Court Opinion

ID: 9476903
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:08:51.147731+00
Date Added: 2024-06-11T17:45:34.833565
License: Public Domain

ESCHBACH, Senior Circuit Judge,
concurring in part and dissenting in part.
I agree with the holding of the Majority to affirm the judgment of the District Court that Sperry is liable for conversion of the proceeds from the sale of the New Holland equipment. However, because I disagree with the Majority with regard to the time the subject acts of conversion occurred, I must respectfully dissent from its holding reversing the District Court on the issue of damages.
As the Majority’s analysis demonstrates, the key to determining the proper amount of damages in this case is ascertaining exactly when Sperry’s acts of conversion transpired. There are only two choices. If Sperry had no lawful right to possess the proceeds of the sale of the equipment by MEC to Mr. Teeters the two acts of conversion took place respectively on the dates Sperry was assigned Mr. Teeter’s retail installment contract (January 26, 1979) and the date Sperry took possession of the Massey-Ferguson equipment Mr. Teeters had traded on the New Holland machinery (April 24, 1980). In contrast, if Sperry had a lawful right to possess the subject proceeds its acknowledged acts of conversion did not occur until the September 25, 1980 date Sperry refused Centerre’s demand that it return the proceeds.
In an apparent attempt to avoid addressing the question of whether Centerre was a buyer in the ordinary course of business under Ind.Code § 26-1-9-307(1), the Majority bases it determination of whether Sperry had a lawful right to possess the subject proceeds solely upon an interpretation of Ind.Code § 26-1-1-306(2). That approach produces an incongruous result that could be avoided by a proper juxtaposition of the two sections of the Indiana Code that are relevant to the facts presented. The Majority opinion seems to rest on the premise that Sperry and Centerre could not have concurrent secured interests in the New Holland equipment and the proceeds of its eventual sale to Mr. Teeters. The following analysis will demonstrate that assumption misconstrues the relevant provisions of the Indiana Code and leads to an outcome that its §§ 26-1-1-201(9) and 26-1-9-306(2) do not compel.
By avoiding the § 26-1-9-307(1) issue the Majority is obliged to strain the meaning of the § 26-1-9-306(2) term “authorized” in order to protect Centerre’s secured interest in the proceeds of the MEC-Teeters sale of the New Holland equipment. Because Centerre was undoubtedly a buyer in ordinary course of business as per Ind.Code § 26-1-9-307(1) the Majority’s unfortunate choice of analytical tack could be avoided and § 26-1-9-306(2) given a more realistic reading.
Ind.Code § 26-1-9-307 provides in relevant part:
(1) A buyer in ordinary course of business (IC 26-1-1-201(9)) takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence....
The remainder of Section 26-1-9-307(1) goes on to specify a number of conditions that apply when a person is buying farm products from a person engaged in farming operations and is not relevant here. Ind. Code § 26-1-1-201(9) states:
“Buyer in ordinary course of business” means 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 but does not include a pawnbroker. All persons who sell minerals or the like (including oil and gas) at a well head or a minehead shall be deemed to be persons in the business of selling goods of that kind. “Buying” may be for cash or exchange of other property or on accrued or unsecured credit and includes receiving goods or documents of title under a preexisting contract for sale but does not include a transfer in bulk or as *1425security or in total or partial satisfaction of a money debt.
The Parties’ Stipulation of Facts on Issue of Liability as submitted to the District Court establishes (at number 2.) that “On or about September 1, 1978, MEC sold to Plaintiff three pieces of New Holland Combine equipment_” Sperry does not allege that Centerre acted in other than good faith or that it had knowledge that its purchase of the New Holland Equipment from MEC was in violation of the security interest Sperry held in those articles. It is clear that MEC was in the business of selling farm equipment. In light of these facts and because none of the remaining qualifications in the statutory definition applies to Centerre, there is no substantive reason to doubt that it was a buyer in ordinary course of business as contemplated by Ind.Code § 26-l-l-201(9).1 Therefore, a straightforward application of the unambiguous first sentence of Ind. Code § 26-1-9-307(1) leads to the conclusion that when Centerre bought the New Holland equipment from MEC it took free and clear of the security interest in that equipment created by MEC and held by Sperry.
The above conclusion does not terminate the inquiry necessary to properly resolve this controversy. With Centerre’s secured interest protected by virtue of its status as a buyer in ordinary course of business, attention must now turn to ascertaining whether Sperry retained any security interest in the proceeds from the second sale of the New Holland equipment. The Majority answers this question in the negative. It relies primarily on Anon, Inc. v. Farmers Prod. Credit Association, 446 N.E.2d 656 (Ind. Ct. App.1983) and First Nat’l. Bank and Trust Co. v. Iowa Beef Processors, Inc., 626 F.2d 764 (10th Cir.1980) as the bases for holding that “MEC’s sale of the New Holland equipment to Centerre was authorized and, therefore by the plain terms of Ind.Code § 26-1-9-306(2), Sperry’s security interest in the New Holland equipment did not continue.” I believe the case authority the Majority relies upon does not support the inference it draws.
Neither Anon nor First Nat’l. Bank and Trust stand for the legal maxim that a dealer security agreement of the nature at issue necessarily and inevitably “authorizes” the type of sale made by MEC to Centerre. In addition, unlike this case both of the cases relied on by the Majority involved a choice between the mutually exclusive secured interests of an original secured party and a second party subsequently granted a secured interest in the same property. In Anon the original secured party (creditor) was found to have expressly waived a provision in its security agreement requiring the debtor to obtain the creditor’s written permission before selling the collateral. Anon, 446 N.E.2d at 662. That finding was a key to the court’s determination that the original secured party had authorized the sale of the collateral with the result that its security interest did not survive the sale.
The court in Anon also concluded that the creditor had granted the debtor standing authority to sell the collateral limited only by the (unwritten) condition that the debtor promptly remit the proceeds to the secured party. Id. The court then cited First Nat’l. Bank and Trust as authority for the axiom that “a consent given a debt- or by the secured party to sell in its own name ‘provided’ debtor remits is not a true conditional sales authorization.” Id. Having both found a waiver by the creditor of *1426the sole written condition on the debtor’s sale of the disputed collateral and ascertained that the unwritten condition on the sale was not a condition at all, the Anon court arrived at the conclusion that the sale was in fact authorized by the secured creditor and that the creditor’s secured interest in the collateral had thus been extinguished.
It is true that Anon, relying upon First Nat’l. Bank and Trust, can be read to establish a rule under Ind.Code § 26-1-9-306(2) that a creditor’s conditioning the sale by its debtor of secured collateral solely on an unwritten stipulation that the debtor will remit the proceeds of any sale of the collateral to the creditor is not a true conditional sales authorization. However, the Majority extends this fair reading of Anon beyond its legitimate bounds when it applies it here to find the Dealer Security Agreement between Sperry and MEC to constitute an unconditional authorization for MEC to make the type of sale at issue.
The Sperry-MEC Dealer Security Agreement does (at item 5.) state that:
Dealer represents and warrants that: (a) at the time the Company's security interest attaches with respect to any collateral, the Dealer shall be the owner of said collateral with good right to sell, transfer, assign or pledge the same, free from any lien, security interests, encumbrances or other right, title or interest, other than that of Company; ... (emphasis supplied).
Item 7 of that same document provides further in relevant part that:
The Dealer may sell inventory collateral to users in the ordinary course of his retail business. Immediately upon such sale, Dealer shall deliver to the Company all cash proceeds, consisting of money, checks and the like, in the exact form in which they are received, and to evidence the Company’s rights hereunder, assign or endorse such proceeds to Company (emphasis supplied).
The agreement contains a total of eighteen item paragraphs and covers three pages. Among those paragraphs is the proviso at item 12 that:
The Dealer shall:
(a) ...,
(b) keep the collateral free from all other liens, encumbrances, security interests, charges and claims whether contractual or imposed by operation of law, and shall not remove the collateral from the Dealer’s place of business, except in the ordinary course of Dealer’s retail business, without the prior written consent of the Company.
The Majority's facile reliance upon the rule of Anon, drawn as it was from a simple fact situation involving only a course of dealing-based verbal condition on the sale of secured collateral, to moot the manifold conditions imposed by the Sperry-MEC Dealer Security Agreement is unwarranted and would surely lead to serious negative future consequences for the parties to the kind of floor plan inventory financing schemes involved here. To infer that Sperry in fact through the consummation of the Dealer Security Agreement authorized the fraudulent act of deception engaged in by MEC defies rationality. MEC’s conduct almost certainly abridged the above-cited restrictions of item 12(b) of its Agreement with Sperry. That fact alone is sufficient to support the District Court’s finding that the sale of the New Holland equipment by MEC to Centerre was unauthorized. See District Court Order of Apr. 30, 1986 at 6.
Based on the foregoing analysis I am compelled to conclude that the District Court was correct in finding that the sale of the New Holland equipment by MEC to Centerre was not “authorized” by the Dealer Security Agreement between Sperry and MEC or otherwise. Because Sperry did not authorize the sale of the collateral New Holland equipment by MEC to Centerre, its security interest in that collateral continued after the sale pursuant to Ind.Code § 26-1-9-306(2). Nevertheless, by operation of Ind.Code § 26-1-9-307(1) Centerre took free of Sperry’s security interest. Thus, once the New Holland equipment was sold a second time, Sperry’s security interest in the proceeds of that sale was, like its security interest in the collateral *1427itself, subordinate to Centerre’s security interest.
The above conclusions notwithstanding, the critical fact remains that even after the sale of the New Holland equipment , to Mr. Teeters by MEC, Sperry still had a valid security interest in the installment contract and the used Massey-Ferguson farm machinery that were the proceeds of the second sale of the New Holland equipment by MEC. As the District Court apparently realized, Sperry’s lawful interest was not necessarily destroyed by the operation of Ind.Code § 26-1-9-307(1) granting Cen-terre an unfettered interest in the New Holland equipment (and therefore in the proceeds of the second sale of that,equipment). Nothing in the Code expressly requires that Sperry’s subordinate security interest in the proceeds at issue (against all others save Centerre) be extinguished absent a finding that it authorized the sale that resulted in Centerre achieving a superior security interest in those proceeds. A careful study of the relevant Indiana case law discloses no such rule. Therefore, I believe the Majority errs when it creates new Indiana law to that effect by an inappropriate invocation of case authority that is only tangentially relevant to the question upon which the determination of damages in this case must turn.
Because Sperry retained a valid subordinate security interest in the proceeds of the sale of the New Holland equipment by MEC to Mr. Teeters, the barrier to sustaining the District Court’s holding on the question of when the two acts of conversion by Sperry actually took place dissolves. Indiana law teaches that when a party comes into possession of property lawfully an act of wrongful conversion does not transpire until the holder of a superior interest demands possession. French v. Hickman Moving and Storage, 400 N.E.2d 1384, 1389 (Ind. Ct. App.1980). By the rule of French Sperry’s acts of conversion did not occur until the September 25, 1980 demand by Centerre that the proceeds of the second sale of the New Holland equipment be delivered to it. Accordingly, I would also affirm the District Court on the issue of damages.

. Careful examination of United Leaseshares, Inc. v. Citizens Bank & Trust Co., 470 N.E.2d 1383 (Ind. Ct. App.1984) reveals a critical difference in the fact situation presented there which renders it inconsequential to this analysis. In that case the purchaser/lessor was found to have purchased the subject automobiles and simultaneously leased them back to the same legal entity. The court held that there was no sale but rather the purchaser/lessor had in fact loaned the pinchase price of the automobiles to the seller/lessee, the automobiles serving as security for the loan. There was no such sale/leaseback arrangement between Centerre and MEC. Centerre bought the New Holland equipment from MEC and then leased it to John Ream. John Ream and MEC are separate persons. Thus, United Leaseshares cannot be said to stand for the proposition that under the facts of this case Centerre was not a buyer in ordinary course of business as per Ind.Code §§ 26-1-1-201(9) and 26-1-9-307(1).