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Fin Ag, Inc. v. Hufnagle

August 10, 2006

FIN AG, INC., RESPONDENT,
v.
HUFNAGLE, INC., F/K/A P & H TRUCKING, ET AL., DEFENDANTS,
KENT MESCHKE POULTRY FARMS, INC., APPELLANT.



SYLLABUS BY THE COURT

1. The inclusion of the "created by the seller" clause in 7 U.S.C. § 1631 (2000), enacted as part of the Food Security Act of 1985 to extend the "buyer in the ordinary course of business" protections to buyers of farm products, means that buyers of farm products are not protected in "fronting" transactions, where the security interest from which protection is sought was created by someone other than the fronting parties.

2. Under 7 U.S.C. § 1631, if the fronting party is treated as the "seller," the buyer takes subject to a security interest in the farm product that was created by someone other than the fronting seller.

3. Although Minnesota's version of the Uniform Commercial Code (UCC) in effect when the subject transactions took place did not exclude buyers of farm products from the protection of a buyer in the ordinary course of business, that protection only extended to a security interest created by the seller.

4. Under Minnesota's version of the UCC, a financing statement is effective against any person who has knowledge of the contents, even though improperly filed in the wrong county, if the filing was made in good faith.

Affirmed.

The opinion of the court was delivered by: Hanson, Justice.

Heard, considered, and decided by the court en banc.

OPINION

This case concerns the impact of grain "fronting" on the respective rights of buyers of farm products and those who hold a security interest in those products. The security interest holder, respondent Fin Ag, Inc., brought suit against the buyer, appellant Kent Meschke Poultry Farms, Inc. (Meschke), for conversion of corn grown by the debtors, Larry and Ronda Buck, doing business as Buck Farms (Buck). The corn had been sold to Meschke in the names of third persons not involved with the debt to Fin Ag. The district court granted summary judgment to Fin Ag, holding that, under 7 U.S.C. § 1631 (2000)--enacted as part of the federal Food Security Act of 1985 (FSA)--the registration of Fin Ag's security interest in Buck's name put Meschke on notice of the interest and that the appearance of third persons as the sellers did not protect Meschke from the security interest created by Buck. The court of appeals affirmed, holding that Buck had constructive possession of the corn and Meschke had constructive knowledge of the security interest against Buck's corn. Meschke sought further review, arguing that section 1631 requires actual, not constructive, possession or knowledge and that a buyer from a disclosed seller takes title free of a security interest that is in the name of an undisclosed owner. We affirm.

A. The Statutory Framework

To develop a proper framework for the analysis of this case, we must consider the interaction between the state and federal statutes that address the conflict between the rights of buyers of farm products and the rights of those who hold a security interest in those farm products. Because the Minnesota statutes governing security interests in farm products have been revised from time to time, it is helpful to first consider what that interaction was when Congress first enacted 7 U.S.C. § 1631 in response to perceived shortcomings in the Uniform Commercial Code (UCC).

Prior to 1985, the UCC generally reflected a policy that favored the rights of the holders of security interests, presumably to promote the availability of credit on reasonable terms. Thus, UCC section 9-201 recognized that "a security agreement is effective according to its terms between the parties, against purchasers of the collateral and against creditors." U.C.C. § 9-201 (1972) (amended 2000), 3A U.L.A. 651-52 (2000). And the general rule embodied in UCC section 9-306 was that a security interest in goods continues despite the sale of those goods by the debtor. U.C.C. § 9-306 (1972) (amended 2000), 3B U.L.A. 33-34 (2002). That general rule was subject to an exception under UCC section 9-307, where a "buyer in the ordinary course of business"*fn1 could take the goods free of some security interests, but only those that were "created by his seller." U.C.C. § 9-307 (1972) (amended 2000), 3B U.L.A. 154 (2002). But that exception did not apply to buyers of "farm products." Id. Thus, the UCC protected buyers in the ordinary course of business only from security interests created by the buyer's seller; and buyers of farm products were excluded from even this narrow protection.*fn2

The practical effect of the exclusion of farm products from UCC section 9-307 was that buyers of farm products became guarantors of their seller's debt. As a result, more than a third of the states amended UCC section 9-307 in various ways, generally attempting to reduce the bias in favor of lenders by providing mechanisms that would assist buyers in protecting their interests. Charles W. Wolfe, Section 1324 of the Food Security Act of 1985: Congress Preempts the "Farm Products Exception" of Section 9-307(1) of the Uniform Commercial Code, 55 UMKC L. Rev. 454, 461-64 (1987).*fn3 The various state amendments were not consistent with one another and diluted the uniformity goals of the UCC. Wolfe, supra, at 455, 461-64.

Congress became concerned with the impact of the UCC on buyers of farm products and with the inconsistent amendments to UCC section 9-307 by many states. Wolfe, supra, at 463. Often, buyers of farm products did not know of a security interest or have any practical way to discover it and thus were required to pay twice for the product--once to the seller and a second time to the security holder if the seller defaulted on the debt. See 7 U.S.C. § 1631(a). To address this situation, Congress in 1985 enacted 7 U.S.C. § 1631 (titled "Protection for purchasers of farm products"). Where it applies, section 1631 preempts all conflicting state laws. See 7 U.S.C. § 1631(d) (prefacing the statutory rule by stating "notwithstanding any other provision of Federal, State, or local law").

The title and congressional findings of section 1631 suggest that it was intended to protect buyers of farm products from having to make "double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender." 7 U.S.C. § 1631(a)(2). But the protection actually provided by section 1631 was not as sweeping as the statement of intent might suggest. As explained below, section 1631 did not provide that the buyer would take free of all security interests, but instead only established a notice system that provided a mechanism for buyers to protect themselves from some, but not all, security interests.

Section 1631 established, contrary to the UCC, that a buyer of farm products in the ordinary course of business takes free of security interests created by the seller. Section 1631(d) provides:

Except as provided in subsection (e) of this section and notwithstanding any other provision of Federal, State, or local law, a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.

7 U.S.C. § 1631(d) (emphasis added). Notably, section 1631(d) adopted the same narrow scope of protection as provided in section 9-307 of the UCC--it only provides protection against a security interest "created by the seller." Therefore, this language provides no protection for a buyer of farm products from any valid security interest that was created by someone other than the immediate seller.

The federal statute does provide exceptions to section 1631(d). 7 U.S.C. ยง 1631(e). Under these exceptions a buyer of farm products takes subject to a security interest created by the seller when notice has been given by one of three specified notice procedures. Id. Two of the notice procedures apply where states have ...


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