The Security National Bank of Sioux City, Iowa, as the duly appointed Personal Representative of the Estate of Roger E. Rand v. Frank H. Welte II, Diane Welte, Matthew Welte, Welte Flats Farms, Inc., BJM, Inc., Western Slopes Farms, Valley Flats Farms, Inc. and Donald Molstad

IN THE COURT OF APPEALS OF IOWA
No. 17-0907
Filed November 21, 2018
THE SECURITY NATIONAL BANK OF SIOUX CITY, IOWA, as the duly
appointed Personal Representative of the Estate of Roger E. Rand,
Plaintiff-Appellant,
vs.
FRANK H. WELTE II, DIANE WELTE, MATTHEW WELTE, WELTE FLATS
FARMS, INC., BJM, INC., WESTERN SLOPES FARMS, VALLEY FLATS
FARMS, INC. and DONALD MOLSTAD,
Defendants-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Woodbury County, John D.
Ackerman, Judge.
The Security National Bank of Sioux City, Iowa appeals the district court’s
ruling in a replevin action. REVERSED.
Daniel L. Hartnett and Marci L. Iseminger of Crary, Huff, Ringgenberg,
Hartnett & Storm, PC, Sioux City, for appellant.
Lance D. Ehmcke and Jacob V. Kline of Heidman Law Firm, PLLC, Sioux
City, for appellees.
Heard by Vogel, P.J., and Vaitheswaran and McDonald, JJ.
2
VOGEL, Presiding Judge.
The Security National Bank of Sioux City, Iowa (SNB), was appointed
personal representative of Roger Rand’s estate and filed a petition for replevin
against multiple defendants. SNB requested immediate possession of farm-
related personal property upon which Rand held a perfected security interest. A
hearing was held, and the district court issued two separate rulings, one of which
is the subject of this appeal. On the merits, we find the district court erred in
determining the two tractors, subject to this appeal, were properly sold within an
implied course of dealing and thereby not subject to Rand’s perfected security
interest.
I. Background Facts and Proceedings
Starting in 2010, Rand made various loans to Frank Welte II and his various
business entities for the purpose of financing Frank’s farming operation. Security
agreements were executed to secure all present and future debts owed to Rand,
giving Rand a blanket security interest in all farm-related property. The security
interests were perfected by the filing of financing statements at the Iowa Secretary
of State’s office.
Rand died on August 29, 2016, and SNB was appointed personal
representative of Rand’s estate. SNB filed a petition for replevin on March 8, 2017,
seeking possession of all secured property. Among the defendants listed in the
petition were Frank; his son, Matthew Welte; and one of Frank’s business entities,
3
BJM, Inc.1 The petition stated the plaintiff was entitled to immediate possession of
all personal property and various intangible property in the possession of the
defendants. The petition also urged the court to set a hearing about the immediate
possession of the collateral.
A hearing was held on May 3 and 4, 2017. On May 9, the court issued a
ruling stating a writ of replevin would be issued for certain property. The ruling
also set a bond and stated the court would issue a second ruling on whether SNB
had a security interest in Matthew’s two tractors, which were previously owned by
Frank/BJM. The court issued a second ruling on May 10, which determined
Matthew acquired the tractors from Frank/BJM free of Rand’s security interest.
The court found an implied course of dealing between Rand and Frank that allowed
Frank/BJM to sell collateral in which Rand had a security interest without
permission from Rand. Also, the court found that since First State Bank had loaned
Matthew the money to purchase the two tractors, it had a purchase-money security
interest in the tractors, which was superior in any interest Rand/SNB may have.
SNB appeals.2
II. Standard of Review
“Replevin actions are tried as ‘ordinary proceedings.’ Our review is for
correction of errors at law.” Ankeny Cmty. Sch. Dist. v. Van Gorp, 501 N.W.2d
1BJM, Inc. is a corporation through which Frank purchases farm equipment. Matthew
was a shareholder in BJM from 2010–2012, signing the promissory notes and security
agreements during that period, both on behalf of BJM as well as in his individual capacity.
2
Given our resolution on the merits, we need not reach SNB’s claim that the hearing was
only intended to be an initial hearing. The court issued a final ruling on the merits, and
this appeal stems from that ruling.
4
506, 507 (Iowa 1993) (internal citations omitted); see also Iowa Code § 643.2(2017); Iowa R. Civ. P. 6.907.
III. Tractors in Matthew Welte’s Possession
A. Rand’s Security Interest
SNB asserts the district court inappropriately determined the tractors in
Matthew’s possession were not subject to Rand’s perfected security interest. In
the May 10, 2017 ruling, the court found “the evidence establishe[d] that there was
[an] implied course of dealing between Mr. Rand and BJM/Frank Welte such that
BJM/Frank Welte had the authority to sell collateral in which Mr. Rand had a
security interest without written permission from Mr. Rand.” However, SNB argues
“[t]he ‘course of dealing’ theory is not meant to absolve a giftee of the obligations
associated with a perfected security interest in property. There was no evidence
presented at the initial hearing that would establish a course of dealing for this type
of transfer,” that is, a gift from father to son for far less than fair market value.
Iowa Code section 554.9315(1)(a) states “a security interest . . . continues
in collateral notwithstanding sale, lease, license, exchange, or other disposition
thereof unless the secured party authorized the disposition free of the security
interest.” Our supreme court has held such authorization may be “implied from a
prior course of dealing between the secured party and the debtor.” C & H Farm
Serv. Co. of Iowa v. Farmers Sav. Bank, 449 N.W.2d 866, 871 (Iowa 1989) (citing
Iowa Code § 554.9306(2) (1981)).3 “A ‘course of dealing’ is a sequence of conduct
3
In 2000, our legislature enacted Iowa Code section 554.9315 as the replacement of Iowa
Code section 554.9306(2). Peoples Tr. & Sav. Bank v. Security Sav. Bank, 815 N.W.2d
744, 761 (Iowa 2012).
5
concerning previous transactions between the parties to a particular transaction
that is fairly to be regarded as establishing a common basis of understanding from
interpreting their expressions and other conduct.” Iowa Code § 554.1303(2).
However,
when the parties’ actions fall outside the “sequence of previous
conduct” there is no “understanding” between the parties authorizing
the transaction. . . . [I]n order for a buyer to take collateral free of a
properly perfected security interest under the “course of dealing”
doctrine . . . , that buyer must present proof of a course of dealing
and show that the purchase involved was within that course of
dealing. While we believe the secured party should bear the risk of
loss when the buyer purchases the collateral in the ordinary course
of dealing, the buyer should bear the risk that the disposition of the
collateral is being made outside the course of dealing in a manner
not impliedly authorized by the secured party.
Larsen v. Warrington, 348 N.W.2d 637, 641 (Iowa Ct. App. 1984);4 see also
Humboldt Tr. & Sav. Bank v. Entler, 349 N.W.2d 778, 781 (Iowa Ct. App. 1984).
The new UCC provision allows a lender to “authorize[] the disposition [of
collateral] free of the security interest,” but when such authorization occurs,
a security interest attaches “to any identifiable proceeds of the collateral.”
The new provision clearly separates a security interest in the collateral,
which is addressed under subsection (a), from a security interest in
identifiable proceeds, which is addressed by subsection (b). The clear
import of the legislative action is that waiver of rights in collateral does not
necessarily mean waiver of rights in the proceeds.
Id. (internal citation omitted). For the purposes of this opinion, we are only concerned with
Iowa Code section 554.9315(1)(a) and the collateral because no proceeds resulted from
the transaction at issue.
4
The Iowa Supreme Court declined to follow Larsen in C & H Farm Service Co., 449
N.W.2d at 874 n.3. The court held “[w]here a third party purchases collateral from a debtor
under [the course of dealing] doctrine—whatever the consideration for the purchase—the
third party is not liable to the secured party for conversion of the collateral. The secured
party has waived its security interest in collateral in the hands of third party purchasers.”
Id. at 873–74. Larsen involved a prior course of dealing where the secured party allowed
the debtor to sell feeder pigs to various livestock dealers for cash and then use the cash
to pay either the secured party or other operating debts. 348 N.W.2d at 642. “The
challenged transaction in [the Larsen] case involved a transfer of the feeder pigs directly
to the feed dealer in partial satisfaction of the feed bill.” Id. Therefore, the challenged
transaction was not akin to the previous transactions because of the different purchaser
as well as the disposition of proceeds. See id. On the contrary, C & H Farm Service Co.
did not involve different types of purchasers and was focused on the fact the secured party
6
When determining whether the disposition of collateral is within the course of
dealing, we focus on whether the sale of the collateral was authorized and not on
the desired disposition of proceeds. Humboldt Tr. & Sav. Bank, 349 N.W.2d at781–82; see also Ottumwa Prod. Credit Ass’n v. Heinhold Hog Mkt., Inc., 340
N.W.2d 801, 803 (Iowa Ct. App. 1983).
According to the security agreements involved here, Frank/BJM may not
“consume, assign or transfer any Collateral without prior written consent of
Secured Party.” Despite this provision, Frank testified he regularly bought and sold
machinery without seeking Rand’s permission.5 He also testified their agreements
were usually verbal and they “didn’t do nothing in writing.” SNB prepared a list of
Frank’s equipment for this proceeding that they believed Rand had a security
interest in, and Frank explained he had sold or traded many items on the list.
Even assuming Frank and Rand had created a course of dealing distinct
from their written agreements, Matthew has not carried his burden to show the
tractors were sold to him “within that course of dealing.” Larsen, 348 N.W.2d at
641. Matthew purchased the tractors, a 2008 John Deere 8430 and a 2008 Case
IH MX335, from Frank/BJM in 2013 when he began his own farming operation.
Matthew acknowledged the only consideration he provided was an agreement to
satisfy two outstanding loans on the tractors. He ultimately paid about $27,000 for
did not always receive the proceeds. 449 N.W.2d at 871–74 (finding the course of dealing
between the secured party and debtor was that the debtor could sell the collateral without
the secured party’s prior written consent and the proceeds could be applied to any purpose
the debtor desires; thus, payment of a debt with the proceeds was not outside the course
of dealing).
5
We also note Frank testified he sought Rand’s permission before selling some real
estate. Rand denied permission shortly before his death, which caused problems for
Frank.
7
the John Deere 8430 and about $28,000 for the Case IH MX335, both payments
made directly to the lending institutions. Prior to the May 3, 2017 hearing, SNB
estimated—and the Weltes did not dispute—the John Deere was worth $116,500
and the Case IH was worth $129,000. That left an estimated equity in the John
Deere of $89,500 and $101,000 in the Case IH. Even if a course of dealing existed,
where Rand allowed Frank the freedom to manage his fleet of farm machinery, a
benevolent sale of tractors from father to son for less than a quarter of their value
would not fall within the scope of the course of dealing. See Humboldt Tr. & Sav.
Bank, 349 N.W.2d at 781–82; Larsen, 348 N.W.2d at 641. Because nothing in the
record indicates Rand consented in any prior course of dealing to allow such
dissipation of secured assets, the district court erred in determining Rand/SNB did
not have a perfected security interest in the two tractors.
B. Priority
In order to “purchase” the tractors from Frank/BJM by paying off the
outstanding loans, Matthew obtained a loan from First State Bank in Danbury,
listing the tractors as collateral. Matthew asserts First State Bank has priority
because it has a purchase-money security interest.6 However, a comment to the
Uniform Commercial Code provides clarity for situations similar to this case:
A owns an item of equipment subject to a perfected security interest
in favor of SP-A. A sells the equipment to B, not in the ordinary
course of business. B acquires its interest subject to SP-A’s security
interest. . . . [I]f B creates a security interest in the equipment in favor
of SP-B, SP-B’s security interest is subordinate to SP-A’s security
interest, even if SP-B filed against B before SP-A filed against A, and
even if SP-B took a purchase-money security interest. Normally, SP-
6
Generally, “a perfected purchase-money security interest in goods other than inventory
or livestock has priority over a conflicting security interest in the same goods.” Iowa Code
§ 554.9324(1).
8
B could have investigated the source of the equipment and
discovered SP-A’s filing before making an advance against the
equipment, whereas SP-A had no reason to search the filings against
someone other than its debtor, A.
U.C.C. § 9-325 cmt. 3 (Am. Law Inst. 2017). In this case, First State Bank had the
opportunity to investigate the ownership and value of the tractors and should have
discovered Rand’s perfected security interest because all of Rand’s security
interests were perfected by the filing of financing statements with the Iowa
Secretary of State’s office. Because Rand had a perfected security interest and
the transaction between Frank/BJM and Matthew was not within any implied
course of dealing, Rand’s perfected security interest in the tractors has priority over
First State Bank’s perfected security interest. See id.
IV. Conclusion
We find, even assuming Frank/BJM and Rand had an implied course of
dealing, Frank’s disposition of the tractors by gifting the equity to Matthew was not
within the prior course of dealing.
REVERSED.