Case Title: Planters Production Credit Association v. Bowles

Citation: 511 S.W.2d 645

Docket Number: 73-300

State: arkansas

Court: Arkansas Supreme Court

Date: 1974-07-22T00:00:00Z

Document:
511 S.W.2d 645 (1974) PLANTERS PRODUCTION CREDIT ASSOCIATION, Appellant, v. Charles W. BOWLES et al., Appellees. No. 73-300. Supreme Court of Arkansas. July 22, 1974. Swift, Alexander & Burnett, Osceola, Reid, Burge & Prevallet, Blytheville, amicus curiae brief filed by Joe C. Barrett, Jonesboro, for appellant. Oscar Fendler, Blytheville, for appellees, Lee Wilson and Co., a corporation and Hohenberg Bros. Co., a corporation. C. E. Lynch, Jr., Osceola, for Gordon Wiseman. Butler & Hicky, Forrest City, for Bluff City Cotton Co. Inc. & Louis B. Strong d/b/a Bluff City Cotton Co., a sole ownership. JONES, Justice. This is an appeal by Planters Production Credit Association, hereafter referred to as "PCA," from a chancery court decree denying judgment against the purchasers of cotton from Charles W. Bowles in a suit brought by PCA against Bowles and the purchasers of cotton raised by him and upon which PCA had perfected a security interest lien. PCA was an association composed of approximately 365 members who borrowed money from the association to finance their individual farming operations. The association obtained the money it loaned to its members from federal sources and each member paid a membership fee of $5.00 for each $100 he borrowed. PCA took notes, financing statements and security *646 agreements pledging crops and proceeds as security for crop loans made to its members. Bowles farmed approximately 2,500 acres of Mississippi County land primarily in cotton and soybeans. He had been a member of PCA from whom he obtained loans in financing his farming operations since 1950. He always repaid his loans without difficulty until in 1969 when he began having difficulty in making his crop loan payments to PCA. By March 15, 1971, he owed PCA $146,162.99 which included a carryover from the previous year of $80,147.36 on a crop loan; $6,634.42 on a past due equipment loan, and $59,381.11 on a so-called "interim financing" loan for current miscellaneous expenses. On March 15, 1971, he borrowed an additional amount of $63,085.00 with which to finance his 1971 crop and gave a note to PCA for $209,622.99. On the same date he executed a financing statement and security agreement pledging his 1971 cotton, wheat and soybean crop, as well as certain farm equipment, as security to PCA. During the 1971 crop year PCA refused to finance Bowles further unless he reduced his past due indebtedness, so he became indebted to others for chemicals and other supplies, and in 1971 he produced approximately 1,100 bales of cotton. He sold futures on a part of his cotton and when the cotton was harvested, he sold it but failed to apply all the proceeds to his indebtedness to PCA. The relationship of the parties is set out in the complaint filed by PCA on May 31, 1972, in which it alleged in part as follows: PCA prayed joint and several judgment in the amount of $160,000 against all the named defendants, or in the alternative it prayed a return of the cotton collateral. The chancellor decreed judgment in favor of PCA against Bowles for $75,867.49 and decreed that PCA was not entitled to judgments against the other defendants on findings recited in the decree as follows: On appeal to this court PCA has designated the points on which it relies for reversal as follows: We disagree with the appellant's first two contentions, consequently we find it unnecessary to discuss the others. The real question before us, and actually one of first impression in Arkansas, is whether a secured creditor may waive his security interest in collateral in favor of a third party purchaser of the collateral simply by his course of dealing with the debtor rather than by express or written waiver under the Uniform Commercial Code, as adopted in this state. We agree with the chancellor that PCA did so under the peculiar facts and circumstances of the case before us. Ark.Stat.Ann. § 85-9-306(1) (2) (Repl. 1961) provides as follows: Ark.Stat.Ann. § 85-9-316 (Repl.1961) reads as follows: The Code definition of "agreement" is found in § 85-1-201(3) as follows: As already stated, the security agreement in this case covered crops to be raised by Bowles on specifically described land. The proceeds from the sale of wheat and soybeans were applied on the PCA indebtedness and only the sale of cotton is involved in this case. Under Item 5 of the security agreement it was extended to "products and proceeds" in language as follows: Under the heading "Terms, Conditions, Warranties, and Agreements," the financing statement and security agreement contain language as follows: The testimony of the parties and witnesses is not germane to the precise issues before us, except the testimony of Mr. Conrad White, the president and general manager of PCA. We shall not set out Mr. White's testimony in detail because according to his uncontroverted testimony there is simply no question and no doubt that PCA, as a general practice and as a general course of procedure, permitted all its members to sell or dispose of collateral at will, and relied on the member-debtor's honesty and integrity in applying the proceeds from such sale or disposition to the payment of his indebtedness to PCA. According to Mr. White, it would appear that PCA was satisfied with this procedure and it worked very well. He said membership loans increased from approximately seven million dollars in 1965 to over fifteen million in 1971, and their loss ratio had been much less than one per cent. Mr. White testified that prospective third party purchasers of collateral had requested lists of PCA member-debtors and that such requests had been denied because it was the policy of PCA to refuse such requests. It is recognized by the attorneys for all parties that there is a split of authority as to the interpretation the courts have placed on that part of the Code provision § 85-9-306(2), supra, reading, "a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise." (Emphasis added). Of course, such action was not authorized except by implication in the security agreement in the case at bar so, the question comes down to whether it was authorized under the "or otherwise" phrase. The parties recognize the 1967 New Mexico case of Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 425 P.2d 726, as the leading case in which the secured party waived its lien under the "or otherwise" phrase of the Code. In that case the New Mexico Code § 50A-9-306(2) was identical to our § 85-9-306(2), supra. The bank had loaned money on cattle in Clovis and the security agreement required written permission to sell. The bank, as secured party, permitted the debtor to sell the collateral (cattle) and relied on his honesty to apply the proceeds on the loan. The borrower finally sold some of the cattle at auction and failed to apply the proceeds to the secured indebtedness. In a suit against the auctioneer for conversion, the court held that the bank's course of dealing in permitting the debtor to sell collateral and deposit the proceeds from such sales in his bank checking account from which he then made payments on his indebtedness, the bank waived its security interest lien on the cattle. We have been favored with an excellent amicus curiae brief in this case in which it is pointed out that the Clovis decision brought about such storm of protest that the New Mexico Code was amended as follows: No such amendment has been added to the Arkansas Code § 85-9-306(2). The above amendment to the New Mexico Code was adopted in 1968, and in the 1973 case of Lisbon Bank & Trust Co. v. Murray v. *650 Meier, 206 N.W.2d 96, the Iowa Supreme Court seemed unimpressed by whatever protest might have brought about the amendment of the Code in New Mexico following the Clovis decision because in Lisbon the Iowa Court followed the same reasoning and reached the same results as the New Mexico Court did in Clovis in applying an identical section, 554.9306(2), of the Iowa Code to almost identical facts appearing in Clovis. The Lisbon Bank & Trust Company was the secured party in the Iowa case and perfected a security interest in cattle purchased by Meier with money be borrowed from the bank. Meier sold some of the cattle to Murray for $2,428.80 and subsequently defaulted on his note to the bank and filed bankruptcy. The bank sought to recover the $2,428.80 from Murray on the theory he purchased the cattle subject to the bank's lien. The trial court found that the cattle were purchased free of the lien. In affirming the judgment the Iowa Supreme Court said: In the Clovis and Lisbon cases the secured parties were regular bank lending institutions and the evidence as to prior mode of dealing was between secured banks and the individual borrower involved. The collateral was cattle actually purchased with the money borrowed. In the case at bar the secured party was an association composed of the debtor Bowles and approximately 365 other like member-debtors of the association. The collateral was growing crops to be harvested and sold. PCA not only had a policy among all its member-debtors of permitting them to sell and dispose of collateral at will and be individually responsible to PCA in applying the proceeds of such sales to the loan indebtedness; PCA protected its membership identity from prospective purchasers of the members products. We conclude that under the facts and circumstances of this particular case, the chancellor's findings were not against the preponderance of the evidence, and the chancellor did not err in applying the law to the facts in this case. The decree is affirmed. BYRD, J., dissents.