Production Credit Ass'n of Chippewa Falls v. Equity Coop Livestock Sales Ass'n

• Decision Date: 03 January 1978
• Docket Number: No. 75-622,75-622
• Citation: 261 N.W.2d 127,82 Wis.2d 5
• Parties: , 23 UCC Rep.Serv. 520 PRODUCTION CREDIT ASSOCIATION OF CHIPPEWA FALLS, Appellant, v. EQUITY COOP LIVESTOCK SALES ASSOCIATION, Respondent.
• Court: Wisconsin Supreme Court

Page 127

261 N.W.2d 127

82 Wis.2d 5, 23 UCC Rep.Serv. 520

PRODUCTION CREDIT ASSOCIATION OF CHIPPEWA FALLS, Appellant, v. EQUITY COOP LIVESTOCK SALES ASSOCIATION, Respondent.

No. 75-622.

Supreme Court of Wisconsin.

Submitted Dec. 1, 1977.

Decided Jan. 3, 1978.

Vance L. Sinclair, Chippewa Falls, and Ross & Stevens, S.C., Madison, of counsel, for appellant.

Axley, Brynelson, Herrick & Gehl, Madison, for respondent.

ABRAHAMSON, Justice.

The issue on appeal is whether a livestock auctioneer may be held liable in conversion for selling a farmer's cattle and paying the proceeds of the sale to the farmer when the cattle are subject to a third party's security interest.

The facts were stipulated. Production Credit Association of Chippewa Falls (PCA) made a loan to Dennis and Julie Johnson on or about March 6, 1972, ¹ for use in the Johnsons' dairy farming operation. To secure the loan, the Johnsons entered into a security agreement with PCA. Under the agreement, PCA took a security interest in the Johnsons' cattle herd, ² feed, specified farm machinery and equipment, and in "all proceeds of the sale or other disposition of any of the property described." The security agreement did not explicitly permit or prohibit the sale of the collateral. ³ A financing statement was filed with the Register of Deeds of Chippewa County.

Equity Coop Livestock Sales Association (Equity) is a livestock auctioneer. Between April 11, 1972, and April 8, 1974, the Johnsons sold 21 head of cattle through auctions conducted by Equity. Equity deducted its service charges and commission, $116.97, and paid the rest of the sales price, $3,002.46, to the Johnsons.

The trial court found that Equity did not buy the livestock. It functioned only as an auctioneer and clerk.

The Johnsons apparently defaulted on their loan payments, and on November 4, 1974, a judgment was entered against the Johnsons in favor of PCA in the amount of $11,964.94, with costs. The Johnsons did not pay any part of the judgment, and PCA brought an action against Equity to recover the damage sustained by PCA due to what it views as Equity's participation in the Johnsons' conversion of the collateral.

The trial court dismissed PCA's complaint on the merits. We affirm the judgment.

PCA argues that in the instant case the debtors have no right to sell the collateral subject to its security interest. Arguing that a debtor who sells secured collateral without explicit permission commits a wrong for which all participants in the sale must answer, PCA seeks to hold Equity liable for conversion. By the weight of authority an agent such as Equity ⁴ may be liable for conversion if the principal engaged in a wrongful act. The agent's good faith and lack of knowledge of the security interest are not good defenses. ⁵ On the record before us, Equity can be held liable for conversion only if the Johnsons had no right to sell the collateral. Thus it is the Johnsons' right to sell the cattle which must concern us. The tort law of conversion and chapter 409, Stats. (Article 9 of the Uniform Commercial Code) ⁶ are applicable to this case.

Prosser describes conversion as "a fascinating tort . . . highly technical in its rules and complications, perhaps more so than any other except defamation, it almost defies definition." ⁷ Conversion is often defined as the wrongful exercise of dominion or control over a chattel. ⁸ It may be committed in a variety of ways, the most common being an unauthorized transfer of the goods to one who is not entitled to them. An action for conversion is bottomed upon a tortious interference with possessory rights. The plaintiff in a conversion suit, here PCA, must allege and prove either that it was in possession of the chattel at the time of the conversion or that it was entitled to immediate possession. ⁹

PCA was not in possession of the cattle at the time of the sale; the Johnsons or Equity had possession. The question thus becomes whether PCA was entitled to immediate possession. PCA was entitled to immediate possession if the Johnsons were in default. ¹⁰ Sec. 409.503, Stats., provides that "unless otherwise agreed, a secured party has on default the right to take possession of the collateral." ¹¹

As noted previously, the event and date of the Johnsons' default are not included in the record, ¹² except that the brief of PCA states that "By November 4, 1974, the Johnsons had defaulted in the payment of the PCA loan."

PCA's contention that Equity is a converter assumes that the Johnsons were in default at the time of each sale by Equity, because the mere sale constituted the default. If the Johnsons were in default, PCA was entitled to immediate possession; if, however, the Johnsons were not in default, PCA had no right to possession and thus no basis for a suit in conversion. ¹³

The security agreement does not attempt to prohibit the sale of the mortgaged property. Nor does the agreement provide that the sale of the collateral constitutes a default. ¹⁴

Under the Uniform Commercial Code, a debtor's transfer of property which is subject to a security interest is not wrongful in itself and the transfer does not result in automatic default.

"The debtor's rights in collateral may be voluntarily or involuntarily transferred (by way of sale, creation of a security interest, attachment, levy, garnishment or other judicial process) notwithstanding a provision in the security agreement prohibiting any transfer or making the transfer constitute a default." Sec. 409.311, Stats.

The official Uniform Commercial Code Comment states that the purpose of sec. 409.311, Stats. is "to make clear that in all security transactions under this Article (9), the debtor has an interest (whether legal title or an equity) which he can dispose of and which his creditors can reach." ¹⁵

The debtor's sale of the property does not, however, destroy or affect the continuing validity of the original security interest. The Code protects a secured party by providing that:

"Except where this chapter 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." Sec. 409.306(2), Stats. ¹⁶

Sec. 409.311 does not appear to have changed the law of Wisconsin. ¹⁷ Prior to the adoption of the Code, this court had held that the secured party (chattel mortgagee) could not sue the debtor's transferee in conversion because the debtor could sell chattel which were subject to a chattel mortgage. The security interest survived the sale, and the buyer took the property subject to the security interest.

"(T)he general property and equitable title being in the mortgagor, the latter may sell and convey a good title subject to the mortgage; and . . . the special interest of the mortgagee, until it becomes absolute, may be extinguished by the owner of the general property by payment of the mortgage indebtedness. This is in accordance with the modern rule that for all practical purposes chattel mortgages are mere liens." Midland National Bank and Trust Company v. Peterson, 229 Wis. 19, 20, 281 N.W. 683, 684 (1938). ¹⁸

As the Peterson case illustrates, prior to enacting the Code Wisconsin recognized the debtor's right to transfer his or her interest.

We interpret the code as incorporating the rationale of the Peterson case that the debtor may sell the collateral; that the debtor's transfer of collateral will not destroy the secured party's interest; and that if the transfer of collateral occurs at a time when the debtor is not in default (and the transfer is not an event of default), the secured creditor has no immediate remedy against either the debtor or the transferee. ¹⁹ We do not reach the question whether a transfer of collateral which constitutes a default or which occurs after the debtor's default is a conversion, because on the basis of the record before us, the assumption must be that the transfers occurred before default. ²⁰

A situation analogous to that of the instant case was presented to this court in First National Bank v. Sheriff of Milwaukee County, 34 Wis.2d 535, 149 N.W.2d 548 (1967). A judgment creditor seized property in which the bank had a security interest. The debtor was not in default on his loan at the time of seizure. The Bank (secured party) sued the judgment creditor in replevin. We found that replevin would not lie against the judgment creditor because the debtor had the right to possession when the property was seized. Relying on sec. 409.311, Stats., we said:

"(W)here, as here, a debtor has the right to possession of the collateral and the sheriff seizes the collateral on execution against him, the secured creditor may not intervene by replevin in an attempt to take possession of the property and prevent the execution sale. Instead, creditors without the right to possession of the goods are protected only by the fact that the execution sale is subject to their interest." Id. at 541, 149 N.W.2d at 551.

For the reasons set forth above, we hold that there was no conversion.

Judgment affirmed.

1 The record does not include a copy of the promissory note given by the Johnsons to PCA.

2 The Schedule of Property covered by the agreement states that it covers "all (livestock) now owned and hereafter acquired including but not limited to the following: 45 cows; 15 Hfrs. 2 yr.; 12 Hfrs. 1 yr.; 17 calves; 1 bull."

3 The copy of the security agreement included in the record provides that the "agreement is subject to the terms printed on the reverse side hereof, which are made a part hereof." However, the additional terms, if any, were not made a part of the record and are not before us on review.

4 The auctioneer is the seller's agent. Faultersack v. Clintonville Sales Corp., 253 Wis. 432, 435, 34 N.W.2d 682 (1948).

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