#24050-rev & rem-SLZ
2008 SD 49
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
FIN-AG, INC., Plaintiff and Appellee,
v.
WATERTOWN LIVESTOCK
AUCTION, INC., Defendant and Appellant.
and
DACOTAH BANK, Defendant.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE THIRD JUDICIAL CIRCUIT
CODINGTON COUNTY, SOUTH DAKOTA
* * * *
HONORABLE ROBERT L. TIMM
Judge
* * * *
JASON W. SHANKS of
May & Johnson, PC
Sioux Falls, South Dakota
and
JONATHAN K. VAN PATTEN
Vermillion, South Dakota Attorneys for appellee.
MICHAEL A. HENDERSON of
Cadwell, Sanford, Deibert
& Garry, LLP
Sioux Falls, South Dakota Attorneys for appellant.
* * * *
ARGUED JANUARY 8, 2007
OPINION FILED 06/18/08
#24050
ZINTER, Justice
[¶1.] This appeal arises from an action for conversion by Fin-Ag, Inc.
against Watertown Livestock Auction, Inc. Fin-Ag alleges it had a perfected
security interest in cattle sold at Watertown under the name C&M Dairy. The case
involves numerous issues regarding a commission merchant’s liability for
conversion when the collateral involves farm products covered by the Food Security
Act (FSA), 7 USC § 1631 (1985). On cross-motions for summary judgment, the
circuit court concluded that Watertown converted Fin-Ag’s collateral.
[¶2.] This case involves the same debtors 1 and creditor, and the same type
of cattle sales considered in Fin-Ag, Inc. v. Cimpl’s, Inc., 2008 SD 47, __NW2d __;
Fin-Ag, Inc. v. Pipestone Livestock Auction Market, Inc., and Fin-Ag, Inc. v. South
Dakota Livestock Sales of Watertown, Inc., 2008 SD 48, __NW2d ___. In fact, the
circuit court’s memorandum decision in Fin-Ag, Inc. v. South Dakota Livestock Sales
of Watertown was the basis for the circuit court’s decision in this case. Because we
considered the same core issues 2 involving virtually identical transactions in the
prior cases, we reverse and remand this case for further proceedings in accordance
with those decisions.
1. Berwalds includes the following persons and entities: Calvin Berwald,
Michael Berwald, Kimberly Berwald, Berwald Brothers (a general
partnership including Calvin and Michael Berwald as general partners), and
Sokota Dairy, LLC.
2. Watertown Livestock raises one additional argument under the Packers and
Stockyards Act, 7 USC § 181, attempting to distinguish Consolidated
Nutrition, L.C. v. IBP, Inc., 2003 SD 107, 669 NW2d 126. We decline to
review that argument because it was not presented to the circuit court.
-1-
#24050
[¶3.] GILBERTSON, Chief Justice, and MEIERHENRY, Justice
concur.
[¶4.] SABERS and KONENKAMP, Justices, dissent in part and concur in
part.
SABERS, Justice (dissenting on all Fin-Ag cases on the FSA issue). 3
[¶5.] Incredibly, Fin-Ag presents this Court with authority from a
neighboring state that is virtually on point to the circumstances of this case; yet, the
opinion goes out of its way at every opportunity in its analysis of the issues to arrive
at the opposite conclusion of the Hufnagle case. Because I cannot agree with the
opinion’s analysis and conclusions regarding FSA protection, I dissent.
[¶6.] In Hufnagle, the lender, Fin-Ag had a perfected security interest in
Buck’s corn crops. 720 NW2d 579, 580 (Minn 2006). Fin-Ag also filed an effective
financing statement, “which caused the interest to be listed in Minnesota’s central
filing system.” Id. Meschke was a registered farm products dealer and he received
the central filing system’s list of sellers whose grain was encumbered by security
interests. Id. When Meschke bought corn directly from Buck he, with two
exceptions, made the checks payable to Buck and Fin-Ag jointly. Id.
3. As the opinion acknowledges, this case is similar to Fin-Ag, Inc. v. Cimpl’s,
Inc., 2008 SD 47, __ NW2d __ and Fin-Ag, Inc. v. Pipestone Livestock Auction
Market, Inc., and Fin-Ag, Inc. v. South Dakota Livestock Sales of Watertown,
Inc., 2008 SD 48, __ NW2d __. Because these cases are closely related and
should be read together, it necessitates that I restate the underlying flaw in
the FSA analysis stated in Cimpl’s, 2008 SD 47, ¶¶10-47, __ NW2d __, and
perpetuated here.
-2-
#24050
[¶7.] Later, Meschke bought corn from persons, the Tookers, who claimed
they were the sellers. Id. at 583-84. There was no one by the name Tooker on the
central filing system list. Id. Meschke bought corn from the Tookers seven
different times. Id. The proceeds from these seven transactions were deposited in
the debtor’s (Buck’s) account. Id. Fin-Ag was not made a co-payee on any of these
checks. Id.
[¶8.] Fin-Ag sued Meschke for conversion after Buck failed to repay Fin-Ag.
Id. The Minnesota district court granted summary judgment in favor of Fin-Ag. Id.
On appeal, the Minnesota Court of Appeals affirmed. Id.
[¶9.] The Minnesota Supreme Court held Meschke was liable for conversion.
Id. at 581. In doing so, it noted that it must determine “how section 1631 works in
the situation of ‘fronting’ sales. The parties describe ‘fronting’ as being where a
seller of farm products that are subject to a security interest has a third party sell
them under the third party’s name.” Id. at 584. The court recognized that “both
Meschke and Fin-Ag can be viewed as innocent parties in the sense that they each
did everything they were required or expected to do under the FSA.” Id.
[¶10.] The buyer, Meschke, made arguments that are similar to the Sale
Barns’ arguments in this case. For instance, Meschke argued that it is difficult for
a buyer of farm products to discover a security interest in a fronting situation and
lenders are better suited to police these situations. Sale Barns advanced a virtually
identical argument.
[¶11.] Despite this argument, and the recognition of the difficulty a fronting
situation presents for a buyer, the Minnesota Supreme Court found it was
-3-
#24050
“constrained to apply the plain language of the statutes, as enacted by Congress and
the Minnesota Legislature, and to follow where they lead.” Id. at 585. The court
noted that the “created by the seller” language was a serious limitation on the FSA’s
protections afforded to the buyer. Moreover, the language has come under much
criticism, but Congress “essentially incorporated this clause in section 1631 when it
attempted to correct some of the other shortcomings, from the perspective of buyers,
of UCC section 9-307.” Id.
[¶12.] Due to this limitation, Meschke could not find protection, even in the
fronting situation and even though he was an innocent buyer. The court noted:
The inclusion of the “created by the seller” clause in
section 1631 means that the statute does not provide
protection for buyers in a fronting situation where the
security interest from which protection is sought was not
created by the fronting parties. Under the facts of this
case, no matter what factual assumptions we make, there
are none under which Meschke could take the corn free of
Fin Ag’s security interest. This is because if we view
Buck as the seller, we must conclude that Meschke’s
rights are subject to Fin Ag’s security interest under
section 1631 because Fin Ag filed an “effective financing
statement” that put Meschke on notice of Fin Ag’s
security interest in Buck’s products. And, if we view the
Tookers as the sellers, we must conclude that Meschke’s
rights are subject to Fin Ag’s security interest, under either
section 1631 or Minnesota’s UCC, because both statutes
only protect a buyer from a security interest created by the
seller and not from a security interest created by an
undisclosed owner, which continues in the product despite
the sale.
Id. at 586 (emphasis added). Here, the same result is required, if we view Calvin
and Michael Berwald as the seller, then Sale Barns’ rights are “subject to Fin-Ag’s
security interest under section 1631” because Fin-Ag filed an ‘effective financing
statement’ that put [Sale Barns] on notice . . . .” Id. Alternatively, if we view C&M
-4-
#24050
Dairy as the seller, then “we must conclude that [Sale Barns]’ rights are subject to
Fin-Ag’s security interest” because under section 1631, a buyer is only protected
“from a security interest created by the seller and not from a security interest
created by an undisclosed owner.” See id.
[¶13.] Instead, the opinion distinguishes Hufnagle by declaring “fronting”
different than using a d.b.a. 4 It rationalizes that the Hufnagle court did not
“consider the fourth factual scenario that is before this Court, i.e., debtors who
created the security interest, and conducted their business under their d.b.a.
business name.” See Fin-Ag v. Cimpl’s, 2008 SD 47, ¶31, __ NW2d __. However,
when discussing if C&M Dairy can be a seller under the FSA, the opinion declares
that C&M Dairy is an “other business entity,” separate and distinct from the
Berwalds. Id. ¶23 (quoting 7 USC § 1631(c)(10). The use of a separate and distinct
entity to sell cattle subject to a different owner’s security interest is factually
analogous to Hufnagle, and is fronting. As the Minnesota Supreme Court noted,
“[t]he corn [cattle] had been sold to Meschke [Sale Barns] in the names of third
persons [separate entity, C&M Dairy] not involved with the debt to Fin-Ag.”
Hufnagle, 720 NW2d at 580. This issue should be decided based on the rationale
expressed in Hufnagle.
4. The opinion attempts to distinguish the Hufnagle case by explaining a
fronting situation only occurs when a separate third person sells the product.
However, what about the deliveries where Austin, Arlen, a semi-driver or
some other unidentified person delivered cattle to the sale barns? Are these
not third persons? Or are we to consider anyone who delivers cattle for
C[alvin] & M[ichael] Dairy a part of that fictitious entity?
-5-
#24050
[¶14.] The opinion can call it anything it wants, but it cannot hide what is
plain and obvious. In its attempts to decide this case in favor of the Sale Barns, it
arrives at some conflicting conclusions. For example, the opinion concludes that
C&M Dairy is a “business entity” and therefore separate from Calvin and Michael
Berwald and can be a seller under the statute, thus the FSA protects Sale Barns.
Then, in the next portion of analysis, C&M Dairy is merely a d.b.a. and cannot be
separated from the Berwalds, therefore C&M Dairy created the security interest
and again, Sale Barns win. In reality, C&M Dairy is an illegal fiction and definitely
a fronting situation. It is not an entity or an alter ego – and certainly not both the
“seller” and the “seller who created the security interest.”
[¶15.] There are two different interpretations of a supposed entity, yet the
same strained outcome. When defining “seller,” it is inconsistent to say that in one
instance C&M Dairy is an entity distinct from the Berwalds, so C&M Dairy can be
the seller and claim Sale Barns did not receive notice of Fin-Ag’s security interest,
and then to say the Berwalds and C&M Dairy are “one and the same” in order to
find C&M Dairy is the “seller who created the security interest.” In Hufnagle, the
Minnesota Supreme Court specifically refused to “define seller two different ways in
the same analysis without a significant indication that this was the legislature’s
intent. No such indication [of legislative intent] exists here.” 720 NW2d at 588-89.
We should not interpret seller two different ways.
[¶16.] We certainly should not interpret seller two different ways when many
commentators have criticized the limitation “created by the seller” in the context of
9-307, yet the clause has never been amended or eliminated since the UCC was
-6-
#24050
rewritten in 1957. Hufnagle, 720 NW2d at 585 (citing William H. Lawrence, The
“Created by His Seller” Limitation of Section 9-309(1) of the UCC: A Provision in
Need of an Articulated Policy, 60 Ind. L.J. 73, 73-74 (1984-1985) and Richard H.
Nowka, Section 9-302(a) of Reviewed Article 9 and The Buyer in the Ordinary
Course of Pre-Encumbered Goods: Something Old and Something New, 38 Brandeis
L.J. 9, 23-24 (1999-2000)). Significantly, despite its criticisms, Congress included
this clause in section 1631 of the FSA in 1985 when attempting to correct some of
the other problems of buying food products under the UCC. See supra ¶11 (Sabers,
J., dissenting) (citing Hufnagle, 720 NW2d at 585).
[¶17.] White and Summers have discussed the difficulties with the “created
by the seller” language. See 4 White & Summers, Uniform Commercial Code § 33-
13 (4th ed 1995 & Supp 2007) (discussing the problems produced by the created by
the seller language in former UCC § 9-307). Importantly, they theorize that:
“Perhaps the drafters intended that as between two innocent parties the ultimate
loss should fall on the party who dealt most closely with the ‘bad guy.’” Id.
Although this may conflict with the FSA policy, we have to presume that Congress
knew what it was doing when it borrowed this language from the UCC.
[¶18.] In each of the cases here, 5 the Sale Barns knew they were dealing with
Calvin or Michael Berwald, or both, before they were dealing with “C&M Dairy.”
Calvin Berwald is the “C” and Michael Berwald is the “M” and the Sale Barns knew
5. Cimpl’s may not have known C&M Dairy as Michael and Calvin Berwald
specifically; however the deliveries were made by Austin, Calvin, Michael, or
Arlen Berwald. The other sale barns had received deliveries of cattle from
Michael and Calvin Berwald in the past as well.
-7-
#24050
it, and they should suffer the ultimate loss. The Sale Barns either took a “head in
the sand” approach and let the Berwalds tell them who they were acting as, or they
simply decided that even though Berwald and family were listed in the master list,
if the Berwalds chose to call themselves something else not mentioned on the list,
the Sale Barns took the position they had to go strictly with the list.6 In this case,
the decision to go with C&M Dairy as the seller was self-serving, as it allowed the
sale barn to collect on a past debt. See Fin-Ag v. Watertown Livestock, Brief of
Appellee at 4, 2008 SD 49, __ NW2d ___ (No. 24050). In sum, these Sale Barns
were more closely dealing with the “bad guy.” 7
6. Either way, when compared to Hufnagle, these facts make it a much stronger
case for Fin-Ag to prevail because in Hufnagle, the buyer was not dealing
with the owner/debtor, Buck, but was dealing with completely unrelated
sellers, the Tookers. Here, Sale Barns dealt solely with the Berwalds simply
using an unregistered, fictitious name. The Sale Barns knew they were
dealing with the Berwalds fronting as C&M Dairy. Once again, it is not
rocket science that the “C” in C&M Dairy stands for Calvin Berwald, and the
“M” in C&M Dairy stands for Michael Berwald, especially when they or their
father, Arlen Berwald, delivered the cattle.
7. Under South Dakota Law, it is not only a crime to sell mortgaged property
without the mortgagee’s consent, see SDCL 44-1-12, it is also a crime under
SDCL 37-11-1, for any person to engage in or conduct a business for profit in
South Dakota “under any name which does not plainly show the true
surname of each person interested in such business unless a statement is
filed first.” (Emphasis added). Furthermore, South Dakota has had a
fictitious name certificate statute for at least sixty-nine years. The fictitious
name certificate must be filed in the register of deeds office or secretary of
state’s office. Penalties are provided for failure to file and it constitutes a
misdemeanor.
Although these issues were not raised in the briefs, the Sale Barns are
“presumed to know the law” and should not benefit from two separate
violations of the criminal law.
-8-
#24050
[¶19.] It does not end there. Again, in an attempt to distinguish Hufnagle,
the opinion indicates that Hufnagle “appeared to involve collusion on the part of the
buyer.” Cimpl’s, 2008 SD 47, ¶33, __ NW2d __. Never mind the fact that the
Supreme Court of Minnesota did not rely on that specific fact in its analysis and it
is not relevant to the discussion. It merely seeks to cloud the real issues. Indeed,
the court noted that “no matter what factual assumptions we make, there are none
under which Meschke could take the corn free of Fin Ag’s security interest.” Id. at
586.
[¶20.] The opinion’s analysis of this issue in Cimpl’s, 2008 SD 47, ¶¶10-47, __
NW2d __, incorporated by reference here, see supra ¶2, sends the message to
deceitful debtors that they can avoid the security interest if they use their initials
as a fictitious name to sell their collateral to sale barns. That opinion blindly
accepts the answer of the driver of the cattle truck to the yardman that the seller is
“C&M Dairy,” even if the driver of the truck is Calvin Berwald, Michael Berwald or
their Father, Arlen Berwald. Interpreting the statutes in this manner produces the
exact result we should prohibit – absurd. That opinion claims the burden should be
on the lender, the party who is more capable of policing this problem. However, it
seems it would be next to impossible for a lender to prevent its debtor from creating
a fictitious name, with no fictitious name filing, and selling cattle under that name,
while it would be relatively easy for the Sale Barn to dig past the fictitious name
and inquire as to the proper owner and seller of the cattle.
[¶21.] Finally, the opinion in Cimpl’s, 2008 SD 47, __ NW2d __, thoroughly
discusses the background of the enactment of the FSA. It details the overarching
-9-
#24050
theme of protecting buyers from the threat of double payment. Then, that opinion
finds the statute ambiguous, because seller is not defined, and declares that we
must use the policy behind the act to interpret the statute. See Cimpl’s, 2008 SD
47, ¶20, __ NW2d __. Thus, according to that opinion, we must interpret the statute
to favor the Sale Barns.
[¶22.] However, failure to define a term does not automatically result in an
ambiguity. Jackson v. Canyon Place Homeowner’s Ass’n, 2007 SD 37, ¶11, 731
NW2d 210, 213 (citing Halls v. White, 2006 SD 47, ¶8, 715 NW2d 577, 581).
Moreover, we consistently only use the plain language of the statute and never
examine the policy or legislative history unless the text is ambiguous. “Resorting to
legislative history is justified only when legislation is ambiguous, or its literal
meaning is absurd or unreasonable. Absent these circumstances, we must give
legislation its plain meaning. We cannot amend [the statute] to produce or avoid a
particular result.” In re Estate of Howe, 2004 SD 118, ¶41, 689 NW2d 22, 32
(quoting Slama v. Landmann Jungman Hosp., 2002 SD 151, ¶7, 654 NW2d 826, 828
(quoting Petition of Famous Brands, Inc., 347 NW2d 882, 885 (SD 1984))); see also
In re Estate of Olson, 2008 SD 4, ¶38, 744 NW2d 555, 566; Jensen v. Turner County
Bd of Adjustment, 2007 SD 28, ¶5, 730 NW2d 411, 413; Goetz v. State, 2001 SD
138, ¶16, 636 NW2d 675, 681; Reider v. Schmidt, 2000 SD 118, ¶9, 616 NW2d 476,
479. As Judge Timm noted, “[t]he FSA is not ambiguous, and the seller using a
different name does not create an ambiguity in the language of the statute.” We
should interpret seller consistently. If interpreted consistently and using the plain
language of the statute, the Sale Barns are not protected by the FSA. It takes an
-10-
#24050
owner or someone with interest in the property to create a security interest. If
Congress meant a fiction or a front instead of the word seller, it would have said so.
[¶23.] There is a scarcity of authority on this issue. We should refuse to
engage in statutory interpretation that so heavily favors the Sale Barns to a
lender’s disadvantage without a clear directive from Congress to do so. The
rationale and holding set forth in Hufnagle should be the law of South Dakota.
In summary:
Watertown (#24050) -
1. I would affirm Judge Timm on the FSA seller issue for the reasons stated in
my writing.
2. However, because Judge Timm granted summary judgment on the conversion
issue and because there are many genuine issues of material fact (as
discussed in Justice Zinter’s writing), we must reverse and remand this issue.
3. Genuine issues of material fact also exist on the damage questions raised in
Justice Zinter’s writing in South Dakota Livestock/Pipestone, 2008 SD 48,
__NW2d __ (#23982, #24001; #23984) and we must reverse and remand for
trial.
[¶24.] KONENKAMP, Justice, joins this dissent.
-11-