Summary of a Recent
Judicial Development in
Secured Transactions

Maximum Default Interest Rate Only Applies in Breach of Contract Action

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Bartlett Milling Co., LP v. Walnut Grove Auction and Realty Co., Inc., 665 S.E.2d 478, (N.C. Ct. App. 2008), the North Carolina Court of Appeals held that the statutory maximum default interest rate for agricultural loans did not apply to a judgment awarded for conversion by other creditors, that the issue of the value of a senior creditor's security interest was a question for the jury, that conversion of cattle did not constitute unfair and deceptive trade practices, that the plaintiff was not entitled to amend its complaint to assert punitive damages, that the defendants were not entitled to UCC protection for good faith justification regarding the conversion, and that the evidence did not support a marshaling instruction.

Background

Bartlett Milling Company obtained a judgment against the Stephens for defaulting on their cattle feed payments, then agreed to remove its judgment from the record, accept a lower total payment, and accept payments over time secured by a security interest in the Stephens' cattle, and the parties executed a promissory note and security agreement to that effect. Id. at 483. The Stephens subsequently bought more cattle from Rocky Creek Dairy, Broker Dairy, and Walnut Grove Auction and Realty Co., and Rocky Creek and Broker Dairy perfected their security interests in the cattle sold to the Stephens. Id. The Stephens then defaulted on their obligations to Bartlett. Id. Although the Stephens had not defaulted on their other obligations, the other creditors repossessed and sold a portion of the Stephens' herd at an auction ran by Walnut Grove. Id. Bartlett had informed the other creditors of its senior lien on the herd, but Walnut Grove told Bartlett that the proceeds of the sale would be held in trust pending a determination of the parties' rights, so Bartlett did not attempt to stop the auction. Id. The other creditors thereafter refused to pay Bartlett any part of the proceeds, and Bartlett brought an action against them. Id. at 484. The trial court granted summary judgment for Bartlett on the issue of liability on the conversion claim, but held that because the Stephens' debt arose from an agricultural loan, a default rate of 18% was unenforceable under North Carolina state law, and reduced the judgment interest accordingly. Id. The trial court also refused to send Bartlett's punitive damage claim to the jury, and all parties appealed. Id.

Arguments

Bartlett argued that the trial court erred as a matter of law in refusing to enforce the Stephens' promissory note according to its original terms, and by refusing to grant its motions for directed verdict and judgment notwithstanding the verdict. Id. Bartlett argued that the trial court erred in failing to determine that the defendant-creditor's actions constituted unfair and deceptive trade practices. Id. at 486.

Defendants argued that they were not obligated to apply the sale proceeds to Bartlett's senior security interest, and that Bartlett was estopped from arguing the impropriety of the auction because it had actual notice of the sale. Id. at 488-89.

Analysis and Holdings

The court determined that the maximum default interest rate for agricultural loans, as set by North Carolina statute, only applied to actions for breach of contract, and thus did not apply to this conversion claim. Id. at 484-85. The court then found that the trial court had not abused its discretion by denying Bartlett's motions for directed verdict and JNOV because the trial court had properly submitted the question of valuation of the herd at the time of conversion to the jury. Id. at 485. The court further held that the trial court was correct in refusing to determine that the defendant-creditors' actions constituted unfair and deceptive trade practices. Id. at 486. The court noted that violation of a statute is not per se evidence of unfair trade and deception practices, but may constitute unfair and deceptive trade practices, depending on the facts of the case and whether the violation "offends established public policy or is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers." Id. Because Bartlett did not offer evidence on this issue, the court rejected the argument. Id. The court also noted there had been no findings by the court or stipulations by the parties that Walnut Grove owed Bartlett any fiduciary duty to support a claim of unfair and deceptive trade practice. Id. at 487. Lastly, the court explained that while conversion can support such a claim, such a determination must be based on specific findings by the jury, and the jury findings were insufficient to support an unfair and deceptive trade practices claim. Id. Regarding the creditors' claims, the court found that they were required to remit sale proceeds to the senior lienholder, that they were not entitled protection under the UCC for good faith justification regarding the conversion of the cattle, and that the evidence did not support a marshaling instruction. Id. at 489-92.

The case was decided on August 19, 2008.