Court Opinion

ID: 9719049
Source: CourtListenerOpinion
Date Created: 2023-08-26 07:41:23.835007+00
Date Added: 2024-06-11T12:23:05.841236
License: Public Domain

SAUFLEY, C.J., and DANA, J.,
concurring in part and concurring in the judgment.
[¶ 23] We concur in the result but write separately to address the question of the security interest in the goods that the Court has declined to reach. We agree with the Court’s conclusion that MFX had the right pursuant to former 11 M.R.S.A. § 9-818(l)(a) (1995)11 to set off the amount NEI owed it for the potato bags against the account receivable for potato purchases owed to NEI and assigned to Farm Credit; although a different characterization of the facts would have been possible, the Superior Court’s finding that the bag debt arose out of the potato contract is not clearly erroneous.
[¶ 24] We do not agree, however, that our decision on the section 9-318 setoff issue makes it unnecessary to consider the separate question of whether MFX took the potatoes free of Farm Credit’s security interest. This separate issue must be considered. However, because Farm Credit has failed to establish that its security interest survived, we concur in the result.12
[¶25] An inventory or crop lender like Farm Credit that has not received the full proceeds of a sale of collateral typically has two potential claims against a buyer of the collateral. One claim sounds in contract: to the extent that the buyer has not paid the full price for the collateral, the secured lender, as the assignee of the account receivable created by the credit sale, may sue the buyer to collect the balance due on the account — subject, however, to the buyer’s defenses to the extent allowed by section 9-318(1). The second potential claim is independent of the first, and involves the goods themselves: “so long as the security interest still continues in the inventory, the secured party can maintain an action against the purchaser for repossession or conversion.” United States v. Handy & Harman, 750 F.2d 777, 786 (9th Cir.1984) (discussing secured party’s different remedies); see also Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185 (7th Cir.1990) (considering propriety of setoff against account but not considering conversion of collateral claim not properly raised before trial court); Producers Cotton Oil Co. v. Amstar Corp., 197 Cal.App.3d 638, 242 Cal.Rptr. 914 (1988) (considering separate conversion and setoff claims); Mid-States Sales Co. v. Mountain Empire Dairymen’s Ass’n, 741 P.2d 342 (Colo.Ct.App.1987) (considering only conversion claim because secured party did not challenge setoff against account).
*93[¶26] Farm Credit brought a contract claim against MFX as assignee of NEI’s account receivable,13 and we have now affirmed the Superior Court’s conclusion that MFX was not liable to Farm Credit on the account because it had a valid setoff arising from the contract. Farm Credit also brought a claim alleging that MFX had converted its collateral, which is discussed in the parties’ briefs on appeal but not in the opinion of the Court nor in the decision of the Superior Court.14 If Farm Credit is correct in its contention that MFX took the potatoes subject to its security interest, then it would be entitled to recover the remainder of the price of the potatoes as damages for conversion, notwithstanding MFX’s valid setoff against the account receivable. For this reason, it is necessary to discuss whether Farm Credit’s security interest in the potatoes 15 survived the sale to MFX.
[¶ 27] Article 9’s default rule is that the security interest survives: “Except where this Article or Article 8 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 ....” 11 M.R.S.A. § 9-306(2) (1995). The first question, then, is whether NEI’s sale of the potatoes to MFX was authorized by Farm Credit. It is clear that the sale was not authorized by the security agreement, nor in writing as provided by the security agreement; at the same time, it is clear that Farm Credit knew that NEI was selling nearly all its potatoes to MFX, and never objected. On this basis, MFX argues that Farm Credit gave its implied consent to the sale. Farm Credit, however, argues that its consent was conditioned on its receiving from MFX (via a check payable, as usual, to NEI and Farm Credit) the full price of the potatoes, which it never received due to MFX’s unauthorized setoff.
[¶ 28] Farm Credit may have the better argument on this issue. The evidence in the record could be read to support a finding that Farm Credit’s consent was conditional and that the condition was not satisfied. A number of courts have held that when a condition that the lender receive the full price of the collateral is not satisfied, the sale has not been “authorized by the secured party” within the meaning of section 9-306(2). See Churchill Bus. Credit, Inc. v. Pac. Mut. Door Co., 49 F.3d 1334, 1338 (8th Cir.1995) (majority rule is that “a security interest in collateral eon-*94tinues where the conditions of release imposed by the secured party are not met”); accord Tri-State Livestock Credit Corp. v. Ellsworth (In re Ellsworth), 722 F.2d 1448, 1450-51 (9th Cir.1984); N. Commercial Co. v. Cobb, 778 P.2d 205, 208-09 (Alaska 1989); but see E. Idaho Prod. Credit Ass’n v. Idaho Gem, Inc., 122 Idaho 946, 842 P.2d 282, 285 (1992) (lender’s authorization to sell collateral conditional on its receiving proceeds cut off security interest though condition not met). We need not resolve this issue, however, because, as we discuss below, Farm Credit cannot prevail even if one assumes that it did not authorize the sale to MFX.
[¶ 29] MFX argues that if Farm Credit did not authorize the sale, MFX still took free of the security interest because it was a buyer in the ordinary course of business: “A buyer in the ordinary course of business ... other than a person buying farm products from a person engaged in farming operations, 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.” 11 M.R.S.A. § 9-307(1) (1995). Farm Credit apparently relies on the farm products exception to the buyer in the ordinary course rule contained in section 9-307(1) to support its contention that MFX took the potatoes subject to its security interest. This argument fails for two reasons. First, as MFX points out, it did not buy farm products from a person engaged in farming operations. NEI was not engaged in farming operations, and thus the potatoes in its hands were inventory, not farm products. 11 M.R.S.A. § 9-109(3), (4) (1995). Second, although the parties do not mention it, the farm products exception in section 9-307(1) has been preempted by the federal Food Security Act (FSA), 7 U.S.C.A. § 1631(d) (1999). See Food Servs. of Am. v. Royal Heights, Inc., 123 Wash.2d 779, 871 P.2d 590, 594-95 (1994) (en banc) (purpose and effect of FSA is to abrogate U.C.C. farm products exception); accord Nelson v. Am. Nat’l Bank, 921 S.W.2d 411, 416 (Tex.App.1996). Although the FSA itself contains three exceptions pursuant to which a buyer of farm products in the ordinary course may take subject to a security interest, 7 U.S.C.A. § 1631(e), Farm Credit failed to persuade the trial court of the existence of any of those exceptions.
[¶ 30] Nor did Farm Credit assert either of two alternative arguments on this issue. First, assuming that MFX was a buyer in the ordinary course, it only follows that it took the potatoes free of the security interest created by its seller. 11 M.R.S.A. § 9-307(1). Farm Credit could have argued, therefore, that MFX’s seller was NEI, not the Wathens, so that MFX took free of the security interest created by NEI but subject to the security interest created by the Wathens.16 See Cent. Wash. Bank v. Mendelson-Zeller, Inc., 113 Wash.2d 346, 779 P.2d 697, 702 (1989) (en banc) (apple buyer did not take free of bank’s security interest because it bought from sales agent, not farmer who created security interest; buyer liable to bank for conversion); Baker Prod. Credit Ass’n v. Long Creek Meat Co., 266 Or. 643, 513 P.2d 1129, 1132 (1973) (en banc) (buyer of cattle carcasses from slaughterhouse did not take free of security interest created by feed lot and was *95thus liable for conversion). There is case law, however, cited by MFX in its brief, holding that when a buyer in the ordinary course purchases crops from farmer-owned processor, both the farmer and the processor are treated as “his seller,” so that the buyer takes free of the security interest created by both. First Bank of N.D.— Jamestown v. Pillsbury Co., 801 F.2d 1036, 1039-40 (8th Cir.1986); United States v. Cont’l Grain Co., 691 F.Supp. 1193, 1200 (W.D.Wis.1988). A reasonable resolution of this conflict appears to be that disregarding the separate entity of the farmer-owned processor is only proper when the elements of “piercing the corporate veil” can be met, Deutsche Credit Corp. v. Case Power & Equip. Co., 179 Ariz. 155, 876 P.2d 1190, 1195 (1994), and it is clear that those elements have not been demonstrated here, see generally Johnson v. Exclusive Props. Unlimited, 1998 ME 244, ¶¶ 4-9, 720 A.2d 568, 570-72 (outlining elements).
[¶ 31] Second, and more significantly, Farm Credit has not successfully challenged MFX’s assertion that it was a buyer in the ordinary course of business. A buyer in the ordinary course is defined in the U.C.C. general definitions in section 1-201(9), which provided:17
“Buyer in the 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 .... “Buying” may be for cash or by exchange of other property or on’ secured 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 security for or in total or partial satisfaction of a money debt.
11 M.R.S.A. § 1-201(9) (1995) (emphasis added). In the section 9-307 context, courts have construed this definition to mean that to qualify as a buyer in the ordinary course, one must give “new value” for the goods purchased, rather than setting off a preexisting debt against the price of the goods. Branch Banking & Trust Co. v. Columbian Peanut Co., 649 F.Supp. 1116, 1118 n. 2 (E.D.N.C.1986) (peanut purchaser was not buyer in ordinary course because it set off against purchase price the amount that farmer owed it for peanut seed); Handy & Harman, 750 F.2d at 782 (“[A] buyer of goods on credit cannot qualify for ordinary course status under § 1201(9) if he subsequently offsets his promise to pay with a debt that was in existence at the time he bought the goods.”); Producers Cotton Oil, 242 Cal. Rptr. at 923 (beet purchaser who set off harvesting costs not buyer in ordinary course because “[n]o new value was given”); see generally 9 WILLIAM D. HAWKLAND ET AL., HAWKLAND UNIFORM COMMERCIAL CODE SERVICE § 9-307:02 (1997) (“[T]he purchaser must give new value if he or she wants to be a buyer in ordinary course.”). It appears that MFX failed to give new value for the potatoes it purchased from NEI to the extent of the setoff it took for the bag debt. To that extent, therefore, MFX would not have been a buyer in the ordinary course; Farm Credit’s security interest would have continued in the potatoes; and MFX’s purchase and subsequent resale of the potatoes, and retention of the resale proceeds, would have been a viola*96tion of Farm Credit’s security interest for which MFX would be liable to Farm Credit for conversion. Because Farm Credit did not assert these arguments, however, the Superior Court did not err when it implicitly found that MFX took the potatoes free of the security interest.18
[¶ 32] In sum, the litigants’ focus on the contract claims resulted in reduced attention to other remedies that ordinarily may be available to secured creditors. Article 9 is meant to provide this complementarity of remedies. If a buyer of collateral gives full value, the secured party can be satisfied out of the proceeds — whether obtained from the debtor or by suing the buyer on an assigned account receivable — and need not retain its security interest in the goods themselves. On the other hand, if the full proceeds are not available to the secured party because the buyer has made a legitimate setoff against the account receivable, the buyer will not have given new value and the security interest will remain in the collateral itself, to be enforced by an action for conversion or replevin. The result in this case, therefore, should not be seen as leaving secured parties without a remedy, but only as properly denying a secured party the one remedy it asserted effectively, but to which it was not entitled.

. All references in this opinion to the secured transactions article of the U.C.C. will be to the former Article 9, 11 M.R.S.A. §§ 9-101 to 9-507 (1995 & Pamph.2000), which governs this case, but which has been repealed and replaced as of July 1, 2001, with new Article 9-A, 11 M.R.S.A. §§ 9-1101 to 9-1709 (Pamph.2001).

. Because Farm Credit has not established MFX’s liability on either the setoff or the security interest issue, we agree with the Court that we need not consider the unjust enrichment issue raised by MFX, which, although characterized by the Superior Court as a "claim,” was really more in the nature of an affirmative defense to liability. Cf. Producers Cotton Oil Co. v. Amstar Corp., 197 Cal.App.3d 638, 242 Cal.Rptr. 914 (1988) (holding beet buyer who wrongfully set off harvesting costs in violation of section 9-318 and converted beets in violation of continuing security interest nevertheless not liable because liability would unjustly enrich secured party).

. Although Farm Credit's counterclaim did not clearly state a contract claim on the account receivable, it is evident from the record and the arguments on appeal that this claim was tried by consent of the parties pursuant to M.R. Civ. P. 15(b).

. Although the Superior Court did not explicitly address the conversion claim, Farm Credit asserts — correctly, we will assume for purposes of argument — that the court made an implicit finding that MFX took the pola-toes free of Farm Credit’s security interest.

. Farm Credit also argues that it had a security interest in the funds that MFX withheld as a setoff for the bag debt, instead of paying 1o NEI, because that money was proceeds of the potatoes. Proceeds, however, are defined as "whatever is received upon the sale ... of collateral.” 11 M.R.S.A. § 9-306(1) (1995) (emphasis added). Proceeds need not be received by the debtor, Farnum v. C.J. Merrill, Inc., 264 A.2d 150, 156 (Me.1970), but they must be received by someone, and the money MFX withheld for the setoff was not received by anyone, see Branch Banking & Trust Co. v. Columbian Peanut Co., 649 F.Supp. 1116, 1119 (E.D.N.C.1986) (no proceeds created when buyer set off peanut seed debt against price of peanuts). On the other hand, the money MFX received when it resold the potatoes clearly was proceeds thereof, and if Farm Credit had a continuing security interest in the potatoes, it had a security interest in those proceeds as well.

. The security interest created by the Wath-ens presumably survived the initial sale from the Wathens to NEI because, although Farm Credit obviously consented to that sale, there is no reason to believe that it consented to a sale free and clear of that security interest. See 11 M.R.S.A. § 9-306, U.C.C. cmt. 3 ("If the disposition ... was authorized by the secured party subject to the secured party’s security interest, the transferee will not acquire the collateral free and clear of the security interest.”).

. The definition of buyer in the ordinary course of business in section 1-201(9) has been revised, in ways not relevant here, concurrently with the adoption of Article 9-A as of July 1, 2001. See 11 M.R.S.A. § 1-201(9) (Supp.2001).

. Alternatively, if the court made no implicit finding but simply failed to make findings on the security interest issue at all, any error in so doing was harmless.