First National Bank & Trust Co. v. Atchison County Auction Co.

10 Kan. App. 2d 382 (1985) 699 P.2d 1032

FIRST NATIONAL BANK AND TRUST COMPANY OF OKLAHOMA CITY, OKLAHOMA, Appellee,
v.
ATCHISON COUNTY AUCTION COMPANY, INC., ATCHISON, KANSAS, Appellant.

No. 56,678

Court of Appeals of Kansas.

Opinion filed May 2, 1985.

Steve R. Fabert, of Fisher, Patterson, Sayler & Smith, of Topeka, for the appellant.

William Hergenreter, of Shaw, Hergenreter & Quarnstrom, of Topeka, for the appellee.

Before FOTH, C.J., SWINEHART and BRISCOE, JJ.

Petition for review denied 237 Kan. 886.

SWINEHART, J.:

Atchison County Auction Company (Atchison Auction) appeals from the judgment of the district court which found it liable to the First National Bank & Trust Company of Oklahoma City (Bank) for the proceeds from an unauthorized sale of seventy-five head of cattle covered by the Bank's perfected security interest.

In September 1981, Dr. Wilbur Hilst, a Topekan, sought financing for the purchase of 1,955 calves to expand his ranching operation. At the time he was negotiating a loan with the Oklahoma Bank, he owned approximately 780 head of cattle, a majority of which were purchased with loans from the First National Bank of Wamego and subject to its perfected security interest. One hundred seventy-eight head of the cattle were purchased from Jim and Russell Winsor on credit, and subject to their security interest which was unperfected at the time the Oklahoma Bank perfected its security interest.

The Oklahoma Bank inspected Hilst's holdings and agreed to grant Hilst a line of credit up to $950,000 for the purchase of the calves. In return they required Hilst sign a security agreement, a financing statement, and a loan agreement granting them a security interest in "all livestock ... now owned or hereinafter acquired" by Hilst. The Oklahoma Bank paid the loans at the Wamego Bank, and its security interest was assigned to the Oklahoma Bank. The financing statement was properly filed with the Shawnee County Register of Deeds on September 28, 1981.

Shortly after the loan was consummated the Bank learned of the Winsor security interest with an outstanding debt of approximately $66,000. An agisters' lien of $16,000 had also been filed by the owners of the pasture in which these cattle were kept. Hilst was instructed by the Oklahoma Bank to clear up the liens on the Winsor cattle with funds other than those he had received from the Bank. The Winsor security interest was finally released in December 1981.

In April or May of 1982 the Oklahoma Bank learned that Hilst had sold seventy-five head of cattle at Atchison Auction on October 24, 1981. Hilst admitted to the Bank in writing that he sold the cattle without the knowledge of the Oklahoma Bank and without forwarding the proceeds of the sale to it.

The Oklahoma Bank then brought action against Atchison Auction, alleging conversion. The trial court found that the Oklahoma Bank had a valid security interest in the cattle, that it had not consented to the sale as required by the security agreement, and that Atchison Auction was liable to the Bank for $20,406.65 with interest at the rate of 10% per annum from October 24, 1981.

On appeal Atchison Auction contends the trial court erred in finding that the Oklahoma Bank had a perfected security interest in the seventy-five head of cattle sold, or, in the alternative, erred in concluding the security interest was not waived by the Oklahoma Bank's consent to the sale.

Initially, Atchison Auction contends that the Oklahoma Bank failed to prove that the cattle sold were cattle covered by the security agreement. The following description of the collateral is found in the security agreement:

"ALL LIVESTOCK, FEED, FEED GRAIN AND FEED COMMODITIES NOW OWNED OR HEREINAFTER ACQUIRED BY THE DEBTOR AND ALL WAREHOUSE RECEIPTS, BANKING ACCOUNTS, DEPOSITS, COMMODITY FUTURES CONTRACTS, MARGIN ACCOUNTS, DOCUMENTS OF TITLE, INSTRUMENTS, CONTRACT RIGHTS, ACCOUNTS RECEIVABLE, GENERAL INTANGIBLES AND OTHER TANGIBLE AND INTANGIBLE PERSONAL PROPERTY RELATING THERETO, ALL INSURANCE POLICIES AND PROCEEDS PAYABLE WITH RESPECT TO ANY OR ALL OF THE FOREGOING, TOGETHER WITH ALL PROCEEDS, PRODUCTS AND INCREASES THEREOF."

The security agreement further included the debtor's covenant that

"Said Goods are now in possession of Debtor, and are or when acquired by Debtor will be located at MAN RANCH; MAN RANCH; and WESTERN FEEDYARD, INC. in Shawnee; Wabaunsee; and Stanton County, State of Kansas." (See Appendix 1, copy of security agreement.)

The description in the financing statement echoes the security agreement description, but contains no reference to the location of the livestock.

Atchison Auction contends that the language of the security agreement covers only those cattle in the stated location, that Hilst had cattle in other counties, and that the Bank failed to show that these cattle were covered by the security agreement. The district court found that the security agreement granted the Bank a security interest in "all livestock" owned by Hilst and that the cattle sold were subject to the security agreement. We agree.

Two provisions of the Uniform Commercial Code speak to the sufficiency of a description of collateral in a security agreement or financing statement.

K.S.A. 84-9-110 provides:

"[F]or purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described."

K.S.A. 84-9-402(1) further provides, in part:

"A statement of collateral in a financing statement is adequate if it generally identifies goods by one or more of the classifications listed in K.S.A. 84-9-109, or generally identifies other collateral by one or more of the following classifications: fixtures, documents, instruments, general intangibles, chattel paper or accounts. A statement of collateral in a financing statement shall not be deemed inadequate solely because it is broader than, or otherwise differs from, that found in the security agreement. A description of the location of the collateral is not necessary to an adequate statement except insofar as a description of location is specifically required by the uniform commercial code."

The Code does not require that a description of livestock include a description of the location of the collateral. Furthermore, we find that the word "livestock," one of the items included within the K.S.A. 84-9-109(3) definition of "farm products," reasonably identified the covered collateral and was sufficient to create a security interest in all livestock owned by Hilst.

The debtor's covenant to keep the collateral at a specific location is not part of the language granting the security interest, but merely a promise on the part of the debtor to restrict the physical location of his livestock. As such it does not act as a limitation on the grant of the security interest. Cf. In re Little Brick Shirthouse, Inc., 347 F. Supp. 827 (N.D. Ill. 1972).

Even if the covenant could be read as part of the language granting the security interest, a review of case law in other jurisdictions reveals that in a majority of cases where a description of the location of the collateral is not required by the code, inclusion of a location in the description does not limit the security interest unless the language of the agreement is unambiguous. See, e.g., Matter of California Pump & Mfg. Co., Inc., 588 F.2d 717 (9th Cir.1978); Matter of Metzler, 405 F. Supp. 622 (N.D. Ala. 1975); In re Lee, 14 Bankr. 804 (Bankr. E.D. Tenn. 1981); Cf. First State Bank of Nora Springs v. Waychus, 183 N.W.2d 728 (Iowa 1971).

Here there was ambiguity in the conflicting descriptions, and the trial judge correctly allowed parol evidence to determine the intent of the parties. The testimony of the parties unequivocally showed that the Bank was shown all of Hilst's cattle, including those kept in counties other than those listed when entering into the agreement, and that both parties clearly intended and understood that the security agreement would cover all of Hilst's livestock. Under these circumstances the intent of the parties governs, and the covenant of the debtor will not serve to limit the extent of the security interest. The trial court did not err in finding the cattle sold were owned by Hilst and subject to the Bank's security interest.

Alternatively, Atchison Auction argues that the Bank consented to the sale, waiving its security interest in the cattle in question. This argument, too, must fail.

The general rule of commercial law is that a buyer in the ordinary course of business takes free of a security interest created by his seller. K.S.A. 84-9-307(1). However an exception to the general rule occurs when the buyer is "a person buying farm products from a person engaged in farming operations." K.S.A. 84-9-307(1). Livestock is included within the definition of farm products, and the parties do not dispute that Hilst was a person engaged in farming operations. K.S.A. 84-9-109(3). This exception permits a secured creditor to reach collateral in the hands of a good faith purchaser unless consent to the sale was given pursuant to K.S.A. 84-9-306(2), which provides:

"Except where this article 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, and also continues in any identifiable proceeds including collections received by the debtor."

Sale may be authorized by the secured party "in the security agreement or otherwise." K.S.A. 84-9-306(2). In North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., 223 Kan. 689, 577 P.2d 35 (1978), the Kansas Supreme Court recognized that nothing in the Code prevents a secured party from attaching conditions or limitations to its consent to sale of collateral by a debtor, and that an unauthorized sale in violation of the conditions would not defeat the security interest. The security agreement in this case required written consent of the Bank before sale of the collateral. The loan agreement further provided that all checks from sale of the collateral be made payable solely to the Bank or jointly payable to Hilst and the Bank. Testimony showed that the Bank waived the requirement of written consent prior to sale, but required that Hilst discuss any proposed sale with them prior to the sale. Although the ultimate decision to sell rested with Hilst, oral consultation of the sale was required.

The record clearly reveals Hilst knew he had an obligation to consult with the Bank prior to any sale, and nothing in the record indicates the condition was ever waived. Furthermore, although Bill Berry, the Bank's loan officer, testified that Hilst should have known to forward a check made payable solely to him to the Bank to be applied on the loan, there was no evidence to indicate Hilst was authorized to have checks from cattle sales made solely to him.

The unauthorized sales in Manhattan on October 23 and in Atchison on October 24 were the first sales after the agreement with the Bank was signed, and in each instance Hilst failed to notify the Bank of the proposed sale and kept the proceeds. The Bank had no knowledge of the sales, and no course of dealing had been established between the parties to indicate the Bank approved and would accept proceeds checks made payable solely to Hilst. In fact, Hilst's own testimony reveals just the opposite:

"Q. Now, did Bill Berry ever tell you, Dr. Hilst, you can go to the sale barn or anyplace and sell the collateral and have the check made payable to you only; did he ever tell you that?

"A. Not to my recollection.

"Q. Did he ever tell you that you could take the cattle you'd mortgaged to the bank, take them to a sale barn and sell them and keep the money?

"A. I can only think of one instance where this really came up, and that was at Christmas time when the ceiling on the loan limit had been reached and there was a question of whether that could be raised or not, and we had a bunch of stray cattle left that were too large to keep and needed to be sold, and I asked him if it was okay to sell them locally and pay some of the feed bills, and he said yes."

It is clear Hilst knew the condition had not been waived by the fact he later explicitly sought permission to have the condition waived for a specific purpose.

Finally, we cannot find that the Bank's instruction to Hilst to clear up the liens on the Winsor cattle constituted an explicit waiver of the conditions. Hilst was specifically instructed to clear up the liens with funds other than those connected with his Oklahoma Bank loan and, although several alternatives were discussed, the sale of cattle was not among them. Sufficient evidence supports the trial court's conclusion that the conditions to sale were neither explicitly nor implicitly waived in this case.

This case differs from those cases in which the court has found an explicit waiver of the condition. In North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co., evidence showed that a bank officer told the debtor that he could sell cattle providing he had the check made jointly or applied the proceeds to the loan. 223 Kan. at 697. A similar instruction was found to defeat the security interest in the recent case of Peoples Nat'l Bank & Trust v. Excel Corp., 236 Kan. 687, 695 P.2d 444 (1985). Again in North Cent. Kan. Prod. Cred. Ass'n v. Boese, 2 Kan. App. 2d 231, 577 P.2d 824 (1978), an instruction to mail or deliver a check for the proceeds was deemed tantamount to express consent that the debtor receive checks in his own name since he could not cash a jointly payable check. When the Production Credit Association later required that all checks be made jointly payable, the court concluded the security interest in the collateral was maintained. 2 Kan. App.2d at 234-35.

We cannot find that the trial court erred in concluding the conditions to sale were not waived, given the facts of this case. Therefore, the sales were unauthorized and the Bank's security interest in the cattle continued.

If Hilst was not authorized to sell the cattle, Atchison Auction, acting as his agent, also had no authority to sell the cattle. A livestock auctioneer who unauthorizedly sells property subject to a third party's security interest is liable in conversion to that third party even if the auctioneer has no knowledge of the security interest. United States v. Burnette-Carter Co., 575 F.2d 587, 588 (6th Cir.1978). The common-law rules of a factor's liability were reiterated by the Kansas Supreme Court in DeVore v. McClure Livestock Commission Co., Inc., 207 Kan. 499, 503-04, 485 P.2d 1013 (1971), where the court said:

"In analyzing the rights of the appealing parties, we start with the common law rule that a factor or commission merchant who receives property from his principal, sells it under the latter's instructions and pays him the proceeds of the sale, is guilty of a conversion if his principal had no title thereto or right to sell the property, and generally the factor may not escape liability to the true owner for the value of the property by asserting he acted in good faith and in ignorance of his principal's want of title (32 Am.Jur.2d, Factors and Commission Merchants, § 45; 35 C.J.S., Factors, § 57b). The basis for the factor's liability if he assists in a conversion, even though innocent, is the fact he stands in the shoes of his principal (Birmingham v. Rice Bros., 238 Iowa 410, 26 N.W.2d 39, 2 A.L.R. 2d 1108, cert. den. 332 U.S. 768, 92 L.ed. 353, 68 S. Ct. 79, reh. den. 332 U.S. 820, 92 L.ed. 397, 68 S. Ct. 151)."

Under these common-law principles Atchison Auction stands in the shoes of Hilst. Since Hilst was unauthorized to sell the cattle, the auction company is liable for conversion of the proceeds from the sale.

The trial court is affirmed.