National Livestock Credit Corp. v. Schultz

• Decision Date: 27 July 1982
• Docket Number: No. 55790,No. 2,55790,2
• Citation: 1982 OK CIV APP 38,653 P.2d 1243
• Parties: 1982 OK CIV APP 38, 34 UCC Rep.Serv. 317 NATIONAL LIVESTOCK CREDIT CORPORATION, a corporation, Appellant, v. G.W. SCHULTZ; Schultz Cattle Co., a limited partnership; Iowa Beef Processors, Inc., a corporation; and Wilson and Co., a corporation, Appellees
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

Page 1243

653 P.2d 1243

1982 OK CIV APP 38, 34 UCC Rep.Serv. 317

NATIONAL LIVESTOCK CREDIT CORPORATION, a corporation, Appellant, v. G.W. SCHULTZ; Schultz Cattle Co., a limited partnership Iowa Beef Processors, Inc., a corporation; and Wilson and Co., a corporation, Appellees.

No. 55790.

Court of Appeals of Oklahoma, Division No. 2.

July 27, 1982.

Rehearing Denied Sept. 28, 1982.

Certiorari Denied Nov. 15, 1982.

Released for Publication by Order of the

Court of Appeals Nov. 19, 1982.

Appeal from the District Court, Oklahoma County; Charles L. Owens, Trial Judge.

Action for conversion of cattle by perfected secured maker of cattle loan against defaulting debtor and purchasers of lien-encumbered cattle for recovery of balance due under security agreement. From summary judgment in favor of purchasers, secured party appeals. Cross-appeal by purchasers from further order of trial court denying award of attorney's fees.

AFFIRMED.

Granville Tomerlin, Tomerlin, High & High, Oklahoma City, for appellant.

Harry H. Selph, II, Fellers, Snider, Blankenship, Bailey & Tippens, P.C., Oklahoma City, James T. Malysiak, Edward W. Rothe, Freeman, Rothe, Freeman & Salzman, P.C., Chicago, Ill., for appellees Iowa Beef Processors and Wilson and Co.

BRIGHTMIRE, Judge.

The major question raised by this appeal is whether the terms of a cattle security agreement regarding sale of the cattle, designed for perfected lender's protection, were waived by the creditor's long-term course of conduct inconsistent with the protective provisions. A secondary issue is whether a secured party is estopped to deny authorization of the sale in a suit for conversion against the buyer based upon a detrimental reliance theory. The trial court resolved both issues against the loan company. We affirm.

I

The facts are not disputed. G.W. "Bill" Schultz and his son were the general and limited partners of Schultz Cattle Co., that ran and grazed cattle until 1973 when it began a so-called "fat cattle" operation. ¹ Beginning in April 1964, Schultz Cattle Co. financed its operation with funds from loans obtained through National Livestock Credit Corporation. The financial arrangement was such that in April 1964 a note was executed in excess of $400,000 payable to National in one year. In each of the succeeding years a new note was executed representing the carry over indebtedness of the cattle company from the preceding year's operations. The last such note, and the one that forms the basis of the present suit, was executed on July 27, 1973, in the principal sum of $586,639.02, payable on July 1, 1974. G.W. Schultz signed the note as co-maker with Schultz Cattle Co. and both executed a security agreement to National giving it a security interest in the herd, including after-acquired cattle and proceeds. Also executed was a loan agreement that, among other things, allowed Schultz to draw whatever money he needed over the course of the year to operate his business. Through this type of arrangement there would be no need for Schultz to retain any portion of the proceeds received from sales of cattle to meet business expenses.

The security agreement also provided:

"The Debtor will care for and maintain the crops and property herein described in a good and husbandlike manner and will not further encumber, conceal, remove or otherwise dispose of the same without the written consent of the Secured Party; however, permission is granted for the Debtor to sell the property described herein for the fair market value thereof, providing that payment for the same is made jointly to the Debtor and to the Secured Party ...."

The loan agreement contained no conditional consent provision, but did say that "Borrower agrees to remit all funds from sale of secured property directly to National" to apply toward the indebtedness.

Between 1973 and 1974, Schultz sold portions of the collateral cattle to various packers without the prior written consent or knowledge of National. In every instance, the check was made payable to Schultz Cattle Co. only. Schultz, in turn, either mailed the check to National or deposited the packer's check into the Cattle Co.'s account and then issued a new check to National to pay off the note indebtedness. National concedes that it never rebuked Schultz for ignoring the terms of the security agreement relating to sales of secured cattle. As a matter of fact, it admits this procedure was customarily followed by all its loan account clients and by the industry as a whole.

In 1974 and 1975, Schultz, along with the entire cattle industry, began experiencing severe financial problems. By a letter dated April 19, 1974, National's then manager, Harley Custer, informed Schultz that several loans would have to be "shaken down fairly well," including the Schultz Cattle Co. loan and that this loan would be discussed at the next board meeting. On June 20, 1974, Custer again wrote Schultz saying there would be no renewal of the loan, due July 1, 1974, because National's bank would approve no more loans and National could not carry the loan unless it were discounted. Custer told Schultz that the loan could be extended an additional 60 to 90 days if Schultz could reduce the loan amount by $200,000. National, however, agreed to a plan by Schultz to liquidate the herd as "fat cattle" over a period of several months instead of immediately selling the cattle as feeders--the expectation was that this plan would increase the value of the herd by $100,000.

It was anticipated, said Custer, that under this program cattle would be sold out of the feedlot to a packer buyer beginning in September 1974 and that National was leaving it solely up to Schultz to decide to whom he would sell the cattle. And, according to Custer, the procedure for handling the proceeds of the sales was to be the same as it had been in the past, i.e., packer would send check to Schultz Cattle Co. in its or Schultz' name and then the cattle company would forward the check to National.

Schultz could not sell the cattle during the fall of 1974 and this spawned weekly calls from Custer to Schultz expressing the lender's concern that no sales had been made. "We had fulfilled our part of the plan in advancing this money [additional money for feed, and extending the note's due date]," he once said, "and we did want him to get to selling these cattle ...."

Eventually, some sales were made to a small processing plant owned by Schultz (Schultz Farms), and the proceeds of these sales were remitted to National in the usual manner. On January 5, 1975, Wilson and Company bought 34 steers and 42 heifers from Schultz on a grade and yield basis ² for a total fair market value of $29,089. Wilson acquired 42 more heifers on January 6 for which it paid a grade and yield price of $14,609. On January 8, Schultz sold 140 heifers to Iowa Beef Processors (IBP) for $50,330.24 and on January 19 sold another 148 head to IBP for $51,121.73. With the exception of the last draft paid by IBP, ³ all of the checks were made payable to Schultz Cattle Co. or Schultz Industries, as directed by Schultz. The proceeds, however, were not transmitted to National, but rather to some of Schultz' feed suppliers.

Upon learning of the sales and Schultz' application of the proceeds to grain bills, National liquidated the remaining herd and otherwise attempted to salvage what it could to reduce the loan balance. National also made demand of Wilson and IBP for payment, which demand, of course, was refused. Schultz, in the meantime, had filed bankruptcy. On March 3, 1976, National filed this action against Wilson and IBP ⁴ claiming the unauthorized sales to them were in derogation of its security interest and filed financing statements and constituted conversion.

Defendants in their answer admitted the respective purchases of cattle and that they rejected National's demand for the purchase price, but denied they had converted the cattle. IBP also raised the affirmative defenses of waiver and estoppel. Wilson alleged, among other things, "that a pattern and practice of dealing was developed over many years whereby [National] allowed ... Schultz ... to keep possession of all [secured] cattle," sell them without National's knowledge or consent and remit the proceeds of the sale to National; therefore, National waived the consent terms in the security agreement, relinquished its security interest in the cattle and is estopped to assert any claim against Wilson. Both defendant buyers specifically asked for reasonable attorney's fees.

Cross-motions for summary judgment were filed by plaintiff and defendants. By letter order dated July 10, 1980, the trial court granted summary judgment in favor of the defendants after finding that National waived the sale restriction terms of the security agreement through a "course of performance" that allowed Schultz to remit only the proceeds of such sales to National. "Thus," the court said, "National authorized Schultz to sell the cattle to IBP and Wilson without restriction and they took title free and clear of National's security interest." Moreover, the court concluded, National was estopped to demand literal compliance with the payment provisions of its security agreement on a detrimental reliance theory on the authority of Poteau State Bank v. Denwalt, Okl., 597 P.2d 756 (1979). Finally, the trial judge denied the defendants' prayer for attorney's fees upon the theory that 12 O.S.1979 Supp. § 940(A) does not apply to conversion of property causes of action.

National timely filed its petition in error challenging the judgment. The defendants cross-appealed with regard to the trial court's refusal to assess attorney's fees pursuant to 12 O.S.1979 Supp. § 940(A) and 42 O.S.1981 § 176.

II

The arguments raised by National in its voluminous brief boil down to this: only the provisions of general Article One of the Uniform Commercial Code and of secured transactions Article Nine govern security...