Title: Metro. Life Ins. Co. v. Reeves-Gustafson
Citation: 228 Neb. 233, 422 N.W.2d 72
Docket Number: 352
State: Nebraska
Issuer: Nebraska Supreme Court
Date: April 15, 1988

422 N.W.2d 72 (1988) 228 Neb. 233 METROPOLITAN LIFE INSURANCE COMPANY, Appellee and Cross-Appellant, v. REEVES-GUSTAFSON, a Nebraska General Partnership, et al., Appellees, Comag Credit Corporation, et al., Appellants and Cross-Appellees. No. 86-352. Supreme Court of Nebraska. April 15, 1988. Richard E. Putnam of Baird, Holm, McEachen, Pedersen, Hamann &amp; Strasheim, Omaha, for appellants and cross-appellees. Daniel M. Placzek of Luebs, Dowding, Beltzer, Leininger, Smith &amp; Busick, Grand Island, for appellee and cross-appellant Metropolitan Life Ins. Co. HASTINGS, C.J., and BOSLAUGH, WHITE, SHANAHAN, GRANT, and FAHRNBRUCH, JJ. BOSLAUGH, Justice. This action was commenced by the plaintiff, Metropolitan Life Insurance Company (Metropolitan), for declaratory relief to determine the rights of the parties to the proceeds from a part of the crops grown on land in Wheeler County, Nebraska, owned by Lawrence Reeves, Philip Gustafson, and their spouses (Reeves-Gustafson). Both *73 Metropolitan and the defendant Omaha National Bank claim priority to the proceeds, which have been paid into the district court. The land involved in this action consists of three tracts, which, for convenience, will be referred to as parcels 1, 2, and 3. In December 1980, Reeves-Gustafson executed and delivered to Metropolitan promissory notes in the amounts of $475,000 and $325,000, secured by mortgages upon parcels 1 and 2. The mortgages, which were recorded on December 19, 1980, contained the following clause: From 1980 to 1983 Reeves-Gustafson executed a series of promissory notes to Commercial National Bank and Trust Company of Grand Island and Comag Credit Corporation to obtain operating funds. On January 20, 1983, Reeves-Gustafson executed a promissory note to Commercial National in the original principal amount of $305,719.49. This note was secured by a security agreement dated June 21, 1982, in which Reeves-Gustafson granted an interest in, among other collateral: The crops in the above were on parcels 1, 2, and 3. This interest was properly perfected. Reeves-Gustafson executed four notes to Comag as follows: (1) on January 25, 1980, in the original principal amount of $136,000; (2) on June 8, 1981, in the original principal amount of $90,076; (3) on June 7, 1982, in the original principal amount of $153,700; and (4) on March 29, 1983, in the original principal amount of $31,000. To secure these obligations, Reeves-Gustafson and Comag entered into security agreements dated April 23, 1980, and June 1, 1981. Among other collateral, Reeves-Gustafson granted Comag a security interest in all of the crops growing or to be grown on parcels 1 and 2, which was properly perfected. As of January 14, 1986, there was due and owing to Commercial National the amount of $104,311.97 and accrued interest in the amount of $113,132.79. Interest has continued to accrue at the rate of $42.15 per day. As of the same date, there was due and owing to Comag the total principal sum of $331,562.12 and accrued interest in the amount of $183,902.05. Interest has continued to accrue at the rate of $119 per day. As of January 14, 1986, Reeves-Gustafson was in total default of the combined sum of $416,830.22 under the two mortgages to Metropolitan. Petitions to foreclose the two mortgages were filed by Metropolitan on March 10, 1984. Because the assets of Commercial National and Comag have been sold to the Omaha National Bank, and it has succeeded to all of the rights of both Commercial National and Comag, Omaha National will be referred to as the defendant. On April 19, 1984, Reeves-Gustafson leased parcels 1, 2, and 3 to Reginald Dobson and Sons, Inc. (Dobson). The lease on parcels 1 and 2 provided Dobson was to pay 35 bushels of corn per acre as rent. Dobson also agreed to pay rent in the form of crops from parcel 3, but the record does not show the amount to be paid. During 1984 Dobson grew crops on parcels 1, 2, and 3, which were harvested in *74 the fall of 1984. Pursuant to the leases, the corn due Reeves-Gustafson was delivered and sold to United Grain Corporation. A check in the amount of $118,192.14, plus the interest thereon, represents the proceeds from the sale of crops due Reeves-Gustafson. Of that amount, $72,192.68 is attributable to parcels 1 and 2. The trial court found that Metropolitan, by virtue of its mortgages, was entitled to the crop proceeds attributable to parcels 1 and 2 and that Omaha National had a first lien on the portion of crop proceeds attributable to parcel 3. Omaha National has appealed and claims that it is entitled to the proceeds from parcels 1 and 2. Metropolitan has cross-appealed and claims that it is entitled to one-half of the proceeds from parcel 3. It is undisputed that the funds in controversy are rents which are due Reeves-Gustafson under the leases to Dobson. Omaha National claims the proceeds from the crops on parcels 1 and 2 by virtue of its perfected security interest in crops. Metropolitan claims the proceeds from the crops on parcels 1 and 2 under the assignment of rents clause in its mortgages, which provides that in the event of default, Metropolitan is "authorized and empowered to take immediate possession of the said premises hereby conveyed and all crops thereon, or to collect the rents therefrom...." In Central Savings Bank v. First Cadco Corp., 186 Neb. 112,181 N.W.2d 261 (1970), we held that such a provision in a mortgage is valid and enforceable. The issue is whether Metropolitan has the better right to the proceeds from the crops on parcels 1 and 2 because Reeves-Gustafson's interest was rent, or whether Omaha National's security interest attached because growing crops otherwise are subject to a perfected security interest. Before a security interest can attach to the property of a debtor, the debtor must have rights in the collateral. Neb.U. C.C. § 9-203(1)(c) (Reissue 1980). Under § 9-203(5)(a), a debtor has no rights in crops until they are planted or otherwise become growing crops. Before the security interest of Omaha National could attach to the crops planted by Dobson, Reeves-Gustafson had to have some rights in the crops. Generally, where the rent reserved is in kind or a share of the crops to be raised, the landlord and tenant are tenants in common of the growing crops. Anest v. Chester B. Brown Co., 169 Neb. 330, 99 N.W.2d 615 (1959); Wendt v. Stewart, 74 Neb. 855, 105 N.W. 550 (1905); Sims v. Jones, 54 Neb. 769, 75 N.W. 150 (1898). Reeves-Gustafson planted no crops on parcels 1 and 2, which had been leased to Dobson, but the lease to Dobson contained provisions which gave Reeves-Gustafson an interest in the corn to be paid as rent. The lease contained a provision that Reeves-Gustafson, The lease further provided that Dobson "shall secure the performance of the terms and conditions of this lease on their part by giving to [Reeves-Gustafson] on demand a chattel mortgage upon all or any part of the crops growing or gathered on said premises during said term." Reeves-Gustafson's only right or interest in the crops planted and harvested by Dobson was as rent due under the lease to Dobson. Neb.U.C.C. § 9-104(j) (Reissue 1980) excludes from article 9 coverage "the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder." (Emphasis supplied.) In Citizens Bank, etc. v. Wy-Tex Livestock Co., 611 S.W.2d 168 (Tex.Civ.App. 1981), the Cockrell Cattle Company had assigned to the bank the rents due it under a lease of a feedyard to International Cattle Systems. Wy-Tex recovered a judgment against Cockrell and then attempted *75 to garnish International for rent payments due Cockrell. The trial court held that Wy-Tex was entitled to $39,372.04 owed to Cockrell. On appeal the judgment was reversed because the Uniform Commercial Code does not apply to an assignment of rents. The court stated: Section 9.104 provides, in pertinent part: "This chapter does not apply ... (10) ... to the creation or transfer of an interest in or lien on real estate, including a lease or rents thereunder ... (emphasis added)." In support of its position, Wy-Tex relies primarily on United States v. PS Hotel Corp., 404 F. Supp. 1188 (E.D.Mo. 1975), aff'd per curiam, 527 F.2d 500 (8th Cir.1976). In that case, the court determined that a motel operator's charges for the use of rooms by its customers are accounts receivables rather than rent payments under a lease of an interest in real estate. Id. at 1192. Thus, in effect, the court determined that charges for rooms used by the motel's customers are not excluded from the operative effect of chapter nine of the Uniform Commercial Code by section 9.104(10). We do not consider the court's determination in PS Hotel Corp. controlling or persuasive in the case before us. In Bristol, the court construed Section 9-104(j) of the Pennsylvania Code, which is identical to Tex.Bus. &amp; Com.Code Ann. § 9.104(10) and section 9-104(10) of the Uniform Commercial Code. The court concluded: "[T]he drafters who wrote Article 9 and the legislators who enacted it into law intended section 9-104(j) to be interpreted sufficiently broadly to exclude the assignment of a lease and rents thereunder from the operation of Article 9. The burden of those who would propound a different view is to persuade the State Legislature. We should not usurp the legislative function." Id. at 1064. 611 S.W.2d at 170-71. In In re Bristol Associates, Inc., 505 F.2d 1056 (3d Cir.1974), cited by the Texas court, the issue was whether the Uniform Commercial Code applied to a security interest in a lease given by the lessor. The court stated the question as follows: 505 F.2d at 1058-59. In holding that the Uniform Commercial Code did not apply to assignment of a lease or the rents thereunder, the court stated: 505 F.2d at 1060-62, 1064. See, also, In re Patterson, 64 B.R. 189 (Bankr.N.D.Ill. 1986); In re Standard Conveyor Co., 773 F.2d 198 (8th Cir.1985). With respect to the cross-appeal, Metropolitan claims an interest in the proceeds from the crops grown on parcel 3 only, as an unsecured creditor. Although a part of the crops grown on parcel 3 was due Reeves-Gustafson as rent, Metropolitan acquired no lien on this portion of the crops. In the hands of Reeves-Gustafson, the crops became subject to the lien of *78 Omaha National's security interest, which was paramount to the interest of any unsecured creditor. The judgment of the district court is affirmed. AFFIRMED. CAPORALE, J., not participating.