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Parties Involved:
Southwestern Livestock, Inc.
Appellant
The First National Bank of Amarillo
Appellee

Document Text:

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PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

THE FIRST NATIONAL BANK OF AMARILLO, 

Plaintiff-Appellee, 

v. 

SOUTHWESTERN LIVESTOCK, INC., 

Defendant-Appellant. 

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FILED 

United States Court of Appeals 

1~cnth Circuit 

OCT 1 71988 

ROBERT L. HO~CKER 

Clerk 

No. 86-1906 

Appeal from the United States District Court 

for the District of Kansas 

(D.C. Civil No. 85-1021-K) 

James T. Malysiak of Freeman, Freeman & Salzman, Chicago, Illinois 

(Jim H. Goering of Foulston, Siefkin, Powers & Eberhardt, Wichita, 

Kansas, and E. Lawrence Oldfield, Chicago, Illinois, with him on 

the briefs) for defendant-appellant. 

Don D. Sutherland (John Huffaker also of Gibson, Ochsner & Adkins, 

Amarillo, Texas, and Donald W. Bostwick of Adams, Jones, Robinson 

& Malone, Wichita, Kansas, with him on the brief) for plaintiffappellee. 

Before LOGAN, MCWILLIAMS, and TIMBERs*,circuit Judges. 

LOGAN, Circuit Judge. 

* The Honorable William H. Timbers, Senior United States Circuit 

Judge for the Second Circuit, sitting by designation. 

Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 1 
· In this diver~ity action, plaintiff First National Bank of 

Amariilo, Texas (the Bank) sued defendant Southwestern Livestock, 

Inc. (Southwestern), a Kansas livestock auction house, for 

conversion of certain cattle in which the Bank had an interest as 

an unperfected secured creditor. The district court entered 

judgment for the Bank based on the parties' stipulation of facts 

and the court's earlier order denying Southwestern's motion for 

summary judgment. See First Nat'l Bank v. Southwestern Livestock, 

Inc., 616 F. Supp. 1515 (D. Kan. 1985). In the stipulation 

Southwestern reserved the right to appeal the denial of its 

summary judgment motion. On appeal, we must decide whether an 

auction house, which acts as the livestock owner's agent, is 

liable in conversion to a secured creditor of the owner, whose 

agreement denied the owner authority to sell the livestock; and, 

if so, whether the fact that the buyers of the auctioned cattle 

took free of the security interest, or that the creditor's failure 

to perfect its security interest in Kansas, should change the 

result. 

The Bank loaned money to Dean and Moeta Newman of Mutual, 

Oklahoma, to help finance their cattle operation and took a 

security interest in the cattle as collateral for the loans. The 

Bank properly perfected the security interest in Oklahoma . 

. · Bubsequently,, .--in. -September .and, October 1983,, .the :cNewmans sold some 

of the cattle in Kansas without the Bank's consent and in 

violation of the security agreement. These sales were conducted 

by Southwestern through its auction barn in Dodge City, Kansas. 

Southwestern sold the cattle on a commission basis and did not 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 2 
have actual knowledge of the Bank's security interest. 

Southwestern deducted its commission and paid the net sales 

proceeds by check to Mutual Feeders, a business operated by the 

Newmans. Neither the Newmans nor Mutual Feeders remitted the 

proceeds to the Bank. At no time did the Bank file a financing 

statement in Kansas. 

I 

The Uniform Commercial Code (UCC) does not address the 

conversion liability of commission agents. Thus, as the district 

court recognized, Southwestern's liability must be determined by 

an analysis of the Kansas common law concerning liability for 

conversion. 1 See Kan. Stat. Ann. §§ 84-1-103; United States v. 

Hext, 444 F.2d 804, 811 n.21 (5th Cir. 1971); United States v. New 

Holland Sales Stables, Inc., 619 F. Supp. 1163, 1164 (E.~. Pa. 

1985); Kershen & Harden, Congress Takes Exception to the Farm 

Products Exception of the UCC: Retroactivity and Preemption, 36 

Kan. L. Rev. 1, 67-68 (1987). 

According to the Kansas Supreme Court, 

"a factor or commission merchant who receives property 

from his principal, sells it under the latter's 

instructions and pays him the proceeds of the sale, is 

guilty of a conversion if his principal had no ... 

right to sell the property, and generally the factor may 

not escape liability to the true owner for the value of 

1 The parties agree, that .Kansas law ,controls-. the .disposition of 

this case. Kan. Stat. Ann. § 84-9-103(l)(b) provides that 

"perfection and the effect of perfection or non~perfection of a 

security interest in collateral are governed by the law of the 

jurisdiction where the collateral is when the last event occurs on 

which is based the assertion that the security interest is 

perfected or unperfected." When the security interest is 

perfected in one state (Oklahoma), and subsequently removed to 

another state (Kansas), the law of the state of removal governs 

the effect of perfection or nonperfection. Id. comment 1. 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 3 
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the property by asserting he acted.in good faith and in 

ignorance of· his principal's want of title. The basis 

for the factor's liability if he assists in a 

conversion, even though innocent, is the fact he stands 

in the shoes of his principal." 

Devore v. McClure Livestock Comm'n Co., 207 Kan. 499, 503, 485 

P.2d 1013, 1016-17 (1971) (addressing conversion liability of a 

livestock auction house) (citations omitted); see also Nelson v. 

Hy-Grade Constr. & Materials, Inc., 215 Kan. 631, 634, 527 P.2d 

1059, 1062 (1974) ("The intent required [for conversion liability] 

is simply to use or dispose of the goods, and knowledge or 

ignorance of the actor as to their ownership has no influence in 

' deciding the question of conversion."); Watkins v. Layton, 182 

Kan. 702, 707, 324 P.2d 130, 134 (1958) (same). This rule has 

been applied consistently to determine the conversion liability of 

commission agents who sold cattle that were subject to UCC 

security interests. See, ~, North Cent. Kan. Prod. Credit 

Ass'n v. Washington Sales Co., 223 Kan. 689, 697-98, 577 P.2d 35, 

41-42 (1978); First Nat'l Bank & Trust Co. v. Atchison County 

Auction Co., 10 Kan. App. 2d 382, 389, 699 P.2d 1032, 1038 (1985); 

accord Sanborn County Bank v. Magness Livestock Exch., 410 N.W.2d 

565, 567 (S.D. 1987); see also Production Credit Ass'n v. Equity 

Coop Livestock Sales Ass'n, 82 Wis. 2d 5, 261 N.W.2d 127, 128 

(1978). 

::..._-.Kansas .cour.ts • have, recognized· onl-y~two·:, .. exceptions to the 

general rule that a commission agent is liable in conversion, even 

if it has no knowledge of competing interests, if its principal 

was without authority to sell the collateral: the secured party 

either consented to the sale or·misled the auctioneer about the 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 4 
debtor's authority to sell. See Devore, 207 Kan. at 504, 485 P.2d 

at 1017. These exceptions are reflected in Kan. Stat. Ann. § 84-

9-306(2), which provides that "a security interest continues in 

collateral notwithstanding sale thereof unless the 

disposition was authorized by the secured party in the security 

agreement or otherwise." (emphasis added). Neither exception is 

applicable to the case at bar. 

Instead of specifically arguing that this case fits into one 

of the established exceptions, Southwestern contends that the 

district court's imposition of liability upon it when it had no 

I 

knowledge of competing interests creates a form of strict 

liability for auctioneers unknown to Kansas law. This argument 

fails to recognize that conversion is a strict liability tort. 

See Centerre Bank v. New Holland Div. of Sperry Corp., 832 F.:2d 

1415, 1423 (7th Cir. 1987); United States v. Gallatin Livestock 

Auction, Inc., 448 F. Supp. 616, 621 (W.D. Mo.), aff'd ~ curiam, 

589 F.2d 353 (8th Cir. 1978); United States v. Topeka Livestock. 

Auction, Inc., 392 F. Supp. 944, 948 (N.D. Ind. 1975); 1 

F. Harper, F. James & o. Gray, The Law of Torts§ 2.10 (2d ed. 

1986). Although subjecting an innocent commission agent to 

conversion liability may seem harsh, 2 Kansas courts consistently 

have declared that the agent's good faith or lack of knowledge of 

t.he~.secur.ity int-eresL..is not aa defense. •· See, ~' Devore, 207 -

2 We note that by an enactment effective December 24, 1986, 

Congress has preempted this common law rule. Food Security Act of 

1985, § 1324, 7 U.S.C. § 1631. Although the exact parameters of 

the new law are in some doubt, see Kershen & Hardin, supra at 35-

37, it clearly does not apply tothe instant case. 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 5 
Kan •. at 503, 485 P.2d at 1016-17; Atchison ·county Auction, 10 Kan. 

App. 2d at 389, 699 P.2d at 1038. 

The Bank's security agreement prohibited the Newmans from 

selling the cattle without the Bank's consent. Southwestern does 

not allege that the Bank waived its security interest or 

authorized the sales in question. Because the Newmans were not 

authorized to sell the cattle, Southwestern, acting as the 

Newmans' agent, also had no authority. Southwestern, then, is 

liable for conversion under Kansas law unless other factors in 

this case relieve it of liability. 

II 

Southwestern argues that it is relieved from conversion 

liability because the buyers of the cattle took free of the Bank's 

security interest. 3 In Kansas, however, whether the buyer of· 

secured property takes free of the underlying security interest is 

irrelevant to the conversion liability of the auctioneer. The 

liability of an auctioneer depends solely on the authority of its 

principal (the secured party's debtor) to sell the collateral. 

See Washington Sales Co., 223 Kan. at 697-98, 577 P.2d at 41-42; 

Atchison County Auction, 10 Kan. App. 2d at 389, 699 P.2d at 1038. 

Simply put, if the sale was authorized, the auctioneer is not 

liable; if the sale was not authorized, the auctioneer is liable. 

3 The Bank's failure to file a financing statement in Kansas 

renders its security interest unperfected as against a purchaser 

after removal. Kan. Stat. Ann. § 84-9-103(l)(d). For purposes of 

this argument we assume the buyers of the cattle took free of the 

Bank's security interest under Kan. Stat. Ann. § 84-9-30l(l)(c), 

which provides that an unperfected security interest is 

"subordinate to the rights of ... a buy€:!r of farm products in 

ordinary course of business." 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 6 
· Southwestern, however, argues that the Kansas Supreme Court 

would adopt the apparent limitations on an auctioneer's liability 

embodied in Restatement (Second) of Torts § 233(1) (1965) 

[hereinafter Restatement], which provides as follows: 

"Except as stated in Subsection (4), one who as agent or 

servant of a third person disposes of a chattel to one 

not entitled to its immediate possession in consummation 

of a transaction negotiated by the agent or servant, is 

subject to liability for a conversion to another who, as 

against his principal or master, is entitled to the 

immediate possession of the chattel." 

(emphasis added); see also id.'§ 235(1). Southwestern asserts 

that because the buyers of the cattle in question took free of the 

Bank's security interest and thus were entitled to immediate 

possession, Southwestern cannot be liable for conversion. See 

Hext, 444 F.2d at 815-16. No Kansas court .has ever discussed 

Restatement § 233 and our task is to predict whether the Kansas 

Supreme Court would apply this provision in a case like that at 

bar. Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574 (10th 

Cir. 1984). 

Under Southwestern's interpretation of Restatement§ 233, a 

commission agent's liability depends on whether the buyers from 

the auction house would be liable for conversion. As noted above, 

Kansas law focuses exclusively on the authority of the agent's 

principal to s-ell the coll-ateral; whether the buyer would take 

_free .. of: tne .. s_ecur.ity .. inter-est is· ir re-levant. Application of this 

section in the instant case.would mark a dramatic departure from 

well-established Kansas law, and Southwestern has offered no 

reason why the Kansas Supreme Court would take this step. 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 7 
. Moreover, we doubt that the phrase "one not entitled to its 

immediate possession" was intended to limit the liability of 

auctioneers based on whether the transferee obtained good title. 

Restatement § 233(1) is made subject to subsection (4), which --/ 

states a single exception based upon passage of good title: 

excusing from liability agents who transfer negotiable instruments 

under circumstances in which the transferees become holders in due 

course. See Restatement § 233(4) comments c-e; Dugan, BuyerSecured Party Conflicts Under Section 9-307(1) of the Uniform 

Commercial Code, 46 u. Colo. L. Rev. 333, 358 & n.90 (1975), We 

' believe the better interpretation of Restatement§ 233(1) is that 

the agent is not liable for conversion if its transferee had a 

preexisting and superior right to possession. See Restatement 

§ 235(1) comment d (construing similar provision); Nickles, 

Enforcing Article 9 Security Interests Against Subordinate Buyers 

of Collateral, 50 Geo. Wash. L. Rev. 511, 524 n.53 (1982) 

(adopting this interpretation and criticizing Hext). For the 

reasons stated, we believe the Kansas Supreme Court would hold 

that whether buyers from Southwestern obtained good title is 

irrelevant to determining Southwestern's liability for the sale. 

III 

Next, Southwestern claims that it is not liable in conversion 

· .because the Bank-. failed~ to• .compl_y with .. Kan. Stat. Ann. § 84-:-:.9-

103 ( l) ( d), which provides in relevant part as follows: 

"When collateral is brought into and kept in this state 

while subject to a security interest perfected under the 

law of the jurisdiction from which the collateral was 

removed, the security interest remains perfected, but if 

action is required by part 3 of this article to perfect 

the security interest, (i) if the action is not taken 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 8 
before •.. the end 

is brought into this 

becomes unperfected 

thereafter deemed to 

person who became a 

of four months after the collateral 

state ... the security interest 

at the end of that period and is 

have been unperfected as against a 

purchaser after removal . . " 

Because the Bank never filed a financing statement in Kansas as 

required by Kan. Stat. Ann. § 84-9-302(1), its security interest 

is deemed to have been unperfected as to any "purchaser" after 

removal. See Victory Nat'l Bank v. Stewart, 6 Kan. App. 2d 847, 

636 P.2d 788, 792 (1981). Southwestern contends that it obtained 

an agister's lien on the cattle pursuant to Kan. Stat. Ann. § 58-

220 and that this lien is sufficient to elevate it to the status 

of an Article Nine "purchaser~ 114 

We need not decide whether an agister's lien is sufficient to 

convert Southwestern from .merely a commission agent to a 

"purchaser" nor even if Southwestern obtained an agist_er 's lien; 

Southwestern cannot escape conversion liability under Kansas law 

even if it is a "purchaser." If Southwestern is a "purchaser," 

§ 84-9-30l(l)(d) provides only that the Bank's security interest 

is unperfected as to it. As we have noted previously, neither 

this UCC provision nor any other addresses the liability of an 

auctioneer for selling collateral subject to a security interest, 

perfected or not. Thus, the general Kansas law of conversion 

controls 5 and lack of knowledge of the Bank's security interest 

-· ·. 4 A "purchaser" is a person who takes "by sale, discount, 

negotiation, mortgage, pledge, lien, issue or reissue, gift or any 

other voluntary transaction creating an interest in property." 

Kan. Stat. Ann.§ 84-1-201(32), (33). 

5 In general, under Kan. Stat. Ann. § 84-9-301(1), an unperfected 

security interest is subordinated to the rights of perfected 

secured parties, certain lien creditors, buyers not in the· 

Continued to next page 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 9 
will. not relieve Southwestern from liability. See Watkins, 182 

Kan. at 707, 324 P.2d at 134; Nelson, 215 Kan. at 634, 527 P.2d at 

1062; Devore, 207 Kan. at 503, 485 P.2d at 1017; Atchison County 

Auction, 10 Kan. App. 2d at 389, 699 P.2d at 1038. All of the 

Kansas cases holding an auctioneer liable for conversion despite 

its good faith and lack of knowledge have dealt with sales in 

violation of perfected security interests. But because the Kansas 

cases make the commission merchant liable because it stands in the 

principal's shoes, and not based upon any perception of duty of 

inquiry or action by anyone, we can discern no basis to 

distinguish· between the liability of an auctioneer based on the 

debtor's violation of a perfected security interest and the 

violation of an unperfected security interest. See United States 

v. Friend's Stockyard, Inc., 600 F.2d 9 (4th Cir. 1979) (holding 

an auctioneer liable for conversion when sales violated an 

unperfected security interest); Commercial Bank v. Hales, 281 Ark. 

439, 665 S.W.2d 857 (1984) (same); Kershen & Hardin, supra, at 14 

(noting that auctioneers do not prevail over unperfected secured 

parties). 

The cases cited by Southwestern do not persuade us otherwise. 

In United States v. Burnette-Carter Co., 575 F.2d 587, 592 (6th 

Cir.), cert. ... denied, 439 U.S. 966 {1978), the Sixth Circuit 

-,·,:·;_•: expres-sed ,.the ,.view .tha.t. -under the 1972 .. -ver:sion of the UCC a 

Continued from previous page 

ordinary course of business, and buyers of farm products in the 

ordinary course of business. Notably absent from the list are 

auctioneers. Thus, the liability of auctioneers must be 

determined by general common law principles. Kan. Stat. Ann~ 

§ 84-1-103. 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 10 
commission agent would not be liable for conversion if the secured 

partyis interest was unperfected. The case, however, was decided 

under the 1962 text and the court's brief statement was dicta. 

More importantly, the court apparently reached this conclusion 

because it believed that an unperfected security interest would 

not be valid. See id. at 588, 589. This conclusion was 

erroneous--an unperfected security interest is valid and 

enforceable. Farmers State Bank v. Cooper, 227 Kan. 547, 554, 608 

P.2d 929, 935 (1980); Kansas.State Bank v. Overseas Motosport, 

Inc., 222 Kan. 26, 29, 563 P.2d 414, 417 (1977); Kan. Stat. Ann. 

§ 84-9-203 & comment 1. 

In United States v. Squires, 378 F. Supp. 798 (S.D. Iowa 

1974), also decided under the 1962 text, the defendant appeared to 

be the buyer of the collateral as well as the auctioneer, and the 

court simply held that a secured party who failed to perfect the 

security interest under UCC § 9-103(l)(d) would have a "junior 

interest to the buyer for value." Squires, 378 F. Supp. at 804 

(emphasis added). Moreover, the Squires court, like the court in 

Burnett-Carter, seemed to assume that an unperfected security 

interest would be invalid. See id. Southwestern also cites three 

unreported Minnesota Federal District Court opinions 6 in support 

of its position. These brief memorandum opinions hold that the 

: -respect,iv.e. auctioneers/were. !'purchase~B·!' under: UCC , § 9-103.P) ( d) 

and not liable in conversion to unperfected secured parties. 

6 United States v. Kost Security, Inc., No. 3-79-12 (D. Minn. 

May 4, 1981); Swift County Bank v. Siouxland Farmers Livestock 

Sales, Inc., No. 3-76-305 (D. Minn. Feb. 13, 1980); United States 

v. Kost Security, Inc., No. 3-76-474 (D. Minn. June 28, 1978). 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 11 
These decisions are bereft of any ~nalysis of the issue and do not 

persuade us to alter our interpretation of Kansas law. 

Finally, Southwestern makes an alternative argument that it 

cannot be held liable for conversion unless it is a "purchaser." 

This claim is based on Kan. Stat. Ann. § 84-9-201, which provides 

that "[e]xcept as otherwise provided by this act a security 

agreement is effective according to its terms between the parties, 

against purchasers of the collateral and ·against creditors." 

According to Southwestern, if it is not a "purchaser," the Bank's 

security agreement cannot be enforced against it. See Dugan, 

supra, at 357 ("If the auctioneer is held not to fall within the 

ambit of Section 9-201, then any conversion action based on his 

interference with a security interest is completely precluded."). 

Southwestern cites no cases and we were unable to discover any 

judicial decisions relieving an auctioneer of conversion liability 

through application of this provision. 

Southwestern's interpretation of§ 84-9-201 would amount to a 

sub silentio repeal of an entire body of law. The introductory 

provisions of the Code, however, provide that general principles 

of law continue to govern commercial transactions unless 

explicitly displaced by the UCC. Kan. Stat. Ann. § 84-1-103 

comment 1, Kansas comment. . We do0 ·not believe § 84-9-201 was 

~designed-to absolve ~ttctioneers~of~conversion liability except in 

those narrow instances in which they also might qualify as 

"purchasers." Furthermore, under Kansas law an auctioneer's 

conversion liability arises because it "stands in the shoes of 

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Appellate Case: 86-1906 Document: 010110032813 Date Filed: 10/17/1988 Page: 12 
[its] principal," a party to the security agreement. Devore, 207. 

Kan. at 503, 485 P.2d at 1017. 

AFFIRMED. 

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