Planters Production Credit Ass'n v. Bowles

• Decision Date: 22 July 1974
• Docket Number: No. 73--300,73--300
• Citation: 256 Ark. 1063,511 S.W.2d 645
• Parties: , 14 UCC Rep.Serv. 1435 PLANTERS PRODUCTION CREDIT ASSOCIATION, Appellant, v. Chares W. BOWLES et al., Appellees.
• Court: Arkansas Supreme Court

Page 645

511 S.W.2d 645

256 Ark. 1063, 14 UCC Rep.Serv. 1435

PLANTERS PRODUCTION CREDIT ASSOCIATION, Appellant, v. Chares W. BOWLES et al., Appellees.

No. 73--300.

Supreme Court of Arkansas.

July 22, 1974.

Swift, Alexander & Burnett, Osceola, Reid, Burge & Prevallet, Blytheville, amicus curiae brief filed by Joe C. Barrett, Jonesboro, for appellant.

Oscar Fendler, Blytheville, for appellees, Lee Wilson and Co., a corporation and Hohenberg Bros. Co., a corporation.

C. E. Lynch, Jr., Osceola, for Gordon Wiseman.

Butler & Hicky, Forrest City, for Bluff City Cotton Co. Inc. & Louis B. Strong d/b/a Bluff City Cotton Co., a sole ownership.

JONES, Justice.

This is an appeal by Planters Production Credit Association, hereafter referred to as 'PCA,' from a chancery court decree denying judgment against the purchasers of cotton from Charles W. Bowles in a suit brought by PCA against Bowles and the purchasers of cotton raised by him and upon which PCA had perfected a security interest lien.

PCA was an association composed of approximately 365 members who borrowed money from the association to finance their individual farming operations. The association obtained the money it loaned to its members from federal sources and each member paid a membership fee of $5.00 for each $100 he borrowed. PCA took notes, financing statements and security agreements pledging crops and proceeds as security for crop loans made to its members.

Bowles farmed approximately 2,500 acres of Mississippi County land primarily in cotton and soybeans. He had been a member of PCA from whom he obtained loans in financing his farming operations since 1950. He always repaid his loans without difficulty until in 1969 when he began having difficulty in making his crop loan payments to PCA. By March 15, 1971, he owed PCA $146,162.99 which included a carryover from the previous year of $80,147.36 on a crop loan; $6,634.42 on a past due equipment loan, and $59,381.11 on a so-called 'interim financing' loan for current miscellaneous expenses. On March 15, 1971, he borrowed an additional amount of $63,085.00 with which to finance his 1971 crop and gave a note to PCA for $209,622.99. On the same date he executed a financing statement and security agreement pledging his 1971 cotton, wheat and soybean crop, as well as certain farm equipment, as security to PCA.

During the 1971 crop year PCA refused to finance Bowles further unless he reduced his past due indebtedness, so he became indebted to others for chemicals and other supplies, and in 1971 he produced approximately 1,100 bales of cotton. He sold futures on a part of his cotton and when the cotton was harvested, he sold it but failed to apply all the proceeds to his indebtedness to PCA.

The relationship of the parties is set out in the complaint filed by PCA on May 31, 1972, in which it alleged in part as follows:

'2. . . . (T)he Defendant, Charles W. Bowles, produced approximately 1100 bales of cotton of an approxmate value of $160,000.00 for which the plaintiff was entitled to receive the proceeds.

3. . . . (T)he Defendant, Charles W. Bowles, failed to pay plaintiff the proceeds or to deliver said cotton crop and instead delivered 704 bales of cotton to the Defendant, Keiser Supply Company, which were ginned and sold to the Defendant, Hohenberg Brothers Company, which issued its drafts to Lee Wilson Company through Keiser Supply Company, which in turn, applied the proceeds to accounts with Lee Wilson Company Seed and Chemical Division, an open account, and to Keiser Supply Company, all in direct contravention and with prior notice of the plaintiff's prior and paramount lien by way of its recorded mortgage. That the Defendant, Charles W. Bowles, also delivered 137 bales of cotton to Allen Seagraves, who ginned said cotton, which was subsequently sold to the Defendant, Gordon Wiseman; that an additional 110 bales were sold under the fictitious name of 'Dunbar Bradey' with the intention of defrauding plaintiff and others.

That the Defendants, Bluff City Cotton Company and Bluff City Cotton Company, Inc., purchased 176 bales of cotton delivering their drafts to the Defendant, Charles W. Bowles, without delivering the proceeds from said sale to the plaintiff. . . .'

PCA prayed joint and several judgment in the amount of $160,000 against all the named defendants, or in the alternative it prayed a return of the cotton collateral.

The chancellor decreed judgment in favor of PCA against Bowles for $75,867.49 and decreed that PCA was not entitled to judgments against the other defendants on findings recited in the decree as follows:

'(T)he court expressly finds that the Plaintiff, Planters Production Credit Association, by its course of conduct through a number of years in regard to authorizing the Defendant, Charles W. Bowles, and all of its other borrowers to sell and otherwise dispose of crops which Bowles and the borrowers had produced and harvested received the cash proceeds from the sale and dispose of same and to use such proceeds in such manner as the Defendant Bowles and other borrowers deemed proper, waived its lien under the financing statement and security agreement that the Plaintiff had taken from the Defendant, Charles W. Bowles, for the year 1971 and for the crops involved in this lawsuit. As a result of said waiver, all of these Defendants and Cross-Defendants except the wife of the Defendant, Jane C. Bowles, purchased such crops grown by the Defendant Bowles in 1971 free of the lien claimed by the Plaintiff or received the money from the sale of those 1971 crops free of any such lien.'

On appeal to this court PCA has designated the points on which it relies for reversal as follows:

'Appellant had a security interest in Bowles' crops and the proceeds therefrom for $75,867.49 plus interest and costs.

The lower court erred in ruling that appellant waived its lien by reason of a course of dealing between it and its debtor-Bowles, or as a result of custom and usage in the trade.

Appellee, Lee Wilson & Company's alleged landlord's lien for furnish and supplies is invalid and appellant is entitled to judgment against it for $40,337.50.

Appellant is entitled to judgment against appellee Hohenberg Brothers Company for $40,337.50.

Appellant is entitled to judgment against appellee Gordon Wiseman for $30,720.70.

Appellant is entitled to judgment against Louis B. Strong, d/b/a Bluff City Cotton Company for.$17,946.45.

Appellant is entitled to judgment against Jane Bowles, d/b/a Bowles Liquor Store, Bowles Stop and Shop Grocery and Bowles Pawn Shop for $34,806.37.'

We disagree with the appellant's first two contentions, consequently we find it unnecessary to discuss the others.

The real question before us, and actually one of first impression in Arkansas, is whether a secured creditor may waive his security interest in collateral in favor of a third party purchaser of the collateral simply by his course of dealing with the debtor rather than by express or written waiver under the Uniform Commercial Code, as adopted in this state. We agree with the chancellor that PCA did so under the peculiar facts and circumstances of the case before us.

Ark.Stat.Ann. § 85--9--306(1)(2) (Repl.1961) provides as follows:

'(1) 'Proceeds' includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are 'cash proceeds.' All other proceeds are 'noncash proceeds.'

(2) Except where this Article (chapter) 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 secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.'

Ark.Stat.Ann. § 85--9--316 (Repl.1961) reads as follows:

'Nothing in this Article (chapter) prevents subordination by agreement by any person entitled to priority.'

The Code definition of 'agreement' is found in § 85--1--201(3) as follows:

"Agreement' means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this Act (Sections 1--205 and 2--208 (§§ 85--1--205, 85--2--208)).

Whether an agreement has legal consequences is determined by the provisions of this Act, if applicable; otherwise by the law of contracts (Section 1--103 (§ 85--1--103)). . . .'

As already stated, the security agreement in this case covered crops to be raised by Bowles on specifically described land. The proceeds from the sale of wheat and soybeans were applied on the PCA indebtedness and only the sale of cotton is involved in this case. Under Item 5 of the security agreement it was extended to 'products and proceeds' in language as follows:

'All products into which the goods and property described or referred to under Items 1 to 4, inclusive, or any part thereof, have been or shall at any time hereafter be manufactured, processed, or assembled; and all cash and non-cash proceeds from the sale, exchange, collection, or other disposition of any of said goods and property; and all accounts receivable resulting from the sale or other disposition of any of said goods or property.'

Under the heading 'Terms, Conditions, Warranties, and Agreements,' the financing statement and security agreement contain language as follows:

'Secured Party shall have the right to inspect said goods and property at any time. If said goods and property or any part thereof shall not, in the opinion of...