Summary of a Recent
Judicial Development in
Secured Transactions

Food Security Act Affords Protection to Certain Purchasers of Farm Products

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Fin-Ag, Inc. v. Cimpl's Inc., 754 N.W.2d 1 (S.D. 2008), the Supreme Court of South Dakota held that the Food Security Act allowed a purchaser of livestock to take free of the seller's creditor's interest.

Background

Fin-Ag entered into an agricultural security agreement with the Berwalds, which granted Fin-Ag a security interest in their cattle. Id. at 2. The agreement provided that all proceeds of cattle sales were to be jointly payable to the Berwalds and Fin-Ag, and it prohibited non-inventory sales of collateral unless authorized by Fin-Ag in writing. Id. Fin-Ag filed a UCC financing statement which qualified as an effective financing statement under the Food Security Act (FSA). Id. The Berwalds subsequently defaulted on their obligations and filed for Chapter 11 bankruptcy. Id. at 3. Fin-Ag brought an action for conversion against Cimpl's, a meat packing company which had purchased some of the Berwald's cattle. Id. at 7. Most of the cattle, however, were sold under one of the Berwalds' trade names, C&M Dairy, which was not listed on Fin-Ag's financing statement. Id. at 4. The circuit court held that C&M Dairy was the seller for purposes of notice and thus Cimpl's was not put on notice and took the livestock free of Fin-Ag's interest pursuant to the Food Security Act, and Fin-Ag appealed. Id. at 8.

Arguments

Fin-Ag argued that the Berwalds, not C&M Dairy, were the sellers of the cattle, so Cimpl's had written notice of Fin-Ag's security interest disqualifying it from protection under the Food Security Act. Id. at 9. Fin-Ag also argued that even if C&M Dairy was considered the seller for purposes of notice, the sale barns were still not protected because the FSA limits its protection to taking free of security interests "created by the seller" and the Berwalds created the security interest, not C&M Dairy. Id.

Analysis and Holdings

The majority found it irrelevant that C&M Dairy was a "nonexistent entity," and stated that it was still considered C&M Dairy to be an additional debtor that required a separate listing for the purpose of giving notice under the Food Security Act. Id. at 24. The court therefore declined to adopt a "know your seller" rule that would require buyers to determine the legal relationship of debtors, reasoning that the Food Security Act specifically relieves buyers of any obligation to check public records other than the master list. Id. at 25. The majority concluded that it was Fin-Ag's duty to follow the FSA regulations and list C&M Dairy as an additional debtor, and having failed to do so, Fin-Ag could not invoke the written notice exception to FSA protection. Id. at 25-27. The court also rejected Fin-Ag's interpretation of the Act's "created by the seller" limitation and held that because C&M Dairy was the alter ego of the Berwalds, and because the Berwalds created the security interest, C&M Dairy must be regarded as the seller who created the security interest. Id. at 39. For those reasons, the court affirmed the judgment of the circuit court and held that Cimpl's took the cattle free of Fin-Ag's interest pursuant to the Act. Id. at 43.

The case was decided on June 18, 2008.