Production Credit Ass'n of Minot v. Melland, 9560

• Decision Date: 09 May 1979
• Docket Number: No. 9560,9560
• Citation: 278 N.W.2d 780,26 UCC Rep.Serv. 1355
• Parties: 26 UCC Rep.Serv. 1355 PRODUCTION CREDIT ASSOCIATION OF MINOT, North Dakota, Plaintiff and Appellee, v. Dorland MELLAND, Defendant, and Daniel R. Delaney and Ray Grain Corporation, Defendants and Appellants. Civ.
• Court: North Dakota Supreme Court

Page 780

278 N.W.2d 780

26 UCC Rep.Serv. 1355

PRODUCTION CREDIT ASSOCIATION OF MINOT, North Dakota Plaintiff and Appellee, v. Dorland MELLAND, Defendant and Daniel R. Delaney and Ray Grain Corporation, Defendants and Appellants.

Civ. No. 9560.

Supreme Court of North Dakota.

May 9, 1979.

Pringle & Herigstad, Minot, for plaintiff and appellee; argued by Herbert L. Meschke, Minot.

John H. MacMaster, Williston, for defendant Dorland Melland; no appearance.

Bjella, Neff, Rathert, & Wahl, Williston, for defendants and appellants; argued by James R. Carlson, Jr., Williston.

ERICKSTAD, Chief Justice.

This case involves the priority of competing claims between Production Credit Association and Daniel R. Delaney to the proceeds of Dorland Melland's 1976 grain crop. Both parties loaned money to Melland that was allegedly secured by the crop and Melland subsequently defaulted on the loans. The district court held that Production Credit Association was entitled to the identifiable proceeds of the crop in the possession of Delaney and Ray Grain Corporation, a wholly-owned corporation of Delaney, and they appeal. We affirm the district court judgment.

Dorland Melland (hereinafter Melland) farmed 2,000 acres of rented land in Williams County. In order to finance his farming operation, Melland borrowed money from, among others, Daniel Delaney (hereinafter Delaney), Ray Grain Corporation, and Production Credit Association (hereinafter PCA). He also purchased supplies on credit from Ray Farmers Union Oil Company.

On December 13, 1975, Melland and Delaney entered into two contracts for future delivery of grain ¹ from Melland's 1976 crop and on the same date, Ray Grain Corporation advanced Melland $52,000. Contemporaneously, Delaney entered into an agreement with Melland that provided in part that Melland would give Delaney an undivided three-fourths ( 3/4) share of his 1976 crop in exchange for the financing provided by Delaney. ² Delaney did not file a financing statement on these transactions. Delaney did file a financing statement, however, on some of Melland's farm machinery and equipment for which he held a security agreement. Delaney also filed a seed lien against Melland in the spring of 1976 and Ray Grain Corporation supplied Melland with seed in the amount of $8,233.05. Priority of this seed lien is conceded by PCA.

Subsequent to the Melland-Delaney transactions, PCA made a series of four loans to Melland totaling $46,607. Three of the loans were "supply loans" in which PCA paid the money directly to Ray Farmers Union Oil Company (hereinafter Farmers Union) who credited Melland's account. These loans were made pursuant to standard procedure and were used to pay a producer's oil, gas, and other supplies that he obtained from local suppliers. In order to facilitate the making of these supply loans to Farmers Union customers, Farmers Union guaranteed the loans. The fourth loan from PCA to Melland was for crop insurance. ³ As security for these loans, PCA entered into a security agreement with Melland on his 1976 crop that showed no prior mortgages and it also filed a financing statement with the Register of Deeds in Williams County on March 29, 1976. The district court found as an undisputed fact that the filing was valid:

"3. As security for the foregoing indebtedness of Defendant Dorland Melland, Production Credit Association of Minot held a valid security agreement on all crops within one year of the date thereof, March 25, 1976, of Dorland Melland, which was duly perfected by filing of a financing statement in the office of the Register of Deeds of Williams County on March 29, 1976 as Document No. 17421, which was the county of residence of Dorland Melland and the county where the real estate was located on which the crops were to be grown; "

Melland delivered all of his 1976 crop to Ray Grain Corporation during harvest of 1976 apparently pursuant to their agreement and the grain was ultimately sold to Ray Grain Corporation for $64,927.32. None of this amount was paid to Melland as Delaney claimed all of the proceeds for Melland's indebtedness to Ray Grain Corporation and himself.

Melland subsequently defaulted on his obligations to PCA without making any payments and PCA brought this suit against Melland, Delaney, and Ray Grain Corporation, for $49,672.40 plus interest. After commencement of the suit, Melland was discharged in bankruptcy. Farmers Union did not pay PCA on its guarantee and it is now also bankrupt.

After deducting the amount for Delaney's 1976 seed lien, the remaining balance held by Ray Grain Corporation and Delaney is $56,694.27.

Where should the balance of the proceeds from Melland's 1976 crop be applied? Should it be applied on Melland's debt of $49,672.40 plus interest to PCA, or on Melland's remaining debt, following foreclosure on other property that was secured by a security agreement, of over $92,000 to Ray Grain Corporation and Delaney?

The district court made the following relevant conclusions of law, all of which are in essence challenged on this appeal:

"2. The unrecorded and unfiled 'Agreement,' dated December 19, 1975, between Dorland Melland and Daniel R. Delaney is a crop mortgage to an individual which is not valid under N.D.C.C. § 35-05-01;

"3. As a transfer of growing crops, the 'Agreement,' dated December 19, 1975, between Defendant Dorland Melland and Defendant Daniel R. Delaney would also be void under N.D.C.C. § 35-05-03; "4. Under N.D.C.C. Chapter 41-02, the 'Agreement' could not be an effective 'sale' of growing crops, since title did not pass prior to Plaintiff's perfected security agreement in the crops because there was no identification of the crops for passing of title prior to Plaintiff's perfected security agreement, under N.D.C.C. § 41-02-05, § 41-02-06, § 41-02-46, and § 41-02-49.

"5. Under N.D.C.C. Ch. 41-09, the 'Agreement' dated December 19, 1975, between Defendant Dorland Melland and Defendant Daniel R. Delaney is not a perfected security interest and is therefore not entitled to priority over Plaintiff's perfected security interest;

"6. 'Good faith' of Plaintiff is not an issue in this case since: (1) there was no contract between Plaintiff, on the one hand, and Defendants Delaney and Ray Grain Corporation, on the other hand; and, (2) in obtaining its crop mortgage from Defendant Melland, Plaintiff was a disinterested creditor attempting to protect its own commercial interest; and, (3) Plaintiff was not in pari delicto with the mortgagor, Defendant Dorland Melland in his dealings with Defendant Delaney;

"7. Plaintiff's perfected security agreement on the crop of Dorland Melland is entitled to priority over the unperfected 'Agreement,' dated December 19, 1975, between Dorland Melland and Defendant Daniel R. Delaney; N.D.C.C. § 41-09-33, subsection 5.

"8. There are no affirmative defenses or issues of fact which would entitle Defendants Delaney or Ray Grain Corporation to trial by jury in this foreclosure action against proceeds;

"9. Under Chapter 41-09, Plaintiff's security agreement is effective against purchasers of the collateral (N.D.C.C. § 41-09-14) and plaintiff's security interest continued in the collateral notwithstanding its sale and also continued in the identifiable proceeds which were not paid to the debtor Dorland Melland (N.D.C.C. § 41-09-27)."

This appeal by Delaney and Ray Grain Corporation raises issues of priority of security interests in crops, of the sale of crops before they are planted, of whether or not Delaney was properly denied a jury trial, and of enforcement of a security interest against a purchaser of the collateral.

Although Delaney advanced money to Melland prior to PCA's loan, it is undisputed that Delaney did not perfect his interest pursuant to Chapter 41-09, N.D.C.C. (Article 9 U.C.C.); therefore, PCA has priority pursuant to Section 41-09-33, N.D.C.C. (§ 9-312 U.C.C.). Delaney argues, however, that PCA should not be allowed to assert its "technical priority" because it knew of Delaney's prior financing arrangements with Melland and it exhibited a lack of good faith. This argument is premised on the theory that Section 41-01-13, N.D.C.C. (§ 1-203 U.C.C.), imposed an obligation of good faith on PCA in its dealings with Delaney. Section 41-01-13, N.D.C.C., provides:

"41-01-13. (1-203) Obligation of good faith. Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement."

PCA responds that Section 41-01-13, N.D.C.C., is inapplicable to its dealings with Delaney because there was no contract between PCA and Delaney and that PCA was merely acting as a disinterested creditor attempting to protect its own commercial interest.

In In re Smith, 326 F.Supp. 1311 (D.Minn.1971), a Federal district court in Minnesota dealt with a similar issue. In Smith, the debtor purchased an automobile in April, 1969, from a car dealer and he executed a conditional sales contract that was assigned by the seller to a bank (first lender). Neither the seller nor the assignee filed a financing statement evidencing the security interest. In July, 1969, a credit company (second lender) lent the debtor money that was secured by the same automobile. The second lender subsequently perfected its interest by filing a financing statement with the county register of deeds. At the time of this transaction, the second lender had actual knowledge of the unperfected security interest of the first lender in the automobile. The Federal district court summarized the situation "The situation presented is one involving conflicting security interests in the same collateral. Community Credit holds a security interest perfected by filing. The Bank's interest is prior in time but is unperfected either by filing or possession. It is conceded by all parties that Community Credit as holder of the perfected security interest would prevail if it had not had actual knowledge of the Bank's prior unperfected...