Summary of a Recent
Judicial
Development in
Secured Transactions
State Supreme Court Rules Security Interest
Subject to Contractual Language
Kaleb K. HennighNational AgLaw Center Graduate Assistant
Summary of Decision
In Consolidated Nutrition, L.C. v. IBP, Inc., 669 N.W.2d 126 (S.D. 2003), the Supreme Court of South Dakota held that the state's Uniform Commercial Code (UCC), rather than the Food Security Act (FSA), governed a priority dispute involving the proceeds from the sale of farm products under a procurement contract, and that the processor's "contractual right of setoff" had priority over other perfected security interests.
Background
IBP, Inc. (IBP) entered into a livestock procurement contract with hog producers that contained price stabilization clauses, which enabled IBP to withhold hog producers' proceeds from the sale and purchase of animals and later use them as deficiency payments for account setoff purposes. See id. at 128. Consolidated Nutrition, L.C. (Consolidated) extended credit to the hog producers and took a security interest in the producers' hogs subsequent to the IBP contract. See id.
On April 6, 2001, the producers sold IBP 590 animals for $70,000, of which IBP withheld $65,000 as a set off due to the producers' account deficiencies. See id. IBP had no notice of Consolidated's security interest in the animals at the time of sale since Consolidated delayed sending in a written notice of its security interest to IBP until July 9, 2001, and "failed to file an effective financing statement under the FSA." Id. at 121. Consolidated filed suit to recover the proceeds from the sale of the hogs. See id. The lower court granted a motion for summary judgment and ruled that IBP had priority. See id. Consolidated appealed the lower court's decision to the South Dakota Supreme Court. See id.
Arguments
Consolidated claimed that its security interest in the animals gave it priority to the proceeds from the sale. See id. IBP argued that state law removed the dispute from being applicable to Article 9, and that it had a "common law right of setoff" that should be acknowledged by the court as being superior to the feed company's security interest. See id. at 132.
Analysis and Holdings
The court determined that IBP took the hogs free of Consolidated's security interest under FSA provisions. Id. at 129. However, the court then held that FSA provisions did not regulate priority disputes regarding the proceeds involved in the setoff right dispute. See id. In finding the FSA inapplicable, the court relied on the decision in Food Serv. of Am. v. Royal Heights, Inc., 871 P.2d 590, 593 (Wash. 1994), where it was found that "[a] buyer or commission merchant entitled to priority for a purchase under the FSA, who also extends credit and then seeks to retain proceeds from the sale as repayment, is not protected by the FSA." Id. at 131.
The court ruled the priority dispute was governed by Article 9 and that Consolidated's security interest did not have priority over IBP's setoff right. See id. at 129. The court stated that Consolidated was an assignee and its interest was subject to the agreement terms and conditions of the procurement contract. See id. at 134. Since the procurement contract terms contained the IBP's right to setoff, Consolidated's secured interest in the proceeds was subject to those terms and thus its interest in the proceeds was subordinate to those contractually granted to IBP. See id.
The case was decided on August 27, 2003; this summary was posted Nov. 9, 2004.