Nolin Production Credit Ass'n v. Canmer Deposit Bank

• Decision Date: 17 October 1986
• Docket Number: No. 85-CA-2701-P,85-CA-2701-P
• Citation: Nolin Production Credit Ass'n v. Canmer Deposit Bank, 726 S.W.2d 693, 2 UCC Rep.Serv.2d 636 (Ky. Ct. App. 1986)
• Parties: 2 UCC Rep.Serv.2d 636 NOLIN PRODUCTION CREDIT ASSOCIATION, Appellant, v. CANMER DEPOSIT BANK (Now Pioneer Bank), and W.E. Vance and Sue Vance, Appellees.
• Court: Kentucky Court of Appeals

Page 693

726 S.W.2d 693

2 UCC Rep.Serv.2d 636

NOLIN PRODUCTION CREDIT ASSOCIATION, Appellant, v. CANMER DEPOSIT BANK (Now Pioneer Bank), and W.E. Vance and Sue Vance, Appellees.

No. 85-CA-2701-P

Court of Appeals of Kentucky.

Oct. 17, 1986.

Rehearing Denied Jan. 30, 1987.

Discretionary Review Denied

by Supreme Court

April 21, 1987.

Dwight Preston, Lewis, Bland & Preston, Elizabethtown, for appellant.

Robert B. Hensley, James I. Howard, Hensley, Dunn & Ross, Horse Cave, James C. Ladd, Munfordville, Glay E. Maggard, Munfordville, for appellees.

Before CLAYTON, COOPER and HOWARD, JJ.

CLAYTON, Judge.

This appeal involves a dispute between two secured creditors over the priority of certain liens on the farm equipment and livestock of bankrupt debtors, W.E. Vance and his wife, Susan. ¹ In its 1983 judgment, the court below determined that Canmer Deposit Bank (now "Pioneer Bank") was entitled to approximately two-thirds of the proceeds from the sale of the equipment, or $10,778. By a later 1985 judgment, the Hart Circuit Court further granted a $97,447 award against Nolin Production Credit Association ("Nolin", "Nolin PCA", or "PCA") to Pioneer Bank based upon the sale of certain livestock found to be included in the after acquired property clause of the bank's 1975 security agreement. Now on appeal, PCA argues: 1) that the language of its February 11, 1977 security agreement was not so indefinite as to be unenforceable; 2) that Pioneer failed to prove that the after acquired property clause of its 1975 agreement was intended to apply to all subsequently purchased cattle, including trading cattle; 3) that Pioneer should have been held to be equitably estopped from asserting its claim to proceeds from the cattle sales occurring between 1975 and 1980; 4) that the circuit court used the wrong measure of damages; and 5) that it further charged the wrong interest rate upon the 1985 judgment.

On July 22, 1970, W.E. Vance executed a promissory note to Pioneer for $17,500 at 7% interest. This debt was subsequently secured by a financing statement filed February 28, 1975. By its terms, the statement covered,

All livestock and farm machinery including but not limited to: Two hundred head holsteins, ages six months to nine years, one hundred fifty head mixed herefords, ages six months to seven years, Model 3020 John Deere Tractor, Model 175 Massey Ferguson Tractor, Model A John Deere Tractor and equipment,

An after acquired property provision found in the same statement provided for security on all proceeds from this property and all similar after acquired property.

Approximately 10 years after his initial loan and five years after the filing of the security agreement, Vance consolidated two subsequent loans made in 1975 and 1979 executing a $59,711 promissory note to the bank on March 27, 1980 at 16% interest. A second financing statement was simultaneously filed, including as collateral,

All livestock and farm machinery including but not limited to: 247 head holsteins, ages 2 months to springing heifers and six bulls, one registered Brahma bull--Model 4020 John Deere Tractor, 330 John Deere Tractor, 60 John Deere Tractor, 175 Massey-Ferguson Tractor and all equipment.

As with the earlier statement, an identically worded after acquired property clause was included in the document. It is undisputed on appeal that this second financing statement was not filed as a continuation statement and that the bank's initial security agreement had lapsed as of the date of the filing of the second statement.

During the five year interim between the filing of these statements, Vance executed to PCA some thirteen separate promissory notes on debts totalling nearly $328,000. To secure these debts, two mortgages and seven separate financing statements were filed by PCA between 1975 and 1980. For our purposes, however, we need only examine three of the seven statements. The first, filed on September 28, 1976, lists as collateral "all beef cattle including but not limited to Angus and Hereford." The second security agreement, filed February 7, 1977, lists "all farm machinery and equipment, including but not limited to tractor [sic]" as collateral. Finally, the third agreement of August 25, 1977, lists "all dairy cattle including but not limited to Holsteins" as collateral. The remaining four financing statements refer simply to specific items of farm machinery or personal vehicles not now in dispute.

On April 16, 1981, Pioneer brought action against Vance and the PCA seeking recovery upon the delinquent 1970 and 1980 promissory notes and their corresponding security agreements. Nolin Production Credit Association answered asserting a $292,062 cross-claim against Vance, and further alleging a prior and superior security interest in all the collateral described in its security agreements with Vance. Upon agreement of the parties, certain farm equipment and machinery was sold at auction in late 1981 and mid-1982 with the proceeds of the sales, some $15,713, being placed in escrow. Pioneer, by amended complaint of December 15, 1982, additionally sought recovery of certain proceeds from the sale of cattle collateral by Vance between 1975 and 1980. As the PCA explains this allegation, Vance, with the knowledge of Pioneer, and the financing of PCA, had over the five year time period made repeated purchases and sales of "trading" cattle using monies borrowed from the PCA. All sale proceeds were apparently remitted to the PCA. It is undisputed that the PCA took no purchase money security interest in the "trading" cattle and that it relies solely on its 1976 and 1977 security agreements as the basis for its interest.

On October 2, 1983, the Hart Circuit Court entered its initial interlocutory judgment (later incorporated into its final judgment of July 26, 1985). By that judgment, the court specifically determined that Nolin was entitled to immediate possession of two 1979 pickup trucks, but that Pioneer was to be granted the proceeds from the sale of the collateral described in its 1980 financing statement. Although the 1980 statement was specifically found not to be a continuation statement, the court determined that the description of collateral found in the PCA statements of 1976 and 1977 was of so general and nondescript a nature that Pioneer was entitled to the sale proceeds representing the collateral as described in its 1980 statement. Any proceeds not traceable to collateral described in the Pioneer financing statement of 1980 were to be divided equally between the creditors, the court being unable to "decipher the extent or priority of the other's lien." As a result of this judgment, Pioneer received $5,842.50 from the sale of two tractors described in its 1980 statement and $4,935.22 representing one-half of the balance of the $15,712.94, total sale proceeds from the two auctions. Nolin PCA received $4,935.22.

On July 25, 1985, the circuit court entered its second, and final, judgment awarding Pioneer some $97,447, and the outstanding balance of the 1970 and 1980 promissory notes. As a basis for this award, the trial court reasoned that the PCA had converted Pioneer's collateral through its receipt and retention of cattle sale proceeds from the sales of "trading" cattle during the 1975-1980 interim. Interpreting the after acquired property clauses of both parties' financing statements, the court found that the clause as set out in Pioneer's 1975 financing statement included all cattle purchased and sold by Vance between 1975 and 1980, a finding which the PCA strongly disputes based upon the deposition testimony of certain bank officers. The lower court then went on to reject Nolin's claim that Pioneer had waived, or was equitably estopped, from asserting its after acquired property interest due to its failure to act during the five year period. In reaching this holding, the circuit court relied upon Burlington National Bank v. Strauss, 50 Wis.2d 270, 184 N.W.2d 122 (1971). As a result of this reasoning, Pioneer was granted a judgment against Nolin for $6,849.90, the indebtedness on the first note, plus interest at a rate of 7% interest per annum from August 10, 1983, to July 25, 1985, with interest thereafter at 12% per annum. A further award was made to Pioneer of $90,597.11, the balance due on the 1980 renewal note, plus interest at a rate of 16% per annum from December 31, 1983, until paid. From this second and final judgment of July 25, 1985, Nolin Production Credit Association took timely appeal to this Court.

I.

THE DIVISION OF SALE PROCEEDS FROM THE SALE OF FARM

IMPLEMENTS AND EQUIPMENT

Appellant first maintains that the trial court erred in holding the language of its February 11, 1977 agreement to be so indefinite as to be unenforceable. As earlier noted, that language provides for an interest in,

All farm machinery and equipment including but not limited to tractor [sic] and all property similar thereto.

Under KRS 355.9-110, of our state's codification of the Uniform Commercial Code (UCC),

... any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described.

In the context of security agreements, KRS 355.9-402(1) additionally includes in the requirements for a sufficient security agreement the proviso that the agreement "contain a statement indicating the types, or describing the items of collateral." Thus, the first question we resolve is whether PCA's description of the collateral satisfies KRS 355.9-402(1) as applied via KRS 355.9-110.

As Kentucky legal commentators have noted, our courts have frequently wrestled with the problem of potentially overbroad descriptions without achieving any conclusive answers. Nowka & Leibson, The Uniform Commercial Code of Kentucky § 8.2(B), p. 685 (1983). The case law in this area unfortunately raises far more questions than it answers. Both appellant and appellee, however, focus in particular...