Case Title: North Cent. Kan. Prod. Cred. Ass'n v. Wash. Sales Co.

Citation: 223 Kan. 689, 577 P.2d 35

Docket Number: 48,585

State: kansas

Court: Kansas Supreme Court

Date: 1978-04-01T00:00:00Z

Document:
223 Kan. 689 (1978)
577 P.2d 35
NORTH CENTRAL KANSAS PRODUCTION CREDIT ASSOCIATION, Appellee,
v.
WASHINGTON SALES COMPANY, INC., AND HARTFORD ACCIDENT AND INDEMNITY COMPANY OF HARTFORD, CONNECTICUT, Appellants,
v.
DENNETH UFFMAN, Third Party Defendant.
No. 48,585

Supreme Court of Kansas.
Opinion filed April 1, 1978.
C. Stanley Nelson, of Hampton, Royce, Engleman & Nelson, of Salina, argued the cause, and was on the brief for appellants. Gerald Sawatzky and James D. Oliver, of Foulston, Siefkin, Powers & Eberhardt, of Wichita, were on the brief amici curiae for Glasco Livestock Exchange, Inc., Osborne Livestock Commission, Inc., and Lowell Darcey, d/b/a Belleville Livestock Commission Co.; Edward W. Rothe and James T. Malysiak, of Freeman, Rothe, Freeman & Salzman, of Chicago, Illinois, and Gerald J. Letourneau, of Colmery, McClure, Funk, Letourneau & Entz, of Topeka, were on the brief amicus curiae for Iowa Beef Processors, Inc.; and Stephen T. Phelps and John K. Pearson, of Wichita, were on the brief amicus curiae for Federal Intermediate Credit Bank of Wichita; and Charles N. Henson and Anne E. Lolley, of Eidson, Lewis, Porter & Haynes, of Topeka, were on the brief amicus curiae for the Kansas Bankers Association.
Don W. Noah, of Noah & Harrison, P.A., of Beloit, argued the cause, and was on the brief for the appellee.
The opinion of the court was delivered by
MILLER, J.:
This is an appeal by the defendant, Washington *690 Sales Company, Inc. (Washington), and the surety on its bond, Hartford Accident and Indemnity Company, from a directed verdict granted in favor of the plaintiff, North Central Kansas Production Credit Association (PCA), in an action for conversion brought by PCA to enforce its perfected security interest in cattle sold by the debtor, Denneth Uffman, through Washington's livestock auction sales barn. The principal question presented here is whether PCA authorized these sales of cattle by the specific language of the security agreements or by its course of dealing with Uffman.
The principal facts are not disputed. PCA loaned Denneth Uffman more than one hundred thousand dollars on March 2, 1972. Uffman executed a promissory note, a security agreement, and a financing statement to PCA on that date. The financing statement was promptly filed with the register of deeds of Washington County, Kansas, on March 8, 1972.
The security agreement specifically covers 80 Holstein cows of various ages, 1 Holstein bull, 20 Holstein calves of various weights, 5 Angus cows, and 5 Angus calves, together with all property similar to that listed which may at any time be acquired by the debtor, including all natural increase thereof, all milk produced by any cows, and various other property. The security agreement provides that:
The financing statement, signed by Uffman, described "livestock of every kind and description whether or not marked or branded," and specifically provided that: "Proceeds of Collateral are also covered."
A few months later, Uffman applied to PCA for an additional loan. He executed a second security agreement, the terms of which are similar to those in the initial security agreement, and since they raise no additional questions, need not be detailed here.
Both PCA and Uffman intended that Uffman should sell milk regularly during the course of the loan, that he would sell wheat, and that from time to time he would cull cows from his dairy herd *691 and sell them, together with calves. The milk, wheat, cows and calves were all included as collateral under the terms of the security agreements and financing statement; payment, upon sales of those items, was, under the terms of the security agreement, to be "made jointly to the Debtor [Uffman] and to the Secured Party [PCA]." The provision covering all milk produced by any cows was part of the printed security agreement. PCA's president testified, however, that: "We do not claim a security interest in the milk payment proceeds ...," and that the security agreement covered only the milk base.
Uffman sold wheat at a local elevator twice. In each instance the elevator issued checks made payable to Uffman. Uffman deposited one check from the elevator in his personal checking account, then wrote a personal check to PCA; he endorsed the other elevator check directly to PCA.
Uffman sold his milk to AMPI. PCA knew that Uffman had already made an assignment of $300 per month to FHA from his milk checks, and had filed that assignment with AMPI. PCA did not feel that AMPI would honor a second assignment, and none was requested. AMPI sent the milk checks directly to Uffman, payable to him only, and he endorsed them over to PCA until December, at which time PCA called Uffman's loan, for reasons not important now. Thereafter, and although PCA protested, Uffman retained the milk checks. PCA did not admonish Uffman when it learned that he had sold wheat and was selling milk, and taking payment in his name only, in violation of the express terms of the security agreement.
It takes a number of consecutive years of production and sale of milk to acquire what is known in the industry as a milk base. Uffman never acquired one.
On March 15, 1972, only 13 days after the loan was made, Uffman first sold cattle which were collateral for the loan. Thereafter, and through March 28, 1973, he sold a total of 35 head of cattle through Washington on ten separate occasions. The total sale proceeds amounted to $7,563.65. Uffman did not report those sales to PCA, and did not remit the proceeds. Washington had no actual knowledge of the loan, the financing statement, or the security agreements. Edwin Burt, president and manager of Washington, testified in substance that he had no knowledge of PCA's lien, and that he was never advised that the cattle were *692 mortgaged or subject to the security agreement. He was aware that financing statements on livestock were recorded with the register of deeds in the county where the owner lives, but he never checked the records on anyone who sold livestock at his sales barn. PCA had no knowledge of these cattle sales until sometime in April, 1973.
The trial judge's decision reads in pertinent part as follows:
We turn first to the following provisions of the Uniform Commercial Code, each of which has application to the dispute before us:
Before examining the issues in detail, we pause to note that we deal here with a controversy between a lender and a third party, neither of whom had actual knowledge of the dealings of the other with the debtor. Washington had constructive notice of PCA's interest in the cattle by virtue of the recorded financing statement. No claim of estoppel is before us, since there was no reliance by Washington upon the acts of PCA, and so far as the record indicates, there was no contact between PCA and Washington, with reference to the matters here at issue, until after the last cattle sales by Uffman.
The first issue is whether the specific terms of the security agreement, authorizing Uffman to sell collateral (1) with the prior written consent of PCA, or (2) with payment for the collateral being made jointly to Uffman and PCA, constitute a waiver of the security interest or a consent to the sales made through Washington.
In Baker Prod. Credit v. Long Cr. Meat, 266 Ore. 643, 513 P.2d 1129 (1973), the court said:
We likewise know of no provision in the UCC as enacted in this state, and none have been cited, which prevents a secured party from authorizing a sale of collateral by the debtor under specific conditions. We conclude that the provisions before us are not violative of the code and do not effect either a waiver of the *694 security interest or a consent to sale in violation of the stated terms.
The next issue is whether PCA impliedly consented to the sales of the livestock by Uffman, and impliedly waived its security interest, by its course of conduct in allowing Uffman to sell wheat and milk in his own name, receive payment therefore, and remit the proceeds to PCA, without admonishing him for violating the security agreement. There were but two sales of wheat; Uffman remitted promptly on both occasions. PCA, therefore, had no reason to complain. The proceeds from the sale of milk were regularly paid to Uffman; he remitted those proceeds to PCA from the inception of the loan until December, 1972. PCA, however, did not in fact claim a security interest in these milk checks; this is clear from the cited testimony of PCA's president. PCA contended that it had a claim only upon the milk base, which was never realized.
We have carefully examined the cases and authorities cited by industrious counsel in the original briefs and those amicus curiae (all of whose briefs were most helpful), as well as others which our research uncovered. The division of authority is sharp. Some cases support the rationale of Clovis National Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 (1967); others  and most writers on the subject  follow Garden City Production Credit Assn. v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971).
In Clovis, the bank held a security interest in cattle belonging to one Bunch. Bunch twice sold cattle which were covered by the security agreement, deposited the proceeds with the bank, and had all or a greater portion of that amount applied upon the loan. A later and much larger sale of cattle was made by Bunch through the defendant commission company, without the bank's knowledge or consent. The proceeds from that sale were not remitted to the bank. There was also some evidence to show that the bank permitted other debtors to sell cattle and remit directly to the bank. Upon this record, the Clovis court held that the bank, by common practice, custom, usage, and procedure, had acquiesced in and consented to the sale, and that it had waived its security interest. Shortly thereafter, the New Mexico legislature repudiated the Clovis doctrine by adding the following sentence to 9-306 (2):
The facts in Lannan are somewhat similar. Garden City PCA held a security interest in the cattle of one Carter. On several occasions, Carter sold cattle and endorsed the drafts over to Garden City, to be applied upon Carter's indebtedness. Later Carter arranged a large cattle sale. The purchaser, Western, gave Carter a small draft in part payment. Carter endorsed it over to Garden City. The draft included a notation that it was given as part payment for 165 head of cattle. Garden City therefore had knowledge of the intended sale. The second sight draft, for the major portion of the purchase price, was dishonored, and was returned for insufficient funds. Western, meanwhile, sold the cattle to defendant Lannan. Garden City PCA then brought action against Lannan to enforce its security agreement. The Lannan court said:
.... .... .... .... .... .
The Clovis decision, as we pointed out earlier, is no longer applicable in the jurisdiction where it was adopted. Be that as it may, we do not think its rationale follows the intent of the framers of the Uniform Commercial Code, particularly as expressed in the sections of the code set forth above. We conclude that a ruling, following the Clovis doctrine, would hinder "the granting of credit to the capital-intensive agricultural industry" in this state; that such a holding is not in the spirit of the UCC, is not required by its terms, and would not be in the public interest. We therefore follow the rationale of Lannan, supra, and find no waiver of a security interest, and no consent to the sales here involved, by PCA's failure to remonstrate with Uffman, following his sales of milk and wheat.
Certainly there was no waiver as that term is generally understood in contract law. Waiver generally implies "that a party has voluntarily and intentionally renounced or given up a known right, or has caused or done some positive act or positive inaction *697 which is inconsistent with the contractual right." United American State Bank & Trust Co. v. Wild West Chrysler Plymouth, Inc., 221 Kan. 523, 526, 561 P.2d 792 (1977), quoting from Proctor Trust Co. v. Neihart, 130 Kan. 698, 705, 288 Pac. 574 (1930). The action of PCA, in accepting payment for the isolated wheat sales, and the milk (in which it claimed no security interest) can hardly be construed as a voluntary and intentional renouncement of its interest in all of the collateral included in the Uffman security agreement.
We also conclude that the equitable doctrine of waiver should not be utilized in favor of one who has constructive notice of a lien, and admittedly has been remiss in checking public records maintained, at least in part, for his protection.
While we hold that PCA did not, by the terms of its security agreement, or by its conduct recited above, expressly or impliedly waive its security interest in the collateral, we are faced with a far more serious question: Did PCA, through its officers, expressly consent to the sale of collateral by Uffman, with payment to Uffman? We think it did. PCA's president, James D. Ganson, was called as a witness on behalf of the plaintiff. On direct examination, he testified as follows:
"Q. When was he told that, sir?
In other words, Uffman was told by the president of the lending association that he could sell cattle "providing he applied the proceeds from that sale." Thus, Uffman was specifically authorized to sell cattle, and he was entrusted to apply the proceeds. The direction to him, by Ganson, was in the alternative; Uffman could apply the proceeds himself, or he could have the check made jointly.
The basis of PCA's claim against Washington is conversion  the exercising of unauthorized control over property. When the debtor was given the right to sell collateral and to collect the money, the sale barn, as his agent, acquired that same right. Since PCA expressly consented to a sale by Uffman with payment to *698 Uffman, we hold that PCA's cause of action against Washington, for conversion, must fail.
In DeVore v. McClure Livestock Commission Co., Inc., 207 Kan. 499, 485 P.2d 1013 (1971), an action for conversion against a cattle sales barn, we said:
In DeVore, Young and DeVore were joint venturers; Young was clothed with full indicia of title, and was directed by DeVore to sell the hogs through the defendant livestock commission. We there held that the livestock commission could not be held guilty of conversion if the one joint adventurer failed, after receiving the proceeds from the commission company, to account to his coventurer for his share of the proceeds.
Likewise, in the case at hand, Uffman was specifically authorized to sell the cattle and receive the proceeds. Washington, derivatively, was authorized to sell the livestock and make payment to Uffman. Under the peculiar and specific facts of this case, we conclude that there was no conversion.
Washington has raised one further point. It contends that PCA benefited from the receipts from the sale of the cattle because those proceeds were used for the maintenance and operations of Uffman's dairy farm and equipment. The trial judge concluded that this contention was wholly unsupported by the evidence. We agree. The proceeds were deposited in Uffman's personal bank account, from which he paid living and other expenses. There is nothing in the evidence to support a finding that PCA benefited from those funds. Further, the point is moot in view of our disposition of this case.
For the reasons above stated, the judgment of the district court is reversed with directions to enter judgment for defendant.