Court Opinion

ID: 9594584
Source: CourtListenerOpinion
Date Created: 2023-08-22 00:31:20.537383+00
Date Added: 2024-06-11T17:33:02.493632
License: Public Domain

Dore, J.
(dissenting) — The majority holds that Rainier National Bank's security interest in the "proceeds" of a dairy herd metamorphosed into a security interest in payments received by a dairy farmer from the federal Dairy Termination Program (DTP). The majority's holding is inconsistent with the plain language of RCW 62A.9-306(1), the purpose of the DTP, and results in an unjustified windfall for the Bank. I dissent.
Dairy Termination Program Payments
An understanding of the nature of the DTP is necessary to determine whether the DTP payments fall within the definition of proceeds. The purpose of the DTP is to reduce the quantity of milk marketed for commercial use, thereby *309helping to stabilize milk prices. See Grunzke v. Security State Bank, 68 Bankr. 446, 447 (Bankr. D. Minn. 1987); In re Weyland, 63 Bankr. 854, 857 (Bankr. E.D. Wis. 1986). Under the program, dairy operators enter into a contract with the Commodity Credit Corporation (CCC). A participating dairy operator: (1) must slaughter or export his or her entire herd of dairy cattle, and (2) is prohibited from acquiring any interest in any other dairy cattle or a proprietary interest in any milk production facility for a 5-year period. 7 C.F.R. § 1430.460 and .462 (1988). Should the dairy operator default under the contract, all payments must be returned together with interest. 7 C.F.R. § 1430-.462(a). The dairy operator also faces the potential of substantial penalties. 7 C.F.R. § 1430.460.
The dairy operator's application or "bid" under the program is based on a dollar per hundredweight of milk produced during certain designated periods. The resulting figure determines the total payments to be received for the dairy operator's agreement to sell his or her dairy cattle and stay out of the dairy business for the 5-year period. 7 C.F.R. § 1430.455. The CCC accepted the Bachmanns' bid of $672,914. Under the terms of their contract, the Bach-manns were required to slaughter or export their dairy herd by August 31, 1986.
Initially, I take issue with the implication in the majority that the Bank has been prejudiced by the sale of the dairy herd for "nominal" slaughter value. The majority ignores the fact that the Bank sought and received a temporary restraining order preventing the Bachmanns from slaughtering their herd. The order was dissolved on August 20, 1986, 11 days before the Bachmanns were required to slaughter their herd under the terms of their contract with the CCC. As a direct consequence of the Bank's actions, the Bachmanns were forced to sell their herd at a distressed price. During the period the temporary restraining order was in effect, the Bachmanns turned down several offers to purchase their herd at a price substantially higher than the slaughter price. The Bachmanns' interests were prejudiced *310in that the Bank's actions reduced the amount the Bach-manns could offset against their debt. The Bank caused the farmer's prejudice.
The Bank was not granted an interest in the Bachmanns' DTP payments for they were not mentioned in the security agreement. The majority, citing In re Munger, 495 F.2d 511 (9th Cir. 1974), suggests that the parties nonetheless intended to include the DTP payments in the security agreement because federal entitlement programs are an integral part of modern farming operations. The majority and the court in Munger fail to explain why the parties did not include any description of federal entitlement programs in the security agreement if they intended to include such payment as security.
In construing a security agreement, the court's duty is to determine the parties' intentions at the time of contracting. Eurick v. Pemco Ins. Co., 108 Wn.2d 338, 340, 738 P.2d 251 (1987); 79 C.J.S. Secured Transactions § 49 (Supp. 1974). There is no evidence in this record to even suggest that the parties intended the DTP payments to be collateral subject to the Bank's security interest. In the absence of such evidence, it is unreasonable to hold, as the majority does, that the parties intended to include the DTP payments as collateral.
Due to the Bank's failure to properly draft its security agreement, this court is forced to characterize the DTP payments under the Uniform Commercial Code (U.C.C.). The majority holds that the DTP payments can be classified as proceeds. Proceeds are defined by RCW 62A.9-306(1) as:
whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.
The majority reasons that the DTP is encompassed within the phrase "or other disposition” of the collateral and that the DTP payments are within the common meaning of the word "whatever" is received upon disposition. Majority, at 302-03. Several considerations lead to the inescapable *311conclusion that the majority's expansive view of proceeds is not warranted by the language of RCW 62A.9-306(1) or the facts.
First, the majority's "all-encompassing" interpretation of proceeds does violence to the plain language of RCW 62A.9-306(1). The phrase "other disposition" is not defined in the U.C.C. The majority, apparently content with the bare legal conclusion that the DTP is a "disposition” of the collateral, also fails to define the phrase. The phrase is defined in Weisbart & Co. v. First Nat'l Bank, 568 F.2d 391, 395 (5th Cir. 1978) as follows:
The meaning of [other disposition] may be distilled by applying the canon of statutory construction known as ejusdem, generis. Employment of the doctrine mandates that "other disposition" refer to a transaction of the same general type as a sale or exchange. Therefore, though "other disposition" cannot technically be characterized as a sale or exchange, at the minimum it must meet the threshold test of these two transactions by effecting a transfer of property.
(Footnote omitted.) Accord, 9 R. Anderson, Uniform Commercial Code § 9-306:12 (3d ed. 1985). The phrase "other disposition" and the terms "sale" "exchange" and "collection" are legally synonymous; each refers to a transaction that results in the direct transfer of the collateral.
The majority's holding that the DTP is a "disposition" of the dairy herd mischaracterizes the nature of the program. The DTP is not itself a disposition of the Bank's collateral because the program does not directly transfer the dairy herd. The DTP is a contractual agreement whereby a dairy operator agrees to get out of the milk production business for 5 years. The phrase "other disposition" does not include contract rights between a debtor and a third party.
Here, the Bachmanns granted the Bank a security interest in their dairy herd and the proceeds of the herd. In other words, they pledged the value received from the sale, exchange or disposition of the dairy herd. The transaction that effected a transfer of the dairy herd — the "disposition" *312of the collateral — was the sale of the herd for slaughter. The proceeds — "whatever" is received upon the disposition — was the slaughter price, money which the Bank received. Once the Bank received the slaughter price, it received its security. Simply put, the Bachmanns' agreement to get out of the dairy business creates no collateral and, therefore, no proceeds.
Second, the majority's willingness to distort the concept of proceeds to fit the facts of this case is unnecessary because the U.C.C. contains a general category of collateral that covers government entitlements. Under the U.C.C., a secured party can obtain an interest in "general intangibles" which is defined as "any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments and money." RCW 62A.9-106. This is a general "catch-all" category of collateral that includes contract rights. See 68 Am. Jur. 2d Secured Transactions § 176 (1973). I believe the phrase "general intangibles" fairly characterizes the right of a debtor to receive DTP payments under a contract with the federal government.
Third, in all the cases dealing with the DTP cited by the parties, the courts have refused to extend the concept of proceeds to include DTP payments. Lisbon Bank & Trust Co. v. Commodity Credit Corp., 679 F. Supp. 903, 905 (N.D. Iowa 1987); Bank of North Ark. v. Owens, 76 Bankr. 672, 674 (Bankr. E.D. Ark. 1987); Grunzke, at 449; Weyland, at 859; see also In re Collins, 68 Bankr. 242, 243-44 (Bankr. D. Minn. 1986) (holding that DTP payments are "general intangibles" but not reaching the issue of whether payments are proceeds). These courts correctly reason that DTP payments are the consideration for the dairy operator's promise to get out of the dairy business for 5 years. The payments are calculated and based on factors peculiar to the dairy operator's business skill and are not directly related to the cows themselves. Decisions dealing with the Milk Diversion Program, the program that preceded the DTP, are in accord. See In re Bechtold, 54 Bankr. 318, 320 *313(Bankr. D. Minn. 1985); In re Frasch, 53 Bankr. 89, 90 (Bankr. D.S.D. 1985).
Fourth, the majority's holding is inconsistent with the commercial realities in this case. The Bachmanns could have disposed of their herd in a commercially reasonable manner and gotten out of the dairy business at any time. If the Bachmanns had simply quit the dairy business, the Bank could not have claimed that its rights under the security agreement were prejudiced because the Bachmanns were no longer producing milk. Thus, when the security agreement was executed, the Bank knew that its security interest was limited to the value of the Bachmanns' herd at the time of disposition.
Fifth, the majority's reliance on In re Cupp, 38 Bankr. 953 (Bankr. N.D. Ohio 1984), which involved the Payment-In-Kind program (PIK), is of no help. The cases are in general agreement that PIK payments made to a farmer where the farmer agrees to abandon a planted crop, disaster payments made to supplement a planted crop and subsidy payments to supplement a planted crop are proceeds of the crop under the U.C.C. See, e.g., Munger, at 512-13 (sugar beet subsidy); In re Kruse, 35 Bankr. 958, 965 (Bankr. D. Kan. 1983) (PIK payments are proceeds of planted crops). In these cases, the agricultural entitlements are properly characterized as proceeds because the payments are substitutes or replacements for crops that actually existed. The courts, however, have been inconsistent in their classification of PIK payments where the farmer receives PIK crops in exchange for an agreement to refrain from growing crops. See generally Marsh, Are PIK Payments "Proceeds" Under Article 9?, 7 J. Agric. Tax'n & L. 291, 299-312 (1986); Comment, Bankruptcy, the U.C.C., and the Farmer: PIK Payments — Heads "General Intangibles," Tails "Proceeds" [In re Schmaling 783 F.2d 680 (7th Cir. 1986)], 26 Washburn L.J. 178 (1986). The prevailing view is that PIK payments granted to the farmer for the farmer's agreement to forgo planting a crop do not constitute proceeds, but are contract rights or general intangibles. See, e.g., In re *314Schmaling, 783 F.2d 680, 682-83 (7th Cir. 1986); In re Sunberg, 729 F.2d 561, 562 (8th Cir. 1984); In re George, 85 Bankr. 133, 145 (Bankr. D. Kan. 1988); Kruse, at 966. The courts adopting this position reason that the consideration for the farmer's agreement not to plant future crops could only be a general intangible in the form of the right to receive PIK payments. See Kruse, at 966. In my view, these are the better-reasoned cases.
Moreover, the DTP program is distinguishable from the PIK program. Under the PIK program, the farmer continues in the farming business, but agrees to take crop land out of production for one growing season. In contrast, the DTP eliminates the dairy farmer from production for a 5-year period. The DTP payments are the only consideration for the dairy operator's agreement to get out of the dairy business and are not substitutes or replacements for the Bank's collateral.
Finally, I look to the intent of Congress in enacting the DTP. Although the DTP requires the participating dairy operator to stay out of the dairy business for a 5-year period, the intent of the program is to permanently eliminate the operator from the dairy business. The DTP payments serve two purposes: (1) they induce the farmer to get out and stay out of the dairy business, and (2) they give the operator the resources to transition to a new business or profession. The Bachmanns would be required to return all payments made under the DTP if they were to breach their agreement and get back into the dairy business. The Bank, however, would not be required to return the DTP payments should the Bachmanns breach. Once the DTP payments are in the hands of the Bank, the Bachmanns are denied the resources to seek new employment. The majority's holding, therefore, defeats the DTP's goal of reducing dairy herds. Obviously Congress did not intend this, for if the Bank takes all the program funds supplied by the government, the farmer will have little, if any, incentive to stay out of the dairy business for 5 years.
*315The Bank could have easily avoided potential losses by careful drafting. If the Bank had intended to include DTP payments as collateral it could have included in its security agreement a reference to "government entitlements", "general intangibles" or "contract rights". Since the Bank's security agreement did not contain such language, the Bank cannot claim that the DTP payments are part of its collateral.
Conclusion
The DTP payments were not received upon the "sale, exchange, collection or other disposition" of the Bank's collateral and therefore the payments cannot be classified as "proceeds" under RCW 62A.9-306(1). The Bank, therefore, did not have a security interest in the Bachmanns' DTP payments.
I would affirm the trial court.
Utter, Dolliver, and Goodloe, JJ., concur with Dore, J.
Reconsideration denied September 28, 1988.