Peoples National Bank & Trust v. Excel Corp.

Citations: 695 P.2d 444; 236 Kan. 687; 40 U.C.C. Rep. Serv. (West) 351; 1985 Kan. LEXIS 296Docket: 56,844

Court: Supreme Court of Kansas; February 20, 1985; Kansas; State Supreme Court

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Peoples National Bank (PNB) appeals a summary judgment favoring Excel Corporation regarding a conversion action for livestock in which PNB held a perfected security interest. Excel contends that PNB released its interest when it consented to the sale of livestock by PNB's debtor, Larry D. Burkdoll. PNB argues that its consent was conditional and did not affect its security interest.

The facts are undisputed: PNB extended a $200,000 line of credit to Burkdoll, secured by a security interest in existing and future livestock, as documented in a security agreement prohibiting the sale or transfer of collateral without PNB's prior written consent. Despite this, a PNB officer advised Burkdoll he could sell the cattle as long as proceeds were paid to PNB. Excel purchased cattle from Burkdoll directly, without obtaining PNB's consent, and Burkdoll deposited some sale proceeds in his personal account at PNB, using only a portion to pay down his debt.

Excel's motion for summary judgment was granted, with the trial court ruling based on K.S.A. 84-9-306(2) and precedent from North Central Kansas Production Credit Association v. Washington Sales Co. The court concluded that PNB's security interest terminated upon Burkdoll's transfer of the cattle to Excel, stating that the sale did not violate the consent conditions. Although Burkdoll failed to apply the proceeds to his loan, it constituted a breach of trust, not a violation of the sales conditions. The court determined that PNB's express authorization for Burkdoll to sell the collateral and receive the proceeds constituted a waiver of its security interest in the sold livestock, governed by the Kansas Uniform Commercial Code (UCC).

A buyer in the ordinary course of business typically acquires goods free of any security interest from the seller, but this does not apply to farm products, including livestock, as per K.S.A. 84-9-109(3) and K.S.A. 84-9-307(1). Farm products exclude milk, cream, and eggs. A security interest persists in collateral despite its sale unless the secured party authorizes the disposition (K.S.A. 84-9-306(2)). PNB argues that its consent for Burkdoll to sell cattle was conditional on immediate delivery of proceeds to PNB, thereby not constituting authorized disposition. Conversely, Excel claims this consent was an authorized disposition, releasing it from liability under the security agreement. 

The court referenced the case of Washington Sales, where North Central Kansas PCA, a secured creditor, had a security agreement prohibiting Uffman from disposing of collateral without written consent but allowed sales if proceeds were paid jointly to PCA and Uffman. Uffman sold cattle without reporting or remitting the proceeds, leading PCA to sue Washington Sales for conversion. The trial court ruled that PCA's conditional consent did not waive its security interest since the sales violated the conditions and were unauthorized. The court concluded that the security agreement's terms did not constitute a waiver or consent, affirming that the Kansas UCC allows secured parties to authorize sales under specific conditions.

PCA's implied consent to livestock sales and waiver of its security interest were contested based on its conduct allowing the debtor to sell wheat and milk without adhering to the security agreement and accepting the proceeds without objection. The court rejected these arguments, determining PCA expressly consented to Uffman's sale of collateral, as a bank officer had verbally authorized the debtor to sell cattle, provided the proceeds were applied accordingly. The court ruled that express authorization constitutes a waiver of the security interest in the sold collateral.

PNB and Excel referenced differing interpretations of the Washington Sales case to support their positions. PNB argued that unauthorized sales by a debtor maintain the security interest, while Excel contended that the case's findings included a pattern of conduct and explicit oral consent permitting sales, which also applied to PNB's actions in this case. PNB contended that Washington Sales was factually distinct and primarily concerned agency law rather than commercial law.

The court referred to another precedent, North Cent. Kan. Prod. Cred. Ass'n v. Boese, where PCA had previously allowed the Boeses to sell cattle without prior express permission, relying on them to remit proceeds. Following a sale where the proceeds were not remitted, PCA's insistence on joint checks for future sales was found to negate earlier consent, thereby maintaining its security interest. The case illustrates that a creditor’s conditional consent may not necessarily authorize sales or waive security interests, with various courts affirming that security interests persist, allowing creditor recovery.

Two key cases support the plaintiff's position regarding the security interest in collateral despite conditional consent from the creditor. In *Production Credit v. Sea-First*, the Washington Supreme Court ruled that farmers' sales of crops without the creditor's written consent were unauthorized, thus maintaining the creditor's security interest per UCC Sec. 9-306(2). Similarly, in *In re Sunriver Farms, Inc.*, the creditor was allowed recovery under comparable circumstances. Other cases that permit creditor recovery differ from the current case, such as *In Re Ellsworth* and *Security Nat. Bank v. Belleville Livestock*. Conversely, some courts deny recovery to creditors against purchasers of farm products, asserting that consent terminated the security interest. Notably, the Idaho Supreme Court in *Western Idaho Product. Credit Ass'n v. Simplot Feed* ruled that a good faith purchaser had a superior right when the creditor allowed farm products to be sold without conditions. Other precedents, such as *Lisbon Bank and Trust Company v. Murray*, suggest that implied authority can negate creditor claims. The prevailing view among cases analyzed is that a creditor's conditional consent does not necessarily retain the security interest if the conditions are not met, as illustrated in *First National Bank v. Iowa Beef Processors*, where the creditor's actual authority to sell was deemed sufficient regardless of the purchaser's awareness of any security interests.

IBP could not have anticipated that Wheatheart would not forward sale proceeds to the bank, especially as the bank had already consented to direct payments from buyers. The court ruled that for sales where the defendant paid the debtor fully, the bank could not recover, despite its conditional consent. The condition requiring the debtor to remit proceeds was deemed unfair, effectively making the buyer an insurer of the debtor's actions, which were beyond their control. The court emphasized that the Uniform Commercial Code promotes marketplace transactions over a secured party's interest in collateral, stating that a secured party's conditional consent does not prevent its security interest from being terminated by a sale under section 9-306(2). Cases cited illustrate that oral consent from a creditor allowing sales conditioned on payment to the creditor constitutes express consent that extinguishes the security interest at the time of sale. In this instance, PNB's oral permission for Burkdoll to sell cattle, despite the security agreement's written consent requirement, precluded PNB from later enforcing that agreement against the purchaser, Excel Corporation. The court noted that PNB's trust in the debtor to manage proceeds and its knowledge of prior sales further supported the decision, affirming that Excel was not liable for Burkdoll's failure to pay PNB. The ruling aligns with previous decisions, confirming the principle that conditional oral consent can relieve purchasers from security interests.

Summary judgment is appropriate when the available evidence, including pleadings and affidavits, demonstrates that no genuine material facts are in dispute and that the moving party is entitled to judgment as a matter of law, as established in Lostutter v. Estate of Larkin. In this case, the trial judge granted summary judgment based on undisputed facts, which remain unchallenged on appeal. The judge's interpretation of Washington Sales aligns with Boese and similar rulings from other jurisdictions. The Tenth Circuit's decision in First National Bank extends the principles of Washington Sales, supporting a policy favorable under the UCC. The loss is attributed to PNB, which allowed the collateral to circulate and relied on the debtor to manage the proceeds. The judgment is upheld.

Dissenting opinion by HERD, J. argues that Excel was constructively aware of the bank's security interest and that there was no waiver of this lien. The conditional consent provided to Burkdoll for selling the cattle did not alter the recorded security agreement, meaning Excel was not misled. The dissent emphasizes that the bank's recorded security interest justified allowing the conditional sale, as it provided security against Burkdoll's potential failure to remit sale proceeds. This case is distinguished from North Cent. Kan. Prod. Cred. Ass'n v. Washington Sales Co. since Excel is not Burkdoll's agent but rather a third party subject to constructive notice. The dissent warns that the majority's decision exacerbates credit issues in agriculture by imposing stricter oversight on farm product sales, which could make agricultural loans less viable. The dissenting opinion calls for reversing the trial court's ruling and holding Excel accountable for the bank's unreleased security interest.