Inc.'s (NEI) account receivable representing proceeds from the sale of potatoes. MFX cross-appeals that part of the judgment denying MFX's claim against Farm Credit for unjust enrichment. Farm Credit contends that the court erred in concluding that MFX had a right to a setoff pursuant to 11 M.R.S.A. § 9-318 (1995) because MFX's interests in NEI's account receivable was subject and inferior to Farm Credit's rights as a secured creditor. We disagree and affirm the judgment.

[¶ 2] Farm Credit loaned approximately $735,000 to Gordon Wathen, Glendon Wathen, and Lynn Wathen, potato farmers, and to NEI, a corporation solely owned by Gordon Wathen, for the 1995-96 potato growing season. NEI leased equipment, bought potatoes from the Wathens, and then stored, packed, and resold the potatoes. Farm Credit secured the loan with a security interest in the potato crop and proceeds with the expectation that proceeds from the sale of the crop would be used to satisfy the loan.¹ Farm Credit notified the buyers, shippers, and packers of potatoes of its security interest in the crops and inventory of NEI. The Wathens sold their crop to NEI in 1995-96, with the express condition that proceeds from NEI's resale of the potatoes would be paid to Farm Credit.

[¶ 3] The security agreement required Farm Credit's written authority prior to NEI selling the potatoes.² In practice, however, only oral discussion took place between Farm Credit and NEI as to how NEI would market the crop and contract for the resale of the potatoes, and Farm Credit did not require NEI to get specific approval to sell the potatoes during the 1995-96 season. NEI sold most of its potatoes to MFX, a corporation in the business of buying and reselling potatoes. MFX was aware of Farm Credit's security interest in the 1995-96 crop. The price that MFX paid was for bagged potatoes. MFX would pay NEI between thirty and forty days after taking delivery by checks made out jointly to Farm Credit and NEI.

[¶ 4] On February 1, 1996, MFX advanced $100,000 to NEI to allow NEI to take advantage of a favorable payment arrangement offered by the Maine Potato Growers, Inc. MFX and NEI agreed that NEI would make weekly payments to repay the loan by deducting the amount from what MFX owed NEI for future potato sales. NEI had the understanding that the $100,000 was not a loan, but rather an advance to NEI to be repaid from the future sale of the potatoes to MFX. The record is not clear as to the extent of Farm Credit's knowledge of this financing agreement, and MFX acknowledged that these arrangements were made without Farm Credit's direct involvement.

[¶ 5] By late 1995 and early 1996, both of NEI's two bag vendors declined to extend further credit to NEI. MFX agreed to facilitate NEI's purchase of bags from those same vendors by permitting NEI to charge the bags to MFX's open account. MFX planned to deduct the amount due for the bags from each shipment invoice for the potatoes it received from NEI. At the request of NEI, however, MFX maintained the account for the bags separately and did not deduct the cost from NEI's account, as long as NEI "[paid] for the bags in about the same manner that [they] would have made the deduction." The agreement required MFX to pay NEI the total price for the bagged potatoes and NEI would then write MFX a check for the bags NEI purchased on MFX's open accounts with the bag vendors.

[¶ 6] MFX also indicated that it "would always keep enough money in [NEI's] ... potato account to deduct the [cost of the] bags, provided [NEI] didn't pay for them." MFX did not charge NEI more for the bags than NEI would have otherwise paid to the bag vendors.³ MFX became a creditor of NEI and maintained a separate book account for the bags provided to NEI. It is unclear whether Gordon Wathen informed Farm Credit about this arrangement.

[¶ 7] NEI did not make the bag payments to MFX and built up a large account payable due to MFX for the bags. MFX then agreed to keep a running account on the amount due for bag reimbursement and to deduct the payment from invoices at a later time in a similar fashion as it was doing for the $100,000 advance. MFX charged fourteen percent interest on the outstanding bag debt. MFX attached a summary of deductions to the joint checks it made out to NEI and Farm Credit, but NEI never forwarded the itemizations to Farm Credit.

[¶ 8] Farm Credit eventually became aware that NEI was not selling at a price sufficient to cover expenses. MFX appeared on every accounts payable list submitted to Farm Credit, and Farm Credit recognized, in the early spring of 1996, that MFX was becoming a substantial creditor of NEI. Farm Credit began adjusting the release price⁴ based on NEI's accruing payables and the monthly financial summaries showing predictions for the remaining unsold crops. The credit arrangement between NEI and MFX, which allowed MFX to deduct from crop sale proceeds the value of the bags sold to NEI on MFX's credit, prevented Farm Credit from calculating an accurate net value of the remaining crops.

[¶ 9] Farm Credit became concerned and discussed with Gordon Wathen the need to pay the accruing sums. Farm Credit witnesses at trial did not recall that they received an explanation as to the specifics of the accounts payable to MFX, or why they were increasing. Gordon Wathen also did not recall telling Farm Credit specifically about the need for the bags and the arrangement with MFX, but believed there was some discussion.

[¶ 10] NEI satisfied the $100,000 advance to MFX in May 1996, but requested that MFX wait to deduct money owed for the bags in order to assist NEI with its cash flow. MFX made its last crop purchase from NEI on May 29, 1996, and did not use its credit account to pay for more bags after April 1, 1996. MFX set off from its June 7, 1996, payment to NEI and Farm Credit for the purchase of the potatoes the $92,270.59 that NEI owed MFX (including accrued interest) for the bags that NEI bought on MFX's credit.

[¶ 11] NEI and the Wathens commenced bankruptcy proceedings in July of 1996. Farm Credit received relief from the automatic stay in order to pursue a claim, as a secured lender, against MFX for the sums that MFX had set off.⁵ MFX filed a complaint with the Bankruptcy Court seeking a declaratory judgment regarding its rights and claiming priority for its setoff from what it owed to NEI. Following the transfer of the case to the Superior Court, Farm Credit filed a counterclaim, asserting that its security interest gave it priority over MFX's claim, and prayed that the court hold MFX liable for crop sale proceeds and for punitive damages.

[¶ 12] The Superior Court found that MFX's setoff claim arose out of its potato contract with NEI, and, relying on 11 M.R.S.A. § 9-318, concluded that Farm Credit's security interest was subject to the setoff claim of MFX. The court entered a judgment in favor of MFX on its setoff claim in the amount of $92,270.59. Farm Credit appealed, and MFX appealed the court's ruling that MFX had not met its burden to prove the elements necessary to make out a claim for unjust enrichment.⁶

[¶ 13] Title 11 M.R.S.A. § 9-318 provides a limited right to a setoff for a party in the position of MFX, a right that can be superior to the security interest of a secured party in the position of Farm Credit, if the subject matter of the setoff arises out of and is part of a contract between an account debtor and assignee.⁷ The statute provides:

Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in section 9-206, the rights of an assignee are subject to

(a) All the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; and

(b) Any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment.

11 M.R.S.A. § 9-318(1) (1995).

[¶ 14] The Superior Court correctly applied the terminology used in section 9-318 to the potato contract between MFX and NEI, and identified MFX as an account debtor (from its purchase of potatoes for which it has not paid), NEI as an assignor (from the assignment of its right of payment for the sale of potatoes), and Farm Credit as an assignee (from the assignment to it of the right to receive payment for the sale of the potatoes).⁸ Under section 9-318(1)(a),⁹ Farm Credit's security interest was subject to "[a]ll the terms of the contract between the account debtor [MFX] and the assignor [NEI] and any defense or claim arising therefrom." Farm Credit's rights as assignee in this case, however, would be subject only to the terms of a single contract for the sale of potatoes between NEI and MFX, but not to the terms of contracts separate from that single contract. See Harris v. Dial Corp., 954 F.2d 990, 993 (4th Cir.1992)

(stating only single contract brings setoff claim within protection of Article 9).

[¶ 15] The issue presented to the Superior Court was whether the agreement to allow NEI to purchase bags on MFX's account was part of the potato contract, or was a separate agreement. If it was a separate contract, Farm Credit's security agreement would not be subject to it, and MFX's rights would be inferior to Farm...