Mid-States Sales Co., Inc. v. Mountain Empire Dairymen's Ass'n, Inc.

• Decision Date: 18 June 1987
• Docket Number: No. 85CA,MID-STATES,85CA
• Parties: 4 UCC Rep.Serv.2d 1622 SALES COMPANY, INC., Plaintiff-Appellant and Cross-Appellee, v. MOUNTAIN EMPIRE DAIRYMEN'S ASSOCIATION, INC., Defendant-Appellee and Cross-Appellant. l261. . III
• Court: Colorado Court of Appeals

Page 342

741 P.2d 342

4 UCC Rep.Serv.2d 1622

MID-STATES SALES COMPANY, INC., Plaintiff-Appellant and Cross-Appellee, v. MOUNTAIN EMPIRE DAIRYMEN'S ASSOCIATION, INC.,

Defendant-Appellee and Cross-Appellant.

No. 85CAl261.

Colorado Court of Appeals,

Div. III.

June 18, 1987.

Hellerstein, Hellerstein and Shore, P.C., Christian Carl Onsager, Gwen S. Anderson, Robert E. Markel, Denver, for plaintiff-appellant and cross-appellee.

Holme Roberts & Owen, Stephen E. Snyder, Nancy J. Gegenheimer, Denver, for defendant-appellee and cross-appellant.

STERNBERG, Judge.

Ronald L. Lewis, a dairyman, was a member of the Mountain Empire Dairymen's Association (MEDA), the defendant. MEDA was Lewis' exclusive agent for marketing dairy products. Mid-States Sales Co., Inc. (Mid-States), the plaintiff, is a secured creditor of Lewis who sued MEDA for allegedly disposing of Lewis' milk proceeds in a manner contrary to Mid-States' security rights in those proceeds.

The trial court concluded that, even though Mid-States had not waived its security interest in Lewis' milk proceeds, MEDA was not liable for converting either of two disputed amounts. Both parties have appealed the judgment. We reverse the judgment and hold that MEDA is liable to Mid-States for converting a portion of the milk proceeds it offset in payment for a milk storage tank it sold Lewis. We also hold that MEDA is liable to Mid-States for the amount it distributed directly to Lewis in December 1981. That amount should have been paid to Mid-States under assignments which had been neither terminated nor released when the amount was paid out to Lewis.

I. Factual Background

In June 1980, Lewis executed two installment sales notes, payable to Mid-States, in the amounts of $164,178 and $30,672. He also executed security agreements, duly perfected by Mid-States, granting Mid-States a security interest in specified cattle, as well as their increase, products, and proceeds. By the printed form security agreement, Lewis also agreed not to sell this property without permission of Mid-States.

Pursuant to a preexisting membership agreement with MEDA, MEDA was Lewis' exclusive agent for marketing milk and dairy products. MEDA subtracted its marketing costs from Lewis' milk proceeds each month and then distributed the proceeds to Lewis' assignees during the following month. Any proceeds remaining after the assignees had been paid were given to Lewis.

In August 1980, Lewis executed two assignments authorizing MEDA to pay Mid-States $3,909 and $852 each month, corresponding to the payments due on the two installment sales notes, out of any amount due Lewis for marketing his milk. These assignments authorize MEDA to "first ... pay any and all expenses of marketing [Lewis'] milk before [Lewis] is entitled to receive any proceeds whatsoever." The assignments also state that Lewis has no authority to cancel the assignments but that Mid-States may cancel them upon notice in writing to MEDA.

MEDA sent Mid-States a form acknowledgement of these assignments, and Mid-States accepted payments under the assignments from August 1980 until October 1981. MEDA's usual practice was to pay out the assignments to Mid-States and other creditors of Lewis in the chronological order in which the assignments had been received. Mid-States' assignments were fourth and fifth on MEDA's list.

On September 24, 1981, MEDA sold Lewis a milk holding tank for $15,293.34. It is a policy of the MEDA Board of Directors that all merchandise purchases from MEDA are to be paid for in cash at the time of sale or deducted from the member's next milk check.

In October 1981, Lewis notified MEDA that, as of November 1, 1981, he would no longer be a member of MEDA. MEDA sent Mid-States and the other assignees the amounts due out of Lewis' milk proceeds for September. Mid-States received its payment on October 23. On October 31, 1981, pursuant to its rules regarding merchandise purchases, MEDA deducted the $14,883.12 still due on the milk tank from Lewis' October milk proceeds. After that deduction, the remaining October proceeds were insufficient to cover even the first two assignments. Mid-States characterizes this deduction by MEDA (the October offset) as a unilateral offset by an unsecured junior creditor, and claims that MEDA converted the portion of these milk proceeds corresponding to the percentage of Lewis' cows covered by security agreements with Mid-States. We hold, as discussed in Part II, that MEDA's deduction was improper.

In November 1981, MEDA notified Mid-States and other assignees of Lewis that because Lewis had terminated his membership it was necessary to have them sign a release of assignment included in the notice. Mid-States did not return the release form or otherwise consent to release of the assignment. However, the record reveals that the other assignees who were paid each month by MEDA before Mid-States did sign releases. On November 10, 1981, Mid-States received notice that a feedlot had repossessed all of Lewis' cows. Deeming itself insecure, Mid-States repossessed its cows from the feedlot, sold them, and applied the proceeds to Lewis' account.

On December 18, 1981, MEDA distributed $2,753.69, representing Lewis' November milk proceeds minus MEDA's costs and an under-production penalty, directly to Lewis. Mid-States claims that MEDA converted this amount (the December direct payment) by distributing it directly to Lewis even though Mid-States had not released its assignment. As discussed in Part III, we agree with this contention.

II. The October Offset

As a preliminary matter we hold that, contrary to MEDA's contentions, Mid-States satisfied its burden of establishing that, at the time of MEDA's offset, 52.5% of Lewis' milk account was identifiable proceeds of Mid-States' collateral. Mid-States' vice president testified that representatives of the feedlot that repossessed Lewis' cattle informed him that they had picked up "all" of Lewis' cattle. The record contains undisputed evidence that 42 out of a total of 80 cows repossessed by the feedlot were covered by Mid-States' security agreement with Lewis. Mid-States' vice president also indicated in his testimony that the non-producing calves were inspected separately. As there is no contrary evidence in the record, we conclude that Mid-States satisfied its burden of establishing that 42/80 or 52.5% of Lewis' milk account at that time was attributable to cows covered by Mid-States' security agreement and was therefore identifiable proceeds of Mid-States' collateral. See § 4-9-315(1)(a), C.R.S. (1986 Cum.Supp.) (perfected security interest continues in goods which become part of a mass in which their identity is lost).

Mid-States is claiming rights to the October proceeds offset by MEDA under its security interest, duly perfected under the provisions of Article Nine of the Uniform Commercial Code, § 4-9-101, et seq., C.R.S., and not under the assignments. This distinction is significant because Mid-States has no right to these proceeds under the assignments. The assignments are of amounts "due Lewis," and after MEDA offset the balance due on the milk tank out of the October proceeds, there remained insufficient funds "due Lewis" to honor Mid-States' assignments. Further, under § 4-9-318(1)(a), C.R.S., Mid-States' rights as an assignee are subject to claims arising from the membership agreement between Lewis and MEDA. This would include MEDA's claim to a setoff under its policy regarding equipment purchases. See Farmers Acceptance Corp. v. DeLozier Construction Co., 178 Colo. 291, 496 P.2d 1016 (1972).

Mid-States' rights to the milk proceeds listed as collateral under its perfected security agreement are separate and distinct from its rights under the assignments executed by Lewis, and its secured interest in those proceeds would appear to extend to the funds offset by MEDA. However, MEDA argues that Mid-States waived its security interest in these proceeds by consenting to distribution of Lewis' milk proceeds to other creditors and to Lewis himself.

Section 4-9-306(2), C.R.S. (1986 Cum.Supp.) effects a waiver of a secured party's interest in collateral if the secured party has authorized disposition of the collateral. It provides:

"[A] security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise...." (emphasis added)

The security agreement between Mid-States and Lewis did not give Lewis or anyone else authority to dispose of collateral. Thus, the issue is whether such authorization may be implied from the circumstances of the parties, the nature of the collateral, the course of dealing of the parties, and the usage of trade. See § 4-9-306, C.R.S. (Official Comment 3); Platte Valley Bank v. B & J Construction, 44 Colo.App. 21, 606 P.2d...