Opinion
4:18-cv-00439
01-28-2020
AGRIFUND, LLC, Plaintiff, v. HEARTLAND CO-OP, Defendant.
Andrew Ryan Biehl, Craig A. Knickrehm, Walentine O'Toole McQuillan & Gordon, Omaha, NE, for Plaintiff. Jeffrey W Courter, Kristina M Stanger, Nyemaster Goode PC, Des Moines, IA,
Andrew Ryan Biehl, Craig A. Knickrehm, Walentine O'Toole McQuillan & Gordon, Omaha, NE, for Plaintiff.
Jeffrey W Courter, Kristina M Stanger, Nyemaster Goode PC, Des Moines, IA,
ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
ROBERT W. PRATT, JUDGE
Before the Court are the parties' cross-motions for summary judgment, filed on September 3, 2019. ECF Nos. 25, 26. Both parties filed responses to the respective motions on September 24, ECF Nos. 28, 29, and replies on October 1, ECF Nos. 30, 31. The Court held a hearing on the motions on November 22. See ECF No. 34. The matter is fully submitted.
I. FACTUAL AND PROCEDURAL BACKGROUND
Farmers Anthony and Mary Salter run a large row crop operation in Harrison and Pottawattamie counties in Iowa and Burt County in Nebraska. ECF No. 25-2 ¶ 6. Defendant Heartland Co-op has had an open-account relationship for farm inputs with the Salters since 2013. Id. ¶ 8. Under the terms of that agreement, the Salters charge farm inputs and receive a monthly statement from Defendant, requiring payment within twenty-five days. Id. Prior to 2017, the Salters made payments pursuant to the terms of the agreement. Id. Beginning in 2017, the Salters started making larger input purchases from Defendant, resulting in larger monthly payments. Id. Although the Salters did not always make these larger payments to Defendant on time, the payments were always made before the end of the year. Id.
Heartland Credit Company (HCC), an affiliate of Defendant, also provided input financing to the Salters for their crops in 2016, 2017, and 2018. Id. ¶ 10. In 2017, HCC provided a portion of the Salters' input financing via a document entitled Promissory Note and Security Agreement Input Finance Loan Program dated February 16, 2017. Id. ¶ 11; ECF No. 25-3 at 9–14. The loan was initially in the amount of $150,000, but was subsequently increased to $500,000, payable on or before February 1, 2018. ECF No. 25-2 ¶ 11; ECF No. 25-3 at 9, 15. By the note's terms, the Salters granted HCC a lien upon all assets, including the Salters' 2017 crops. ECF No. 25-2 ¶ 11. HCC perfected the lien. Id. ; see ECF No. 25-3 at 16.
Heartland and its affiliate Heartland Credit Company, LLC (HCC) are under common ownership, control, and management. ECF No. 25-2 ¶ 7. Additionally, the two entities share a Senior Credit Leader, Don Frazer. Id. ¶ 30.
Plaintiff Agrifund, LLC provided additional financing for a portion of the Salters' 2017 crop inputs through a Demand Promissory Note dated February 28, 2017, in the amount of $4,195,612. ECF No. 25-2 ¶ 13; ECF No. 25-3 at 17–18. As collateral security for the note, the Salters granted Plaintiff a security interest with respect to all crops, farm products, equipment, inventory, accounts, general intangibles, and chattel paper. ECF No. 25-2 ¶ 14; ECF No. 25-3 at 19–30. Plaintiff perfected its lien. ECF No. 25-2 ¶ 15; ECF No. 25-3 at 31–32.
However, the parties agree the total amount Plaintiff loaned to the Salters in 2017 was $4,410,780. See ECF No. 25-2 ¶ 21.
Because HCC had a senior lien upon the Salters' 2017 crops, Plaintiff asked HCC to enter into a lien subordination agreement with it. Id. ¶ 17. AG Resource Management, Inc. (ARM), an affiliate acting on behalf of Plaintiff, entered into a Lien Subordination Agreement with HCC on March 1, pursuant to which HCC subordinated to Plaintiff "all of its liens and security interest in, and all of its rights, titles and interest in and to, [the Salters'] 2017 crops and all proceeds thereof, including all crop insurance proceeds and government program payments for the 2017 crop year" but "limited to the amount actually loaned by [Plaintiff] to the [Salters]." ECF No. 25-2 ¶ 18; ECF No. 25-3 at 35–36.
On February 28, Plaintiff provided Defendant a Notice to Buyer of Security Interest in Farm Products pursuant to the Food Security Act, 7 U.S.C. § 1631, effectively notifying Defendant of Plaintiff's security interest in the Salters' 2017 crops and all proceeds derived therefrom. ECF No. 25-2 ¶ 16; ECF No. 25-3 at 33. The notice further provided that if the Salters sold any of their 2017 crops to Defendant, Defendant was required to issue the proceeds check jointly payable to the Salters and Plaintiff. ECF No. 25-2 ¶ 16; ECF No. 25-3 at 33.
In November 2017, the Salters sold some of their crops to Bunge Elevator for $600,000. ECF No. 25-2 ¶ 23. Plaintiff had not provided a Food Security Act notice to Bunge regarding its security interest in the crops because the Salters did not disclose to Plaintiff that Bunge was a potential buyer. Id. ¶ 25. On November 21, the Salters delivered to Defendant's Council Bluffs office a check drawn upon their farm account for their unpaid balance for chemicals owing to Defendant in the amount of $328,124.46. ECF No. 25-2 ¶ 20; see ECF No. 25-3 at 48. At the time Defendant received that payment, it was aware of Plaintiff's security interest in the Salters' crops and proceeds, up to the $4,410,780 Lien Subordination amount, but did not know the payment consisted of funds derived from the sale of grain to Bunge. ECF No. 25-2 ¶¶ 21, 26.
Plaintiff thereafter made a demand upon Defendant for payment of the $328,124.46, which Defendant refused. Id. ¶ 31. Plaintiff filed a Complaint in this Court on November 9, 2018. ECF No. 1. On November 30, Plaintiff amended its Complaint, alleging claims of breach of contract, conversion, and unjust enrichment. ECF No. 6.
The parties stipulated at the hearing that the balance owed by the Salters to Plaintiff is currently less than the $328,124.46 initially sought and that Plaintiff's damages are limited to the outstanding balance. Draft Hrg. Tr. at 13, 26–27.
II. SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(a) provides, "A party may move for summary judgment, identifying each claim or defense ... on which summary judgment is sought." Rule 56(a) mandates the entry of summary judgment upon motion after there has been adequate time for discovery "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Summary judgment is proper when the record, viewed in the light most favorable to the nonmoving party and giving that party the benefit of all reasonable inferences, shows there is no genuine issue of material fact and the moving party is therefore entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a) ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Harlston v. McDonnell Douglas Corp. , 37 F.3d 379, 382 (8th Cir. 1994). Both parties agree there are no material facts in dispute and summary judgment is appropriate.
III. ANALYSIS
Plaintiff has not attempted to prove, or even discussed, the elements of its claims. Rather, both parties, in their briefs and at oral argument, focused on Defendant's affirmative defense of its status as a holder in due course. The status of holder in due course is an affirmative defense to conversion. See Waukon Auto Supply v. Farmers & Merch. Sav. Bank , 440 N.W.2d 844, 846 (Iowa 1989). Thus, the Court first examines whether Plaintiff can prevail on its claim for conversion before turning to the question of whether Defendant can establish its affirmative defense.
A. Plaintiff's Conversion Claim
Under Iowa law, "[c]onversion is the wrongful control or dominion over another's property contrary to that person's possessory right to the property." Condon Auto Sales & Serv., Inc. v. Crick , 604 N.W.2d 587, 593 (Iowa 1999). Thus, to prevail here, Plaintiff must first demonstrate that it held a possessory right to the 2017 crops of the Salters, the proceeds of which were remitted to Defendant. To sustain a claim for conversion, "[t]he wrongful control must amount to a serious interference with the other person's right to control the property." Id. at 593. Iowa courts consider the following factors in determining whether the conduct of a defendant amounted to a "serious interference" with the possessory rights of a plaintiff: (1) "the extent and duration of the ... exercise of dominion or control;" (2) "the actor's intent to assert a right ... inconsistent with the other's right"; (3) "the actor's good faith;" (4) "the extent and duration of the resulting interference"; (5) the harm to the chattel; and (6) "the inconvenience and expense caused to the other." Kendall/Hunt Publ'g Co. v. Rowe , 424 N.W.2d 235, 247 (Iowa 1988) (citing Restatement (Second) of Torts § 222A(2) ).
Although Defendant does not concede Plaintiff has pleaded a prima facie case, it also does not dispute it. Plaintiff's perfected and superior security interest gives it a possessory right to the Salters' 2017 crops and any proceeds therefrom, see Iowa Code § 554.9315, as against junior competing claims. The question then, is whether Defendant exercised wrongful control over the proceeds of the 2017 crops. Deposition testimony of Anthony Salter from his bankruptcy proceeding shows that the funds used to pay Defendant in November 2017 were the proceeds from the sale of a portion of the Salters' 2017 crops to Bunge Elevator. ECF No. 25-2 ¶ 23. Defendant, therefore, exercised total dominion and control over the relevant portion of the proceeds of the Salters' 2017 crops to which Plaintiff had a possessory right. Now the Court must consider whether Defendant's wrongful control seriously interfered with Plaintiff's right to control the property. The following Rowe factors indisputably support a finding of conversion here. Since receiving the Salters' check and applying the funds to their open account in November 2017, Defendant has exercised total dominion and control over the property and interfered with Plaintiff's right. Additionally, Defendant's receipt and application of the funds to the Salters' open account is equivalent to the complete destruction of the property. Finally, Plaintiff has incurred considerable inconvenience and expense from the loss of the crop proceeds and the costs of asserting its claim in this litigation. The remaining factors—whether Defendant possessed the wrongful intent to assert a right inconsistent with Plaintiff's and whether Defendant acted in good faith—warrant further discussion. The Court considers these two factors together.
Plaintiff identifies the salient issue in this case as "whether [Defendant] took the Check in good faith and without notice of [Plaintiff]'s contrary claim." ECF No. 26-1 at 7. Similar to the parties in Agriliance L.L.C. v. Farmpro Services, Inc. , 328 F. Supp. 2d 958 (S.D. Iowa 2003), the parties in this case treat the analysis of the good-faith element of conversion as equivalent to the good-faith element of holder-in-due-course status. As noted in Farmpro Services, Inc. , this Court must separately analyze Plaintiff's conversion claim before addressing Defendant's affirmative defense. See 328 F. Supp. 2d at 965.
Plaintiff cites the following facts as evidence that Defendant had notice of Plaintiff's superior claim to the proceeds and nevertheless acted in contravention of that claim in bad faith. First, Defendant knew about Plaintiff's senior lien on the Salters' 2017 crops and resulting proceeds through (1) the Food Security Act notice it received from Plaintiff on February 28, 2017, and (2) its common ownership with HCC and shared Senior Credit Leader, which imputed to Defendant knowledge of HCC's express Subordination Agreement with Plaintiff. Second, Defendant knew the Salters were paying their bill owed to Defendant later than they normally had and not within the twenty-five days required by their agreement. And third, within the month before receiving the check from the Salters, Defendant received a balance sheet dated October 2, 2017, from the Salters that noted they still had a $4.6 million debt owed to Plaintiff. See ECF No. 25-2 ¶ 19; ECF No. 25-3 at 37–47. Based on these facts, Plaintiff asserts, Defendant had a duty to inquire into the source of the funds before accepting the check but failed to do so. Such failure, Plaintiff contends, is evidence of Defendant's bad faith.
Defendant contends it could not have possessed an intent to assert control over the Salters' 2017 crops and proceeds in contravention of Plaintiff's right because it did not have constructive notice of Plaintiff's claim to the check at the time it was received. Defendant asserts it believed the funds could have come from either the $2.524 million equity cushion found in the Salters' October 2017 balance sheet for that year's crops or from the Salters' other sources of income that year, which when combined exceeded the amount of the check by $16,875.54. Defendant further asserts the Salters' check was in the ordinary course of business between them and was drawn upon the Salters' farm account. Additionally, Defendant asserts it received the check two to three months earlier than when it typically received payments from crop proceeds. Defendant also claims it had no duty to inquire into the source of the funds given its normal trade practices and the fact that it has annual revenues over $900,000,000 and 1347 customer accounts with regular monthly payments made. Thus, Defendant claims, it had no reason to believe the funds came from the sale of a portion of the Salters' 2017 crops and did not act in bad faith. In Agriliance, L.L.C. v. Farmpro Services, Inc. , 328 F. Supp. 2d 958, 967 (S.D. Iowa Aug. 15, 2003), the court found the defendants' acts did not "r[i]se to the level of willful acts sufficient to find them liable for the intentional tort of conversion" because there was no evidence that the defendants had "knowledge that their exercise of control over the funds was inconsistent with the rights of [the plaintiff]." The court also declined to infer bad faith, noting that "nowhere did [the Cashier's Check] indicate the [farmers'] crops funded the check." 328 F. Supp. 2d at 967.
In contrast, in Agriliance, L.L.C. v. Runnells Grain Elevator, Inc. , 272 F. Supp. 2d 800, 806 (S.D. Iowa July 21, 2003), this Court found the defendant grain elevator converted the farmer's crops and resulting proceeds when, after receiving a Food Security Act notice from the plaintiff, paid the proceeds from the sale of crops to the creditors the farmer directed the payment to instead of to the plaintiff, who had a security interest in the crops. This Court concluded the defendant "should have known that the crops were quite possibly ... crops owned by the [farmer] and could therefore be subject to [the plaintiff]'s interest," but "failed to make any inquiry ... concerning the proper ownership of the crops or the possibility that the [plaintiff] indeed had an interest in the crops." 272 F. Supp. 2d at 806–07. Thus, the "failure to determine whether the crops ... were subject to [the plaintiff]'s interest evidence[d] a reckless disregard for [the plaintiff]'s claim to the crops, which constitutes a wrongful intent to exercise control over the crops and their proceeds to the detriment of [the plaintiff]." Id. at 807.
The Court concludes Defendant is liable for conversion here. It is true Defendant did not have actual knowledge that the source of the funds received from the Salters in November 2017 was the sale of a portion of their 2017 crops in which Plaintiff had a superior security interest and the Salters' check did not indicate the source of the funds. But Defendant knew enough between the Food Security Act notice it received from Plaintiff about Plaintiff's security interest in the Salters' 2017 crops and its knowledge that HCC had subordinated its lien on the crops to Plaintiff that it should have inquired as to the source of the funds. Defendant's failure to do so evidences an intent to exercise control over the proceeds of the crops inconsistent with Plaintiff's right and bad faith.
Having concluded Plaintiff has met its burden of proving Defendant is liable for conversion, the Court next turns to whether Defendant can establish its affirmative defense.
B. Defendant's Holder-in-Due-Course Defense
Under the Uniform Commercial Code (UCC), a holder in due course takes a negotiable instrument free of any claim to the instrument, including claims of prior secured parties. Iowa Code §§ 554.3302, 554.3306, 554.9331 ; see First Nat'l Bank v. Creston Livestock , 447 N.W.2d 132, 133 (Iowa 1989). It is undisputed that the Salters' check accepted by Defendant is a negotiable instrument subject to the priority rules of Article 3 of the UCC. Valley Nat'l Bank v. Porter , 705 F.2d 1027, 1029–30 (8th Cir. 1983). To establish a holder-in-due-course defense to conversion, Defendant must demonstrate it took the instrument (1) "for value," (2) "in good faith," and (3) "without notice that the instrument is overdue or has been dishonored," that any contrary claim to rights in the instrument, and "that any party has a defense or claim in recoupment." Iowa Code § 554.3302 ; see Waukon Auto Supply , 440 N.W.2d at 850 (noting the defendant bears the burden of establishing each of the required elements of this affirmative defense). The parties do not dispute that Defendant accepted the Salters' check for value, in repayment of the outstanding obligation of the Salters. The key issues then, are whether Defendant has satisfied the good-faith and notice requirements of the holder-in-due course defense.
Iowa Code section 554.9331(1) provides that the priority rules of Article 9 of Iowa Code Chapter 554 "[do] not limit the rights of a holder in due course of a negotiable instrument, [who] take[s] priority over an earlier security interest, even if perfected, to the extent provided in Articles 3, 7, and 8." Article 3 of the UCC further provides that a holder in due course takes free of any claim to a negotiable instrument. Iowa Code § 554.3306.
It must also be proven that the instrument, when issued, bore no apparent evidence of forgery, that it was not otherwise irregular or incomplete so as to call into question its authenticity, and that the party asserting the defense took the instrument without notice that the instrument contains an unauthorized signature or had been altered. However, there is no dispute here as to these requirements.
Under Iowa law, good faith "means honesty in fact and the observance of reasonable commercial standards of fair dealing." Iowa Code § 554.1201(2)(t). This definition of good faith thus contains both a subjective and an objective element. See Iowa Code § 554.9331 cmt. 5 ("This means that the junior not only must act ‘honestly’ but also must observe ‘reasonable commercial standards of fair dealing’ under the particular circumstances."). The "fair dealing" referenced in the section "is concerned with the fairness of conduct rather than the care with which an act is performed," and must be "judged in the light of reasonable commercial standards." Iowa Code § 554.3103 cmt. 4. Thus, objective commercial standards of fairness cannot be conflated with a general duty of care.
"Although ‘good faith’ does not impose a general duty of inquiry, e.g., a search of the records in filing offices, there may be circumstances in which ‘reasonable commercial standards of fair dealing’ would require such a search." Iowa Code § 554.9331 cmt. 5. Additionally, the language of the Iowa Code shows that neither a showing of good faith nor the availability of the holder-in-due-course defense itself is defeated by the mere existence of a perfected security interest. See Iowa Code § 554.9331(3) ("Filing under this Article does not constitute notice of a claim or defense to [holders in due course of negotiable instruments]."). "Whether the junior secured party qualifies as a holder in due course is fact-sensitive and should be decided on a case-by-case basis in the light of those circumstances." Id.
Here, the subjective prong has been satisfied because the parties do not dispute that Defendant lacked actual knowledge of Plaintiff's claim to the Salters' check. The objective prong requires further analysis. The Court must consider whether reasonable commercial standards of fair dealing would require Defendant to inquire into the source of the funds of the check before accepting the check, that is, whether Defendant would have had reason to know of Plaintiff's competing claim to the check at the time it was accepted such that Defendant should have inquired about how the check was funded before accepting it. Farmpro Servs., Inc. , 328 F. Supp. 2d at 970. The good-faith analysis thus merges with the notice analysis in this case and boils down to whether Defendant had constructive notice of Plaintiff's claim to the $328,124.46 check. See id. ; Runnells Grain Elevator, Inc. , 272 F. Supp. 2d at 813. If not, the general rule that "good faith" imposes no general duty of inquiry, see Iowa Code § 554.9331 cmt. (5), protects Defendant and it will be afforded status of a holder in due course.
Although Defendant had actual knowledge of Plaintiff's perfected superior interest in the Salters' 2017 crops, this fact alone is not sufficient to put Defendant on notice of Plaintiff's claim to the check or limit Defendant's ability to be afforded holder-in-due-course status. See Farmpro Servs., Inc. , 328 F. Supp. 2d at 970 ; Runnells Grain Elevator, Inc. , 272 F. Supp. 2d at 813 (noting the mere existence of a public filing is not sufficient to charge a party with notice of that claim). A person has notice when he or she "has actual knowledge of it, ... has received a notice or notification of it, or from all the facts and circumstances known to the person at the time in question, the person has reason to know that it exists." Farmpro Servs., Inc. , 328 F. Supp. 2d at 970 (quoting Runnells Grain Elevator, Inc. , 272 F. Supp. 2d at 813 ). "This is ‘essentially an objective test of what a reasonable person in the holder's position would know.’ " Id. (quoting Porter , 705 F.2d at 1029 ).
The Court must determine whether Defendant's actual knowledge is, under the circumstances, sufficient to allow it to "reasonably infer the probable existence of the claim." Porter , 705 F.2d at 1029. "The proper time for determining whether the recipient of an instrument has notice of a claim or defense is the time of negotiation of the instrument to the holder." Allison-Kesley Ag. Ctr. v. Hildebrand , 485 N.W.2d 841, 844 (Iowa 1992). Here, when Defendant received the check it had actual knowledge both that Plaintiff had a perfected security interest in the Salters' 2017 crops and any proceeds therefrom from the Food Security Act notice it directly received from Plaintiff and that Plaintiff's lien was senior pursuant to HCC's Subordination Agreement. Additionally, Defendant knew from the Salters' October 2017 balance sheet that Plaintiff's lien on the crops was still outstanding. Despite the fact that Defendant knew crop input loans are typically paid early in the year following the harvest, Defendant could see from the balance sheet that the Salters' had harvested their crop and still owed Plaintiff $4.6 million. See ECF No. 25-3 at 37. Defendant was also aware the Salters were not making their monthly payments on time. Moreover, the check the Salters delivered to Defendant was for the remaining amount the Salters still owed Defendant and was not a monthly payment amount pursuant to their agreement. See ECF No. 25-2 ¶ 20. The Court thus finds Defendant's lack of suspicion that the funding of the November 2017 check was from the Salters' 2017 crops was not in observance of reasonable commercial standards of fair dealing under the unique circumstances of this case. Defendant should have known that the check was potentially subject to a claim by Plaintiff and had a duty to inquire as to the source of the funds. See Farmpro Servs., Inc. , 328 F. Supp. 2d at 973.
Defendant cannot be seen to have taken the check without notice of Plaintiff's potential claim to it because Defendant "had ‘actual knowledge of facts from which it could reasonably infer the probable existence of [Plaintiff's] claim." Porter , 705 F.2d at 1029 (quoting Eldon's Super Fresh Stores, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 296 Minn. 130, 207 N.W.2d 282, 288 (1973) ). Therefore, Defendant is not a holder in due course, see Iowa Code § 554.3306, and Plaintiff is entitled to the remaining outstanding balance from the proceeds of the November 2017 sale of crops to Bunge Elevator. IV. CONCLUSION
Because the Court concludes Plaintiff has proved a claim for conversion and Defendant was not a holder in due course, the Court does not examine Plaintiff's claims for breach of contract or unjust enrichment.
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Based on the foregoing analysis, Plaintiff's Motion for Summary Judgment (ECF No. 26) is GRANTED, and Defendant's Motion for Summary Judgment (ECF No. 25) is DENIED. The parties shall submit a stipulation to the Court stating the amount of Plaintiff's damages outstanding. Thereafter, the Court will enter an order approving the stipulation and directing the Clerk of Court to enter Judgment in favor of Plaintiff.
IT IS SO ORDERED.