Peoples State Bank v. San Juan Packers, Inc.

696 F.2d 707
CourtCourt of Appeals for the Ninth Circuit
DecidedJanuary 12, 1983
DocketNo. 79-4238
StatusPublished
Cited by3 cases

This text of 696 F.2d 707 (Peoples State Bank v. San Juan Packers, Inc.) is published on Counsel Stack Legal Research, covering Court of Appeals for the Ninth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Peoples State Bank v. San Juan Packers, Inc., 696 F.2d 707 (9th Cir. 1983).

Opinion

PER CURIAM.

This is a dispute between a secured creditor of a bankrupt food processor and a secured creditor of farmers from whom the food processor bought vegetables. The food processor, San Juan Packers, Inc., bought cans on credit from a can manufacturer, National Can Corporation, and granted the can manufacturer a floating lien on all of its inventory. In late summer, 1976, the food processor bought vegetables from many farmers, including the three involved in this litigation. These three farmers had obtained financing from Peoples State Bank and had granted the bank a security interest in their crops and the “proceeds” thereof.

The food processor filed a petition in bankruptcy after it had received the farmers’ vegetables and processed and sold a portion of them, but before it had finished paying all purchase price installments due the farmers. Not having been paid by the food processor, the farmers did not pay the bank. The bank brought this adversary proceeding in bankruptcy court against all of the food processor’s secured creditors to establish the priority of the bank’s security interest in the farmers’ vegetables and in the cash proceeds thereof. The parties agreed to the sale of all vegetables in the food processor’s possession and creation of a [709]*709fund from the proceeds to satisfy any judgment that might arise from this action.

The bankruptcy court found for the bank, and the can manufacturer appealed to the district court, which affirmed. The can manufacturer appeals to this court, advancing three contentions.

I.

The can manufacturer first contends that money received by the food processor for the farmers’ vegetables is not “proceeds” to which the bank’s security interest attached under its security agreements with the farmers.

The Uniform Commercial Code (UCC)1 provides that “[pjroceeds includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of.” Section 9-306(1). Under this definition, the money the food processor received for the farmers’ vegetables is “proceeds” unless the vegetables ceased to be collateral when purchased by the food processor.

“ ‘Collateral’ means the property subject to a security interest .... ” Section 9-105(l)(c). “Except where ... Article [9] otherwise provides, a security interest continues in collateral notwithstanding sale ... by the debtor unless his action was authorized by the secured party .... ” Section 9-306(2). Since the can manufacturer does not dispute the bankruptcy court’s finding that the bank did not authorize the sale free of its security interest, and Article 9 does not otherwise provide,2 it would appear that the bank’s security interest continued in the vegetables after their sale to the food processor, that the vegetables remained “collateral,” and that whatever was received by the food processor when the vegetables were sold is “proceeds.”

The can manufacturer points out that section 9r306(2) provides that a security interest continues, “notwithstanding sale ... by the debtor and ... in any identifiable proceeds including collections received by the debtor” (emphasis supplied), and argues that the bank’s security interest was not saved by section 9-306(2) when the vegetables were sold and cash received by the food processor rather than by the farmers because the farmers and not the food processor were the “debtors.” But under § 9-105(l)(d), the food processor is the “debtor”:

(1) In this article, unless the context otherwise requires:
(d) “Debtor” means the person who owes payment or other performance of the obligation secured, whether or not he owns or has rights in the collateral .... Where the debtor and the owner of the collateral are not the same person, the term “debtor” means the owner of the collateral in any provision of the Article dealing with the collateral, the obligor in any provision dealing with the obligation, and may include both where the context so requires.

(emphasis supplied).

Official Comment 2 to section 9-105 makes it clear that an owner of the collateral is a “debtor” whether he acquired his rights in the collateral at the time the security interest was created or at a later date:

In all but a few cases the person who owes the debt and the person whose property secures the debt will be the same. Occasionally, one person furnishes security for another’s debt, and sometimes property is transferred subject to a secured debt of the transferor which the transferee does not assume; in such cases, under the second sentence of the definition, the term “debtor” may, de[710]*710pending on the context, include either or both such persons.

The can manufacturer protests that under this view the bank could follow these vegetables into the hands of the ultimate consumer.3 But this is precisely what the plain language of the UCC requires. See B. Clark, The Law of Secured Transactions under the Uniform Commercial Code 1 8.4[3][a] at 8-22 to -23 (1980); R. Henson, Secured Transactions under the Uniform Commercial Code 143-44 (1979); cf. Garden City Production Credit Ass’n. v. Lannan, 186 Neb. 668, 186 N.W.2d 99 (1971) (plaintiff’s security interest in livestock continued through unauthorized sale by farmer and resale by farmer’s transferee). As a practical matter, of course, it would be difficult for the secured party to identify its collateral far down a chain of purchasers.

Cases relied upon by the can manufacturer did not consider section 9-105(l)(d). See Get It Kwik of America, Inc. v. First Alabama Bank, 361 So.2d 568 (Ala.Civ.App.1978); Beneficial Finance Co. v. Colonial Trading Co., 4 U.C.C.Rep.Serv, (Callaghan) 672 (Pa.Ct. of Common Pleas 1967).

II.

The can manufacturer’s second argument is that by the terms of section 9-306(2) the bank’s security interest continued only in “identifiable proceeds” and was lost because the food processor mixed together vegetables purchased from various farmers making it impossible to identify vegetables, or proceeds from the sale of vegetables remaining in the food processor’s possession, as attributable to any particular farmer.

Section 9-315 of the UCC requires rejection of this argument.4 The bank had a perfected security interest in the farmers’ vegetables, and those vegetables became part of a mass of vegetables in the hands of the food processor, so commingled that their identity became lost in the mass. By the express terms of section 9-315(1), where collateral loses its identity by commingling or processing, the security interest continues in the mass or product — and it is not disputed that the proceeds in the fund established in this case can be traced to commingled vegetables in the hands of the food processor.

Cases relied upon by the can manufacturer involved nonfungible goods that did not lose their identity when commingled with other goods. See Howarth v. Universal C.I.T. Credit Corporation, 203 F.Supp. 279 (W.D.Pa.1962); Chrysler Credit Corporation v. Bank of Wiggins, 358 So.2d 714 (Miss. 1978).

III.

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696 F.2d 707, Counsel Stack Legal Research, https://law.counselstack.com/opinion/peoples-state-bank-v-san-juan-packers-inc-ca9-1983.