Opinion ID: 901757
Heading Depth: 1
Heading Rank: 3

Heading: FSA Protection from Conversion in Purchasing Farm Products in the Ordinary Course of Business

Text: [¶ 10.] Fin-Ag argues that FSA protection for the buyers of farm products was not available to Cimpl's for two reasons. First, Fin-Ag argues that for purposes of notice, and despite the fact that C & M Dairy was the only identified seller in each instance: (1) Berwalds were the sellers; (2) Berwalds were listed as sellers on the master list; and therefore, (3) Cimpl's had written notice of Fin-Ag's security interest thereby disqualifying Cimpl's from protection under the notice exception of the FSA. Second, Fin-Ag points out that the FSA limits Cimpl's protection to take free of security interests created by [Cimpl's] seller. See 7 USC § 1631(d). Therefore, Fin-Ag argues that even if C & M Dairy was the seller for purposes of the notice exception of the FSA, C & M Dairy did not create the security interest, Berwalds did. Accordingly, Fin-Ag argues that FSA protection was unavailable under the created by the seller limitation of the FSA, and Cimpl's was liable for the state law claims of conversion. [¶ 11.] Our standard of review of the circuit courts summary judgment is well-settled: In reviewing a grant or a denial of summary judgment under SDCL 15-6-56(c), we must determine whether the moving party demonstrated the absence of any genuine issue of material fact and [established] entitlement to judgment on the merits as a matter of law. The evidence must be viewed most favorably to the nonmoving party[,] and reasonable doubts should be resolved against the moving party.... Our task on appeal is to determine only whether a genuine issue of material fact exists and whether the law was correctly applied. Consol. Nutrition, L.C. v. IBP, Inc., 2003 SD 107, ¶ 8, 669 N.W.2d 126, 129 (citations omitted) (alterations in original). [¶ 12.] To develop a proper framework for the analysis of the issues, we restate the history and purpose of the FSA. Prior to 1985, the UCC generally reflected a policy that favored the rights of the holders of security interests. Fin Ag, Inc. v. Hufnagle, Inc., 720 N.W.2d 579, 581 (Minn.2006). Under the UCC, a security interest in goods continued despite sale of those goods by the debtor. Id. (citing UCC § 9-306) (1972) (amended 2000); 3B ULA 33-34 (2002). Although the UCC recognized an exception for buyers in the ordinary course of business, that exception did not apply to buyers of farm products. Id. (citing UCC § 9-307) (1972) (amended 2000); 3B ULA 154 (2002). Therefore, buyers of farm products were not protected from security interests created by their sellers. Id. Congress noted that this farm products exception ... force[d] innocent buyers of farm products to become unwilling loan guarantors, in essence assuming the credit supervision responsibilities that rightly belong with the lender who [was] making the profit off the loan to begin with. H.R. Rep. No. 99-271(I) at 108-9 (1985), U.S.Code Cong. & Admin.News 1985 at 1103, 1209-10. [¶ 13.] Because Congress was concerned with this impact of the UCC on buyers of farm products, it enacted the FSA. Hufnagle, 720 N.W.2d at 582. The Congressional findings for enactment of the FSA are particularly relevant in this case: Congress finds that  (1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser does not know that the sale of the products violates the lender's security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender; (2) these laws subject the purchaser of farm products to double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender; (3) the exposure of purchasers of farm products to double payment inhibits free competition in the market for farm products; and (4) this exposure constitutes a burden on and an obstruction to interstate commerce in farm products. 7 USC § 1631(a). [¶ 14.] Congress enacted the FSA to alleviate these concerns by removing such burdens on and obstructions to interstate commerce in farm products. 7 USC § 1631(b). `To achieve this purpose, the Act shifts the burden of potential loss from the buyers and commission merchants to the lenders who finance farm operations.' Mercantile Bank of Springfield v. Joplin Reg. Stockyards, Inc., 870 F.Supp. 278, 282 (W.D.Mo.1994) (quoting Food Servs. of Am. v. Royal Heights, Inc., 69 Wash.App. 784, 850 P.2d 585, 587 (1993) (citing Lisco State Bank v. McCombs Ranches, Inc., 752 F.Supp. 329, 334 (D.Neb.1990))). [¶ 15.] Thus, the FSA generally protects a buyer of farm products from liability for conversion. It does so by preempting UCC provisions and creating a general rule protecting buyers in the ordinary course of business who purchase farm products subject to a lender's security interest. Notably, the House Reports make clear that the FSA was specifically intended to remove the buyer's obligation to diligently check public records: [The FSA was] ... intended to preempt state law (specifically the so called farm products exception of [UCC] Section 9-307) to the extent necessary to achieve the goals of this legislation. Thus, this Act would preempt state laws that set as conditions for buyer protection of the type provided by the bill requirements that the buyer check public records, obtain no-lien certificates from the farm products sellers, or otherwise seek out the lender and account to that lender for the sale proceeds. H.R. Rep. No. 99-271(I) at 110, U.S.Code Cong. & Admin.News 1985 at 1211. Additionally, the protection is afforded even if the buyer has actual knowledge of the existence of that security interest: ... 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 USC § 1631(d). [¶ 16.] The protection is, however, subject to notice exceptions and one limitation. Under the [ ] notice exceptions[,] a buyer of farm products takes subject to a security interest created by the seller when notice has been given by one of three specified notice procedures. Hufnagle, 720 N.W.2d at 582 (citing 7 USC § 1631(e)). Under the notice exception at issue in this case, no FSA protection is afforded if the state establishes a central filing system and the buyer receives written notice under that system that the seller and the collateral are subject to an EFS. 7 USC § 1631(e)(3). [8] [¶ 17.] Significantly, the FSA specifically provides that a buyer of farm products is subject to a security interest only if the secured party complies with this notice exception in 7 USC § 1631(e). 7 USC § 1631(d) (emphasis added). Further, 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. Farmers & Merchants State Bank v. Teveldal, 524 N.W.2d 874, 878 (S.D.1994) (citing Lisco State Bank, 752 F.Supp. at 334). Consequently, the test is not whether [the buyer] had actual notice that the sale violated a security interest, but whether [the buyer] takes subject to the [secured party's] security interest because there was compliance [by the secured party] with one of the exceptions defined in the Act. Ashburn Bank v. Farr, 206 Ga.App. 517, 426 S.E.2d 63, 65 (1992). [¶ 18.] In addition to the notice exceptions, there is one limitation on the protection afforded buyers in the ordinary course. A buyer only takes free of security interests created by the seller from whom the buyer acquired the farm product. 7 USC § 1631(d). This limitation is similar to the created by the buyer's seller limitation in SDCL 57A-9-320 [9] (UCC § 9-320, formerly § 9-307) for those who buy in the ordinary course of business. Hufnagle, 720 N.W.2d at 582. Under the FSA limitation, there is generally no protection if the underlying security interest was created by someone other than the buyer's immediate seller. Id. [¶ 19.] Accordingly, under the applicable notice exception, Cimpl's took subject to Fin-Ag's security interest if Fin-Ag's EFS in the Secretary of State's master list provided written notice that the seller and the cattle were subject to Fin-Ag's security interest. 7 USC § 1631(e)(3). And, under the limitation, Cimpl's took subject to Fin-Ag's security interest if the security interest was created by someone other than Cimpl's immediate seller. 7 USC § 1631(d). Because C & M Dairy was the only identified seller in the sales at issue, there are two seller questions that must be resolved to determine whether the FSA protected Cimpl's: (1) was C & M Dairy the seller of the cattle within the meaning of the written notice exception of the FSA; and (2) should C & M Dairy be regarded as the seller who created Fin-Ag's security interest within the meaning of the FSA limitation. [10]