Moffat Cty. State Bank v. Producers Livestock Mktg., 82-C-1763.

• Decision Date: 17 December 1984
• Docket Number: No. 82-C-1763.,82-C-1763.
• Citation: 598 F. Supp. 1562
• Parties: MOFFAT COUNTY STATE BANK, Plaintiff, v. PRODUCERS LIVESTOCK MARKETING ASSOCIATION, Defendant.
• Court: U.S. District Court — District of Colorado

598 F. Supp. 1562

MOFFAT COUNTY STATE BANK, Plaintiff, v. PRODUCERS LIVESTOCK MARKETING ASSOCIATION, Defendant.

No. 82-C-1763.

United States District Court, D. Colorado.

December 17, 1984.

Gregory L. Williams, Rothgerber, Appel & Powers, Denver, Colo., for plaintiff.

William D. Meyer, Boulder, Colo., for defendant.

ORDER

CARRIGAN, District Judge.

The plaintiff, Moffat County State Bank (the "Bank"), a Colorado corporation, sued Producers Livestock Marketing Association ("Producers"), a livestock sale barn, claiming that Producers converted the Bank's property by selling at auction sixty-eight head of cattle for the account of Thomas E. Seewald which were subject to the Bank's perfected security interest. Producers is a Utah corporation doing business in Colorado. The Bank is claiming $20,313.00, the proceeds from the cattle sale, plus interest from the date of the sale. The Bank and Producers have filed cross motions for summary judgment. Producers has filed a third party complaint against Thomas E. Seewald but that complaint is not in issue here. Jurisdiction is founded on diversity. 28 U.S.C. § 1332(a).

The parties submitted Stipulated Facts and Exhibits setting forth all facts necessary to decide the summary judgment motions. Because there are no genuine issues of material fact, summary judgment is appropriate. Fed.R.Civ.P. 56. The essential facts are as follows:

On July 27, 1981, the Bank loaned $75,232.33 to Thomas E. Seewald of Maybell, Colorado. This loan combined a new advance and a rewriting of existing mature loans previously made to Seewald. Seewald was a cattle rancher in Moffat County, Colorado. To secure its loan, the Bank entered into a security agreement with Seewald designating as collateral certain farm equipment, seventy-nine head of cattle and four horses. The cattle were identified by number, sex, age and brand.

Section 2 of the security agreement provides that the Bank holds a security interest in the listed property "together with all additions, accessions, replacements, substitutions, proceeds and products therefrom including natural increase of livestock and any and all property of similar type or kind now owned or hereafter acquired by the debtor and used for either personal, family or household purposes; farming or ranching operations; or any business in which the debtor is or might be engaged."

Two other provisions of the agreement are relevant. Section 5(4) provides that the "Debtor shall at all times keep the collateral at Maybell in Moffat County, Colorado unless notice is given to the Secured Party in advance and the Secured Party consents in writing to the removal to another location." Section 6 provides that the "Debtor shall be in default under this Agreement upon the ... sale of any of the collateral. ..."

Because the Bank had entered into similar arrangements with Mr. Seewald in the past, a financing statement, listing the bank as secured party and Seewald as debtor, and covering "Machinery and Livestock," had been filed with the Clerk and Recorder of Moffat County in 1976. Neither the "proceeds" nor the "products" box of the financing statement was checked. Pursuant to the Uniform Commercial Code ("U.C.C."), as codified at Colo.Rev.Stat. § 4-9-403(2) (1984 Cum.Supp.), a financing statement is effective for five years from the date of filing. In anticipation of the execution of the July 27, 1981 security agreement, and pursuant to Colo.Rev.Stat. 4-9-403(3) (1984 Cum.Supp.), the Bank filed a Continuation Financing Statement with the Moffat County Clerk and Recorder on July 10, 1981.

On October 20 and 21, 1981, without the Bank's knowledge, Seewald sold sixty-eight head of cattle through Producers, a livestock sale barn in Greeley, Colorado. Prior to sale, the cattle were inspected by a Colorado state brand inspector who certified compliance with the livestock bill of sale laws to Producers. According to Producers' sales records, it sold sixty-three head of cattle for Seewald on October 20, 1981 for a gross sales price of $19,730.56, and five head of cattle on October 21, 1981 for a gross sales price of $1,837.33. The total net proceeds paid by Producers to Seewald for both sales, after deducting commissions and other sale expenses, was $20,313.00. Seewald warranted to Producers that all cattle were free from any liens and encumbrances. Producers made no inquiry and had no actual knowledge of the Bank's asserted security interest in the cattle. Seewald neither remitted any part of the proceeds to the Bank nor informed the Bank of the sale.

In January 1982, the Bank first learned, through an anonymous letter, that Seewald may have sold some of his cattle without informing the Bank or remitting the proceeds to the Bank. By letter of February 19, 1982, the Bank informed Seewald that he was in breach of the security agreement by diverting proceeds from the October 1981 cattle sales and by failing to apply that money to the note principal and interest at the Moffat County State Bank. After contacting public livestock markets across the state, the Bank discovered, in March 1982, that Producers had sold the cattle for Seewald in October 1981. Despite the Bank's repeated demands for payment, neither Seewald nor Producers has remitted to it any part of the proceeds.

In August 1982, the Bank foreclosed on the farm equipment listed in the security agreement. After applying the proceeds of that sale to Seewald's indebtedness, Seewald still owed the Bank approximately $35,000 plus accrued interest. On August 20, 1982, Seewald filed, in the United States Bankruptcy Court for the District of Colorado, a voluntary petition under chapter 7 of the Bankruptcy Code.

The course of dealing and course of performance between the Bank and Seewald with respect to sales of cattle other than the one in dispute are also relevant. Seewald was an agricultural loan customer at the Bank from 1974 through 1982. During that period, Seewald negotiated a number of agricultural loans to finance his cattle breeding operation. The Bank expected Seewald to repay his loans from the proceeds derived from the sale of cattle.

Although the Bank's security agreements with Seewald, including the July 1981 agreement, state that Seewald was required to obtain written consent from the Bank before selling any cattle collateral, the Bank did not transact business with its customers, including Seewald, in that manner. The relevant stipulated facts are as follows:

"14. On more than one occasion, J. Ted Haddan, the Bank Vice-President advised Seewald that he was permitted to sell his cattle collateral as he saw fit provided that he brought the proceeds from each sale promptly to the Bank, where Seewald and the Bank would discuss the disposition of such proceeds. This arrangement was applied by the Bank to most of its agricultural loan customers and is typical in the cattle industry.

15. The Bank did not require agricultural borrowers, including Seewald, to have proceeds' checks drawn payable to both the borrower and the Bank, unless the borrower was in default or had otherwise given the Bank cause for concern. Such restriction was not placed on Seewald.

16. In practice, the Bank did not require Seewald or other agricultural borrowers to obtain written consent from the Bank to transport or sell cattle collateral before such transportation or sale. There were two reasons this was not required: (1) requiring written consent would have created an administrative burden for the Bank; and (2) the Bank trusted Seewald and its other agricultural borrowers to bring in the proceeds after any sale.

26. Prior to October 1981, the Bank's policy generally required the loan officer to field inspect collateral for loans once per year, time permitting. The Seewald collateral was inspected on April 28, 1979 and January 30, 1982 by Haddan. More frequent inspections were not performed due to Haddan's lack of time to perform same.

32. In addition to the October 1981 sales by Seewald at Producers' market, the Bank is aware of cattle sales by Seewald on or about March 9, 1977, June 30, 1977, October 14, 1977, January 10, 1978, October 20, 1980, and December 10, 1981. On none of these occasions did Seewald request specific pre-sale permission from the Bank to sell some of his cattle.

38. If Seewald had brought the proceeds from the October 1981 sales at Producers in to the Bank within a few days after those sales, the Bank would not have considered Seewald in breach of his promissory note or security agreement with respect to those sales."

This is a diversity case. Because all events relevant to the dispute occurred in Colorado, Colorado law governs.

Two issues must be resolved:

A. Did the Bank perfect a security interest in the cattle sold by Producers?

B. Did the Bank authorize sale of the cattle and thus lose its security interest in the collateral under Colo.Rev.Stat. § 4-9-306(2) (1984 Cum.Supp.)?

If the Bank perfected its security interest in the cattle sold by Producers and did not authorize the sale of the cattle, Producers is liable to the Bank for converting the cattle. On the other hand, if the Bank failed to perfect its security interest in the cattle or authorized the sale by Producers, the Bank must bear the loss for Seewald's breach of the security agreement.

The applicable Colorado law is clear and undisputed:

"An auction company that sells property in behalf of another who holds the property subject to a perfected security interest, and the purchaser thereof, are each liable to the holder of the security interest for the fair value of the property sold, regardless of whether the auction company purchaser had actual knowledge of the existence of the security interest or the other's want of authority to sell, in the absence of facts showing acquiescence or consent on the part of the holder of the security interest." Colorado Bank and Trust Company v. Western Slope Investments, Inc., 36 Colo.App. 149, 539 P.2d 501,

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