Producers Cotton Oil Co. v. Amstar Corp.

• Decision Date: 05 January 1988
• Docket Number: No. F005950,F005950
• Court: California Court of Appeals Court of Appeals
• Parties: , 5 UCC Rep.Serv.2d 32 PRODUCERS COTTON OIL COMPANY, Plaintiff and Respondent, v. AMSTAR CORPORATION, Defendant and Appellant.

Page 914

242 Cal.Rptr. 914

197 Cal.App.3d 638, 5 UCC Rep.Serv.2d 32

PRODUCERS COTTON OIL COMPANY, Plaintiff and Respondent, v. AMSTAR CORPORATION, Defendant and Appellant.

No. F005950.

Court of Appeal, Fifth District, California.

Jan. 5, 1988.

Review Denied March 23, 1988.

Thomas, Snell, Jamison, Russell & Asperger, Steven M. McClean and David M. Gilmore, Fresno, for defendant and appellant

McCormick, Barstow, Sheppard, Wayte & Carruth, Oliver W. Wanger and Timothy Jones, Fresno, for plaintiff and respondent.

OPINION

STONE ^*, Associate Justice.

STATEMENT OF THE CASE

Appellant, Amstar Corporation (Amstar), appeals from a money judgment rendered against it in an action for conversion of crop proceeds. The case presents a number of novel issues in California involving the interplay of sections 9306, 9307 and 9318 of the California Uniform Commercial Code. ¹

We are called upon to determine two main issues. The first is whether a secured creditor's implied authorization of sale of collateral relinquishes the creditor's security interest in collateral proceeds. We hold that the creditor's security interest in the proceeds continues where the creditor does not waive its interest by conduct or by the language of the sales contract.

The second issue is whether a claim based upon equitable principles of unjust enrichment can, in certain circumstances, supersede the rights of a secured creditor whose interest is fully perfected. We hold that such an equitable claim prevails in this case.

STATEMENT OF THE FACTS

Producers Cotton Oil Company (Producers) financed Cecil Borboa's farm operations for crop years 1976 through 1981. It was Producers's practice to take a security interest in all crops that it financed and send a notice to the crop buyers informing them of that interest. The notice reserved Producers's security interest in each crop and its proceeds. The assignment stated that no setoff or deductions were to be made by the buyer.

Producers loaned Borboa $2,042,710.28 for his various farming operations and received a promissory note dated January 13, 1981. Borboa also signed a security agreement and financing statement in Producers's favor which covered all his crops and the proceeds therefrom. The financing statement was duly filed, and the parties agree that Producers had a perfected security interest before any crop sale.

The terms of the security agreement required Borboa to obtain written consent from Producers to sell his sugar beets. However, in 1979, 1980 and 1981 Borboa contracted to sell his beets to Amstar without written authority from Producers. Borboa dealt with Frank Hunt, a field man for Spreckles Sugar Division of Amstar. Hunt knew that Producers financed Borboa, and he assumed Producers held a security interest in Borboa's crops.

Borboa informed William O'Hare, Producers's gin manager, he had agreed to sell his beets to Amstar and gave copies of the sales contracts to O'Hare. The contracts stated, and both Borboa and O'Hare were aware, Amstar would deduct from the sales price amounts for seed, dirt haul, curly top virus assessment and California Beet Growers Association dues. Harvesting costs were not specified as deductions.

When O'Hare was informed of the crop sale, he sent Producers's assignment of crop proceeds to Amstar. Amstar responded by attaching a conditional acceptance, the condition being that Amstar would honor the assignment subject to deductions for indebtedness of the grower, and returned it to Producers. Producers did not respond to the assignment modification, either by acceptance or rejection.

In 1979 and 1980, Borboa hired O.L. Williams to harvest his sugar beet crop. Williams billed Borboa, and Borboa presented the bills to Producers for payment. A portion of the 1980 bill in the amount of $10,000 was not paid, however, because of insufficient funds. O'Hare told Borboa he would try to pay the bill in 1981 out of 1981 crop proceeds.

Since Williams was not paid in full for the 1980 harvest, he wanted assurance of payment for 1981. Borboa agreed with Williams the cost of the 1981 harvest as well as the $10,000 unpaid from the 1980 harvest would be paid from the income of the 1981 crops. On October 13, 1981, Borboa requested Amstar pay Williams. Amstar told Borboa it would pay Williams if Producers agreed to that arrangement. Borboa never spoke with anyone at Producers regarding the payment to Williams. However, O'Hare was in the field during harvest time and knew Williams was performing harvesting services. He neither inquired about nor objected to the operation.

Amstar's usual procedure when a grower made such a request was to obtain a subordination from the entity which had the assignment of proceeds. Normally money would not be paid to another party until a signed subordination agreement was received from the secured party. Amstar employees Norman Rianda, the agricultural superintendent, and Michael Bozzini, the agricultural accounts manager, knew Amstar would require a subordination agreement from Producers before Amstar could pay Williams. Bozzini sent a subordination request to Producers but, inadvertently, a copy of the request was not filed in Amstar's grower ledger to notify others that a request had been sent out.

Usually, Producers funneled subordination requests to O'Hare, to be forwarded to the main office. O'Hare did not recall receiving the subordination request from Amstar, but Mr. Veaco, Producers's corporate secretary, testified Producers had received the request and placed it in Borboa's file without making a response. Producers generally denied requests for subordination.

After Amstar sent out the subordination request, Mr. Cushin, a clerical level employee of Amstar, sent a check for $80,600 to Williams on October 30, 1981. The check was paid from net beet credits which had been earned by Borboa's delivery of beets to Amstar to that date. Amstar admitted releasing the check was a "complete breach" of its normal policies and practice because it had notice of the assignment to Producers and had not obtained a subordination.

Because Amstar had paid for harvesting, Borboa did not present a bill for that cost to Producers in 1981. O'Hare took no action to determine why no bill was sent despite the fact previous years' harvest bills had been paid by Producers because Borboa was a "very resourceful person" and could find ways to get work done. At harvest time, O'Hare had projected that Borboa's crop revenues would not be sufficient to repay the loan.

In January 1982, supervisory personnel at Amstar discovered Williams had been paid from crop proceeds. Amstar requested Williams submit harvest bills and return payment in excess of the actual cost of harvesting and hauling. Williams submitted a bill for $53,336.35, including $43,336.35 for harvesting the 1981 crop and $10,000 still owing for the 1980 harvest. Williams returned $27,263.65, the difference between his bill and the $80,600 he was paid in October.

Borboa's 1981 sugar beet crop yielded proceeds of $231,108.76. Amstar remitted $166,019.38 to Producers after deducting $5,129.24 for beet seed, $6,623.49 for "standard deductions" and $53,336.65 for harvesting expenses paid to Williams. In spring 1982 Producers demanded Amstar pay the amounts deducted from the 1981 crop proceeds. Amstar refused.

Producers brought an action against Amstar claiming the deductions violated its security interest and constituted conversion of the proceeds. The court concluded Amstar converted Producers's proceeds to the extent it withheld sums paid to Williams, and Amstar was not entitled to offset those expenses on an unjust enrichment theory.

I Producers's Authorization of Sale of Collateral Did Not Affect Its Security Interest in Sale Proceeds--Section 9306

A. Producers Authorized the Sale of the Sugar Beet Crop.

The security agreement protecting Producers's interest in the collateral provides the standard prohibition against sale without written consent, by providing in paragraph 3:

"That the collateral shall not ... be sold ... without the prior written consent of the secured party...."

Section 9306, subdivision (2) states, except where the code provides otherwise,

"... 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.)

This court held in Central Cal. Equip. Co. v. Dolk Tractor Co. (1978) 78 Cal.App.3d 855, 144 Cal.Rptr. 367 that in the face of a security agreement which prohibits sale of collateral without written consent, evidence sufficient to sustain a finding of implied consent under the "or otherwise" language of section 9306, subdivision (2) must be clear and be based on prior conduct.

"... [W]hen a security agreement expressly prohibits the disposition of collateral without written consent of the secured party, in order for a court to find an authorization permitting disposition free of the security interest within the meaning of section 9306, subdivision (2), there must either be actual prior or subsequent consent in writing by the secured creditor manifesting a purpose to authorize the disposition free of the security interest. Mere acquiescence is insufficient. While we interpret 'or otherwise' in section 9306, subdivision (2), to permit an implied agreement, we believe that such an implied agreement should be found with extreme hesitancy and should generally be limited to the situation of a prior course of dealing with the debtor permitting disposition. The issue is a question of fact, but the trial court should carefully consider the written prohibition against disposition found in the security agreement as an important factor in the factual determination and should determine the matter in favor of the written...