Moritz Implement Co., Inc. v. Matthews

• Decision Date: 29 May 1998
• Docket Number: No. 79191,79191
• Parties: , 35 UCC Rep.Serv.2d 1057 MORITZ IMPLEMENT COMPANY, INC., Appellee, v. John L. MATTHEWS, a/k/a John Matthews, Appellant, The Jamestown State Bank, Defendant, David R. Klaassen, the Successor in the Interest of Hampton, Royce, Engleman & Nelson, L.C., Appellant, Emmett Gaylord Rothchild and Iva Marie Rothchild, husband and wife, Defendants, Jerome L. Boden and Velora K. Boden, husband and wife, Defendants, Farmway Credit Union, Appellant, and The Board of County Commissioners of Jewell County, Kansas, Defendant.
• Court: Kansas Supreme Court

Page 886

959 P.2d 886

265 Kan. 179, 35 UCC Rep.Serv.2d 1057

MORITZ IMPLEMENT COMPANY, INC., Appellee, v. John L. MATTHEWS, a/k/a John Matthews, Appellant The Jamestown State Bank, Defendant David R. Klaassen, the Successor in the Interest of Hampton Royce, Engleman & Nelson, L.C., Appellant Emmett Gaylord Rothchild and Iva Marie Rothchild, husband and wife, Defendants, Jerome L. Boden and Velora K. Boden, husband and wife, Defendants, Farmway Credit Union, Appellant, and The Board of County Commissioners of Jewell County, Kansas, Defendant.

No. 79191.

Supreme Court of Kansas.

May 29, 1998.

Syllabus by the Court

1. Growing crops are treated as "goods" under the Uniform Commercial Code--Secured Transactions, K.S.A. 84-9-101 et seq. (Article 9), and are considered personal property and subject to the rules of Article 9. Article 9 is the exclusive statutory scheme to cover security interests in growing crops, and the attachment, perfection, and priority rules of the UCC apply to any party claiming an interest in crops, whether severed or not.

2. Perfected security interests in growing crops remain attached after the redemption period expires in a mortgage foreclosure action despite the transfer of the real property as the result of a foreclosure sale.

3. A judgment is valid even though it reserves determination of attorney fees for a later date.

4. K.S.A. 58-2312 allows any note executed after its effective date to provide for the recovery of attorney fees as a part of the reasonable costs of collection.

David R. Klaassen, Marquette, argued the cause, and Rod Ludwig, of Miller & Ludwig, Beloit, was with him on the briefs, for appellants.

Guy R. Steier, of Frasier & Steier, Beloit, argued the cause, and Curtis A. Frasier, of the same firm, was with him on the briefs, for appellee.

Charles N. Henson, of Wright, Henson, Somers, Sebelius, Clark & Baker, L.L.P., Topeka, was on the brief, for amicus curiae Kansas Bankers Association.

LARSON, Justice:

This case involves a first-impression issue of who is entitled to crops growing upon real property sold in a foreclosure sale. John Matthews and various of his creditors with perfected security interests in crops growing upon his land appeal the decision of the trial court holding title to the unharvested crops passed to the purchaser at the foreclosure sale, Moritz Implement Company, Inc. (Moritz). They also appeal the order of the trial court awarding Moritz attorney fees under the terms of a promissory note, as allowed by K.S.A. 58-2312.

Factual statement

The facts are undisputed. On July 6, 1995, Moritz filed a petition to foreclose its mortgages on real property owned by Matthews. The mortgages, which secured promissory notes totalling $43,860.87, were dated February 28, 1991, and August 26, 1994. The latter note contained the following language: "Upon default, Borrowers agree to pay all costs and expenses, including attorney fees and expenses, which may be incurred in the collection of this note or any part thereof." Moritz' petition requested attorney fees and costs, without specifying an amount.

Prior to the commencement of the foreclosure action, Farmway Credit Union (Farmway) and David R. Klaassen (Klaassen), the successor in interest to Hampton, Royce, Engleman & Nelson, L.C. (Hampton), obtained and perfected security interests in crops Matthews might grow on his property. In its foreclosure petition, Moritz did not state it was asserting a lien against crops growing on Matthews' real estate or that it considered any such crops subject to its mortgage interests. Neither did Moritz claim any interest in any growing crops under any provision in its mortgage purporting it covered "rents and profits."

The court entered judgment on the notes as prayed for in Moritz' foreclosure petition and entered an order of sale. Matthews filed an appeal, which was later dismissed by the Court of Appeals.

In the interim, on February 1, 1996, Matthews filed a voluntary petition for relief under Chapter 12 of the bankruptcy code. The bankruptcy court granted Matthews' motion to obtain a revolving line of credit from Farmway to be secured by a priority lien in growing crops on Matthews' property. Moritz never objected to the motion. During August and September 1996, Matthews borrowed money from Farmway and planted 105 acres of wheat on the property which was subject to Moritz' foreclosure petition.

Matthews' bankruptcy case was dismissed on October 29, 1996. Shortly thereafter, the district court again entered an order of sale, in which the proceeds of the sale were to be paid and applied as follows:

"1. To the payment of the costs of this action and of said sale;

"2. To the payment of all real estate taxes and assessments that may be due upon said real estate;

"3. The payment of the first mortgage indebtedness due to The Jamestown State Bank;

"4. To the payment of the judgment due Plaintiff Moritz Implement Company, Inc.;

"5. To the payment of the mortgage indebtedness held by Hampton, Royce, Engleman & Nelson, L.C.;

"6. To the payment of the mortgage indebtedness held by Emmett Gaylord Rothchild and Iva Marie Rothchild;

"7. The surplus, if any, to be paid into the hand of the Clerk of this court to await further order of this Court."

The sale was subject to a 3-month redemption period and was set for December 16, 1996.

Prior to the sale, Matthews gave all parties notice of Farmway's and Klaassen's security interests in the wheat growing on the property. The purchase price at the foreclosure sale ($109,922.35) left an amount in excess of the total amount necessary to pay items 1 through 4 in the order for sale, and Klaassen was next in line to receive proceeds from the sale. Moritz moved to confirm the sale and for assessment of attorney fees and allocation of proceeds.

Matthews filed a response objecting to Moritz' motion for confirmation of the sale. Matthews requested the court, if it confirmed the sale, to hold that the crops growing upon the foreclosed property were personal property subject to duly perfected security interests and not part of the land sold at the foreclosure sale.

The court confirmed the sale, awarded Moritz attorney fees from the remaining sale proceeds, and held that the growing wheat crop passed to the purchaser at the sale as part of the real estate, free of all security interests. In deciding that the security interests of Farmway and Klaassen did not attach to the crops on foreclosed real property, the court relied upon pre-Uniform Commercial Code (UCC) Kansas case law and determined that an Illinois case, Anna National Bank v. Prater, 154 Ill.App.3d 6, 107 Ill.Dec. 26, 506 N.E.2d 769 (1987), supported its position that the UCC did not apply.

Farmway, Klaassen, and Matthews appeal. The case is before us pursuant to K.S.A. 20-3018(c).

Entitlement to crops

Moritz claims title to the crops planted on Matthews' property under a line of old cases whereby the purchaser at a foreclosure sale was entitled to growing, unsevered crops after the redemption period had expired. Moritz first cites Beckman v. Sikes, 35 Kan. 120, 10 P. 592 (1886), and states that this principle was upheld in Goodwin v. Smith, 49 Kan. 351, 31 P. 153 (1892), and Brendle v. Hudson, 146 Kan. 924, 73 P.2d 1013 (1937).

Despite the rule promulgated in these earlier cases, the question before us is whether the adoption of the UCC in Kansas, effective January 1, 1966, changed the law regarding interests in growing crops. This involves questions of law and statutory construction, over which we have unlimited review. KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 635, 643, 941 P.2d 1321 (1997).

K.S.A. 84-1-102 sets forth the purposes of the UCC and provides in part:

"(1) This act shall be liberally construed and applied to promote its underlying purposes and policies.

"(2) Underlying purposes and policies of this act are:

(a) to simplify, clarify and modernize the law governing commercial transactions."

Article 9 of the UCC governs secured transactions. K.S.A. 84-9-102 defines the policy and subject matter of Article 9 and states:

"(1) Except as otherwise provided in section 84-9-104 on excluded transactions, this article applies

(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts."

K.S.A. 84-9-104 states that Article 9 does not apply to the following relevant transactions:

"(j) except to the extent that provision is made for fixtures in section 84-9-313, to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder."

Pursuant to the above statutes, Article 9 clearly applies to any transaction which is intended to create a security interest in "goods," which is defined in K.S.A. 84-9-105(h):

" 'Goods' includes all things which are movable at the time the security interest attaches or which are fixtures (K.S.A. 84-9-313, and amendments thereto),.... 'Goods' also include standing timber which is to be cut and removed under a conveyance or contract for sale, the unborn young of animals and growing crops." (Emphasis added.)

Article 9 sets forth rules for creating and perfecting security interests in goods and other types of property and designates the relative priorities of those claiming interests in such property, including subsequent purchasers. K.S.A. 84-9-201 generally provides that a security agreement is effective as against the parties, purchasers of the collateral, and creditors. K.S.A. 84-9-301 and K.S.A. 84-9-312 designate the priorities involving perfected and unperfected security interests and indicate that all unperfected interests are subordinate to properly perfected security interests. K.S.A. 84-9-307 lists the limited circumstances in which buyers of goods may take free of a security interest.

With this general...