Court Opinion

ID: 9623019
Source: CourtListenerOpinion
Date Created: 2023-08-22 06:26:44.528958+00
Date Added: 2024-06-11T09:43:14.858117
License: Public Domain

McFADDEN, Chief Justice,
specially concurring.
I concur with the reasoning and result contained in the majority opinion. However, the dissenting opinion raises several arguments concerning the assumptions underlying the majority opinion. While I do not agree with the position of the dissent, I believe its arguments require additional discussion as set forth in this concurring opinion.
The majority opinion assumes that the Whitworths have a valid security interest in the after-acquired cattle of the Cammacks, including those purchased from the Kruegers. The thrust of the opinion is the question of whether the Krueger lease constituted a security interest so as to require perfection by filing under the terms of the Uniform Commercial Code, Article Nine. The majority concludes that the lease is a security interest. This conclusion is sound and I concur, as does the dissent. The majority then assumes that the Kruegers failed to perfect that interest by filing, and that their interest is junior to the Whitworths’. The dissent attacks the two assumptions embodied in the majority opinion: that the Whitworths have a valid security interest in after-acquired cattle (Parts I and II of the dissent), and that the Krueger interest is unperfected (Part III of the dissent).
I. IDENTIFICATION OF COLLATERAL IN THE WHITWORTH AGREEMENT: WAS A VALID “AFTER ACQUIRED” SECURITY INTEREST CREATED?

A. Summary of Dissent Arguments

 In Parts I and II, the dissent objects to the majority opinion’s assumption that the Whitworth agreement created a valid security interest in cattle subsequently acquired by the Cammacks, i. e. the cattle purchased from the Kruegers. The dissent first argues that the description of the collateral in the Whitworth agreement was insufficient to create a valid security interest, as it does not reasonably identify the collateral. I.C. § 28-9-110; United States v. Mid-State Sales Co., 336 F.Supp. 1099 (D.Neb.1971). The dissent then turns to the “after-acquired” aspect of the Whitworth agreement. The language contained in that agreement reads:
“Buyers agree to grant t [sic] Sellers a lien upon said property [cattle] and upon the replacements therefore * * * ”
This lien upon “replacements” follows an agreement by buyers to maintain a herd size at least equivalent to the number of cattle sold and secured in the agreement. The dissent argues that the use of the term “replacements” is not adequate to create an “after-acquired” security interest. Creation of an after-acquired right requires a “clear expression” of the intention, “manifest from the language of the instrument.” Poage v. Co-operative Pub. Co., 57 Idaho *71561, 66 P.2d 1119 (1937). A right in after-acquired assets is not to be inferred. In Re Middle Atlantic Stud Welding Co., 503 F.2d 1133 (3d Cir. 1974). The word “replacement” has no legal significance, and does not create an after-acquired right.
The majority opinion does not discuss these issues. However, I believe the arguments can and should be answered, in reaching the result found in the majority opinion.

B. An Overview of Livestock Financing, and the Whitworth Agreement

One of the avowed purposes of the Uniform Commercial Code is “to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties.” (Emphasis added.) I.C. § 28-l-102(2)(b). Thus, consideration of the place of security interests in after-acquired livestock in the farm industry is proper in construing the Whitworth agreement.
Security interest financing of livestock herds involves special problems resulting from the unique nature of the collateral involved:
“Dairy cattle, beef cattle, hogs and sheep are all valuable assets available as collateral for the farm loan. Except for the dairy herd and perhaps sheep, it is the kind of collateral which is held for sale. Even the dairy herd is a constantly changing asset. Poor producers are culled and replaced. New acquisitions result from purchases or birth. Male increase is sold to meat packers while female increase will likely be retained in the herd.” (Emphasis added.) Coates, Farm Secured Transactions Under the UCC, Vol. IB, Bender’s UCC Service (1976).
The nature of the assets requires special considerations in managing the collateral.
“From an economic standpoint, the secured party should encourage replacements in the dairy herd. Anything that improves the condition of the herd increases the income of the farmer. When a cow is diseased or reaches an age when it no longer is profitable to keep her or if the farmer wants to increase butterfat content, changes are in order. These decisions can best be made by the farmer.” Coates, supra.
Thus, the security interest arrangement must allow the collateral to change as farming exigencies demand, while protecting the secured party. The economics of financing livestock then makes the after-acquired security interest critical. As the Wisconsin Court noted:
“Prior to the code, it was almost impossible for a lender to maintain in farm financing a valid security on a herd of cattle which was being sold or renewed. * * * In order to give more flexibility to such financing, the code freed the debtor from strict accountability to the secured creditor for the property secured * * * and recognized the validity of a secured interest in after-acquired property. Thus a debtor is now able to commingle his property and use it to his best interest, and the acquiescence of the secured creditor under an after acquired clause in such a program by the debtor does not invalidate the security interest of the creditor.” Burlington Nat’l Bank v. Strauss, 50 Wis.2d 270, 184 N.W.2d 122, 124 (1971).
The scheme envisioned by the Whitworth contract seems to coincide exactly with that described by the Wisconsin court. Taking the Whitworth contract as a whole, the following picture emerges. The Whitworths desired to sell a herd of cattle to the Cammacks, and agreed to carry the financing. In extending credit to the Cammacks, the Whitworths sought to secure the debt by placing a lien over the Cammack herd, while allowing the Cammacks to manage the herd, and buy and sell cattle as necessary, without jeopardizing the security interest. To this end, the agreement provides that
“Buyers shall have the right to sell cows that cease to be productive or to otherwise cull the herd; but they shall at all times retain a sufficient number of replacement heifers, or otherwise provide *72satisfactory replacements, to maintain a herd not smaller than that being now purchased by said Buyers, hereunder.”
The Whitworths then assured the safety of their security interest by placing a lien on those cows brought in to maintain the herd size: “Buyers agree to grant to sellers a lien upon said property and upon the replacements therefore * * * ” From a consideration of the entire instrument, it is apparent that the Whitworth agreement embraces the optimal farm financing practice, and exploits the code’s unique advantage for livestock financing:
“The use of livestock as collateral has been improved by the Code. By the use of an after-acquired clause, the entire herd can be covered without specific identification of each animal.” Coates, supra.

C. Adequacy of Collateral Description

The dissent cites the Mid-State Sales case for the proposition that the collateral was inadequately described. In that case, the language granting the alleged after-acquired right reads “fifty-one head of Holstein Heifers with increase.” That language is compared to the Whitworth document which reads “84 Holstein Cows and 14 Holstein Heifers, 1 to 2lk years of age [and replacements].” The court in Mid-State does not find the language so inexact as to void the agreement, however. It only finds it questionable enough so as to require a more exacting burden of proof. Further, the Mid-State decision is questionable authority. Generally, floating lien situations should not require great specificity in description:
“To date, the relatively few courts which have had occasion to pass on the sufficiency of description in a financing statement, have, for the most part, been willing to follow the admonition of the Code drafters. Adverting to the functional approach taken by the code, they have generally permitted the use of broad indefinite descriptions. * * * [Floating liens and after-acquired property aspects of inventory and accounts receivable financing make mandatory the use and judicial validation of very broad descriptions * * * ” Comment, 48 Denver L.J. 146 (1971).
Livestock descriptions of a general nature are usually held valid:
“The problem of sufficient description of livestock as collateral has been the subject of litigation, but the courts have been lenient towards secured creditors and have found sufficient description such as ‘all livestock’ reasoning that creditors have been put on notice of a security interest.” Miller, Farm Collateral under the UCC, 20 S.Dak.L.Rev. 514, 523 (1975).
Requiring specific identification of collateral animals would subvert the advantage of livestock financing allowed by after-acquired finance clauses by limiting the ability of the debtor to alter his herd. Coates, supra. Thus, general descriptions are not uncommon. In re Malzac, 14 UCC Rep. 1223 (D.C.Vt.1974); Barth Bros. v. Billings, 17 UCC Rep. 237, 68 Wis.2d 673, 227 N.W.2d 673 (1975).
Some specificity is inferable from the agreement. The Whitworths intended to secure all cattle up to the number of the herd sold. Thus, the intended security was based on all cattle purchased to bring the herd up to the required size, i. e. replacements for any lost cattle which reduced the herd size below the required number.

D. “Replacement’’ as After-Acquired

The dissent next argues that the use of the term “replacement” is not adequate to create an after-acquired right. As a general rule, creation of an after-acquired right does not demand the use of any special language.
“It is not necessary that the security agreement or the financing statement use the words ‘after-acquired property.’ Where a reasonable man, looking at the description of the collateral, would recognize that it was intended to extend to replacements or additions, the security interest will have that effect.” (Emphasis added.) Anderson U.C.C., Vol. 4, p. 181, § 9-204:9 (1971).
*73The word “replacement” appears to be commonly used in the creation of livestock after-acquired rights. See, United States v. Pete Brown Enterprises, 9 UCC Rep. 734, 328 F.Supp. 600 (N.D.Miss.1971); Erb v. Stoner, 1 UCC Rep. 469 (Pa.Ct.Comm.Pl.1959); United States v. Pirnie, 339 F.Supp. 702 (D.C.Neb.1972); Coates, supra. These cases use the word “replacement” in conjunction with other after-acquired language and are not cited for the proposition that the word “replacement” alone is sufficient to create an after-acquired right. Rather, they show that the word does have a meaning commonly known to create one of a number of different after-acquired rights. As is noted below, the word limits the after-acquired right to only certain after-acquired cattle. In this sense, it means cattle brought in to maintain herd size, as opposed to additions. To construe “replacement” to mean a specific cow brought in to take the stall once occupied by “Old Bessie” does not appear to be a reasonable construction in view of common farm livestock practices; cattle farmers do not buy 50 head of new cattle to replace lost friends. “Replacement” as it is used in the livestock context more probably refers to stock acquired to maintain herd size when other stock is lost from the herd. This is exactly what the Whitworth agreement seeks to do: maintain a herd size adequate to secure the debt.
In this sense, it is important to realize that “after-acquired” is not freely interchangeable with “replacement.” Had the term “after-acquired” been used, it would have included all subsequently purchased cattle, ad inf initem. The Whitworths desired only to assume a security interest in the specified herd size. Thus, the use of “replacement” was more appropriate. To argue, as the dissent does, that no after-acquired right was intended because “it would have been a simple matter to have used ‘after-acquired’ language” is clearly erroneous.
Nor does the notion of replacement require some specific intent to replace lost cattle; the effect of replacement is adequate to subject the collateral to this after-acquired security interest. To require the debtor to intend to replenish his herd would be to allow the debtor to decimate the floating lien by selling all the secured cattle and then purchasing others without “intending” a replacement. Thus, the mere happening of a replacement subjects the collateral to the after-acquired clause; it is not necessary that there be evidence that the Cammacks specifically sought to replace the Whitworth cattle with those acquired from the Kruegers.
The dissent cites the Poage case for the proposition that the intent to create an after-acquired right must be manifest from the instrument language. However, that case involved a document where the clause was clear, and the court merely endorsed the validity of the after-acquired clause. The case in no way attempts to create a minimum standard, as the dissent attempts to use the case.
The dissent further cites Middle Atlantic Stud and concludes that creation of an interest in after-acquired property must be explicit. In that case, the agreement was for a security interest in “all receivables.” The question was whether this included after-acquired receivables, or only present receivables. In refusing to imply an after-acquired right, the court based their decision on the unique practices of accounts receivable financing. Thus, the case is distinguishable. Further, as Seitz, C. J., notes in his dissent in that case, the outcome is premised on pre-code hostility to floating liens which is inappropriate.
II. FILING OF THE KRUEGER LEASE AS PERFECTION OF THEIR SECURITY INTEREST.
Assuming, as we do here, that the Krueger lease is a security agreement, then it is clearly a purchase money security agreement. I.C. § 28-9-107. As such, it would have priority over the Whitworth after-acquired right if it was perfected within 10 days after the date of its attachment, I.C. § 28-9-312(4). A copy of the lease was filed with the county recorder within that time. In Part III, the dissent argues that *74the lease as written was sufficient to constitute a financing statement, and when it was filed, the Krueger interest perfected, thus giving them a priority over the Whit-worth security interest.
Perfection by filing is designed to give inquiry notice of existing security interests. A potential creditor is charged with the task of going to the recorder’s office to check whether the collateral is already encumbered. As the purpose of the financing statement is to put the creditor on inquiry notice, sufficient information must be contained to direct him to the first creditor so that he may determine the status of the collateral. Anderson, UCC, Vol. 4, p. 470 (1971). Filing of the lease could only be adequate if it accomplishes this goal.
The dissent assumes that when a lease is filed it is placed in the recorder’s office such that a person searching for security interests could find it. However, the lease was filed pursuant to I.C. § 25-2001, and would be filed similarly to a chattel mortgage. That lease would not be indexed with financing statements. Indexing schemes are defined in I.C. § 31-2404. That section requires two indexes of leases, I.C. § 31-2404(8) and (9), and another index for UCC financing statements, I.C. § 31-2404(27). Thus, it can be assumed that the lease was not filed with financing statements, and a creditor looking for security interests by checking financing statements would not find the lease. At any rate, if a perfected interest was to be implied from the lease, it would be up to the Kruegers to prove that the lease was filed with the security interests. Thus, even if we do not assume that it was filed with the leases, it would still be necessary to find evidence that the lease was properly filed as an Article Nine security interest. There is no such evidence in the record.
We acknowledge that I.C. § 28-9 — 402(1) provides that a security agreement may be filed instead of a financing agreement. The dissent argues that this section validates the filing of the lease as perfecting the interest. This position misses the point. It is not what was filed that is objectionable; all else being equal, filing of the lease would be effective (subject to the address exclusion discussed below). What is inadequate is the where of the filing. We assume that when the lease was filed as a lease, it was indexed as a lease and to assume otherwise is unreasonable. Thus, it would not have been indexed in the Article Nine index provided for in I.C. § 28-9 — 403 and I.C. § 31-2404(27). The goal of the code is to allow an easy access to filed security interests. Reasonable diligence does not require a creditor to search through the lease indexes to find security interests. The lease, as a security interest, was presumptively filed in the wrong place. The instances in which the code excuses an improper place of filing are set forth in I.C. § 28-9 — 401(2). Two such allowances are noted and neither is applicable here.
Further, the code requires the address of the creditor and debtor, and the lease does not include their addresses. The address requirement is strictly construed, because the potential creditor must be able to know where to go to get further information. Thus, inclusion of only a city or county is not adequate; a mailing address is needed. See, In re Lindley, 12 UCC Rep. 1031 (D.C.Me.Ref.1969); Mid-American Dairymen, Inc. v. Newman Grove Cooperative Creamery Co., 191 Neb. 74, 214 N.W.2d 18 (1974); Burlington Nat’l Bank v. Strauss, 50 Wis.2d 270, 184 N.W.2d 122 (1971). As Anderson, supra comments:
“While only substantial compliance with the statutory form of financing statement is required, there is no substantial compliance if the statement omits the debtor’s address. * * * A financing statement is insufficient when it does not contain the address of the creditor.
The dissent cites Rooney v. Mason, 394 F.2d 250 (10th Cir. 1968), for the proposition that omission of addresses from a financing statement is not fatal to the perfection. However, that case explicitly noted that the addresses were “readily attainable and known by virtually all of the credi*75tors.” 394 F.2d 250, 253. It is not evident from the record that the Krueger or Cam-mack addresses were similarly known. Filing of the lease is not adequate to accomplish the notice required by the perfection sections of the code. It would be the Kruegers who are asserting a perfected prior security interest. The burden was upon them to demonstrate adequacy of the filing, and they failed to do so.
III. “INTENDED RESULTS” VIS-AVIS JUSTICE.
Running throughout the dissent, and especially apparent as the fourth part of that opinion, is the notion that the result reached in the majority opinion is somehow less than just, and is not the result intended by the code, the parties, or Shakespeare (we can be certain the Bard did not write the lines included in the dissent; perhaps it was Bacon?) Couched in terms of “penalizing” the Kruegers for “not filing a financial statement,” the dissent seems to be chastizing the majority opinion for taking the “Krueger’s cows” away from them. Cases cited in that section chide the “illogical” results of applying the code without reference to special circumstances of each case. The dissent attempts to distinguish the simple dairy farmer as “seller” or “buyer” from “lenders and borrowers,” whom apparently are something different than simple farmers.
These arguments are overly simple. First, it is incorrect to characterize the cows as the “Krueger’s cows.” The lease giving the cows to the Cammacks, we conclude, was in actuality a disguised installment sales contract. After that sale, the cows no longer belonged to the Kruegers, they belonged to the Cammacks. The Kruegers did not have any special rights to the cows other than the security interest. Either Cammack creditor had an equal right to satisfy their debt by access to the Cammack cattle; the question is, given a limited number of cows, who wins? The provisions of the code required that the Kruegers simply check the county recorder to know whether the debt was secure. If not they had only to file a financing statement within 10 days.
Most importantly, it is apparent from the common usage of after-acquired clauses in livestock'financing, that the Kruegers, as dairy farmers, should have known that the cattle they sold might be encumbered. A person familiar with cattle or livestock sales should know that any cattle sold might be already attached as collateral, under a common after-acquired clause.
The dissent contends that the drafters of the code never intended for an unfiled purchase money security interest to lose to an after-acquired interest, and that filing in such instances is unimportant as the secured party prior to the purchase money interest is not prejudiced as is a subsequent creditor. This assertion is contrary to Official Comments to the U.C.C. Section 9-312, Comment 3, discusses this outcome and policy behind it at length. See also, White & Summers, Uniform Commercial Code, p. 918 (1972). The after-acquired creditor, who loses his otherwise valid interest only because the new creditor is a purchase money financer, is nonetheless entitled to notice of his lost interest so that he does not rely on it. In fact, in some after-acquired versus purchase money conflicts, the new creditor must give direct notice to the old to have priority.
This case does not present an instance of manifest injustice for the Kruegers. It presents an instance where one or the other of the Cammacks creditors must lose. The Whitworths fairly and honestly attempted to protect their debt by securing it upon cattle (up to the herd size) which the Cam-macks might purchase to replace lost members of their herd. It is as unjust to deny them the cattle upon which they meant to secure their debt, as it is to “penalize” the Kruegers for failing to file. The Kruegers should have known the danger of possible after-acquired clauses, should have checked to see whether a security interest in Cam-mack cattle was on file, and should have perfected their own interest. Given an equal right, justice-wise, to the Cammack cattle as between the Whitworths and the *76Kruegers, and given that the Kruegers could have prevailed had they exercised the minimal diligence required by the Code, there is no injustice in holding them to the code’s system of priorities. See, North Platte State Bank v. Production Credit Assoc. of North Platte, 189 Neb. 44, 200 N.W.2d 1 (1972), where a purchase money interest, in cattle, not perfected in 10 days, was defeated by a filed interest under an after-acquired clause.
The dissent prefaces its position on the statement that the result reached by the majority “would have been intolerable under the pre-Code law of Idaho, that it is palpably unjust, and that was not even within the contemplation of the winning party; it is a decision that finds no support in the Code itself.” Hopefully, this special concurrence answers these objections. That the result would have been different under pre-Code law is irrelevant; we must deal with the legislatively established scheme of commercial law reflected in the adoption of the U.C.C. The injustice occurs only if the Kruegers have a greater right to the collateral than the other secured party, and no such special right is apparent. The assertion that the result was not contemplated by the Whitworths is puzzling; this thought is not indicated anywhere in the record. Most importantly, the result is reflected in the Code, and I believe appropriately so.
DONALDSON, J., and SCOGGIN, District: Judge, concur.