Terra Western Corp. v. Berry and Co.

• Decision Date: 08 August 1980
• Docket Number: No. 42915,42915
• Citation: 295 N.W.2d 693,207 Neb. 28
• Parties: , 29 UCC Rep.Serv. 1046 TERRA WESTERN CORPORATION, a corporation, Appellant, v. BERRY AND COMPANY, a corporation, et al., Appellees.
• Court: Nebraska Supreme Court

Page 693

295 N.W.2d 693

207 Neb. 28, 29 UCC Rep.Serv. 1046

TERRA WESTERN CORPORATION, a corporation, Appellant, v. BERRY AND COMPANY, a corporation, et al., Appellees.

No. 42915.

Supreme Court of Nebraska.

Aug. 8, 1980.

Syllabus by the Court

1. Uniform Commercial Code: Insurance: Words and Phrases. Under the provisions of Neb. U.C.C. § 9-306 (Cum.Supp. 1978), the term "proceeds" includes insurance proceeds representing destroyed collateral.

2. Conversion: Words and Phrases. Conversion is an unauthorized assumption and exercise of the right of ownership over goods or chattels belonging to another to the alteration of their condition or the exclusion of the owner's rights. Conversion may also be defined as any distinct act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein.

3. Insurance: Mortgages: Conversion. Although a mortgagor has, in the security instrument, contracted with the mortgagee to insure for the latter's benefit and insurance is procured, if the policy contains no loss payable clause covering the lienholder, an insurer who, acting in good faith and without actual knowledge of the mortgagee's interest, pays the insured for a loss, is not liable to the mortgagee for conversion of proceeds.

4. Uniform Commercial Code: Insurance: Mortgages. The provisions of Neb. U.C.C. § 9-306 (Cum.Supp. 1978) including insurance proceeds representing destroyed collateral within the statutory definition of "proceeds," does not serve the function of giving the insurer notice of a mortgagee's equitable interest in the insurance policy and is not a substitute for either a loss payable clause or actual notice to the insurer of the equitable interest of the mortgagee.

Forrest F. Peetz of Peetz & Peetz, O'Neill, for appellant.

Jewell, Otte, Gatz, Collins & Domina, Norfolk, for appellees.

Heard before KRIVOSHA, C. J., and BOSLAUGH, McCOWN, CLINTON, BRODKEY, WHITE, and HASTINGS, JJ.

CLINTON, Justice.

This is an action by the plaintiff, Terra Western Corporation (Terra), against the defendants, Berry and Company (Berry), a corporation, and Alliance Insurance Companies (Alliance), a corporation, founded on the theory that Alliance converted funds of Terra when Alliance, as insurer of a 1977 corn crop on which Terra held a perfected security interest, paid directly to Robert Temme (Temme), the insured, the amount of a claim arising from destruction of the crop by hail. The defendants filed a demurrer to Terra's amended petition, asserting that it stated no cause of action. The trial court sustained the demurrer. Terra elected to stand upon the petition and the petition was dismissed. Terra then appealed to this court. The question here is, Did the petition state a cause of action for conversion? We find it did not and affirm the action of the District Court.

The material allegations of the petition, other than those pertaining to identification of the parties, are the following: On May 3, 1977, to secure a promissory note for $35,000, Temme, as mortgagor, executed and delivered to Farmers Agriculture Credit Corporation, a note covering "All crops" on certain tracts of land in Holt County, Nebraska. A copy of the security agreement and financing statement were attached to the petition and incorporated therein. The note, financing statement, and security agreement were later assigned to Terra. The agreement provided, among other things, that the debtor would keep the property insured for the benefit of the secured party and deposit the policy with the insured party. It also provided that "all proceeds of the sale, exchange or other disposition of any of said collateral" be covered by the lien. The security agreement also contained a provision for acceleration of the debt on default and upon various other contingencies, none of which are made applicable by any allegation of the petition. The due date of the promissory note was February 1, 1978.

The petition alleged that the financing statement was duly recorded. There are data set forth in the petition with reference to recordation. Prior to June 1977, Berry sold and delivered to Temme a policy of insurance, insuring Temme against loss or damage to the crop by hail. The policy was issued by Alliance. In July 1977, the crop was damaged by hail and Temme submitted a claim under the policy. Alliance paid the claim, in the amount of $62,250, directly to Temme.

The petition further alleges that, because the security agreement covered "proceeds," the payment by Alliance to Temme "constituted an unauthorized exercise of dominion over those proceeds to the exclusion of . . . (Terra's) right, thereby wrongfully converting and disposing of a portion of said 1977 corn crop to their own use to . . . (Terra's) damage in the sum of $29,232.60, plus accrued interest . . .." The petition prayed for damages in the sum of $29,232.60 and accrued interest.

The petition did not allege that the policy of insurance contained a loss payable clause in favor of the mortgagee, or that Berry or Alliance had any actual notice of Terra's lien on the crop, or that Alliance made payment to Temme with notice of his contractual agreement to insure the crop for the benefit of the mortgagee.

To sustain its position, Terra relies primarily upon a 1977 amendment of Neb. U.C.C. § 9-306 (Cum.Supp. 1978) defining the term "Proceeds" to include "insurance proceeds representing destroyed collateral." The essence of the argument is that the inclusion of insurance proceeds in the definition places upon an insurer of property the duty of examining the lien records before making payment to an insured. As supporting case authority, Terra cites First Nat. Bank v. Merchant's Mut. Ins. Co., 89 Misc.2d 771, 392 N.Y.S.2d 836 (1977).

It is clear that, by reason of the 1977 amendment, insurance proceeds received by the insured are proceeds subject to the lien of a security instrument covering collateral which is the subject of a covered loss. That, however, does not answer the question of whether an insurer commits the tort of conversion when it pays the insurance proceeds directly to the insured.

The problem is put into perspective if we first discuss some fundamentals. First: What are the elements of a cause of action for the tort of conversion of personal property? Conversion is an unauthorized assumption and exercise of the right of ownership over goods or chattels belonging to another to the alteration of their condition or the exclusion of the owner's rights. 89 C.J.S. Trover & Conversion § 1 (1955). This court has defined conversion as any distinct act of dominion wrongfully exerted over another's personal property in denial of or inconsistent with his rights therein. Polley v. Shoemaker, 201 Neb. 91, 266 N.W.2d 222 (1978); Jessen v. Blackard, 159 Neb. 103, 65 N.W.2d 345 (1954). In the latter case, we also noted that the plaintiff must have the actual custody of the property or some species of property right, general or special, with an immediate right to possession. At 89 C.J.S. Trover & Conversion § 3 (1955), it is noted that the essence of conversion is not acquisition by the wrongdoer, but the act of depriving the owner wrongfully of the property.

Second: In the absence of some controlling statutory provision, what are the obligations of an insurer to a lienholder and what are the rights of a lienholder in the proceeds of an insurance policy covering personal property which is destroyed? These duties and rights vary, depending upon the factual situation. The mortgagee, as well as the owner-mortgagor, both have insurable interests in the property. However the contract of insurance is personal and does not run with...