Norfolk Production Credit Ass'n v. Bank of Norfolk, 84-442

• Decision Date: 02 August 1985
• Docket Number: No. 84-442,84-442
• Citation: 371 N.W.2d 276,220 Neb. 593
• Parties: , 41 UCC Rep.Serv. 1062 NORFOLK PRODUCTION CREDIT ASSOCIATION, Appellant, v. BANK OF NORFOLK, Appellee.
• Court: Nebraska Supreme Court

Page 276

371 N.W.2d 276

220 Neb. 593, 41 UCC Rep.Serv. 1062

NORFOLK PRODUCTION CREDIT ASSOCIATION, Appellant, v. BANK OF NORFOLK, Appellee.

No. 84-442.

Supreme Court of Nebraska.

Aug. 2, 1985.

Syllabus by the Court

1. Uniform Commercial Code: Security Interests: Sales. A security interest continues in the proceeds of the sale of collateral only if the proceeds can be identified.

2. Uniform Commercial Code: Security Interests: Sales. A secured creditor's right to proceeds under Neb.U.C.C. § 9-306 (Reissue 1980) is generally dependent on the ability to trace and identify the fund as his property.

3. Uniform Commercial Code: Security Interests: Sales. The burden is upon the secured party claiming a lien on proceeds from the sale of collateral to trace and identify proceeds received by the debtor from the disposition of secured collateral.

James T. Gleason, Omaha, for appellant.

Jerrold L. Strasheim, William G. Dittrick, and Terrence L. Michael of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha, for appellee.

KRIVOSHA, C.J., and BOSLAUGH, WHITE, HASTINGS, SHANAHAN, and GRANT, JJ.

BOSLAUGH, Justice.

This was an action for conversion brought by the Norfolk Production Credit Association (PCA), plaintiff, against the Bank of Norfolk (Bank), defendant. After a bench trial the plaintiff's petition was dismissed. In this appeal the plaintiff has assigned as error the trial court's findings (1) that the PCA had released its security interest in the collateral and the proceeds thereof; (2) that the PCA had failed to prove that a conversion occurred; (3) that the debtor's notes to the PCA were not due or in default; and (4) that the failure to find that the PCA's right to the proceeds of its collateral had priority over any rights of the Bank.

The record demonstrates that on April 22 and June 1, 1981, the PCA extended credit to Philip G. Schmer, totaling $320,000, in the form of a "Renewal Note" and an "Additional Note" in order to finance his farming and cattle business. The notes were payable on or before October 5, 1981. As collateral, the PCA perfected a security interest in all of Schmer's livestock to be purchased, all feed and grain, all owned or thereafter acquired machinery, equipment, and tools as described, and all crops as described.

Schmer also maintained and operated a trucking business, Philip G. Schmer, Inc., which was financed by the Bank in the amount of $317,644.88. This line of credit was evidenced by five separate notes due on September 15, 1981, or on demand. As collateral, the Bank retained a security interest in "[a]ll trucking equipment including but not limited to truck tractors, trailers, inventory, supplies, tools and equipment, sheds and buildings, all contracts and contract rights, and accounts now owned or hereafter acquired." At no time did the Bank have a secured interest in any farm-related property, nor did the PCA have a secured interest in any trucking-related property.

On October 2, 1981, certain items of personal property owned by Schmer and Philip G. Schmer, Inc., were sold at an auction sale conducted by Taylor & Martin, Inc. The sale was conducted pursuant to an "Auction Agreement," signed by Schmer, which provided in part: "6. Seller agrees that if one or more, individuals, and or corporations, and or firms, own the property listed on one or more auction agreements signed by and between the Seller and Agent, the proceeds therefrom may be commingled and used to pay guarantees, costs and commissions."

At the time of the sale, Philip G. Schmer, Inc.'s, notes were due and owing to the Bank. Consequently, the Bank had arranged with Taylor & Martin, Inc., that it was to receive all proceeds resulting from the sale of its collateral directly from Taylor & Martin, Inc. Additionally, Schmer had received consent of the PCA to conduct the sale some 30 to 45 days beforehand.

After the auction sale Taylor & Martin, Inc., prepared a report of the sale on which it indicated the property sold and the amount received therefrom, some of which was prefaced with a "T" or "F" indicating whether it was trucking-related or farm-related property. The total proceeds received from the sale were $681,268. From this, Taylor & Martin, Inc., issued the following checks: $106,999.42 to the Commercial Savings Company; $139,894.94 to Security National Bank; $14,612.84 to John Deere Co.; and $252,170.60 to the Bank. After subtracting its commission and advertising payments, Taylor & Martin, Inc., issued a final check in the amount of $108,319.88 to Philip Schmer, Inc., for the net proceeds of the sale. This check was received by Schmer and deposited in the account of Philip G. Schmer, Inc., at the Bank on or about October 23, 1981.

On October 26, 1981, Schmer delivered two checks to the PCA, totaling $80,000, payable from the account of Philip G. Schmer, Inc. These checks were returned unpaid by the Bank, marked "See Maker." Prior to the time these checks were presented for payment, a "hold" had been placed on the Philip G. Schmer, Inc., account; at that time the account had a balance in excess of $110,000. On November 12, 1981, the Bank debited the account of Philip G. Schmer, Inc., to pay the outstanding obligation of the corporation to the bank.

In the order dismissing the petition, the district court found that the PCA released any and all security interest it may have had in the property sold by Schmer; that when the $108,319.88 check payable to Philip Schmer, Inc., was deposited in the account of Philip G. Schmer, Inc., the Bank, through the use of its term "freeze," legally offset an amount in the account of Philip G. Schmer, Inc., sufficient to satisfy the debt of Philip G. Schmer, Inc., to the Bank; and that the PCA had failed to prove that a conversion had occurred. The assignments of error all relate to this order.

The plaintiff's theory of the case is premised on Neb.U.C.C. § 9-306(2) (Reissue 1980), which provides:

(2) Except where this article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.

(Emphasis supplied.) Of specific concern here is the italicized language above.

The plaintiff cites Rudio v. Yellowstone Merchandising Corp., 200 Mont. 537, 652 P.2d 1163 (1982), in support of its theory. In Rudio the court held:

Whether or not Rudio waived his security interest has no bearing on his right to the proceeds of the sale as against competing creditors such as MMI. In, In Re Mid State Wood Products Company (D.Ill.1971), 323 F.Supp. 853, the Federal District Court held: "...