Court Opinion

ID: 7124521
Source: CourtListenerOpinion
Date Created: 2022-07-24 13:00:32.317431+00
Date Added: 2024-06-11T16:14:13.569382
License: Public Domain

Green, J.,
dissenting:
Barkley Clark’s hypothesis, from his treatise entitled The Law of Secured Transactions Under the Uniform Commercial Code (rev. ed. 1994) which is cited by the majority in support of their position, is factually distinguishable from the present case. Clark specifically states in his hypothesis that the wheat was not delivered to the elevator. Clark notes: “After the wheat is harvested, but before delivery to the elevator, Farmer goes into default on his Country Bank loan.” (Emphasis added.) § 8.05. Clark also states in his hypothesis that the “Farmer still had rights in the collateral at the time the security interest was granted and before delivery. . . .” (Emphasis added.) § 8.05. Clearly, the nondelivery of the wheat to the elevator was a key element in Clark’s hypothesis. Unlike Clark’s hypothesis, the farmer in the present case did deliver the grain crop to the elevator. This factual difference between Clark’s hypothesis and the present case is significant.
Once DeBruce took delivery of the com in which Ag Services had a security interest and gave Shore its promise to pay, DeBruce became an account debtor and Ag Services was the assignee of the account by virtue of its security agreement and by operation of K.S.A. 84-9-306. K.S.A. 84-9-306(2) gives a secured party an automatic right to proceeds from the disposition of collateral, unless otherwise agreed.
*588Ag Services’ claim to the proceeds is based on the forward contract between DeBruce and Shore. For example, the notice that Ag Services sent to DeBruce under the Federal Food Security Act, 7 U.SC. 1631 (1994), stated that DeBruce had a “payment obligation” to issue a check in the full amount of the “sale proceeds” jointly in the names of Ag Services and Shore. Furthermore, the parties’ stipulated that Ag Services was claiming the proceeds under the forward contract.
The stipulation stated:
“That on December 20,1995, Eugene Knoploh, credit manager of Ag Services forwarded a letter to Mike Bernard reminding DeBruce of its secured interest in the Contract proceeds and demanded payment of the proceeds from the sale of 8,288 bushels of com delivered pursuant to the Contract at a price of $2.73 1/2 per bushel. . . .”
Under K.S.A. 84-9-318(l)(a), the rights of the assignee are subject to all the terms of the contract between the account debtor and the assignor, including any claim or defense arising from it, unless the account debtor has agreed not to raise its claim or defense. For example, an assignee under K.S.A. 84-9-206 could insist that a waiver-of-defenses clause be added to the sales contract. If the account debtor agrees to such a clause, the account debtor waives its right to raise these defenses against the assignee. No such agreement existed in this case.
Because Ag Services’ claim to the proceeds is based on the forward contract, DeBruce is entitled to raise any claims or defenses against Ag Services that it could raise under its contract with Shore. See K.S.A. 84-9-318(l)(a). First, the parties stipulated that Shore told DeBruce that “it (Shore) would default on delivery of the remaining 21,711.96 bushels of com as required by the Contract.” Second, the parties stipulated “[t]hat Shore Ltd. never delivered the balance of the grain and was in default under the terms of the Contract.” Third, the forward contract gave DeBruce the right to purchase corn on the open market to make up for the amount of corn Shore failed to deliver. In fact, DeBruce and Ag Services stipulated
“[t]hat pursuant to the Contract, upon default in the delivery of the contracted for grain, DeBruce had the contractual right to buy in com in the open market *589for the account of Shore Ltd. to cover the undelivered grain and to set off the additional costs against the proceeds due Shore Ltd. for grain delivered.”
Because DeBruce’s claims and defenses arise from the forward contract and not from Ag Services’ notice, K.S.A. 84-9-318(l)(b) is not applicable. The trial court relied on First Nat’l Bank & Tr. v. Miami Co. Co-op Ass’n, 257 Kan. 989, 897 P.2d 144 (1995), for its holding that Ag Services’ security interest is superior to “the right of setoff that exists between DeBruce Grain, Inc., and Shore Limited.” Nevertheless, the Miami County case is distinguishable from the present case. First, the defenses under K.S.A. 84-9-318 were never raised in the proceeding. Second, if the co-op had raised a defense, K.S.A. 84-9-318(l)(b) would have controlled. Under this subsection, the co-op’s defense would not have prevailed because the defense arose out of a pre-existing debt obligation which was unrelated to the current sale of grain pledged to the secured creditor. No evidence was presented that the co-op’s claim defense arose before the secured creditor gave notice of its security interest to the co-op. On the other hand, DeBruce’s defense and claim arose out of the forward contract and were governed by K.S.A. 84-9-318(l)(a).
Although not mentioned by DeBruce, DeBruce should also prevail under K.S.A. 84-2-712(2) and K.S.A. 84-2-717. K.S.A. 84-2-712(2) allows a buyer to recover the difference between the cost of cover and the contract price following a seller’s breach. K.S.A. 84-2-717 permits a buyer to deduct all or any part of the damages resulting from any breach of the contract from any part of the unpaid purchase price after notifying the seller of its intention to do so. DeBruce sent a letter to Randy Shore stating DeBruce’s intention to cover the defaulted portion of the corn contract. No formality of the notice is required and any language which reasonably indicates the buyer’s reason for withholding its payment is sufficient. As a result, DeBruce’s notice of its intention to cover the defaulted portion of the com contract satisfies this requirement. See Southern Concrete Products Co., v. Martin, 126 Ga. App. 536, 191 S.E.2d 314 (1972) (notice requirement was satisfied by buyer’s complaint about inferior quality of the delivered goods); *590and Puritan Manufacturing, Inc., v. I Klayman & Company, 379 F. Supp. 1306, 1313 (E.D. Pa. 1974) (notice requirement was met by buyer’s letter of complaint).
See also Matter of McDonald, 224 Bankr. 862 (Bankr. S.D. Ga. 1998) (where a Chapter 12 debtor-farmer breached his contract by delivering to market only 106 of the 300 bales of cotton contracted for, buyer was entitled to recoup its cover damages from contract price despite security interest of bank that had financed the crop).
In summary, the rights of the assignee, Ag Services, are subject to the claims that the account debtor, DeBruce, could have asserted against the assignor, Shore. DeBruce suffered a $22,667.68 loss because Shore failed to deliver the remaining 21,711.96 bushels of corn as required by the forward contract. Requiring DeBruce to pay $22,667.68 and to lose 22,667.68 in the same transaction does not seem right. Because DeBruce paid Ag Services for the difference between the cost of com covered and the value of the corn delivered, Ag Services has received the amount it was entitled to by reason of its security intérest in the com. As a result, I would reverse.