Maryott v. Oconto Cattle Co.

• Decision Date: 24 March 2000
• Docket Number: No. S-98-977.,S-98-977.
• Parties: Ned MARYOTT, appellee, v. OCONTO CATTLE CO., a limited partnership, et al., appellees, and Farm Credit Services of the Midlands, PCA, intervenor-appellant.
• Court: Nebraska Supreme Court

607 N.W.2d 820

259 Neb. 41

Ned MARYOTT, appellee, v. OCONTO CATTLE CO., a limited partnership, et al., appellees, and Farm Credit Services of the Midlands, PCA, intervenor-appellant.

No. S-98-977.

Supreme Court of Nebraska.

March 24, 2000.

Kirk S. Blecha and Mary Leiter Swick, of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, for intervenor-appellant Farm Credit Services of the Midlands, PCA.

David E. Copple and Sara E. Miller, of Copple & Rockey, P.C., Norfolk, for appellee.

HENDRY, C.J., WRIGHT, CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

CONNOLLY, J.

This case presents the following question: Under the Nebraska Uniform Commercial Code, is the interest of an unpaid cash seller in goods, already delivered to a buyer, superior or subordinate to the interest of a holder of a perfected security interest in those same goods?

The appellee, Ned Maryott, delivered cattle to Oconto Cattle Company, a limited partnership (Oconto), and was given two sight drafts drawn from lines of credit extended by the appellant, Farm Credit Services of the Midlands, PCA (Farm Credit). Before the drafts were presented for payment, Farm Credit declared the loans in default and refused payment on the drafts. Farm Credit held perfected security interests in cattle acquired by Oconto.

Maryott brought a replevin action against Oconto seeking return of the cattle, and Farm Credit intervened. The district court held that Maryott had a superior interest in the cattle and entered judgment in his favor. Farm Credit appeals, contending that regardless of whether Maryott retained title when he delivered the cattle to Oconto, all Maryott retained was a security interest in the cattle, which he failed to perfect. We conclude that under the Nebraska Uniform Commercial Code, an unpaid seller who reserves title in goods sold retains a security interest in the goods that, if perfected, will give the seller priority over creditors of the buyers. Because Maryott did not perfect his security interest as required by Neb. U.C.C. §§ 9-107 (Reissue 1992) and 9-312 (Cum.Supp.1996), we conclude that Farm Credit has priority. Accordingly, we reverse.

BACKGROUND

Farm Credit is composed of a production credit association (PCA) and a federal land credit association (FLCA). PCA makes operational loans secured by chattels, and FLCA makes longer term loans secured by real property. Oconto, a Nebraska limited partnership, owned a commercial cattle feedlot. At all relevant times, Warren E. Bierman, as general partner, operated the feedlot. Oconto's business included buying and selling cattle in its own name, custom feeding and marketing of cattle owned by others, and custom feeding and marketing of cattle purchased by others for which purchases Oconto supplied the financing.

Farm Credit was Oconto's lender. That relationship began in 1995 with the execution of several promissory notes. On July 25, 1996, the notes were renewed. At that time, two different notes provided Oconto with a line of credit up to $3,000,000 on each note. All notes were secured and cross-collateralized by security interests granted by Oconto in a security agreement and trust deed. The security agreement included in its description of collateral all livestock and inventory then owned by Oconto and thereafter acquired. The security agreement stated that the collateral secured all future and additional loans made to Oconto by Farm Credit.

Farm Credit's security interests were duly perfected by a financing statement filed with the Custer County clerk on June 1, 1995, and the Nebraska Secretary of State on June 5, and by a Nebraska effective financing statement filed with the Custer County register of deeds on June 1. The rights and obligations of Farm Credit and Oconto were contained in the promissory notes, security agreements, and trust deed described above, along with a loan agreement and several loan addendums (collectively the loan documents).

On and after July 25, 1996, under the loan documents, Farm Credit at its option could advance funds to Oconto under the line of credit loans to a maximum of $3,000,000 for each note. However, all advances were conditioned upon Oconto's being in compliance with the terms and conditions of the loan documents, including a borrowing base formula. The borrowing base formula, among other things, required Oconto to report monthly to Farm Credit. Such reports enabled Farm Credit to compute the ratio of debt to collateral. At the time of trial, Farm Credit had a nondischargeable judgment against Bierman.

For over 20 years, Maryott, a resident of Britton, South Dakota, sold cattle either to Bierman, individually, or to Oconto through Bierman. Maryott's practice was to deliver cattle by truck to the feedlot and present invoices for the cattle to Bierman or other feedlot personnel. Approximately 25 percent of the time, Maryott was paid immediately upon delivery of the cattle. Otherwise, Oconto would pay Maryott 2 to 3 weeks after delivery. In the industry, Oconto had the reputation of being a slow-pay client. With the exception of the cattle at issue, Oconto eventually paid Maryott for the cattle delivered.

When Maryott delivered cattle to Oconto, he did not restrict Oconto's ability to sell the cattle to others. He did not instruct Oconto regarding how to pen the cattle, how to feed or care for the cattle, or where, when, or at what price to sell the cattle. If cattle died after delivery but before Maryott received payment, the loss was born by Oconto.

Oconto paid Maryott for cattle with Farm Credit sight drafts payable through Norwest Bank Nebraska, N.A. The sight drafts were drawn on the lines of credit that Farm Credit had extended to Oconto under the loan documents. The loan documents provided that each sight draft that was honored by Farm Credit constituted an extension of credit to Oconto. Under the loan documents, Farm Credit had an absolute right to instruct Norwest not to honor a sight draft. Norwest would provide Farm Credit daily with a list of drafts presented for payment and obtain authorization from Farm Credit before payment. This form of payment is the customary method by which Farm Credit extends credit to borrowers with lines of credit.

From July 16 through August 29, 1996, Maryott, in several different deliveries, delivered 640 head of cattle to the feedlot. Although Oconto did not pay Maryott after each delivery, he continued to deliver cattle.

Maryott first learned there was a problem when two Farm Credit sight drafts dated August 26 and 28, 1996, issued by Oconto in partial payment for the cattle, were dishonored. Maryott called Bierman, who told Maryott to send the drafts through again. When Maryott did so, the drafts were dishonored a second time. Maryott called Bierman and was reassured that he would be paid. Maryott did not call or visit Farm Credit to inquire about the drafts until approximately September 19 or 23.

The reason for the dishonor was that on August 30, 1996, Farm Credit had declared Oconto in default of the loan documents and canceled Oconto's lines of credit. The lines were canceled because it appeared that Bierman had been double counting some receivables and that he was not in compliance with the borrowing base formula. There was also evidence of a check-kiting scheme. When Bierman failed to provide a satisfactory explanation, Farm Credit declared the Oconto loans to be in default and refused to extend any further credit with the exception of making some protective advances. At the time of Oconto's default, its indebtedness to Farm Credit was well in excess of the value of the cattle. The protective advances were made to cover costs in keeping up the feedlot and to ensure that cattle remaining on the lot were cared for until sold. Oconto subsequently filed bankruptcy.

Maryott came to the feedlot on September 23, 1996, inspected the cattle, and met with a Farm Credit representative, who did not allow him to take any of the cattle. Following a review of the records regarding the cattle, Farm Credit determined that Maryott could not prove a superior ownership and that there would likely be a dispute over it. However, there is some dispute in the record regarding whether a representative of Farm Credit told Maryott that "maybe" he would get either money or the cattle back.

Maryott subsequently filed a replevin action against Oconto, Bierman, and Bierman's wife, seeking a return of the cattle, and Maryott was granted relief from the automatic stay by the bankruptcy court. Farm Credit intervened. In both his petition and answer to Farm Credit's petition in intervention, Maryott alleged that as the owner of the cattle, he had a security interest in them. Maryott did not allege in his petition or answer to Farm Credit's petition in intervention that Farm Credit acted in bad faith. However, the court denied a motion for summary judgment on the basis that questions of fact remained regarding whether title to the cattle passed to Oconto upon delivery and whether Farm Credit acted in good faith when it stopped payment on the drafts.

At trial, Maryott contended that it was the industry standard that title would not pass until the seller of the cattle had been paid. As evidence of this, Maryott called three witnesses: a friend and neighbor of Maryott, a person who had a longstanding business relationship with Maryott, and a customer of Oconto who was in the same position as Maryott in relation to Oconto. The witnesses testified that the practice in the industry was that the buyer would not receive any rights in cattle until the seller was paid and that if there was no payment, the seller had the right to pick up the cattle.

Evidence introduced at trial indicated that Maryott was familiar with cattle financing and had given lenders, including Oconto, security interests in cattle as collateral for loans. Maryott did not require Oconto to execute any security documents in his favor...