Benson County Cooperative Credit Union v. Central Livestock Ass'n

Citations: 300 N.W.2d 236; 31 U.C.C. Rep. Serv. (West) 300; 1980 N.D. LEXIS 318Docket: Civ. 9818

Court: North Dakota Supreme Court; November 21, 1980; North Dakota; State Supreme Court

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Central Livestock Association, Inc. appeals a summary judgment from the Cass County District Court, which was entered in favor of Benson County Cooperative Credit Union. The Supreme Court of North Dakota reverses the judgment and remands the case for trial. Lyla Hagen applied for and received a $24,000 loan from the Credit Union on February 10, 1976, to support her hog-raising operation. She executed a note for repayment in ten annual installments and a security agreement listing the Credit Union as the secured party, covering specific livestock and equipment. A clause in the security agreement prohibited the sale of the collateral without the Credit Union’s consent. 

Despite financial difficulties, Lyla entered into an extension agreement with the Credit Union when she was unable to make the first payment. The financing statement, executed by both Lyla and her mother Hazel, was filed before the loan was made and did not reference the loan itself. Lyla sold hogs to Central Livestock but failed to use the sale proceeds to repay the Credit Union. In January 1978, she indicated intentions to file for bankruptcy. The Credit Union later initiated legal action against Central Livestock for allegedly purchasing the property covered by its security agreement and for conversion, asserting that Lyla and Hazel operated as a partnership, despite a lack of supporting records.

Lyla's gross sales from Central Livestock amounted to $8,048.38, with net sales at $7,693.44, while Hazel's gross sales totaled $10,070.30, with net sales of $9,623.99. The differences between gross and net sales stemmed from expenses such as trucking, yardage, feed, sales commissions, and transit insurance related to the marketing of hogs. Combined, their gross sales reached $18,215.50 and net sales totaled $17,405.63. On October 9, 1979, a hearing was held regarding the Credit Union's motion for summary judgment, which the Cass County District Court granted on February 29, 1980, awarding the Credit Union $18,215.50 plus interest and costs. The court found that the financing statement for the secured property was filed on February 14, 1976, contrary to the February 14, 1975 date on the statement, and determined that Lyla acted as a partner in executing the loan despite the absence of this designation in the note and security agreement. The partnership inference was drawn from the joint signature on the financing statement. The Credit Union had not authorized the sale of the hogs, and Lyla reported in January 1978 that all the hogs were sold as she and Hazel prepared for bankruptcy. Additionally, Central Livestock was found liable for converting the hogs. Four key issues for appeal include: whether the district court improperly resolved material facts, if deposition testimony indicated the Credit Union waived its rights, whether there were genuine issues about the security interest scope, and if the damages awarded were computed correctly. Summary judgment standards require that the moving party demonstrate no genuine material issues exist. The appellate court must view evidence favorably for the non-moving party and can reverse summary judgment if any unresolved material facts exist.

Central Livestock challenges the district court's findings on material facts in granting summary judgment, asserting that the court mischaracterized disputed facts as "UNDISPUTED FACTS." They argue that the court failed to consider the record favorably for the opposing party and contest the court's determination regarding the date of the financing statement's filing, asserting it was filed on February 14, 1975, not February 14, 1976. Additionally, Central Livestock disputes the court's conclusion that Lyla and Hazel operated as a partnership, claiming the findings lack factual support. 

The Credit Union acknowledges the district court's error regarding the financing statement date but argues it's insignificant under N.D.C.C. § 41-09-41, which allows for early filing prior to a security agreement. To evaluate this, the court must consider the relevant laws on security agreements and the conditions for attachment and enforceability of security interests under N.D.C.C. § 41-09-16. It states that a security interest is enforceable against the debtor and third parties only if specific conditions are met, including possession of collateral or a signed security agreement. It's agreed that the Credit Union complied with these provisions, thereby establishing an enforceable security interest against Lyla concerning the collateral. 

Attachment has two key effects: it enables the secured party to foreclose on the collateral if the debtor defaults and grants enforceability against third parties, although unperfected security interests can be defeated by them. Perfection, achieved through filing or possession, provides optimal protection for the secured creditor, and under N.D.C.C. § 41-09-23, the Credit Union's interest must be filed to be perfected.

The security interest in question includes hogs and a tractor, classified as goods under North Dakota Century Code (N.D.C.C.) § 41-09-05, with their classification as farm products under § 41-09-09(3). The Credit Union correctly filed its financing statement, which initiated a dispute regarding its timing in relation to the execution of the security agreement. According to § 41-09-41(1), a financing statement may be filed before a security agreement is executed, and it remains effective for five years as per § 41-09-42(2). The Credit Union's early filing allowed its security interest to be perfected upon attachment, which occurred when Lyla signed the security agreement and received her loan to purchase the hogs. The perfection of the security interest was not contingent on the exact filing date.

As per § 41-09-27(2), a security interest persists in collateral despite its sale unless authorized by the secured party. However, buyers in the ordinary course of business take free of security interests unless they purchase farm products from a debtor in farming operations. The security agreement did not permit the sale of hogs without the Credit Union's consent. Central Livestock argues that by not objecting to prior sales of hogs, the Credit Union waived the written consent requirement. In a conversion action against a buyer, demonstrating the secured party's consent to the sale serves as a valid defense.

Consent for a security interest may be established through both implied conduct and express words. According to N.D.C.C. § 41-09-27(2), a security interest ceases after the sale of collateral if authorized by the security agreement or otherwise. The doctrine of implied consent to collateral sales, which led to waiving rights under the agreement, is modified by N.D.C.C. § 41-01-15(4). 

In the current case, the determination of whether a sale was authorized by the secured party is a factual dispute. Central Livestock contends that the district court incorrectly classified Lyla and Hazel as partners because the security agreement was signed solely by Lyla, and the financing statement did not reference any partnership. Both women shipped hogs to Central Livestock individually, and payments were made to them separately, undermining the partnership claim. 

N.D.C.C. § 41-09-41(8) states that a financing statement is effective despite minor errors as long as it substantially complies with requirements. There are significant disputes regarding the effectiveness of the financing statement concerning Hazel's interest in the hogs. 

Central Livestock argues that under Rule 56(e), N.D.R.Civ.P., the district court's summary judgment should be upheld. This rule mandates that affidavits for summary judgment be based on personal knowledge and must present facts admissible in evidence, which must demonstrate that the affiant is competent to testify. An adverse party cannot rely solely on allegations or denials and must present specific facts showing a genuine issue for trial.

Summary judgment may be entered against a party that fails to respond appropriately to a motion, but the burden lies with the movant to prove there are no genuine material facts in dispute. The Credit Union argued that Central Livestock did not provide sufficient evidence to counter its motion for summary judgment. However, the court disagreed, stating that the evidence must be viewed in favor of the opposing party, and Central Livestock had submitted briefs and referenced deposition testimony and transaction documents. The court found that genuine issues of material fact existed regarding the nature of the partnership between Lyla and Hazel, the execution of the security agreement, whether the Credit Union waived the requirement for written consent, and the effectiveness of the financing statement as notice to Central Livestock. Consequently, the district court's summary judgment was deemed erroneous, leading to its vacatur and the remand of the case for trial on factual issues and merits.