Van Diest Supply Co. v. Adrian State Bank
| fullCitation | Van Diest Supply Co. v. Adrian State Bank, 305 N.W.2d 342 (Minn. 1981) |
| Decision Date | 08 May 1981 |
| Citation | 305 NW 2d 342 |
| Docket Number | No. 50926.,50926. |
| Parties | VAN DIEST SUPPLY COMPANY, Respondent, v. ADRIAN STATE BANK, Appellant. |
| Court | Minnesota Supreme Court |
Brecht, Hedeen & Hughes and William T. Hedeen, Worthington, Faegre & Benson and Hendrik De Jong, Minneapolis, for appellant.
Gislason, Dosland, Hunter & Malecki, and Robert M. Halvorson, New Ulm, for respondent.
Considered and decided by the court en banc without oral argument.
Van Diest Supply Company brought this action against Adrian State Bank to obtain a declaratory judgment that Van Diest's subordinate security interest in assets of A & B Seed & Chemical Company has priority over a security interest given by A & B to the bank several months earlier. The bank appeals from the judicial declaration that Van Diest's lien has priority over the bank's lien because the bank waived, released, or subordinated its security interest to that of Van Diest by failing to advise Van Diest of its claim.
Stipulated facts relative to the creation of the parties' security interests and their course of conduct when A & B defaulted on the secured debts include the following: For several years prior to July 1975, Alice Jean Anker retailed seed and farm chemicals under the name A & B Seed & Chemical. In August 1975 Mrs. Anker incorporated her business and on January 21, 1976, transferred its assets to the corporation. Prior to that time, the corporation had applied for a loan from the bank to be guaranteed by the Small Business Administration (SBA), and on January 21, 1976, the bank made a loan of $100,000 to A & B for which the SBA issued a 90% payment guaranty to the bank. On January 23, the bank made a loan to A & B of $60,000 for working capital; no part of this loan was guaranteed by the SBA.
The SBA-guaranteed loan was used to construct a retail store, and was secured by a first mortgage on the retail store and a mortgage on the Anker homestead. In addition, a security interest in the corporation's personal property was given to the bank to guarantee both loans. The bank perfected its security interests by filing financing statements with the Nobles County recorder on January 30, 1976, and with the secretary of state on February 3, 1976. The loan for working capital was renewed in March 1977 for $54,000. A & B made one payment on this obligation in April 1977, leaving a balance due of $53,780.
In the spring of 1976 Van Diest sold chemicals to A & B on an open account. In November 1976, in response to demands for payment of the account, A & B gave Van Diest two notes totalling $57,000, one payable on December 15, 1976, the other on January 15, 1977. To secure their payment A & B granted Van Diest a security interest in the corporation's personal property; Van Diest perfected this interest by filing financing statements on November 8, 1976 with the secretary of state. The notes were not paid when due and on April 15, 1977, Van Diest brought an action in the Nobles County District Court to foreclose its security interest. On April 23, 1977, that court issued an order giving Van Diest possession of the collateral and on May 16, 1977, determined that Van Diest was entitled to judgment for $63,700 against A & B.
The foreclosure constituted a default under the loan guaranty agreement between the Bank and the SBA. The bank had notice of the action and notified the SBA, requesting that it pay the bank 90% of the balance due on the SBA-guaranteed loan in accord with the guaranty agreement. The SBA's representative then met with the bank and Van Diest, and they agreed that a public auction of A & B's assets should be held. The sale was delayed because two seed companies which had supplied a large quantity of seed to A & B claimed the right to repossess it. As a result, the SBA, the bank, and Van Diest agreed to release the seed to those companies upon condition that the companies place $52,312 in escrow, pending resolution of the parties' claims.
On May 5, 1977, the bank assigned its real estate mortgages and the security agreement it had received on January 21, 1976, and the financing statements covering A & B's personal property to the SBA. The SBA then paid the bank $84,633.07, 90% of the balance still due on the loan it had guaranteed. On May 19, 1977, A & B's personal property, other than the seed inventory, was sold at a public auction from which $38,068.70 was realized. In August 1977 the SBA foreclosed the mortgage on A & B's building, bidding it in for $42,338 at the foreclosure sale.1 On August 30, 1977, the bank duly filed UCC-3 statements of assignment of the financing statements it had filed earlier.
The controversy with the seed companies was settled in January 1978, the SBA receiving $38,894 of the amount which had been placed in escrow. Neither of the parties received any part of the settlement. The SBA has asserted no claim to the proceeds of the May 1977 sale, and each party here claims that its lien entitles it to those proceeds.
In addition to the stipulated facts, the parties also presented evidence on the issue of priority. Anthony Moser, a liquidation officer of the SBA, called as a witness by Van Diest, said that the bank had the option either to enforce the guaranty or to cancel it and decide for itself what action to take to obtain payment of the guaranteed loan. Moser recalled that A & B had given the bank a separate note for the $60,000 advanced for working capital and testified further that the bank "had a first lien on, I don't know now whether inventory, receivables or what, but I know the bank was in there first on some part of it." The bank introduced a recomputation by the SBA of the sale proceeds which stated that the bank should receive all of the proceeds because "they have first lien on this property." The bank's president testified also that its assignments of the SBA-guaranteed note, security agreement, and financing statement were made in May 1977 at the request of the SBA. The note received for the inventory loan was not assigned.
Based on this evidence, the trial court first found that the bank in exercising its option under the SBA loan agreement, had "duly assigned to SBA . . . all its perfected security interest in and to the property of A & B by duly assigning its security agreement and financing statement to SBA without recourse, reservation, or exception" and that it had duly filed a statement of assignment of its financial statement to the SBA which also did not indicate any recourse, reservation, or exception. The trial court concluded that Van Diest was entitled to judgment declaring that it has a perfected security interest in the proceeds of A & B's property superior to any security interest or other claim of the bank.
The bank moved alternatively for a new trial or for two amended findings: (1) that the bank had not released or waived its security interest in A & B's assets insofar as that interest secured the inventory loan or the bank's 10% participation in the SBA-guaranteed loan; and (2) that the SBA had delivered the proceeds of the May 1977 sale of A & B's inventory to the bank in recognition of the bank's prior security interest therein as security for the inventory loan. In support of its motion for amended findings the bank filed an affidavit describing their evidentiary basis and moved for a hearing to permit the bank to offer such evidence. In opposition to the motion, Van Diest's attorney filed an affidavit in which he denied the averment of the bank's attorney that the parties had agreed that the bank should make the assignments to the SBA merely to permit the SBA to conduct foreclosure proceedings "in the interests of all the parties, as those interests existed before the collateral was delivered to the SBA." Van Diest's attorney alleged that he had agreed to allow the SBA to conduct the liquidation of A & B's personal property because the SBA had a first lien thereon after the bank's...
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