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Integrity Bank Plus v. Talking Sales, Inc.

United States District Court, D. Minnesota
Feb 22, 2005
Civ. No. 04-4523 (RHK/JSM) (D. Minn. Feb. 22, 2005)

Opinion

Civ. No. 04-4523 (RHK/JSM).

February 22, 2005

Matthew R. Burton, Leonard, O'Brien, Spencer, Gale Sayre, Ltd., Minneapolis, Minnesota, for Plaintiff.

Scott R. Carlson, Hinshaw Culbertson, LLP, Minneapolis, Minnesota, for Defendant Elm River Credit Union.

Daniel J. Crothers and Jacqueline S. Anderson, Nilles Law Firm, Fargo, North Dakota, for Defendant Steffes Auctioneers.


MEMORANDUM OPINION AND ORDER


Introduction

The primary issue in this case is who among the parties has the superior security interest in five John Deere tractors. Plaintiff Integrity Bank Plus ("Integrity") has sued Defendants Talking Sales, Inc. ("Talking Sales"), Elm River Credit Union ("Elm River"), Steffes Auctioneers ("Steffes"), John Doe, and Mary Roe alleging conversion and unjust enrichment, and reserving its right to bring a motion for claim and delivery. Elm River and Steffes have separately moved to dismiss the claims against them. For the reasons set forth below, the Court will deny their motions.

Talking Sales, John Doe, and Mary Roe have not filed motions to dismiss. John Doe and Mary Roe are persons or entities whose identity and location are unknown to Integrity. (Am. Compl. ¶ 5.)

Background

Integrity is a bank located in Wabasso, Minnesota. (Am. Compl. ¶ 1.) On November 6, 2003, Integrity loaned money to non-party Wabasso Farm Equipment Rental Company, LLC ("Wabasso Farm"). (Id. ¶ 14.) In return, Wabasso Farm executed a promissory note and a security agreement granting Integrity a security interest in its inventory and equipment. (Id.) On November 7, 2003, Integrity filed a financing statement with the Minnesota Secretary of State, which identified its security interest in Wabasso Farm's goods, inventory, and equipment. (Id.; see Carlson Aff. Ex. A.) Included among its security interests were five John Deere tractors. (See Am. Compl. ¶¶ 21, 24-26.)

On January 21, 2004, Wabasso Farm sold the five John Deere tractors to Talking Sales, a North Dakota corporation located in Fargo, for $340,000. (Id. ¶¶ 2, 18.) Talking Sales had borrowed the money from Elm River, a North Dakota credit union located in Kindred, North Dakota, which wired the funds to Wabasso Farm on January 23, 2004. (Id. ¶¶ 3, 18.) That same day, Talking Sales executed a promissory note and a security agreement granting Elm River a security interest in the five tractors. (See Reis Aff. Exs. F, G.) Years earlier, in June 1998, Elm River had filed a financing statement with the North Dakota Secretary of State (renewed in June 2003), which identified its security interest in Talking Sales's "MACHINERY NOW OWNED AND HEREAFTER ACQUIRED." (See Carlson Aff. Ex. H.)

On March 4, 2004, Wabasso Farm sold all its assets at an auction conducted by Steffes, a North Dakota corporation located in Fargo. (Am. Compl. ¶¶ 4, 17.) Included in the auction were the five John Deere tractors, which sold for $379,000. (Id. ¶ 19.) Of that amount, $342,403.29 went to Elm River, $15,160 went to Steffes, and the balance went to Wabasso Farm. (Id.) John Doe and Mary Roe purchased the tractors and are currently believed to be in possession of them. (Id. ¶¶ 5, 22.) Also sold at the March auction, for $27,000, was one John Deere baler. (Id. ¶ 20.) For unexplained reasons, Steffes deducted this amount from the proceeds paid to Integrity after the auction. (See id.) Integrity did not, however, have a security interest in the John Deere baler. (Id.)

In the aftermath of the farm equipment sales, Integrity filed this three count suit. Count One alleges that Talking Sales, Elm River, and Steffes converted its interest in the five tractors and the proceeds from their sale. (Id. ¶ 24.) It also alleges that Steffes converted its interest in the proceeds from the baler's sale by deducting money from amounts paid to Integrity. (Id. ¶ 27.) Count Two alleges that each of the Defendants has been unjustly enriched by the sale of the five tractors. (Id. ¶ 29.) It also alleges that Steffes was unjustly enriched by the value of the baler. (Id. ¶ 30.) Finally, Count Three reserves Integrity's right to bring a motion for "claim and delivery" against John Doe, Mary Roe, and others having custody of Integrity's collateral. (Id. ¶ 32.) Elm River and Steffes have each moved to dismiss the claims made against them under Rule 12(b)(6) of the Federal Rules of Civil Procedure.

Standard of Review

Under Rule 12(b)(6), all factual allegations must be accepted as true and every reasonable inference must be made in favor of the complainant. Fed.R.Civ.P. 12(b)(6); see Midwestern Mach., Inc. v. Northwest Airlines, Inc., 167 F.3d 439, 441 (8th Cir. 1999); Carney v. Houston, 33 F.3d 893, 894 (8th Cir. 1994). "[D]ismissal under Rule 12(b)(6) serves to eliminate actions which are fatally flawed in their legal premises and [destined] to fail, thereby sparing litigants the burden of unnecessary pretrial and trial activity." Young v. City of St. Charles, Mo., 244 F.3d 623, 627 (8th Cir. 2001) (citation omitted). A cause of action "should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff cannot prove any set of facts in support of his claim that would entitle him to relief." Schaller Tel. Co. v. Golden Sky Sys., Inc., 298 F.3d 736, 740 (8th Cir. 2002) (citations omitted). On a motion to dismiss, "[t]he court may consider, in addition to the pleadings, materials embraced by the pleadings and materials that are part of the public record." In re K-tel Int'l Sec. Litig., 300 F.3d 881, 889 (8th Cir. 2002).

Analysis

A. Conversion

Integrity alleges that Elm River and Steffes converted its interest in the tractors and that Steffes converted its interest in the baler. Conversion is the exercise of dominion and control over property inconsistent with, and in repudiation of, the owner's rights in that property. See Rudnitski v. Seely, 452 N.W.2d 664, 668 (Minn. 1990). Elm River and Steffes have moved to dismiss both conversion claims. The Court will examine each claim in turn.

1. The Tractors

Integrity's first conversion claim derives from its alleged security interest in the five John Deere tractors. It alleges that it had a security interest in the tractors; that its security interest continued after the tractors were transferred to Talking Sales; and that Elm River and Steffes converted its interests by not paying it for the tractors. (See Am. Compl. 24-26.) Security interests are governed by Article 9 of Minnesota's Uniform Commercial Code. See Minn. Stat. § 336.9-101, et seq. Under Article 9, a security interest in collateral continues after a transfer and also continues in any proceeds of a transfer. When a debtor makes an unauthorized transfer of collateral, the security interest continues in the collateral in the hands of the transferee. Because a transferee takes collateral subject to the security interest, the secured party may maintain a conversion action against the transferee. See Minn. Stat. § 336.9-315(a) and official cmt. 2; Farmers State Bank v. Easton Farmers Elevator, 457 N.W.2d 763, 766 (Minn.Ct.App. 1990).

However, there is an exception to this general rule for "a buyer in ordinary course of business." Under certain circumstances, such a "buyer" takes collateral free of a security interest created by the buyer's seller. See Minn. Stat. § 336.9-320(a); id. § 336.9-315, official cmt. 2. A "buyer in ordinary course of business" is defined as

a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person . . . in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices. . . . Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under article 2 may be a buyer in ordinary course of business. . . .
Id. § 336.1-201(9). The party claiming to be a such a "buyer" bears the burden of proof with respect to that issue. See In re Certain Pharm. Proceedings of Northland Providers, Inc., 78 F. Supp. 2d 954, 963-64 (D. Minn. 1999) (citing cases).

Turning to the present case, Elm River and Steffes argue that Integrity's conversion claim fails because Talking Sales was a buyer in ordinary course of business and took the tractors free of Integrity's security interest. (See Elm River Mem. at 6-9, Reply Mem. at 2-5, Sur-Reply Mem. at 2; Steffes Mem. at 4-7, Reply Mem. at 4.) Elm River contends that "[t]here are no allegations in the Amended Complaint that suggests that Wabasso Farm Equipment's sale to Talking Sales was not in the ordinary course [of business]. . . ." (Elm River Mem. at 9.) Similarly, Steffes asserts that "the record lacks any basis to conclude Talking Sales was not a `buyer in good faith.'" (Steffes Reply Mem. at 4.)

While Elm River and Steffes make other arguments in their briefs, the buyer in ordinary course of business issue was the sole argument made at the motions hearing.

The problem, however, is that it is not Integrity's burden to show that Talking Sales was not a buyer in ordinary course of business. Rather, the burden is on Elm River and Steffes to establish that Talking Sales was such a "buyer." See In re Certain Pharm. Proceedings, 78 F. Supp. 2d at 963-64. On the current record, Elm River and Steffes have not met their burden. For example, they have not established that Talking Sales bought the tractors in "good faith," which means "honesty in fact in the conduct or transaction concerned." Minn. Stat. § 336.1-201(19). Although they ask the Court to infer good faith from the allegation that Talking Sales "purchased" the tractors for $340,000 (Am. Compl. ¶ 18), all reasonable inferences must be made in favor of Integrity, not Elm River or Steffes, see Midwestern Mach., 167 F.3d at 441. What's more, to allege that the tractors were "purchased" does not allege, and certainly does not establish, that they were purchased in "good faith."

Elm River and Steffes acknowledged this burden of proof at the motions hearing.

Furthermore, Elm River and Steffes have not demonstrated that Talking Sales purchased the tractors "without knowledge that the sale violate[d] the rights" of Integrity. Minn. Stat. § 336.1-201(9); see id. § 336.9-320, official cmt. 3. While both assert that there is no allegation that Talking Sales knew the sale violated Integrity's security interests (see Elm River Mem. at 9; Steffes Mem. at 5), they, not Integrity, have the burden to establish what Talking Sales knew or didn't know.

With this said, the Court makes no determination as to whether or not Talking Sales was a "buyer in ordinary course of business." Suffice it to say that the Court cannot conclude at this early juncture that "it appears beyond doubt" that Integrity cannot prove any set of facts in support of its claims that would entitle it to relief. See Schaller, 298 F.3d at 740. The parties are before the Court on motions to dismiss, not motions for summary judgment. Thus, Integrity's factual allegations must be accepted as true and every reasonable inference must go their way. See Midwestern Mach., 167 F.3d at 441. Accordingly, the motions to dismiss Integrity's conversion claims regarding the tractors will be denied.

To be clear, while the Court has provided two examples of where Elm River and Steffes have failed to meet their burden, the Court has made no determination as to whether they have met their burden in demonstrating the other requirements of a buyer in ordinary course of business.

2. The Baler

Integrity's second conversion claim derives from Steffes's alleged deduction of $27,000 from the amount due Integrity after the baler was sold at auction. (See Am. Compl. ¶ 27.) Steffes raises two grounds for dismissal; neither is meritorious. First, it contends that Integrity lacks standing to assert Wabasso Farm's claim for payment. (Steffes Mem. at 9.) But the Amended Complaint alleges that Steffes failed to pay Integrity, not Wabasso Farm. (See Am. Compl. ¶ 27.) It is undisputed that Integrity has standing to assert its own claim for payment. Second, Steffes contends that "when [the] allegations are dismissed regarding the 5 tractors," the Court will lack subject matter jurisdiction over the baler claim because the $27,000 allegedly not paid falls short of the $75,000 requirement under 28 U.S.C. § 1332. (Steffes Mem. at 9.) Integrity's claim regarding the tractors, however, will not be dismissed. Accordingly, Steffes's motion to dismiss Integrity's baler conversion claim will be denied.

B. Unjust Enrichment

Integrity alleges that Elm River and Steffes were unjustly enriched by not paying it for the five tractors. (See Am. Compl. ¶ 29.) It also alleges that Steffes was unjustly enriched by improperly deducting money due Integrity on the baler. (Id. ¶ 30.) "Unjust enrichment is an equitable claim that arises when a party gains a benefit illegally or unlawfully, and there is no valid contract completely governing the rights of the parties." Stein v. O'Brien, 565 N.W.2d 472, 474 (Minn.Ct.App. 1997) (citation and internal quotations omitted). Elm River and Steffes make several arguments in support of their Motions, but none warrants the dismissal of Integrity's unjust enrichment claims.

They first argue that Talking Sales was a buyer in ordinary course of business. (See Elm River Mem. at 10; Steffes Mem. at 8.) But, as noted above, they have not established that Talking Sales was such a buyer on the record before the Court. See supra Analysis Part A.1. They next argue that the sale of the tractors was governed by an express contract and that Integrity's unjust enrichment claim is therefore barred. (Elm River Mem. at 10; Steffes Mem. at 7.) Both rely on Sharp v. Laubersheimer, 347 N.W.2d 268, 271 (Minn. 1984), which held that the existence of an express contract between parties precludes recovery under an unjust enrichment theory. In this case, however, there is no allegation that an express contract existed between Integrity and either Elm River or Steffes. Finally, Steffes argues that it was not enriched by any sales and that Integrity suffered no detriment. (Steffes Mem. at 8-9.) However, these arguments require factual determinations that are not properly resolved on a motion to dismiss. The Motions to Dismiss Integrity's unjust enrichment claims will therefore be denied.

C. Claim and Delivery

In its Amended Complaint, Integrity "reserves the right to bring a motion for claim and delivery against John Doe, Mary Roe, or other persons or entities having custody of their collateral." (Am. Compl. ¶ 32.) Elm River and Steffes assert that this count must be dismissed as to them because there is no allegation that either possesses the farm equipment. (Elm River Mem. at 10; Steffes Mem. at 10.) Integrity, however, does not make a claim for claim and delivery; rather, it has reserved the right to do so. This issue need be resolved only if Integrity brings such a motion.

Conclusion

Based on the foregoing, and on all the files, records, and proceedings herein, IT IS ORDERED that Defendant Elm River Credit Union's and Defendant Steffes Auctioneers's Motions to Dismiss (Doc. Nos. 14, 17) are DENIED.


Summaries of

Integrity Bank Plus v. Talking Sales, Inc.

United States District Court, D. Minnesota
Feb 22, 2005
Civ. No. 04-4523 (RHK/JSM) (D. Minn. Feb. 22, 2005)
Case details for

Integrity Bank Plus v. Talking Sales, Inc.

Case Details

Full title:INTEGRITY BANK PLUS, Plaintiff, v. TALKING SALES, INC., Elm River Credit…

Court:United States District Court, D. Minnesota

Date published: Feb 22, 2005

Citations

Civ. No. 04-4523 (RHK/JSM) (D. Minn. Feb. 22, 2005)

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