North Central Kansas Production Credit Ass'n v. Washington Sales Co., Inc.

Decision Date01 April 1978
Docket NumberNo. 48585,48585
Citation223 Kan. 689,577 P.2d 35
Parties, 23 UCC Rep.Serv. 1343 NORTH CENTRAL KANSAS PRODUCTION CREDIT ASSOCIATION, Appellee, v. WASHINGTON SALES COMPANY, INC. and Hartford Accident and Indemnity Company of Hartford, Connecticut, Appellants, v. Denneth UFFMAN, Third Party Defendant.
CourtKansas Supreme Court

Syllabus by the Court

1. Nothing in the Uniform Commercial Code prevents a secured party from attaching conditions or limitations to its consent to sale of collateral by a debtor. If such conditions are imposed, then a sale by the debtor in violation of those conditions is an unauthorized sale and the security interest continues.

2. The acceptance, by a secured party, of the proceeds from unauthorized sales of collateral by a debtor, without remonstrating with the debtor for violating the express terms of the security agreement, does not, standing alone, constitute an implied waiver of the security interest in the remaining collateral.

3. An express authorization by the secured party of the debtor to sell collateral and to receive the proceeds constitutes an express waiver of the security interest in the collateral sold.

4. In an action for conversion brought by the holder of a security interest against a livestock auction firm which had sold encumbered cattle at the direction of the debtor, and had paid out the proceeds to the debtor, it is held that there was no conversion under the peculiar and specific facts of this case.

C. Stanley Nelson, of Hampton, Royce, Engleman & Nelson, Salina, argued the cause, and was on brief for appellants.

Gerald Sawatzky and James D. Oliver, of Foulston, Siefkin, Powers & Eberhardt, Wichita, were on the brief amici curiae for Glasco Livestock Exchange, Inc., Osborne Livestock Commission, Inc., and Lowell Darcey, d/b/a Belleville Livestock Commission Co.

Edward W. Rothe and James T. Malysiak, of Freeman, Rothe, Freeman & Salzman, Chicago, Ill., and Gerald J. Letourneau, of Colmery, McClure, Funk, Letourneau & Entz, Topeka, were on the brief amicus curiae for Iowa Beef Processors, Inc.

Stephen T. Phelps and John K. Pearson, Wichita, were on the brief amicus curiae for Federal Intermediate Credit Bank of Wichita.

Charles N. Henson Jr. and Anne E. Lolley, of Eidson, Lewis, Porter & Haynes, Topeka, were on the brief amicus curiae for the Kansas Bankers Ass'n.

Don W. Noah, of Noah & Harrison, P.A., Beloit, argued the cause, and was on brief for appellee.

MILLER, Justice:

This is an appeal by the defendant, Washington Sales Company, Inc. (Washington), and the surety on its bond, Hartford Accident and Indemnity Company, from a directed verdict granted in favor of the plaintiff, North Central Kansas Production Credit Association (PCA), in an action for conversion brought by PCA to enforce its perfected security interest in cattle sold by the debtor, Denneth Uffman, through Washington's livestock auction sales barn. The principal question presented here is whether PCA authorized these sales of cattle by the specific language of the security agreements or by its course of dealing with Uffman.

The principal facts are not disputed. PCA loaned Denneth Uffman more than one hundred thousand dollars on March 2, 1972. Uffman executed a promissory note, a security agreement, and a financing statement to PCA on that date. The financing statement was promptly filed with the register of deeds of Washington County, Kansas, on March 8, 1972.

The security agreement specifically covers 80 Holstein cows of various ages, 1 Holstein bull, 20 Holstein calves of various weights, 5 Angus cows, and 5 Angus calves, together with all property similar to that listed which may at any time be acquired by the debtor, including all natural increase thereof, all milk produced by any cows, and various other property. The security agreement provides that:

"(5) The Debtor . . . will not . . . dispose of (the property herein described) 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 . . ." (Emphasis supplied.)

The financing statement, signed by Uffman, described "livestock of every kind and description whether or not marked or branded," and specifically provided that: "Proceeds of Collateral are also covered."

A few months later, Uffman applied to PCA for an additional loan. He executed a second security agreement, the terms of which are similar to those in the initial security agreement, and since they raise no additional questions, need not be detailed here.

Both PCA and Uffman intended that Uffman should sell milk regularly during the course of the loan, that he would sell wheat, and that from time to time he would cull cows from his dairy herd and sell them, together with calves. The milk, wheat, cows and calves were all included as collateral under the terms of the security agreements and financing statement; payment, upon sales of those items, was, under the terms of the security agreement, to be "made jointly to the Debtor (Uffman) and to the Secured Party (PCA)." The provision covering all milk produced by any cows was part of the printed security agreement. PCA's president testified, however, that" "We do not claim a security interest in the milk payment proceeds . . .," and that the security agreement covered only the milk base.

Uffman sold wheat at a local elevator twice. In each instance the elevator issued checks made payable to Uffman. Uffman deposited one check from the elevator in his personal checking account, then wrote a personal check to PCA; he endorsed the other elevator check directly to PCA.

Uffman sold his milk to AMPI. PCA knew that Uffman had already made an assignment of $300 per month to FHA from his milk checks, and had filed that assignment with AMPI. PCA did not feel that AMPI would honor a second assignment, and none was requested. AMPI sent the milk checks directly to Uffman, payable to him only, and he endorsed them over to PCA until December, at which time PCA called Uffman's loan, for reasons not important now. Thereafter, and although PCA protested, Uffman retained the milk checks. PCA did not admonish Uffman when it learned that he had sold wheat and was selling milk, and taking payment in his name only, in violation of the express terms of the security agreement.

It takes a number of consecutive years of production and sale of milk to acquire what is known in the industry as a milk base. Uffman never acquired one.

On March 15, 1972, only 13 days after the loan was made, Uffman first sold cattle which were collateral for the loan. Thereafter, and through March 28, 1973, he sold a total of 35 head of cattle through Washington on ten separate occasions. The total sale proceeds amounted to $7,563.65. Uffman did not report those sales to PCA, and did not remit the proceeds. Washington had no actual knowledge of the loan, the financing statement, or the security agreements. Edwin Burt, president and manager of Washington, testified in substance that he had no knowledge of PCA's lien, and that he was never advised that the cattle were mortgaged or subject to the security agreement. He was aware that financing statements on livestock were recorded with the register of deeds in the county where the owner lives, but he never checked the records on anyone who sold livestock at his sales barn. PCA had no knowledge of these cattle sales until sometime in April, 1973.

The trial judge's decision reads in pertinent part as follows:

"The primary issue is whether the plaintiff waived its security interest in the cattle by consenting to the sale by the provision of its security agreement.

"While there appears to be a division of authority on this question, and the Kansas Supreme Court appears not to have ruled on it, it appears to the Court that the purpose and intent of the Uniform Commercial Code is best served by the reasoning of the cases holding that the secured party did not waive its security interest in the cattle by the provision quoted from the security agreement.

"While a sale by a debtor cuts off a security interest in the collateral if the secured party has authorized the debtor's actions in the security agreement or otherwise, the plaintiff did not waive its security interest by consenting to the sale of the cattle in return for drafts of the buyer payable to the plaintiff. Nothing in the Uniform Commercial Code prevents a secured party from attaching conditions or limitations to its consent to sales of collateral by a debtor. If such conditions are imposed, a sale by the debtor in violation of those conditions is an unauthorized sale and the security interest continues.

"Nor can we find a waiver in the course of dealings between the plaintiff and Uffman. As long as the checks for wheat and milk were turned over to plaintiff, it had no reason to object and the conduct is entirely consistent with the conditional consent to sell.

"The Court follows the rationale of Baker Production Credit Ass'n v. Long Creek Meat Co., (266 Or. 643) 513 P.2nd 1129, an Oregon case; and Garden City Production Credit Ass'n v. Lannan, 186 Nebraska 668 (186 N.W.2d 99)."

We turn first to the following provisions of the Uniform Commercial Code, each of which has application to the dispute before us:

"K.S.A. 84-1-205(4) The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade."

"K.S.A. 84-9-306(2) Except where this article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the...

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