Opinion ID: 1679781
Heading Depth: 1
Heading Rank: 2

Heading: Whether Bank's failure to comply with the EFS code numbering system destroys perfection of its security interest as against a secured supplier of feed?

Text: The standard of review on a motion for summary judgment is whether the moving party demonstrated the absence of any genuine issue of material fact and showed entitlement to judgment on the merits as a matter of law. Mooney's v. S.D. Dept. of Transp., 482 N.W.2d 43, 45 (S.D.1992) (citations omitted). The evidence must be viewed most favorably to the nonmoving party and reasonable doubts should be resolved against the moving party. Lamp v. First Nat. Bank of Garretson, 496 N.W.2d 581, 583 (S.D.1993) (citations omitted). Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. If there exists any basis which supports the ruling of the trial court, affirmance of summary judgment is proper. Id. Each party claims a superior perfected security interest in Haiar's hogs. Under SDCL 57A-9-312(5)(a), the first security interest perfected is superior to all competing claims. Since Bank perfected first, we must determine whether Bank's failure to list the EFS code for hogs destroyed perfection of its security interest and whether the FSA protects Teveldal. Under SDCL 57A-9-402(8), [a] financing statement substantially complying with the requirements of this section is effective even though it contains minor errors which are not seriously misleading. Bank included in its description of collateral [a]ll cattle, hogs, sheep & wool now owned or hereafter acquired, together with natural increase from said livestock. Plaintiff's Exhibit A (emphasis added). Bank included the EFS code numbers for beef cattle and dairy cattle, but not for hogs. In First Bank v. Eastern Livestock Co., 837 F.Supp. 792 (S.D.Miss.1993), the court considered the sufficiency of a collateral description in a financing statement under the EFS. The court found no case under the FSA, so it resorted to the U.C.C. for precedent. Id. at 799. The court held that: the majority of courts addressing the adequacy of financing statements under the U.C.C. have held that a financing statement, in order to perfect a security interest, need not specifically identify the property which is the subject of a security interest; rather, it is sufficient if the description would put a reasonably prudent prospective lender or buyer on notice that the collateral sought to be purchased or encumbered might be the subject of a preexisting security interest. Id. (citations omitted). [T]he financing statement is designed only to provide general notice or warning that certain collateral might already be encumbered[.] Production Credit Ass'n v. Bartos, 430 N.W.2d 238, 241 (Minn.App. 1988) (emphasis added). Therefore, the financing statement need not provide all information but only that information which states that a transaction has taken place and that details may be obtained from the address shown. First Bank, 837 F.Supp. at 799. A majority of courts have adopted the view that a description is sufficient if it merely provides notice of the need for additional inquiry. United States v. Southeast Mississippi Livestock Farmers Ass'n, 619 F.2d 435, 438 (5th Cir.1980). Here, Bank's financing statement provided general notice that Bank held a security interest in Haiar's hogs. Teveldal should have conducted a search more thorough than a mere EFS code inquiry. The omission of the code number in the EFS section did not render Bank's financing statement insufficient. The formal requirements for a financing statement were met, SDCL 57A-9-402(1), and the Bank's filing constituted perfection of its security interest in Haiar's hogs. SDCL 57A-9-303(1). Teveldal places too much reliance upon a telephone call to the Secretary of State. The secretary of state is not responsible for accuracy and completeness of the information furnished verbally in response to a telephone request. SDCL 57A-9-407.1. Teveldal did not ask for a computer printout which would have shown the Bank's interest was perfected in hogs as well as cattle. A reasonable inquiry by requesting a printout would have shown the hogs were also covered under the financing statement. Teveldal could have received a copy of the entire financing statement prior to supplying the feed, thereby precluding the need for this lawsuit. SDCL 57A-9-403(9), 57A-9-407(3). Even though Bank perfected its security interest, Teveldal claims he is a buyer in ordinary course protected under the FSA, 7 U.S.C. § 1631. The FSA provides a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected [,] and the buyer knows of the existence of such interest. 7 U.S.C. § 1631(d) (emphasis added). Under SDCL 57A-1-201(9), a buyer in ordinary course is a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods[,] buys in ordinary course from a person in the business of selling goods of that kind[.] The FSA deleted the good faith and without knowledge requirement to protect buyers even though they know of the existence of a perfected security interest. Lisco State Bank v. McCombs Ranches, Inc., 752 F.Supp. 329, 334 (D.Neb.1990). Prior to the FSA, a buyer of farm products could be liable to the seller/debtor and to the party holding a security interest in the farm products. 7 U.S.C. § 1631(a)(2); see SDCL 57A-9-307; Lisco, 752 F.Supp. 329. Under the FSA, buyers of farm products are not exposed to liability for double payment. [3] 7 U.S.C. § 1631(d); Sanborn Cty. Bank v. Magness Livestock Exch., 410 N.W.2d 565, 566 n. 1 (S.D.1987). Buying does not include receiving goods or documents of title under a preexisting contract as security for or in total or partial satisfaction of a money debt, SDCL 57A-1-201(9), thereby excluding attaching creditors and others who take goods in satisfaction of preexisting debts from the definition of a buyer in ordinary course. 2 J. White & R. Summers, Uniform Commercial Code, § 26-13, at 533, n. 2 (3rd ed. 1988). Teveldal did not obtain a security interest in Haiar's hogs until after he had supplied feed. Therefore, it was a preexisting debt. A creditor who receives a security interest for a preexisting debt is not a buyer in ordinary course. [4] Id., § 26-13, at 533, nn. 2-3. Other than eliminating double payment liability for a buyer in ordinary course in farm products, Congress did not intend to preempt state law relating to the creation, perfection, or priority of security interests. 9 C.F.R. § 205.202; Food Services of Am. v. Royal Heights, 69 Wash.App. 784, 850 P.2d 585, 588 (Div. 3 1993). Teveldal erroneously argues that he is a buyer in the ordinary course, deserving protection under the FSA. Obviously, Teveldal was not a buyer. He was a seller and supplier of feed. Therefore, he is not entitled to protection under the FSA. The trial court correctly concluded that Teveldal was not a buyer protected under the FSA. We have considered Teveldal's other arguments and determine them to be without merit. Affirmed. MILLER, C.J., and WUEST, AMUNDSON and KONENKAMP, JJ., concur.