Western Farm Service, Inc. v. Olsen

90 P.3d 1053, 151 Wash. 2d 645, 53 U.C.C. Rep. Serv. 2d (West) 614, 2004 Wash. LEXIS 364

Opinions

Madsen, J.

Key Bank National Association (Key Bank) challenges a Court of Appeals decision reversing the trial court’s grant of summary judgment in its claim for conversion against J.R. Simplot Co. (Simplot). Key Bank, which held a security interest in potato crops purchased by Simplot, claims that Simplot converted proceeds when it failed to designate Key Bank as a copayee on a check issued to the seller as a hauling allowance. We hold that the hauling allowance constitutes proceeds and reinstate the judgment of the trial court.

FACTS

Lynn Olsen is a potato and onion farmer, farming approximately 4,000 acres of land. Key Bank financed Olsen’s farming operation between 1996 and 1998 and had a perfected security interest in Olsen’s assets, including all general crops and proceeds thereof as well as instruments arising out of sales or other disposition of crops. Key Bank’s security interest in crops and the proceeds was perfected by filing a financial statement on April 1, 1996. There were no prior filings. Pursuant to the Food Security Act of 1985, 7 U.S.C. § 1631(e), Key Bank sent a notice to buyer alerting Simplot, with which Olsen contracted for as many potatoes as he had grown, of its security interest in Olsen’s crops in 1996 and 1997. The notice to buyer stated that all proceeds shall be paid jointly to Olsen and Key Bank.

In one of the contracts between Olsen and Simplot, Olsen was to deliver his potatoes to a place designated by Simplot at Olsen’s own expense. However, the contract also provided that Simplot was to give Olsen a hauling allowance, along with payment for the sale of the potatoes, once Olsen completed delivery. After the delivery, Simplot issued a check to Olsen for $160,607.44 representing a hauling allowance, made payable only to Olsen, not to Key Bank.

For reasons unrelated to the issue under consideration here, Simplot sued Key Bank for breach of contract. Key Bank then filed a counterclaim against Simplot for conversion, alleging that Simplot converted money by issuing a check payable only to Olsen. Both Key Bank and Simplot filed motions for summary judgment. Key Bank asserted that Simplot should have designated Key Bank as a copayee of the check because Key Bank’s security interest covered the hauling allowance as proceeds of the potato crop. The trial court granted summary judgment in favor of Key Bank.

Simplot appealed and the Court of Appeals reversed, concluding that there was no conversion because the hauling allowance was not proceeds of the potato crops. W. Farm Serv., Inc. v. Olsen, 114 Wn. App. 508, 522, 59 P.3d 93 (2002), review granted, 150 Wn.2d 1008 (2003).

ANALYSIS

The issue presented here is whether a payment for hauling potatoes, made pursuant to a contract for the sale of potatoes, constitutes crop proceeds that are subject to a security interest in the potato crops. Key Bank claims that Simplot converted proceeds when it failed to name Key Bank as a joint payee on the check it paid Olsen for hauling potatoes.¹

The legislature has defined the term “proceeds” broadly. Former RCW 62A.9-306(1) (1995) provided that proceeds include “whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds.” Key Bank argues that the trial court correctly applied the statute and relevant case law when it held that the hauling allowance paid to Olsen constituted proceeds. We agree.

As this court has noted, the broad statutory definition of proceeds is intended to ensure that the term will be all-encompassing and will be given “ ‘a flexible and broad content.’ ” Rainier Nat’l Bank v. Bachmann 111 Wn.2d 298, 302, 757 P.2d 979 (1988) (quoting In re Munger, 495 F.2d 511, 513 (9th Cir. 1974)). In Rainier National Bank, the bank held a security interest in the debtors’ collateral, including their dairy cattle and the proceeds. Id. at 299-300. Under the Food Security Act of 1985, the debtors received payments from the federal government in exchange for selling all of their cattle for slaughter or for export and an agreement not to acquire any interest in dairy cattle or in the production of milk. Id. at 300. The debtors refused to assign the payments from the government to the bank, claiming that the bank’s security interest did not cover the government payments, although it covered the cash gained through the sale of their cattle. Id. at 301. In concluding that the payments were included in proceeds, the court noted that, by including the words “whatever is received” in the statutory definition of proceeds, the legislature clearly intended to include more than the usual cash proceeds received in a normal sale of collateral. Id. at 303.

We employed an expansive reading of proceeds again in Central Washington Bank v. Mendelson-Zeller, Inc., 113 Wn.2d 346, 779 P.2d 697 (1989). In that case, the bank financed the debtor’s expenses for their crops. 113 Wn.2d at 349. As collateral, the bank retained a perfected security interest in the apple crops and the proceeds. Id. Pursuant to the bank’s requirements, the debtors contracted with Premium Packing and Storage, Inc. (Premium) to operate as a commission merchant. Id. at 349-50. In turn, Premium had a sales agent agreement with Mendelson-Zeller to perform marketing functions for a commission. Id. at 350. Mendelson-Zeller sold the apples and advanced funds to Premium for picking, hauling, and packing expenses. Id. Premium retained the packing advances and distributed the picking and hauling expenses to the debtors and other growers. Id. When Mendelson-Zeller sold the debtors’ crops, it retained a part of the gross proceeds as sales commission and brokerage fees and repayment of advances made to Premium, remitting the remaining proceeds to Premium. Id. In turn, Premium deducted its commission and forwarded the remaining amount to the bank. Id. The bank brought a conversion action against Premium and Mendelson-Zeller, claiming a right to all proceeds.² Id. In its defense, Mendelson-Zeller argued that the bank’s proceeds included only payments received by the debtors after payment of the costs of handling and marketing. Id. at 359. The court rejected this claim, finding that the term “proceeds” includes “whatever is received,” including proceeds that were not actually received by the debtor. Id. at 360-61. In reaching this conclusion, the court quoted language from Johanson Transportation Service v. Rich Pik’d Rite, Inc., where the court held that “[p]roceeds ‘includes all economic components that go into the total amount received for the product.’ ” 164 Cal. App. 3d 583, 592, 210 Cal. Rptr. 433 (1985); Cent. Wash. Bank, 113 Wn.2d at 361. The court also relied on a pre-U.C.C. case, Cashmere Valley Bank v. Pacific Fruit & Produce Co., 198 Wash. 363, 88 P.2d 579 (1939), where the factual situation was virtually identical to that of Central Washington Bank. In Cashmere Valley Bank, this court held that a merchant of fruits covered by the security interest could not deduct handling expenses because a creditor, whose rights were subordinate to those of a secured party, would otherwise be able to defeat the secured interest in collateral. Cashmere Valley Bank, 198 Wash, at 369-70.

The Johanson case, quoted in Central Washington Bank, is particularly germane. There, Wells Fargo and Rich Pik’d Rite had a security interest in strawberries and proceeds grown by a farmer. 164 Cal. App. 3d at 586. Johanson Transportation Service (Johanson) advanced freight charges to the farmer, who failed to repay. Id. at 587-88. The freight charges were included in the sale price to the fruit buyer. Id. at 587. The farmer deposited all the checks he received for the sale of the strawberries in the deposit account at Wells Fargo. Id. Johanson sued Wells Fargo and Rich Pik’d Rite for conversion and unjust enrichment. Id. at 588. Johanson claimed that the freight charges were not included in proceeds. Id. at 591. The court rejected Johanson’s claim, stating that the term “proceeds” is to be construed broadly. Id.

Simplot, however, urges that Johanson is distinguishable and that the court should instead follow Thompson v. Danner, 507 N.W.2d 550 (N.D. 1993). In Thompson, a bank had a security interest in potato crops grown by growers Thompson and Danner. 507 N.W.2d at 553. The growers sold their potato crops to Simplot. Id. The potatoes-sales contracts between Simplot and Danner contained a section for storage payments to Danner because those contracts called for delayed deliveries of Danner’s potatoes to Simplot. Id. at 558. The bank claimed that the storage payments were included within proceeds of the potato crops, which Simplot protested. Id. at 557. On review, the court held that the storage payments were not included within proceeds, noting that the storage payment was received as an additional compensation for a service provided by Danner to Simplot rather than in consequence of the disposition of the crops. Id. at 558.

In contrast to Johanson, Simplot points out that here, as in Thompson, there is a separate contract section providing payment for hauling potatoes. However, the decision in Thompson stems from the court’s view that the nature of storage payments is significantly different from a hauling allowance. The court noted that the term “proceeds” includes whatever is received upon disposition of collateral. It then reasoned that Danner received storage payments because the disposition of his crops was delayed and the storage payments were additional compensation for the storage service. The court concluded the storage payments fell outside the scope of the term “proceeds” even though the crops were subject to a security interest. Thompson, 507 N.W.2d at 558; see also In re Connelly, 41 B.R. 217, 220 (Bankr. D. Minn. 1984); In re Sumner, 69 B.R. 758, 762-63 (Bankr. D. Or. 1986). In contrast, a hauling allowance, including the allowance in this case, is a payment received upon the sale of crops. Thus, a hauling allowance is an integral part of the disposition of the crops.³

Simplot also urges a more flexible approach to defining proceeds that looks to the language of the sales contracts between the parties. Simplot points out the hauling allowance is provided in a separate contract clause and this indicates that the parties did not intend the allowance to be a part of the sales price of the potatoes. However, if we conclude that the hauling allowance is not proceeds in this case because it is mentioned in a separate clause, brokers and carriers will be encouraged to create contract sections for freight allowances, commissions, or brokerage fees and the like, separate from the main sales section, lowering the value of the collateral. By doing so, the contracting parties can effectively undermine the interest of a secured party and could allow a creditor with subordinate rights to defeat a secured interest in collateral. This is exactly the court’s concern in Cashmere Valley Bank. Simplot’s position is contrary to our determination that the term “proceeds” includes all economic components that go into the total amount received for the product. Cashmere Valley Bank, 198 Wash, at 369-70; Cent. Wash. Bank, 113 Wn.2d at 361 (quoting Johanson, 164 Cal. App. 3d at 592).

Additionally, Simplot would not prevail under the approach it suggests. Here, the hauling allowance was an integral part of the potato-sales contract between Olsen and Simplot. According to the contract, Olsen was required to deliver his potatoes to a place designated by Simplot at Olsen’s own expense. Although he was entitled to the hauling allowance along with the payment for potatoes, Olsen could collect these sums only after the potatoes were delivered. Plainly, these sums were “received upon the sale, exchange, collection or other disposition” of Olsen’s potatoes and thus properly viewed as proceeds. Former RCW 62 A. 9--306(1).

We hold that the hauling allowance in this case constitutes proceeds of the potato crops and that Key Bank’s security interest covers the check Simplot gave to Olsen for that purpose.

Simplot next argues that there can be no conversion where there is a benefit to the owner. Simplot claims that Key Bank incurred no damages or at most only mitigated damages even if Key Bank’s security interest covers the check for hauling. Essentially, Simplot argues that the hauling allowance would have been used to pay Olsen’s farming expenses in 1998 regardless of whether Key Bank or Olsen received the check from Simplot. In support of the argument, Simplot relies on three out-of-state cases in which the courts stated that the damages are mitigated if the victim receives benefits from the conversion. United States v. Keeling, 131 F. Supp. 304, 307 (W.D. Ark. 1955); Burke County v. First Nat’l Bank of Birmingham, 73 F.2d 783, 785 (5th Cir. 1934); Ballenger v. Liberty Nat’l Life Ins. Co., 266 Ala. 407, 412, 96 So. 2d 728 (1957).

No Washington case has adopted the approach urged by Simplot, and Simplot points to no evidence sufficient to create an issue of material fact on whether Key Bank benefited from the proceeds of the check.

CONCLUSION

We hold that the hauling allowance paid as a part of the sale of crops is proceeds as defined in former RCW 62A.9--306(1). Accordingly, we conclude that the trial court did not err in granting a motion for summary judgment in Key Bank’s favor. We reverse the judgment of the Court of Appeals and reinstate the trial court’s summary judgment.

Alexander, C.J., and Johnson, Bridge, Owens, and Fairhurst, JJ., concur.

Footnotes

1

“ ‘A conversion is a willful interference with a chattel without lawful justification, whereby a person entitled thereto is deprived of the possession of it.’ ” Paris Am. Corp. v. McCausland, 52 Wn. App. 434, 443, 759 P.2d 1210 (1988) (quoting Olin v. Goehler, 39 Wn. App. 688, 693, 694 P.2d 1129, review denied, 103 Wn.2d 1036 (1985)). When a debtor transfers collateral subject to a perfected security interest, the secured party may commence an action against the purchaser for conversion. See, e.g., Wash. State Bank v. Medalia Healthcare, L.L.C., 96 Wn. App. 547, 550-52, 984 P.2d 1041 (1999).

2

Premium did not appeal the order of summary judgment in favor of the bank. Cent. Wash. Bank v. Mendelson-Zeller, Inc., 113 Wn.2d 346, 350, 779 P.2d 697 (1989).

3

Although Thompson can be factually distinguished, we also find the rationale of Thompson questionable. The court relied on two cases that held that storage payments received in connection with participation in a government grain set-aside program are not “proceeds” of the grain placed in storage. 507 N.W.2d at 558. This view appears inconsistent with our holding in Rainier National Bank v. Bachmann, 111 Wn.2d 298, 757 P.2d 979 (1988).