Southwest Washington Production Credit Ass'n v. Seattle-First Nat. Bank

• Decision Date: 28 February 1978
• Docket Number: SEATTLE-FIRST,No. 2856-II,2856-II
• Citation: 19 Wn.App. 397,577 P.2d 589
• Parties: , 23 UCC Rep.Serv. 1040 SOUTHWEST WASHINGTON PRODUCTION CREDIT ASSOCIATION, Respondent, v.NATIONAL BANK, Appellant.
• Court: Washington Court of Appeals

Page 397

19 Wn.App. 397

577 P.2d 589, 23 UCC Rep.Serv. 1040

SOUTHWEST WASHINGTON PRODUCTION CREDIT ASSOCIATION, Respondent, v. SEATTLE-FIRST NATIONAL BANK, Appellant.

No. 2856-II.

Court of Appeals of Washington, Division 2.

Feb. 28, 1978.

Marvin L. Gray, Jr., Seattle, for appellant.

James A. VanderStoep, Chehalis, for respondent.

SOULE, Judge.

Seattle-First National Bank (Sea-First) appeals from a declaratory judgment in favor of Southwest Washington Production Credit Association (PCA) holding that the PCA had a security interest in certain farm products in the hands of a purchaser and that that security interest had priority over Sea-First's interest in the same collateral. We reverse.

Symons Frozen Foods, Inc. was a food processor financed by Sea-First Bank. Sea-First held a valid security interest in several of Symons' assets including inventory. Part of the inventory consisted of corn, peas, and berries purchased by Symons from Aldrich, Goeres, and Drew. Aldrich, Goeres, and Drew were farmers who were financed by loans from the PCA which held a security interest in their crops.

Before planting time each spring, each farmer would go to the PCA and obtain a loan. The PCA would prepare a security agreement in which the farmer would pledge most of his assets, including crops, as collateral. The agreement consisted of a standard form which stated, among other things, that the debtor-farmer would not sell the collateral without obtaining written authorization from the secured party, PCA. At the time the security agreement was entered into, the PCA prepared a financial assessment or budget showing the income that each farmer expected to realize from the sale of his crops. The PCA loan officer, Joseph Cooke, testified by deposition that he expected the loans to be repaid as the farmers received payment from the producer Symons. He knew that the farmers would be selling their crops to Symons without written authorization from the PCA; he said he relied on the farmers' honesty to insure that the proceeds from those sales reached PCA. The farmers had each dealt with the PCA for over a decade and at no time had the PCA ever enforced its no-sales-without-written-authorization clause against them.

In dealing with Symons, the farmers were paid for their crops in three installments. The first payment was 50 percent of the value of the crop and was paid within a few days of delivery. Twenty-five percent was paid 3 months later and the remaining 25 percent was paid 6 months later. In 1976, Symons became insolvent and was not able to finish paying off the farmers who in turn did not pay the PCA for part of their 1975 crop loans. The PCA sought to cover their losses by claiming a security interest in the farmers' products which were in the possession of the purchaser, Symons. RCW 62A.9-307(1). ¹ This claim was opposed by Sea-First which argued that the PCA had authorized the farmers to sell the farm products to Symons and, therefore, waived its security interest under RCW 62A.9-306(2). ² Sea-First conceded that if the PCA's security interest continued through to Symons, then the PCA's interest would have priority over Sea-First's interest.

In order to settle the dispute, the PCA sought a declaratory judgment against Sea-First which impleaded the farmers as third-party defendants. After reviewing the various security agreements, the budgets prepared by the PCA, and the depositions of Aldrich, Goeres, Drew and Joseph Cooke, the trial court found that the PCA had assented to the sale of the farm products to Symons but that the assent was "conditioned upon" PCA's receipt of the proceeds. Consequently, the court concluded that the PCA's security interest continued in the farm products which Symons purchased and was superior to Sea-First's security interest in Symons' inventory. See RCW 62A.9-312(5). ³

On appeal, Sea-First contends that the record does not support the trial court's findings that the PCA's consent to the sale of the crops was conditioned on PCA's subsequently receiving the proceeds of the sale. Specifically, Sea-First assigns error to the following findings and conclusions:

Finding of Fact No. 3

In providing financing to Symons the defendant knew that Symons obtained the corn, peas, and berries from third party defendants and other farmers, and one purpose of such financing was to provide funds to acquire and pay for such products. The defendant knew that plaintiff had a security interest in the farm products of third party defendants, and knew that the plaintiff and third party defendants expected to be paid therefor by Symons.

Finding of Fact No. 8

The plaintiff, defendant, third party defendants and Symons all knew that plaintiff's security interest was to be discharged by receipt from Symons of the proceeds of the crop. Plaintiff's knowledge that the crops would be delivered to Symons and plaintiff's assent thereto were conditioned upon plaintiff's receipt of such proceeds.

Conclusion of Law No. 1

All parties to this action and Symons know that the security interest of plaintiff in the farm products of third party defendants was to continue until payment for such product was made by Symons.

Conclusion of Law No. 2

Any assent by plaintiff to delivery of the farm products to Symons was conditioned upon the proceeds therefor being forthcoming and remitted to plaintiff.

Although the facts of this case are somewhat novel, the general principles have been analyzed by many courts, including Division Three of this Court. See Central Washington Prod. Credit Ass'n v. Baker, 11 Wash.App. 17, 521 P.2d 226 (1974). The principal issue is whether a buyer of farm products is able to purchase free of any security interest by showing that the security interest has been waived.

A "waiver" is the intentional and voluntary relinquishment of a known right, or such conduct as warrants an inference of the relinquishment of such right. The person against whom a waiver is claimed must have intended to relinquish the right, advantage, or benefit, and his actions must be inconsistent with any other intention than to waive them.

To constitute a waiver other than by express agreement, there must be unequivocal acts or conduct . . . evincing an intent to waive.

Birkeland v. Corbett, 51 Wash.2d 554, 565, 320 P.2d 635, 642 (1958) (citation omitted). See also State ex rel. Madden v. Public Util. Dist. No. 1, 83 Wash.2d 219, 517 P.2d 585 (1973); Bonanza Real Estate, Inc. v. Crouch, 10 Wash.App. 380, 517 P.2d 1371 (1974); Gorge Lumber Co. v. Brazier, 6 Wash.App 327, 493 P.2d 782 (1972); 28 Am.Jur.2d Estoppel & Waiver §§ 154-60 (1966).

RCW 62A.9-307(1) of the Uniform Commercial Code states that a person buying farm products from a person engaged in a farming operation takes the products subject to any security interest in them. See also RCW 62A.9-201. However, the Code also provides that a security interest will not continue in collateral which is sold, exchanged, or otherwise disposed of if the disposition "was authorized by the secured party in the security agreement or otherwise." RCW 62A.9-306(2). The weight of authority is that this latter provision codifies the common law waiver. Swift & Co. v. Jamestown Nat'l Bank, 426 F.2d 1099 (8th Cir. 1970); United States v. Greenwich Mill & Elevator Co., 291 F.Supp. 609 (N.D.Ohio 1968); Vermilion County Prod. Credit Ass'n v. Izzard, 111 Ill.App.2d 190, 249 N.E.2d 352 (1969). ⁴ Thus it is clear that the PCA, which had a security interest that was good even as against a buyer in the ordinary course of business, could waive that interest by authorizing the sale of the collateral.

The second issue, then, is what actions constitute a waiver. RCW 62A.9-306(2) provides that waiver or authorization may be shown by express agreement "or otherwise." Obviously, there was no express waiver in the case at bench; to the contrary, the agreement stated that sale or removal of the collateral was conditioned upon the debtor "first having obtained the written consent of the secured party." Therefore, if a waiver exists it must be implied from the conduct of the secured party, PCA. Cf. Buchanan v. Switzerland Gen. Ins. Co., 76 Wash.2d 100, 455 P.2d 344 (1969) (waiver is a unilateral action). The official comments to the Code indicate that any words or conduct of the parties may be used to infer a waiver. See RCW 62A.9-306, Official Comment 3; RCW 62A.9-307, Official Comment 2. See generally Central Washington Prod. Credit Ass'n v. Baker, supra.

Under pre-Code law the theory of implied consent to sell and waiver of lien was an accepted concept, even when a chattel mortgage required written consent. If a secured party consented to sale of the collateral with an understanding that the proceeds would be paid over to him by the seller, then he waived his security interest. See Annot., 97 A.L.R. 646 (1935). While these common law principles have been incorporated into Article 9 of the Code, they only supplement the statutory language. RCW 62A.1-103. Thus, before we examine the record for an implied waiver, we must consider to what extent the common law doctrine of waiver contained in RCW 62A.9-306(2) may be modified by other provisions of the Code. See Gorge Lumber Co. v. Brazier, supra.

Where the security agreement provides that the sale of the collateral is unauthorized without the written consent of the secured party, some courts have concluded that a course of dealing which is inconsistent with the agreement constitutes a waiver. Hedrick Sav. Bank v. Myers, 229 N.W.2d 252 (Iowa 1975); Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (1967); Central Washington Prod. Credit Ass'n v. Baker, 11 Wash.App. 17, 521 P.2d 226 (1974) (alternate holding). ⁵ These cases have been severely criticized for ignoring RCW 62A.1- 205(4) which states that where the written agreement of the parties is inconsistent with their course of dealing or usage of trade, the written agreement controls. See Miller,...