Case Name: Farmers State Bank, appellant, v. Farmland Foods, Inc., doing business as Farmland Industries, appellee
Court: Nebraska Supreme Court
Jurisdiction: Nebraska
Decision Date: 1987-03-20
Citations: 225 Neb. 1
Docket Number: No. 85-250
Parties: Farmers State Bank, appellant, v. Farmland Foods, Inc., doing business as Farmland Industries, appellee.
Judges: Krivosha, C.J., Boslaugh, White, Hastings, Caporale, Shanahan, and Grant, JJ.
Reporter: Nebraska Reports
Volume: 225
Pages: 1–19

Head Matter:
Farmers State Bank, appellant, v. Farmland Foods, Inc., doing business as Farmland Industries, appellee.
402 N.W.2d 277
Filed March 20, 1987.
No. 85-250.
Knudsen, Berkheimer, Richardson & Endacott, for appellant.
David R. Webb and Brian F. Beckner, for appellee.
Krivosha, C.J., Boslaugh, White, Hastings, Caporale, Shanahan, and Grant, JJ.

Opinion:
Grant, J.
Plaintiff-appellant, Farmers State Bank (hereafter Bank), brought this action for conversion against the defendantappellee, Farmland Foods, Inc. (Farmland), for damages based on Farmland's purchase of hogs which were subject to the Bank's security interest. Farmland answered, generally denying it was liable to the Bank in any amount and setting out various defenses to the Bank's action, including the defense that the Bank had impliedly consented to the sale of hogs to Farmland and thus waived the Bank's security interest in that collateral. The case was tried to a jury. At the close of all of the evidence, both the Bank and Farmland moved for a directed verdict. The trial court overruled Farmland's motion and sustained the Bank's motion in part, after finding that the acts of Farmland constituted a conversion for which Farmland could possibly be liable. The issue of Farmland's liability was submitted to the jury for its determination as to Farmland's defenses of waiver, consent, estoppel, and ratification. The jury returned a verdict for Farmland. The Bank timely appealed to this court.
Appellant Bank assigns as error the trial court's actions in submitting to the jury the issues of waiver, estoppel, consent, and ratification and in failing to properly instruct the jury on the issue of waiver by estoppel. For the reasons hereinafter set out, we affirm.
Evidence adduced at trial shows the following. For approximately 15 years ending in the latter part of 1983, David Hopwood was engaged in a hog-raising operation described as a farrow-to-finish operation. The hogs would be raised from birth until they reached market weight, at approximately 5 to 6 months, and would then be sold at market.
In February of 1977 Hopwood approached appellant Bank to obtain financing for his operation. The Bank initially loaned Hopwood approximately $86,000. At that time Hopwood signed a security agreement with the Bank pledging his hogs, among other farm assets, as collateral. The security agreement contained various warranties. One such warranty stated "DEBTOR [Hopwood] WARRANTS AND COVENANTS: . (3) Not to sell, transfer or dispose of the Collateral . . . without the prior written consent of the Secured Party [the Bank]."
Despite this requirement for written consent prior to any sale of collateral, Hopwood sold his hogs on over 130 occasions between February 2, 1977, and February 1983, without first obtaining the Bank's consent. The president of the Bank testified that Hopwood was never questioned about his practice of selling the collateral without having obtained permission, nor did the Bank ever require Hopwood to obtain prior consent to any sale. The Bank president further testified that complying with the provision requiring written consent prior to the sale of the collateral was "humanly impossible" and "physically impossible." He explained the circumstances surrounding a typical sale of a farmer's collateral. The farmer would call the buyer for a quote of the current market price. Depending on the market condition, this quoted price was subject to change if not accepted immediately. Requiring the farmer to obtain permission from the secured party before a sale at the quoted price rather than immediately accepting the offer would require a great deal of the farmer's time and might result in a change in price before the intended sale would be completed. In order for the farmer to keep most of his time available for his farming work and to avoid this possible drop in prices, he must be able to accept the quoted price immediately.
Hopwood testified that between February 2, 1977, through February of 1983, he sold hogs to the defendant, Farmland, approximately 10 to 15 times a year. These sales ranged from 20 to 40 hogs per sale. Hopwood testified that he would check on the price Farmland was paying, and if this was satisfactory, Hopwood would immediately sell and deliver the hogs to Farmland. Hopwood would then take the collateral sale proceeds to the Bank and have these proceeds applied against his loan. During all this time, the Bank was aware of Hopwood's sales to Farmland because Farmland checks were applied to Hopwood's loan with the Bank. Hopwood testified that he never sought permission to sell his collateral in this manner, nor was he ever reprimanded by the Bank for not having done so. After the proceeds were applied to his loan, Hopwood would usually borrow more money for his continuing operation.
On some occasions Hopwood was unable to speak with a loan officer. On these occasions he would deposit the proceeds directly into his farm account rather than giving the proceeds to the Bank for application to reduce the loan account balance. Then, a few days later, he would return to the Bank and have those proceeds applied to his loan. As an example, the testimony showed that such a procedure was followed in sales on October 25, November 8, and November 9, 1982. The proceeds of these sales were deposited in Hopwood's farm account. Hopwood returned to the Bank on November 16, 1982, and had these deposits applied toward his loan. While there was testimony that the Bank told Hopwood at this time that these direct deposits into his farm account were a violation of the security agreement, Hopwood testified that he did not recall there being any reprimand or censure by officials of the Bank, that, in fact, the November 16, 1982, incident was not isolated, and that on two or three other occasions when direct deposits to his farm account were made, there was no complaint.
The present case concerns six specific sales made by Hopwood to Farmland between April 30 and June 17, 1983. The six sales were of 155 hogs for a price of $16,612.01. The proceeds from these sales were deposited directly into Hopwood's farm account. Rather than returning to the Bank and having these proceeds applied to his loan balance and then borrowing additional funds from the Bank, Hopwood used the proceeds to pay for feed for the hogs and other farm operation expenses. The Bank became aware of these sales in July of 1983, after a state bank examiner noticed a lack of activity on Hopwood's loan sheet. Hopwood was called into the Bank to discuss this inactivity. At this time a plan for an orderly liquidation of the collateral was suggested. Additional funds were advanced by the Bank to Hopwood in order to keep the operation going until the liquidation could be complete. Hopwood continued to sell his hogs just as he had done before the plan for liquidation, until November of 1983, when he filed for bankruptcy. At this point appellant Bank requested all future checks for the sale of collateral be issued jointly to Hopwood and the Bank. Farmland complied with this request on all sales after that time. The Bank then sought to recover the proceeds from the six disputed sales between April 30 and June 17, 1983, in an action for conversion against Farmland.
This court has often held that a jury verdict will not be disturbed on appeal unless it is clearly erroneous and against the preponderance of the evidence and so clearly contrary to findings that it is the duty of the reviewing court to correct it. Further, a jury verdict is sufficient if there is any competent evidence presented to the jury upon which it could find for the successful party. Mennonite Deaconess Home & Hosp. v. Gates Eng'g Co., 219 Neb. 303, 363 N.W.2d 155 (1985). The district court did not err in submitting to the jury the issue of waiver.
The controlling issue to be determined is whether the Bank, by its conduct over a long period of time, has consented to the sale of the Bank's collateral without its written consent and has thus, by implication, waived its rights in the collateral. The Bank contends that Hopwood did not have express consent to sell the collateral. Consent, however, may be established by implication arising from a course of conduct as well as expressly, and such consent operates as a waiver of the security interest. See, Hedrick Savings Bank v. Myers, 229 N. W.2d 252 (Iowa 1975); United States v. Central Livestock Association, Inc., 349 F. Supp. 1033 (D.N.D. 1972); Moffett Bros. & Andrews Commission Co. v. Kent, 5 S.W.2d 395 (Mo. 1928).
Waiver has been defined as a "voluntary and intentional relinquishment or abandonment of a known existing legal right . or such conduct as warrants an inference of the relinquishment of such right..." (Emphasis supplied.) Five Points Bank v. Scoular-Bishop Grain Co., 217 Neb. 677, 681, 350 N.W.2d 549, 552 (1984).
We determine that the evidence as presented in this case was sufficient to support the finding of such conduct that would warrant an inference of the relinquishment of the Bank's right in the collateral in question. There was evidence from which the jury could have found that the Bank, by its long course of conduct of not requiring Hopwood to obtain the Bank's consent to sell collateral, had consented to such sales and thus waived its security interest in the collateral. Despite the covenant not to sell the collateral without prior written consent, Hopwood sold his hogs on more than 130 occasions over a 6-year period without having first obtained the consent of the Bank. Testimony of the bank president showed the Bank was fully aware of these sales. Hopwood testified that the Bank never requested compliance with this provision of the security agreement. The Bank was also aware of the occasional deposit of the proceeds directly into Hopwood's farm expense account rather than immediate application toward the loan balance. While the evidence is conflicting, it was sufficient for the jury to determine "by clear and convincing evidence" that the Bank had never reprimanded or rebuked Hopwood for his actions. Five Points Bank v. Scoular-Bishop Grain Co., supra at 682, 350 N.W.2d at 552. The Bank was fully aware of its right to require the prior written consent for the sale of collateral, yet it so acted as to waive its right.
The appellant Bank argues the security interest continued in the proceeds, and relies on Neb. U.C.C. § 9-306(2) (Reissue 1980), which states:
Except where this article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.
(Emphasis supplied.)
It is clear the security agreement involved in this controversy did not authorize the sale of collateral except by prior written consent. Farmland relies on the "or otherwise" language in its contention that the Bank had waived its security interest. That language, "or otherwise," was specifically before this court in State Bank v. Scoular-Bishop Grain Co., 217 Neb. 379, 349 N.W.2d 912 (1984), and in Five Points Bank v. Scoular-Bishop Grain Co., supra. In Five Points at 680, 350 N.W.2d at 551, we reaffirmed the holding in State Bank v. Scoular-Bishop Grain Co., supra, and stated that "it was a factual question whether a bank's prior course of dealing with the debtor might create an implied agreement amounting to a waiver of the security interest..."
In this case we hold that the Bank's performance under the Bank-Hopwood security agreement was such that the Bank's conduct constituted, in effect, an amendment to the security agreement, in that the Bank waived its right to require its written consent to any sale of collateral by Hopwood. On over 130 occasions over 6 years (or approximately twice each month during that time), the Bank acquiesced in Hopwood's method of doing business and consented to it. On at least five occasions the Bank acquiesced not only in the sale of collateral but in Hopwood's failure to immediately apply the proceeds of such sales to the loan owing to the Bank. After 6 years of such conduct, the Bank would now have the courts hold that its business conduct in the marketplace is completely immaterial and that if such conduct results in a loss to the Bank, the Bank is entitled, as a matter of law, to point to the security agreement of 1977 and rely on the words of that agreement that there can be no waiver. We hold that the facts in this case were such as to permit the jury to find that the Bank, by its conduct, waived its contractual right with Hopwood to require that the Bank give written consent to any sale of collateral.
In so holding, we are cognizant of the Bank's contention that its practice of not enforcing the prior written consent provision cannot be construed as a waiver of that provision. The Bank argues that a course of dealing is not applicable to show waiver when it is inconsistent with the express terms in the agreement. Neb. U.C.C. § 1-205(4) (Reissue 1980) provides:
The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.
The Bank relies on this court's rulings in Garden City Production Credit Assn. v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971), and Farmers State Bank v. Edison Non-Stock Coop. Assn., 190 Neb. 789, 212 N.W.2d 625 (1973), for support in its contention that mere acquiescence or failure to rebuke the seller is not sufficient to override the express terms of § 1-205(4). We hold that the Bank's reliance on this section is misplaced. Section 1-205(4) deals with a course of dealing and trade usage. Under § 1-205(1), course of dealing is restricted to a sequence of conduct between the parties previous to the agreement. See § 1-205, comment 2. See, also, Dugan, Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code, 46 U. Colo. L. Rev. 333, 340 (1975), where the author states: "Section 1-205 simply does not attempt to deal with the legal consequences of post-agreement events such as those which the Code defines elsewhere as 'course of performance' [Neb. U.C.C. § 2-208(1) and (3) (Reissue 1980)]____"
In the case at bar there was no need to know the conduct of the parties before the contract was entered into between Hopwood and the Bank to determine the meaning of that contract. The terms of that contract were clear. The question to be determined is whether the Bank's performance, after that contract was signed, operated to amend the contract. The conduct which might be found to be a waiver of the prior written consent provision occurred continuously after this agreement was reached. Such postagreement course of performance is not governed by § 1-205(4). See Burke, Secured Transactions, 32 Bus. Law. 1133,1146(1977), where the author states: "Section 1-205(4) controls only the interpretation and construction of the written security agreement and should not prevent the introduction of evidence to show that an express term of the agreement has been waived by the secured creditor."
Section 1-205, comment 2, states:
Course of dealing under subsection (1) is restricted, literally, to a sequence of conduct between the parties previous to the agreement. However, the provisions of the act on course of performance make it clear that a sequence of conduct after or under the agreement may have equivalent meaning. (Section 2-208).
Although § 2-208 generally deals with sales, its terms are made relevant to the security agreement of the parties by the terms of Neb. U.C.C. § 1-201(3) (Reissue 1980), which sets out a general definition as follows:
"Agreement" means the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in this act (sections 1-205 and 2-208). Whether an agreement has legal consequences is determined by the provisions of this act, if applicable; otherwise by the law of contracts (section 1-103).
The court may look to Neb. U.C.C. § 1-103 (Reissue 1980), which provides: "Unless displaced by the particular provisions of this act, the principles of law and equity, including the law merchant and the law relative to capacity to contract. . . shall supplement its provisions."
The code has thus made provisions for dealing with preagreement dealing and postagreement performance. Section 2-208(3) has more relevant application to this situation than does § 1-205(4), which pertains to preagreement dealing between the parties. Section 2-208(3) provides: "Subject to the provisions of the next section [Neb. U.C.C. § 2-209 (Reissue 1980)] on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance."
We hold that performance under a security agreement, including the failure of the secured party to rebuke the debtor or object to the debtor's conduct in selling collateral in violation of the terms of the security agreement, may amount to a waiver of the lender's contractual right to require its written consent to a sale of collateral. Whether the secured party's conduct constitutes a waiver of its right to require written consent to a sale of collateral is a question of fact.
Under precode law, conduct such as that of the Bank in the case at bar could have been held to constitute a waiver of the security interest. See, Charterbank Butler v. Central Cooperatives, 667 S.W.2d 463 (Mo. App. 1984); Commercial Credit Corporation v. Blau, 393 S.W.2d 558 (Mo. 1965); First Nat. Bank & Trust Co. v. Stock Yards Loan Co., 65 F.2d 226 (8th Cir. 1933), cert. denied 290 U.S. 648, 54 S. Ct. 87, 78 L. Ed. 576. Since this precode concept of waiver is not specifically displaced by the code, under § 1-103 it must be treated as supplementing the code. The Bank contends that before there can be a waiver, it must be shown that Farmland had knowledge of the Bank's conduct with respect to Hopwood's operations. However, in First Nat. Bank & Trust Co. v. Stock Yards Loan Co., supra at 229, the court states: "When a mortgagee under a chattel mortgage allows the mortgagor to retain possession of the property and to sell the same at will, the mortgagee waives his lien, and this is true whether the purchaser knew of the existence of the chattel mortgage or not!'' (Emphasis supplied.) We agree with that concept where there is a long course of conduct. To the extent they hold otherwise, this court overrules the cases of Garden City Production Credit Assn. v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971), and Farmers State Bank v. Edison Non-Stock Coop. Assn., 190 Neb. 789, 212 N. W.2d 625 (1973).
We hold, then, that the jury could have found by clear and convincing evidence that the course of performance between the Bank and Hopwood was a waiver of the security interest in the collateral sold to appellee on the six occasions between April 30 and June 17, 1983. The Bank was fully aware of its right to require written consent before the sale of collateral, yet it never exercised this right nor reprimanded the seller for failure to obtain written consent. The Bank was not concerned with this written consent provision and did not rely on it.
Since the issue of waiver is dispositive of this controversy, we need not consider the other assignment of error. The judgment of the district court is affirmed.
Affirmed.