Summary of a Recent
Judicial
Development in
Secured Transactions
Food Security Act Protects Buyers of Farm Products Who
Aren't Adequately Notified of Existing Security Interests
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Fin-Ag, Inc. v. Pipestone Livestock Auction Market, Inc., 754 N.W.2d 29 (S.D. 2008), the Supreme Court of South Dakota held that the Food Security Act protected livestock auction barns from liability for conversion of cattle because the seller was not listed on the creditor's master list in its effective financing statement.
Background
Fin-Ag entered into an agricultural security agreement with the Berwalds, which granted Fin-Ag a security interest in their cattle. Id. at 34. The agreement provided that all proceeds of cattle sales were to be jointly payable to the Berwalds and Fin-Ag and 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, but it only listed dairy cattle and milk as collateral. Id. The Berwalds subsequently defaulted on their obligations and filed for Chapter 11 bankruptcy. Id. Fin-Ag brought an action against two public livestock auction barns, Pipestone Livestock and South Dakota Livestock, alleging that the sale barns were aware of Fin-Ag's interest in cattle sold by the Berwalds but failed to remit payment to Fin-Ag. Id. 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 effective financing statement. Id. The court in the Pipeline case held because C&M Dairy was not listed on Fin-Ag's effective financing statement, Pipeline took the cattle free and clear of Fin-Ag's interest pursuant to the Food Security Act from one sale in which Pipestone acted as a commission merchant. Id. at 34-35. However, the court held that the Act did not protect Pipeline for the other sales because it was acting as a lender when it applied sale proceeds to C&M Dairy's account for prior purchases, rendering it liable for conversion. Id. The court in the South Dakota Livestock case held that the Berwalds, not C&M Dairy, were the real sellers under the FSA and thus SD Livestock was liable for conversion for all its sales. Id. Both sale barns appealed the ruling, and the cases were combined for review. Id. at 37.
Arguments
The sale barns argued that they were entitled to protection under the Act because C&M Dairy was the seller, not the Berwalds, so the sale barns did not have the necessary written notice of Fin-Ag's claim. Id. at 37.
Fin-Ag argued that the Berwalds, not C&M Dairy, were the sellers of the cattle, so the sale barns had written notice of Fin-Ag's security interest disqualifying them from protection under the Food Security Act. Id. Alternatively, Fin-Ag argued that even if C&M Dairy was considered the seller for purposes of notice, the sale barns were not protected because the Act limits their 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 issue before the court was whether the Food Security Act preempted state law conversion actions and afforded the sale barns protection from liability. Id. at 19. The court concluded that the Act provided the sale barns protection from conversion. Id. The court made this decision based upon the fact that C&M Dairy was the seller, C&M Dairy was not on the master list giving buyers notice of Fin-Ag's security interest, and because C&M Dairy was the alter ego of the Berwalds and therefore was regarded as having created the security interest. Id. at 20.
The case was decided on June 18, 2008.