Miracle Feeds, Inc. v. Attica Dairy Farm, 84-2405

• Decision Date: 13 February 1986
• Docket Number: No. 84-2405,84-2405
• Citation: 129 Wis.2d 377,385 N.W.2d 208
• Parties: , 42 UCC Rep.Serv. 1782 MIRACLE FEEDS, INC., Plaintiff-Respondent, v. ATTICA DAIRY FARM, a partnership, Defendant, Zim's Cheese, Inc., Garnishee Defendant, Commercial & Savings Bank of Monroe, Intervening Garnishee Defendant-Appellant. *
• Court: Wisconsin Court of Appeals

Page 208

385 N.W.2d 208

129 Wis.2d 377, 42 UCC Rep.Serv. 1782

MIRACLE FEEDS, INC., Plaintiff-Respondent, v. ATTICA DAIRY FARM, a partnership, Defendant Zim's Cheese, Inc., Garnishee Defendant Commercial & Savings Bank of Monroe, Intervening Garnishee Defendant-Appellant. ^*

No. 84-2405.

Court of Appeals of Wisconsin.

Submitted on Briefs Nov. 11, 1985.

Opinion Released Feb. 13, 1986.

Opinion Filed Feb. 13, 1986.

Review Denied.

Carlyle H. Whipple and Whipple Law Offices, S.C., Madison, for intervening garnishee defendant-appellant.

Dennis P. Maroney and Patrick T. McMahon and McMahon & Moroney, S.C., Milwaukee, for plaintiff-respondent.

Before GARTZKE, P.J., and DYKMAN and EICH, JJ.

EICH, Judge.

Commercial & Savings Bank of Monroe appeals from a summary judgment awarding Miracle Feeds, Inc., the proceeds of several garnisheed milk checks payable to the Attica Dairy Farm. The garnishment action was brought by Miracle against Attica as principal defendant and Zim's Cheese as garnishee defendant. Zim's Cheese was holding several milk checks payable to Attica, all of which were "caught" by the garnishment. The bank, another of Attica's creditors, intervened in the action, asserting a claim against the captured funds for which it claimed a prior perfected security interest.

The issue is whether the trial court erred in concluding that the bank had waived its security interest by failing to "police" the debt--failing to actively pursue or exercise its rights to Attica's milk checks after default. We conclude that the bank did not waive or abandon its interest in the checks, and we therefore reverse.

In exchange for advances from the bank exceeding one million dollars, Attica executed a UCC Farm Security Agreement which gave the bank a security interest in "[a]ll accounts and contract rights ... arising from ... Milk Sales, which [Attica] hereby assigns to [the bank]." The bank recorded the agreement, together with various supplemental financing statements and a general assignment of milk receipts. As a result, the bank had a perfected security interest in all of Attica's milk proceeds. It is conceded that the bank's interest predated the lien asserted by Miracle in the garnishment action.

In early 1983, Attica was in serious financial trouble. The bank became concerned about the devaluation of assets often associated with foreclosure or bankruptcy proceedings and, together with several other creditors, negotiated a "Creditor Arrangement" with Attica. Among other things, the agreement established a repayment schedule which allowed Attica to defer payments on the bank's debt until December 20, 1983, at which time Attica was to begin making payments of at least $800 per month. The $800 was intended to be a token payment consistent with Attica's reduced cash flow. ¹ Attica failed to make any of the payments. However, notwithstanding the assignment of milk checks, the bank did not enforce its agreements with Attica but instead placed the milk sale proceeds in an account managed by Attica's principal owners.

When Miracle, who was not a party to the creditor agreement, commenced the garnishment action, the bank intervened and all parties moved for summary judgment. The trial court granted Miracle's motion, concluding that the bank had relinquished its rights to the proceeds by failing to enforce its lien or "police" Attica's debt, stating that "[t]o rule otherwise ... would be to render the garnishment law totally unenforceable for all practical purposes, a nullity in almost any type of situation." We disagree. ²

Miracle's garnishment action does not give it any greater right to the milk proceeds than Attica itself possessed on the date the action was filed. In effect, the garnishment was "an action by [Attica] in [Miracle's] name against the garnishee, the purpose of which is to subrogate the plaintiff to the rights of the defendant against the garnishee." Commercial Inv. Trust, Inc. v. Wm. Frankfurth H. Co., 179 Wis. 21, 24, 190 N.W. 1004, 1005 (1922). Miracle merely stands in Attica's shoes, and since Attica had assigned all milk sale proceeds to the bank long before Miracle's garnishment, Miracle had no present right to them. Kramer v. Burlage, 234 Wis. 538, 541, 291 N.W. 766, 768 (1940); Middleton Lumber & Fuel Co. v. Kosanke, 216 Wis. 90, 93, 256 N.W. 633, 634 (1934).

Miracle argues, however, that the trial court was correct in holding that the bank relinquished its right to assert its security interest because several milk checks, which ostensibly were assigned to the bank, were not held, but rather deposited in an account controlled by Attica. Wisconsin law does not support the assertion. The bank may grant Attica unfettered control over the secured proceeds--it can wholly refrain from "policing" the debt--without losing its security interest. Section 409.205, Stats., provides that:

A security interest is not invalid or fraudulent against creditors by reason of liberty in the debtor to use, commingle or dispose of all or part of the collateral (including returned or repossessed goods) or to collect or compromise accounts or chattel paper, or to accept the return of goods or make repossessions, or to use, commingle or dispose of proceeds, or by reason of the failure of the secured party to require the debtor to account for proceeds or replace collateral.

The statute was created in 1961 as part of Wisconsin's adoption of the Uniform Commercial Code. The Legislative Council Report accompanying the act summarized the changes made by sec. 409.205, Stats., as follows:

[B]roader application [is given] to the principle ... that granting the debtor certain rights with respect to collateral does not in itself make the security interest fraudulent or void against creditors; specifically, this will abrogate the rule announced in several Wisconsin cases that a mortgage on stock in trade is void as to creditors unless the mortgagee applies the proceeds to payment of the mortgage debt or to acquisition of replacement stock.

In addition, the official UCC comment to sec. 409.205 (UCC sec. 9.205) states:

[A] security interest is not invalid or fraudulent by reason of liberty in the debtor to dispose of the collateral without being required to account for proceeds or substitute new collateral. [The section] repeals the rule of Benedict v. Ratner, 268 U.S. 353 [45 S.Ct. 566, 69 L.Ed. 991] (1925) [the substance of which was to require "policing" of collateral], and other cases which held such arrangements void as a matter of law because the debtor was given unfettered dominion or control over the collateral.

We have found only one case construing sec. 409.205, Stats. In Burlington Nat. Bank v. Strauss, 50 Wis.2d 270, 184 N.W.2d 122 (1971), the plaintiff bank had a perfected security interest in a farmer's herd of cattle. The bank permitted the farmer to buy, sell, and replace cows at his discretion, and another creditor argued that the bank's acquiescence in the farmer's exercise of control over the herd constituted a waiver of its lien. The court held, however, that while there may well have been a waiver under the pre-UCC law, under the present law (sec. 409.205), "a debtor is now able to commingle his property and use it to his best interest, and the acquiescence of the secured creditor under an after acquired clause in such a program by the debtor does not invalidate the security interest of the creditor." Id. at 274, 184 N.W.2d at 124. See also Helstad, Wisconsin UCC Handbook, sec. 17.12(3).

While we deal here with negotiable instruments, not cattle, the Burlington Bank's lien in Strauss, like that of the Commercial Bank, arose from a standard farm security agreement containing an after-acquired property clause, and it failed to "police" the debtor's ongoing transactions involving the collateral. As in Strauss, we conclude that the Commercial Bank has not waived its rights, and its security interest in the milk receipts takes precedence over Miracle's judgment lien. Secs. 409.301(1)(a) and (b) and 409.312 Stats.

Miracle next argues that, because "there has been no default," the bank cannot assert any rights to the captured funds. It is true that under Wisconsin law a secured creditor may not enforce rights and remedies in the collateral until the debtor defaults. This does not mean, however, that the debtor must default before a secured party has an interest in the collateral sufficient to defeat other creditors' claims. The bank's rights in relation to others claiming an interest in the collateral are not determined by the debtor's default or the bank's recognition of, or action on, that default. Rather, the existence and enforceability of those rights depend upon the bank's compliance with the provisions of ch. 409 governing the perfection and priority of security interests.

The priority of a perfected security interest is not affected by the fact that a secured party, in order to assist the debtor and to enhance the likelihood of satisfaction of any indebtedness, agreed not to declare the debtor in default. A secured creditor does not owe any duty to those holding subordinate interests to proceed to enforce his remedies. To hold otherwise would place an undue burden, not imposed under the UCC, upon debtors and creditors alike. National Accept. Co. of America v. Virginia, 491 F.Supp. 1269, 1276 (E.D.Va.1980) (citations omitted).

Finally, Miracle argues that because Attica's "default" relates only to the monthly payments of $800...