Opinion ID: 1717292
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Heading: Waiver By Prior Course of Dealing.

Text: Iowa Code section 554.9306(2) (1983) provides: 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. We have held the or otherwise language of this provision includes authorization resulting from an implied waiver of the security interest and that such an implied waiver may result from the establishment of a prior course of dealing, acquiesced in by the secured party, involving the collateral. See Ottumwa Prod. Credit Ass'n v. Keoco Auction, 347 N.W.2d 393, 395 (Iowa 1984); Hedrick Savings Bank v. Myers, 229 N.W.2d 252, 254-55 (Iowa 1975); Lisbon Bank and Trust Co. v. Murray, 206 N.W.2d 96, 98 (Iowa 1973). An implied waiver resulting from such a course of dealing is unaffected by the debtor's refusal to abide by a condition attached by the secured party to its authorization of the transaction, such as that the debtor will apply the proceeds to the secured debt. Lisbon Bank and Trust, 206 N.W.2d at 99. Likewise, the nonperformance of a condition imposed upon a debtor will not affect the rights of a purchaser who neither is a participant in the condition nor has knowledge thereof. Producers Livestock Mktg. Ass'n v. John Morrell & Co., 220 Iowa 948, 952, 263 N.W. 242, 244 (1935) (quoting 11 C.J. Chattel Mortgages § 339 at 624 (1917)); see Ottumwa Prod. Credit Ass'n, 347 N.W.2d at 397. The rationale of these rules is that when a secured party waives its lien the personal obligation of the debtor is substituted for the collateral. Lisbon Bank and Trust, 206 N.W.2d at 99; See Ottumwa Prod. Credit Ass'n, 347 N.W.2d at 397. The present record includes the following testimony given by Jerry Jobe, vice-president and cashier of First State Bank: Q. And was the bank aware that he always sold his crop to Percival Grain? A. Yes. Q. And as far as you know, they never made any written request or oral request that he not do that? A. What time frame are we speaking? Are you saying totally they never made any request on that? Q. Right. A. I don't believe they did. Q. Wasn't the general practice that Mr. Zach would sell his grain, and then he would get a check for the proceeds from Percival Grain, and bring it to the bank? A. Correct. Q. And the bank had no problem with him doing that? A. No. Q. And so the bank relied on Mr. Zach to bring the proceeds to the bank? A. Yes. Q. At any time did the bank notify Percival Grain that they were not to buy grain from Jan Zach? A. To buy from Jan Zach? Not to buy grain? No. Not to my knowledge they were never instructed not to buy grain. Q. And Percival Grain was never notified by the bank to not give the proceeds to Jan Zach? A. Not to my knowledge they were not. Q. And as far as you know, the bank never gave Percival Grain any notices that they had a security interest in Jan Zach's crop? A. As far as direct communicationI mean Q. Direct communication. A. First State Bank write to Percival Grain or Shirley Ag; is this what you are saying, sir? Q. Yes. A. I don't believe we did. This testimony corroborates that given by Jan Zach. We think this evidence demonstrates the existence of a prior course of dealing whereby First State Bank knew of, and acquiesced in, Zach's sale of the collateral to Percival Grain. In the case at bar, however, we must take account of a factor which was present in the challenged transaction and which was not a part of the prior course of dealing: First State Bank's service of fore-closure papers on Jan Zach prior to Zach's disposition of the secured crop. In this state, a secured creditor's right to possession of the collateral accrues upon default, unless otherwise agreed. Iowa Code § 554.9503 (1983). In an analogous situation, we have held that an obligee's contractual rights under a promissory note, even though previously waived by a course of dealing between the parties, may be enforced if the obligor is informed of the note-holder's intention to rely on the rights in the future. Dunn v. General Equities of Iowa, Ltd., 319 N.W.2d 515, 517 (Iowa 1982). A party's entitlement to withdraw the waiver of contractual rights upon reasonable notice is familiar to this court. See Nora Springs Coop. v. Brandau, 247 N.W. 2d 744, 749 (Iowa 1976); Bettis v. Bettis, 228 N.W.2d 193, 195 (Iowa 1975); Iowa Code § 554.2209(5) (1983). In fact, we have held that notice of contractual forfeiture is itself a notice of withdrawal of a previous waiver of a contractual right. Janes v. Towne, 201 Iowa 690, 699, 207 N.W. 790, 792 (1926); see Bettis, 228 N.W. 2d at 195. Similarly here, we hold as a matter of law that when First State Bank chose to foreclose on its secured property and duly served Zach with notice of the foreclosure, the bank effectively withdrew its earlier grant of implied authority to dispose of the secured property. In so holding, we emphasize that the dispositive issue is whether this particular disposition of collateral was authorized by the secured party. See Iowa Code § 554.9306(2) (1983). Under the present facts, which disclose both First State Bank's affirmative efforts to protect its security interest through foreclosure proceedings and Zach's actual knowledge thereof, we hold that, as a matter of law, the disposition at issue was not authorized by the prior course of dealing.