Peoples Nat. Bank and Trust v. Excel Corp., 56844

• Decision Date: 20 February 1985
• Docket Number: No. 56844,56844
• Citation: 695 P.2d 444,236 Kan. 687
• Parties: , 40 UCC Rep.Serv. 351 PEOPLES NATIONAL BANK AND TRUST, Appellant, v. EXCEL CORPORATION, Appellee.
• Court: Kansas Supreme Court

Page 444

695 P.2d 444

236 Kan. 687, 40 UCC Rep.Serv. 351

PEOPLES NATIONAL BANK AND TRUST, Appellant, v. EXCEL CORPORATION, Appellee.

No. 56844.

Supreme Court of Kansas.

Feb. 20, 1985.

Syllabus by the Court

1. Under the provisions of the Kansas Uniform Commercial Code a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. K.S.A. 84-9-307(1).

2. 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. K.S.A. 84-9-306(2).

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. The cases denying creditors recovery against purchasers where there has been an oral conditional consent to a sale of collateral are consistent with our holding in North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., 223 Kan. 689, 577 P.2d 35 (1978).

5. Summary judgment is proper where the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

Winton A. Winter, Jr., of Stevens, Brand, Lungstrum, Golden & Winter, Lawrence, for appellant.

Todd N. Thompson, of Barber, Emerson, Six, Springer & Zinn, Lawrence, argued, and Fred N. Six, Lawrence, was with him on brief, for appellee.

HOLMES, Justice:

Peoples National Bank & Trust (PNB) appeals from an order of summary judgment in favor of Excel Corporation (Excel) granted in an action for conversion of certain livestock in which PNB held a perfected security interest. Excel bought the livestock from PNB's debtor, Larry D. Burkdoll, and contends PNB released its security interest when it expressly consented to the sale by Burkdoll. PNB appeals claiming its consent was merely conditional and did not affect its security interest. The facts are not in dispute.

PNB is a banking corporation doing business in Franklin County, Kansas. On January 9, 1981, PNB extended a $200,000 line of credit to Larry D. Burkdoll for use in his cattle operation near Princeton, Kansas. As security for the initial loan and all future advances, Burkdoll granted PNB a security interest in the livestock he then owned (385 mixed steers in feed lots), or would thereafter acquire. The security agreement, signed by PNB and Burkdoll, was on a standard form and included a printed provision which stated: "The Debtor will not sell, or offer to sell or otherwise transfer or encumber the Collateral or any interest therein without the prior written consent of the Secured Party." A financing statement was filed with the Franklin County Register of Deeds on January 13, 1981, resulting in a perfected security interest in the livestock. Notwithstanding the specific provisions of the security agreement, one of PNB's officers instructed Burkdoll when the loan was first made that he was free to sell the cattle at any time so long as he delivered the proceeds to PNB as payment on the indebtedness.

PNB alleges that at "various times" after January 9, 1981, Excel purchased livestock from Burkdoll and made payment directly to him without requiring any consent from PNB. PNB did not contact Excel or any of its representatives to object to the manner in which these purchases were handled. For its part, Excel does not make it a practice to check public records for liens or interests in cattle being considered for purchase, and Excel's agent handling these purchases from Burkdoll made no such effort. Larry Burkdoll usually deposited the proceeds of the Excel sales in his personal account at PNB although only a portion of the funds were used to reduce his financial obligation to PNB.

Following completion of discovery, Excel filed a motion for summary judgment which was sustained by the trial court. Relying on K.S.A. 84-9-306(2) and our decision in North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., 223 Kan. 689, 577 P.2d 35 (1978) (hereinafter Washington Sales ), the trial judge determined PNB had no cause of action for conversion because its security interest in the cattle terminated at the time of the transfer to Excel.

"In this case, the secured party (plaintiff) attached conditions to its consent to sale of the cattle by Mr. Burkdoll. However, the sale by Mr. Burkdoll was not in violation of these conditions in this sales transaction. He sold the cattle and received the proceeds in accordance with the consent. He did fail to apply the proceeds on the loan, however, this was a breach of trust, not of the sales conditions.

"In conclusion, it is the judgment of this court that in this case 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."

The security agreement executed by Burkdoll provided that all transactions under the agreement and the parties to the agreement were to be governed by the Kansas Uniform Commercial Code (UCC). While the general rule is that a buyer in the ordinary course of business takes the goods free of any security interest created by the seller, that rule does not apply to farm products as defined in K.S.A. 84-9-109(3). Livestock is included within the definition of farm products. K.S.A. 84-9-307(1) provides:

"A buyer in ordinary course of business (subsection (9) of section 84-1-201) other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. For purposes of this section only, "farm products" does not include milk, cream and eggs."

However, the exception created by that section of the UCC is subject to K.S.A. 84-9-306(2) which provides, in part:

"[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 added.)

PNB contends that its consent that Burkdoll could sell the cattle without obtaining the prior written consent of PNB was only a conditional consent dependent upon immediate delivery of the proceeds to PNB to apply upon the debt and did not constitute an "authorized disposition" affecting its security interest. Excel, on the other hand, takes the position that the consent constituted an authorized disposition as contemplated by the statute, which released it from any liability under the security agreement. Both parties rely upon our decision in Washington Sales.

In Washington Sales we were confronted with the question of whether North Central Kansas Production Credit Association (PCA), the secured creditor, had authorized sales of cattle by the specific language of its security agreements or by its course of dealing with the debtor. PCA loaned Uffman, the debtor, more than $120,000 in early 1972. The security agreement covered 111 cows, calves and bulls. It also forbade Uffman from disposing of the collateral without PCA's written consent, but went on to grant the debtor permission to sell the property for fair market value "providing that payment for the same is made jointly to the Debtor and to the Secured Party." Washington Sales, 223 Kan. at 690, 577 P.2d 35 (emphasis supplied by court). Shortly after receiving the loan, Uffman began selling a total of thirty-five head of cattle on ten separate occasions for a total of $7,563.65. He did not report these sales to PCA, nor did he remit the proceeds. Washington Sales Company, Inc., handled the sales of the cattle through its livestock auction sales barn, but had no actual knowledge of the loan, the financing statement or the security agreements. Washington's president and manager was aware financing statements on livestock were matters of public record, but he did not check the records on anyone who sold livestock at his sales barn. When PCA became aware of the sales it sued Washington Sales Company for conversion. The trial court directed a verdict for plaintiff, finding PCA did not by its conditional consent waive its security interest, because the debtor's sale in violation of those conditions was unauthorized. Washington Sales Company and its surety appealed.

The first issue raised was whether PCA waived its security interest, or consented to the sales made through Washington Sales Company because of the specific terms of the security agreement authorizing Uffman to sell collateral either with PCA's prior written consent, or with payment for the collateral made jointly to Uffman and PCA. The court found those provisions constituted neither waiver nor consent because there is no provision in the Kansas version of the Uniform Commercial Code which prevents a secured party from authorizing a sale of collateral by the debtor under specific conditions. It was also argued that PCA had impliedly consented to the livestock sales and impliedly waived its security interest in the livestock by its course of conduct in allowing the debtor to sell wheat and milk without compliance with the security agreement and by its acceptance of the proceeds of such sales without admonishing Uffman.

Rejecting all arguments of implied consent, the court went on to conclude PCA, through its officers, expressly...