FIN-AG, INC., Plаintiff and Appellee, v. WATERTOWN LIVESTOCK AUCTION, INC., Defendant and Appellant. and Dacotah Bank, Defendant.
No. 24050
Supreme Court of South Dakota.
Argued Jan. 8, 2007. Decided June 18, 2008.
2008 SD 49
[¶ 73.] There is a scarcity of authority on this issue. We should refuse to engage in statutory interpretation that so heavily favors the Sale Barns to a lender‘s disadvantage without a clear directive from Congress to do so. The rationale and holding set forth in Hufnagle should be the law of South Dakota.
In summary:
Cimpl‘s (# 24172)—
- I would reverse Judge Rusch on the FSA seller issue for the reasons statеd in my writing.
- I would remand all other issues not reached by Judge Rusch for determination of genuine issues of material fact.
- I would reverse the Order for Disbursements because Cimpl‘s should not win this lawsuit at this point.
[¶ 74.] KONENKAMP, Justice, joins this dissent.
Jason W. Shanks of May & Johnson, PC, Sioux Falls, SD and Jonathan K. Van Patten Vermillion, SD, for appellee.
Michael A. Henderson of Cadwell, Sanford, Deibert & Garry, LLP, Sioux Falls, SD, for appellant.
ZINTER, Justice.
[¶ 1.] This appeal arises from an action for conversion by Fin-Ag, Inc. against Watertown Livestock Auction, Inc. Fin-Ag alleges it had a perfected security interest in cattle sold at Watertown under the name C & M Dairy. The case involves numerous issues regarding a commission merchant‘s liability for conversion when the collateral involves farm products covered by the Food Security Act (FSA),
[¶ 2.] This case involves the same debtors1 and creditor, and the same type of
[¶ 3.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice concur.
[¶ 4.] SABERS and KONENKAMP, Justices, dissent in part and concur in part.
SABERS, Justice (dissenting on all Fin-Ag cases on the FSA issue).3
[¶ 5.] Incredibly, Fin-Ag presents this Court with authority from a neighboring state that is virtually on point to the circumstances of this case; yet, the opinion goes out of its way at every opportunity in its analysis of the issues to arrive at the opposite conclusion of the Hufnagle case. Because I cannot agree with the opinion‘s analysis and conclusions regarding FSA protection, I dissent.
[¶ 6.] In Hufnagle, the lender, Fin-Ag had a perfected security interest in Buck‘s corn crops. 720 N.W.2d 579, 580 (Minn. 2006). Fin-Ag also filed an effective financing statеment, “which caused the interest to be listed in Minnesota‘s central filing system.” Id. Meschke was a registered farm products dealer and he received the central filing system‘s list of sellers whose grain was encumbered by security interests. Id. When Meschke bought corn directly from Buck he, with two exceptions, made the checks payablе to Buck and Fin-Ag jointly. Id.
[¶ 7.] Later, Meschke bought corn from persons, the Tookers, who claimed they were the sellers. Id. at 583-84. There was no one by the name Tooker on the central filing system list. Id. Meschke bought corn from the Tookers seven different times. Id. The proceeds from these seven transactions were deposited in the debtor‘s (Buck‘s) account. Id. Fin-Ag was not made a co-payee on any of these checks. Id.
[¶ 8.] Fin-Ag sued Meschke for conversion аfter Buck failed to repay Fin-Ag. Id. The Minnesota district court granted summary judgment in favor of Fin-Ag. Id. On appeal, the Minnesota Court of Appeals affirmed. Id.
[¶ 9.] The Minnesota Supreme Court held Meschke was liable for conversion. Id. at 581. In doing so, it noted that it must determine “how section 1631 works in the situation of ‘fronting’ sales. The parties describe ‘fronting’ as being where a seller of farm products that are subject to a security interest has a third party sell
[¶ 10.] The buyer, Meschke, made arguments that are similar to the Sale Barns’ arguments in this case. For instance, Meschke argued that it is difficult for a buyer of farm products to discover a security interest in a fronting situation and lenders are better suited to police these situations. Sale Barns advanced a virtually identical argument.
[¶ 11.] Despite this argument, and the recognition of the difficulty a fronting situation presents for a buyer, the Minnesota Supreme Court found it was “constrained to apply the plain language of the statutes, as enacted by Congress and the Minnesota Legislature, and to follow where they lead.” Id. at 585. The court noted that the “created by the seller” language was a serious limitation on the FSA‘s protections afforded to the buyer. Moreover, the language has come under much criticism, but Congress “essentially incorporated this clause in section 1631 when it attempted to correct some of the other shortcomings, from the perspective of buyers, of UCC section 9-307.” Id.
[¶ 12.] Due to this limitation, Meschke could not find protection, even in the fronting situation and еven though he was an innocent buyer. The court noted:
The inclusion of the “created by the seller” clause in section 1631 means that the statute does not provide protection for buyers in a fronting situation where the security interest from which protection is sought was not created by the fronting parties. Under the facts of this case, no matter what factual assumptions we make, there are none under which Meschke could take the corn free of Fin Ag‘s security interest. This is because if we view Buck as the seller, we must conclude that Meschke‘s rights are subject to Fin Ag‘s security interest under section 1631 because Fin Ag filed an “effective financing statement” that put Meschke on notice of Fin Ag‘s security interest in Buck‘s products. And, if we view the Tookers as the sellers, we must conclude that Meschke‘s rights are subject to Fin Ag‘s security interest, under either section 1631 or Minnesota‘s UCC, because both statutes only protect a buyer from a security interest created by the seller and not frоm a security interest created by an undisclosed owner, which continues in the product despite the sale.
Id. at 586 (emphasis added). Here, the same result is required, if we view Calvin and Michael Berwald as the seller, then Sale Barns’ rights are “subject to Fin-Ag‘s security interest under section 1631 because Fin-Ag filed an ‘effective financing statement’ that put [Sale Barns] on notice....” Id. Alternatively, if we view C & M Dairy as the seller, then “we must conclude that [Sale Barns]’ rights are subject to Fin-Ag‘s security interest” because under section 1631, a buyer is only protected “from a security interest created by the seller and not from a security interest created by an undisclosed owner.” See id.
[¶ 13.] Instead, the opinion distinguishes Hufnagle by declaring “fronting” different than using a d.b.a.4 It rationalizes that the Hufnagle court did not “cоnsider the fourth factual scenario that is before this Court, i.e., debtors who created the security interest, and conducted their business under their d.b.a. business name.”
[¶ 14.] The opinion can call it anything it wants, but it cannot hide what is plain and obvious. In its attempts to decide this case in favor of the Sale Barns, it arrives at some conflicting conclusions. For example, the opinion concludes that C & M Dairy is a “business entity” and therefore separate from Calvin and Michael Berwald and cаn be a seller under the statute, thus the FSA protects Sale Barns. Then, in the next portion of analysis, C & M Dairy is merely a d.b.a. and cannot be separated from the Berwalds, therefore C & M Dairy created the security interest and again, Sale Barns win. In reality, C & M Dairy is an illegal fiction and definitely a fronting situation. It is not an entity or an alter еgo—and certainly not both the “seller” and the “seller who created the security interest.”
[¶ 15.] There are two different interpretations of a supposed entity, yet the same strained outcome. When defining “seller,” it is inconsistent to say that in one instance C & M Dairy is an entity distinct from the Berwalds, so C & M Dairy can be the seller and claim Sale Barns did not receive nоtice of Fin-Ag‘s security interest, and then to say the Berwalds and C & M Dairy are “one and the same” in order to find C & M Dairy is the “seller who created the security interest.” In Hufnagle, the Minnesota Supreme Court specifically refused to “define seller two different ways in the same analysis without a significant indication that this was the legislature‘s intent. No such indication [of legislative intent] exists here.” 720 N.W.2d at 588-89. We should not interpret seller two different ways.
[¶ 16.] We сertainly should not interpret seller two different ways when many commentators have criticized the limitation “created by the seller” in the context of 9-307, yet the clause has never been amended or eliminated since the UCC was rewritten in 1957. Hufnagle, 720 N.W.2d at 585 (citing William H. Lawrence, The “Created by His Seller” Limitation of Section 9-309(1) of the UCC: A Provision in Need of an Articulated Pоlicy, 60 Ind. L.J. 73, 73-74 (1984-1985) and Richard H. Nowka, Section 9-302(a) of Reviewed Article 9 and The Buyer in the Ordinary Course of Pre-Encumbered Goods: Something Old and Something New, 38 Brandeis L.J. 9, 23-24 (1999-2000)). Significantly, despite its criticisms, Congress included this clause in section 1631 of the FSA in 1985 when attempting to correct some of the other problems of buying food products under the UCC. See supra ¶ 11 (Sabers, J., dissenting) (citing Hufnagle, 720 N.W.2d at 585).
[¶ 17.] White and Summers have discussed the difficulties with the “created by the seller” language. See 4 White & Summers, Uniform Commercial Code § 33-13 (4th ed. 1995 & Supp. 2007) (discussing the problems produced by the created by the
[¶ 18.] In each of the cases here,5 the Sale Barns knew they were dealing with Calvin or Michael Berwald, or both, before they were dealing with “C & M Dairy.” Calvin Berwald is the “C” and Michael Berwald is the “M” and the Sale Barns knew it, and they should suffer the ultimate loss. The Sale Barns either toоk a “head in the sand” approach and let the Berwalds tell them who they were acting as, or they simply decided that even though Berwald and family were listed in the master list, if the Berwalds chose to call themselves something else not mentioned on the list, the Sale Barns took the position they had to go strictly with the list.6 In this case, the decision to go with C & M Dairy as the sеller was self-serving, as it allowed the sale barn to collect on a past debt. See Fin-Ag v. Watertown Livestock, Brief of Appellee at 4, 2008 SD 49, 754 N.W.2d 23 (No. 24050). In sum, these Sale Barns were more closely dealing with the “bad guy.”7
[¶ 19.] It does not end there. Again, in an attempt to distinguish Hufnagle, the opinion indicates that Hufnagle “appeared to involve collusion on the part of the buyer.” Cimpl‘s, 2008 SD 47, ¶ 33, 754 N.W.2d 1, 2008 WL 2469183. Never mind the fact that the Supreme Court of Minnesota did not rely on that specific fact in its аnalysis and it is not relevant to the discussion. It merely seeks to cloud the real issues. Indeed, the court noted that “no matter what factual assumptions we make, there are none under which Meschke could take the corn free of Fin Ag‘s security interest.” Hufnagle, 720 N.W.2d at 585-86.
[¶ 20.] The opinion‘s analysis of this issue in Cimpl‘s, 2008 SD 47, ¶¶ 10-47, 754 N.W.2d 1, 2008 WL 2469183, incorporated by reference here, see supra ¶ 2, sends the message to deceitful debtors that they can
[¶ 21.] Finally, the opinion in Cimpl‘s, 2008 SD 47, 754 N.W.2d 1, 2008 WL 2469183, thoroughly discusses the background of the enactment of the FSA. It details the overarching theme of protecting buyers from the threat of double payment. Then, that opinion finds the statute ambiguous, because seller is not defined, and declares that we must use the policy behind the act to interpret the statute. See Cimpl‘s, 2008 SD 47, ¶ 20, 754 N.W.2d 1, 2008 WL 2469183. Thus, according to that opinion, we must interpret the statute to favor the Sale Barns.
[¶ 22.] However, failure to define a term does not automatically result in an ambiguity. Jackson v. Canyon Place Homeowner‘s Ass‘n, 2007 SD 37, ¶ 11, 731 N.W.2d 210, 213 (citing Halls v. White, 2006 SD 47, ¶ 8, 715 N.W.2d 577, 581). Moreover, we consistently only use the plain language of the statute and never examine the policy or legislative history unless the text is ambiguous. “Resorting to legislative history is justified only when legislation is ambiguous, or its literal meaning is absurd or unreasonable. Absent these circumstances, we must give legislation its plain meaning. We cannot amend [the statute] to produce or avoid a particular result.” In re Estate of Howe, 2004 SD 118, ¶ 41, 689 N.W.2d 22, 32 (quoting Slama v. Landmann Jungman Hosp., 2002 SD 151, ¶ 7, 654 N.W.2d 826, 828 (quoting Petition of Famous Brands, Inc., 347 N.W.2d 882, 885 (S.D.1984))); see also In re Estate of Olson, 2008 SD 4, ¶ 38, 744 N.W.2d 555, 566; Jensen v. Turner County Bd. of Adjustment, 2007 SD 28, ¶ 5, 730 N.W.2d 411, 413; Goetz v. State, 2001 SD 138, ¶ 16, 636 N.W.2d 675, 681; Reider v. Schmidt, 2000 SD 118, ¶ 9, 616 N.W.2d 476, 479. As Judge Timm noted, “[t]he FSA is not ambiguous, and the seller using a different name does not create an ambiguity in the language of the statute.” We should interpret seller consistently. If interpreted consistently and using the plain language of the statute, the Sale Barns are not protected by the FSA. It takes an owner or someone with interest in the property to create a security interest. If Congress meant a fiction or a front instead of the word seller, it would have said so.
[¶ 23.] There is a scarcity of authority on this issue. We should refuse to engage in statutory interpretation that so heavily favors the Sale Barns to a lender‘s disadvantage without a clear directive from Congress to do so. The rationale and holding set forth in Hufnagle should be the law of South Dakota.
In summary:
Watertown (# 24050)—
- I would affirm Judge Timm on the FSA seller issue for the reasons stated in my writing.
- However, because Judge Timm granted summary judgment on the conversion issue and because there
- Genuine issues of material fact also exist on the damage questions raised in Justice Zinter‘s writing in South Dakota Livestock/Pipestone, 2008 SD 48, 754 N.W.2d 29, 2008 WL 2469194 (# 23982, # 24001, # 23984) and we must reverse and remand for trial.
[¶ 24.] KONENKAMP, Justice, joins this dissent.