Mid-States Sales Co. v. Mountain Empire Dairymen's Ass'n
Docket: 85CAl261
Court: Colorado Court of Appeals; June 18, 1987; Colorado; State Appellate Court
Ronald L. Lewis, a dairyman and member of the Mountain Empire Dairymen's Association (MEDA), was represented by MEDA as his exclusive agent for marketing dairy products. Mid-States Sales Co. Inc. (Mid-States), a secured creditor of Lewis, filed a lawsuit against MEDA, claiming it improperly disposed of Lewis' milk proceeds, infringing upon Mid-States' secured rights. The trial court ruled that MEDA was not liable for conversion, despite Mid-States retaining its security interest in the milk proceeds. Both parties appealed.
The Colorado Court of Appeals reversed the trial court's judgment, finding MEDA liable to Mid-States for two specific amounts: one that MEDA deducted to offset the cost of a milk storage tank sold to Lewis and another amount distributed directly to Lewis in December 1981. The court emphasized that these amounts should have been paid to Mid-States under valid assignments that were neither terminated nor released at the time of payment.
Factual details include that Lewis executed two installment sales notes to Mid-States in 1980, along with security agreements granting Mid-States a security interest in his cattle and related proceeds. Lewis had assigned MEDA to pay Mid-States directly from his milk proceeds for specific amounts each month, with MEDA required to pay marketing expenses before distributing any remaining proceeds to Lewis. MEDA's practice prioritized payments based on the chronological order of assignments received. In September 1981, MEDA sold a milk holding tank to Lewis, and in October, MEDA deducted the remaining balance from Lewis' milk proceeds, which left insufficient funds to cover the earlier assignments to Mid-States.
MEDA's deduction, termed the October offset, is characterized by Mid-States as a unilateral offset by an unsecured junior creditor, alleging that MEDA converted the portion of milk proceeds tied to Lewis' cows secured by Mid-States. The court ruled that MEDA's deduction was improper. In November 1981, MEDA informed Mid-States and other assignees that Lewis had ended his membership, necessitating their signature on a release of assignment; however, Mid-States did not consent. Other assignees did sign releases, and after a feedlot repossessed all of Lewis' cows, Mid-States, deeming itself insecure, repossessed and sold its cows, applying the proceeds to Lewis' account. MEDA later distributed $2,753.69 directly to Lewis, which Mid-States contends constituted conversion since it had not released its assignment. The court agreed with Mid-States on this point.
Regarding the October offset, the court found that Mid-States met its burden of proving that 52.5% of Lewis' milk account was identifiable as proceeds from its collateral. Evidence showed that 42 out of 80 repossessed cows were covered by Mid-States' security agreement. Mid-States' claim to the October proceeds stems from its perfected security interest under the Uniform Commercial Code, not from assignments, as the latter only pertain to amounts due to Lewis. After MEDA's offset, there were insufficient funds to satisfy Mid-States' assignments. Additionally, under the membership agreement, Mid-States' rights as an assignee are subject to claims from MEDA concerning setoffs. The court concluded that Mid-States retains a secured interest in the milk proceeds despite MEDA's argument that Mid-States waived this interest by allowing distribution to other creditors and Lewis, as waiver under C.R.S. would apply only if the secured party authorized collateral disposition.
A security interest in collateral remains enforceable despite its sale or disposal unless such action is authorized by the secured party. The security agreement between Mid-States and Lewis did not grant authority to dispose of collateral, raising the question of whether authorization can be implied from the parties' circumstances, collateral nature, dealings, and trade practices. Under Colorado law, there is no requirement for written permission to sell collateral, and implied authorization from previous dealings may align with the agreement's terms. It is irrelevant that MEDA, rather than Lewis, disposed of the collateral, as the law no longer specifies that only the debtor can do so. The collateral in question is the proceeds from milk sales, which are expected to be sold under a cattle financing arrangement to service the line of credit. Mid-States retains rights to these proceeds, even if the transferee takes them free of the security interest.
Mid-States did not waive its security interest in milk proceeds by permitting milk sales; however, it allowed MEDA to dispose of these proceeds monthly to cover marketing costs and pay Lewis' other debts, which led to a waiver of the security interest in those proceeds. Proceeds distributed to Lewis and subsequently spent in the ordinary course of business are also free from the security interest. There is insufficient evidence to imply that Mid-States authorized MEDA to offset payments for equipment purchases before fulfilling Lewis' assignments. Although Mid-States consented to receive payments under Lewis' assignments, these did not include rights for MEDA to offset equipment purchase amounts, unlike previous assignments. The trial court's finding that MEDA could pay itself for a milk tank from amounts owed by Lewis was incorrect, as Mid-States had not received the relevant payment for October, which was actually for September's sales.
On October 31, 1981, MEDA had sufficient proceeds from October milk sales to implement an offset, but instead of distributing the proceeds to assignees as usual, MEDA subtracted its marketing costs and paid itself for a tank, leaving insufficient funds for Mid-States' assignments. Although Lewis was not in default at the time of the offset, the offset would have caused a default by the November payment due date (November 22, 1981) if the feedlot repossession had not occurred first. A secured creditor cannot enforce its interest until the debtor defaults; however, conflicting claims to collateral are governed by the Uniform Commercial Code's provisions on attachment and perfection of security interests. The trial court incorrectly concluded that MEDA did not convert $14,883.12 from milk proceeds owed to Mid-States. In the usual course, Mid-States would have received only $4,761 from the October proceeds, with the remainder distributed to other creditors with implied consent. Mid-States' security interest continued only in unallocated proceeds. Regarding December payments, Lewis' assignments to MEDA included any amounts due for milk, unaffected by the termination of his membership, as he could not cancel the assignments unilaterally. MEDA was obligated to pay Mid-States $2,753.69 from Lewis' November sales, as the agency relationship and rights under the assignments remained intact. Other assignees had released their claims, and MEDA failed to assert an offset against November proceeds, so Mid-States retained rights to those amounts. The judgment was reversed, and the case remanded for entry of judgment for Mid-States totaling $4,761 for the October offset and $2,753.69 for the December payment, with interest from the conversion dates.
