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USDC: AGRICULTURE | UCC - proceeds from sale of farm assets; security interests

1
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Border State Bank, N.A.,
Plaintiff,
v. Civil No. 06-2611 (JNE/RLE)
ORDER
AgCountry Farm Credit Services, FLCA, and
AgCountry Farm Credit Services, PCA,
Defendants.
Heather L. Marx, Esq., Mansfield, Tanick & Cohen, P.A., appeared for Plaintiff Border State
Bank, N.A.
Jon R. Brakke, Esq., Vogel Law Firm, appeared for Defendants AgCountry Farm Credit
Services, FLCA, and AgCountry Farm Credit Services, PCA.
AgCountry Farm Credit Services, FLCA (AgCountry FLCA), and AgCountry Farm
Credit Services, PCA (AgCountry PCA), retained proceeds from the sale of a farms assets.
Claiming that it should have received a portion of the proceeds, Border State Bank, N.A.,
brought this action against AgCountry FLCA and AgCountry PCA (collectively, Defendants) for
violations of Minn. Stat. 336.9-608, -611 (2006), unjust enrichment, conversion, and an
accounting. The case is before the Court on Defendants Motion for Summary Judgment and
Border State Banks Motion for Partial Summary Judgment. For the reasons set forth below, the
Court grants Defendants motion and denies Border State Banks motion.
I. BACKGROUND
In the late 1990s and early 2000s, River Ridge Dairy, L.L.P., borrowed approximately
.8 million from AgCountry PCA and approximately .0 million from AgCountry FLCA.
River Ridge Dairy granted AgCountry PCA and AgCountry FLCA mortgages on its land and
2
security interests in essentially all of its assets. River Ridge Dairy defaulted on the loans made
by AgCountry PCA and AgCountry FLCA.
In early January 2003, River Ridge Dairy, its guarantors, AgCountry PCA, AgCountry
FLCA, and Dutch Friendship Farms, LLP, entered into a Forbearance Agreement. The
Forbearance Agreement contemplated payment on the loans made by AgCountry PCA to reduce
principal, interest, and other charges due to .4 million and Dutch Friendship Farms
assumption of the loans made by AgCountry PCA. Later that year, Dutch Friendship Farms
bought assets of River Ridge Dairy pursuant to an Asset Purchase Agreement. Dutch Friendship
Farms paid the purchase price of .4 million by the assumption of that debt and obligation
owing to Ag Country.
In 2005, Border State Bank loaned 0,000 to Dutch Friendship Farms. Border State
Bank also obtained a security interest in assets of Dutch Friendship Farms.
Dutch Friendship Farms defaulted on the loans made by Border State Bank and
AgCountry PCA, and its assets were sold. At the time of the sale, principal, interest, and
advances on the loans made by AgCountry PCA amounted to approximately .4 million, and
principal and interest on the loans that AgCountry FLCA made to River Ridge Dairy exceeded
.6 million. AgCountry PCA and AgCountry FLCA obtained approximately .7 million from
the sale of Dutch Friendship Farms assets. The proceeds were first applied to the loans made by
AgCountry PCA and to the expenses incurred during the sale of Dutch Friendship Farms. The
remaining proceeds were applied to the loans made by AgCountry FLCA. Border State Bank
contends that it should have received a portion of the sale proceeds.
3
II. DISCUSSION
Summary judgment is proper if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there is no genuine issue as
to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.
R. Civ. P. 56(c). The moving party bears the initial responsibility of informing the district court
of the basis for its motion, and must identify those portions of [the record] which it believes
demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986). If the moving party satisfies its burden, Rule 56(e) requires the nonmoving
party to respond by submitting evidentiary materials that designate specific facts showing that
there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986). In determining whether summary judgment is appropriate, a court must look at
the record and any inferences to be drawn from it in the light most favorable to the nonmoving
party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
A. Defendants motion
1. Minn. Stat. 336.9-608
Border State Bank alleges that Defendants violated Minn. Stat. 336.9-608 by failing to
pay Border State Bank a portion of the proceeds from Dutch Friendship Farms sale. Where a
security interest or agricultural lien secures payment or performance of an obligation, section
336.9-608 sets forth the order in which a secured party shall apply cash proceeds of collection or
enforcement under Minn. Stat. 336.9-607: (1) reasonable expenses of collection and
enforcement and, under certain circumstances, reasonable attorne y fees and legal expenses
incurred by the secured party; (2) the satisfaction of obligations secured by the security interest
or agricultural lien under which the collection or enforcement is made; and (3) under certain
4
circumstances, the satisfaction of obligations secured by any subordinate security interest in or
other lien on the collateral subject to the security interest or agricultural lien under which the
collection or enforcement is made. Minn. Stat. 336.9-608(a)(1)(A)-(C).
Defendants assert that they are entitled to summary judgment because Border State
Banks security interest was subordinate to their security interests and the sale proceeds were
insufficient to satisfy the obligations secured by their security interests. It is undisputed that
Border State Banks security interest was subordinate to that of AgCountry PCA and that
AgCountry PCA properly retained a substantial portion of the proceeds from the sale of Dutch
Friendship Farms. Border State Bank raises two principal arguments in opposition to
Defendants motion: (1) that AgCountry FLCA should have not received any of the proceeds;
and (2) that Defendants agreed to take no more than .3 million of the proceeds.
First, Border State Bank maintains that AgCountry FLCA should have not received any
of the proceeds because AgCountry FLCA had no security interest in Dutch Friendship Farms
assets. As noted above, AgCountry FLCA had a security interest in River Ridge Dairys assets.
After River Ridge Dairys default, Dutch Friendship Farms bought River Ridge Dairys assets
subject to AgCountry FLCAs security interest. The Forbearance Agreement states: The
Personal Property Collateral will be sold subject to the security interests of Lender.1 An
addendum to the Asset Purchase Agreement provides: All Assets shall be transferred from
Seller [River Ridge Dairy] to Buyer [Dutch Friendship Farms] subject to the security interests of
. . . AgCountry Farm Credit Services, FLCA . . . in the Assets . . . . Accordingly, AgCountry
FLCAs security interest continued after Dutch Friendship Farms purchase of River Ridge
Dairys assets. See id. 336.9-315(a)(1) (providing that a security interest or agricultural lien
1 The Forbearance Agreement defines Personal Property Collateral to include property
encumbered by AgCountry FLCAs security interest and Lender to include AgCountry FLCA.
5
continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof
unless the secured party authorized the disposition free of the security interest or agricultural
lien).
Border State Bank also argues that satisfaction of the underlying debt extinguished
AgCountry FLCAs security interest. According to Border State Bank, AgCountry FLCA
accepted a deed to land owned by River Ridge Dairy to satisfy the loans made by AgCountry
FLCA. In support, Border State Bank relies on an affidavit of Michael Muston, an investor in
and guarantor of River Ridge Dairy and Dutch Friendship Farms, and a letter from Defendants
senior loan officer to Border State Banks president.
The Court first considers Mustons affidavit. In it, Muston states: Pursuant to that
agreement [the Forbearance Agreement], AgCountry Farm Credit Services, FLCA agreed to
accept the deed to the River Ridge land back in satisfaction of its debt. The Forbearance
Agreement, however, unambiguously states that AgCountry FLCAs acceptance of the deed
shall not constitute satisfaction of the debt owed AgCountry FLCA by River Ridge Dairy:
Even if Lender [AgCountry FLCA] acquires the Mortgaged Property by recordation of the
Deed and/or foreclosure of the Mortgages, this shall not satisfy the Indebtedness other than with
respect to the proceeds realized upon sale of the Mortgaged Property, which proceeds shall be
applied to the Indebtedness.2 Border State Bank cannot properly rely on Mustons affidavit to
contradict the Forbearance Agreement. See Klawitter v. Straumann, 255 N.W.2d 407, 411
(Minn. 1977) (In short, the excluded testimony would be an attempt by the Straumanns to say
that while they agreed in writing to one thing, they meant another. This is precisely the type of
2 No sale of the property mortgaged by River Ridge Dairy took place.
6
evidence intended to be excluded by the parol evidence rule, and the district judge acted properly
in excluding it from the record.).
As to the letter from Defendants senior loan officer to Border State Banks president, it
states:
The long term assets of [River Ridge Dairy] were deeded back to
AgCountry and in turn, AgCountry has entered into a lease arrangement with
Dutch Friendship Farms on the facilities over a four (4) year period. AgCountry
came up substantially short on the long term loans but agreed this was the best
method to minimize our best options [sic] to net the most dollars back to
AgCountry at the present time.
The letter does not state that AgCountry FLCA accepted the deed as satisfaction of River Ridge
Dairys debt.
In short, the Forbearance Agreement unambiguously provides that AgCountry FLCAs
acceptance of the deed did not satisfy the debt owed by River Ridge Dairy. Neither Mustons
affidavit nor the senior loan officers letter provides a proper basis to conclude otherwise.
Consequently, the Court rejects Border State Banks assertion that AgCountry FLCA should not
have received any of the proceeds from Dutch Friendship Farms sale.
Second, Border State Bank argues that Defendants agreed to take no more than .3
million from the sale of Dutch Friendship Farms. This argument rests on an agreement allegedly
signed by Dutch Friendship Farms manager, a representative of a cattle company, Dutch
Friendship Farms managing partner, and Ron Beyer as Vice President Credit, AgCountry Farm
Credit Services. The agreement3 states:
D.F.F. LLP [Dutch Friendship Farms] signs up for C.W.T.-bid.
AgCountry FCS waits until bid is accepted or not.
Until so long AgCountry FCS doesnt take any action or for closure
against D.F.F. LLP.
3 The first words that appear on the agreement are Draft subject to approval.
7
When bid is accepted, then from all the sales of cattle and machinery and
C.W.T.:
A. Ag Country FCS gets US $ 1,300,000.00 maximum.
Defendants contend that Border State Bank cannot properly rely on the agreement to
oppose their motion. In support, Defendants rely on Beyers deposition testimony. At his
deposition, Beyer characterized the agreement as a purported agreement, testified that the
agreement was falsified, and that it was falsified [i]n many regards. He explained: Look at
it first of all. Look at the various lines across it appears to be cut and pasted. I dont sign any
written agreements unless my attorney drafts them, and this certainly wasnt drafted by my
attorney. He also testified that he first became aware of the agreement in 2006, but the
agreement bears the date of September 14, 2005. Border State Bank does not respond with any
evidence that authenticates the agreement. In the absence of such evidence, the Court declines to
consider the agreement. See Stuart v. Gen. Motors Corp., 217 F.3d 621, 635 n.20 (8th Cir. 2000)
(To be considered on summary judgme nt, documents must be authenticated by and attached to
an affidavit made on personal knowledge setting forth such facts as would be admissible in
evidence or a deposition that meets the requirements of Fed. R. Civ. P. 56(e). Documents which
do not meet those requirements cannot be considered.); Vess Beverages, Inc. v. Paddington
Corp., 941 F.2d 651, 655 (8th Cir. 1991) (Under Fed. R. Evid. 901, one must authenticate a
documenti.e., show that it is what it purports to bebefore introducing it into evidence.).
In short, the record, viewed in the light most favorable to Border State Bank, reveals that
AgCountry PCA and Ag Country FLCA had security interests in the assets of Dutch Friendship
Farms, that Border State Banks security interest was subordinate to those of AgCountry PCA
8
and Ag Country FLCA,4 and that obligations secured by AgCountry PCAs and Ag Country
FLCAs security interests exceeded the proceeds obtained from the sale of Dutch Friendship
Farms. Consequently, neither AgCountry PCA nor AgCountry FLCA violated section 336.9-608
by declining to pay Border State Bank a portion of the proceeds from Dutch Friendship Farms
sale.
2. Conversion
Conversion is an act of willful interference with personal property, done without lawful
justification, by which a person entitled thereto is deprived of use and possession. DLH, Inc. v.
Russ, 566 N.W.2d 60, 71 (Minn. 1997). For the reasons set forth above, the record, viewed in
the light most favorable to Border State Bank, reveals that Defendants did not interfere with
personal property to which Border State Bank was entitled. The Court therefore grants
Defendants motion on this claim.
3. Unjust enrichment
To establish an unjust enrichment claim, the claimant must show that the defendant has
knowingly received or obtained something of value for which the defendant in equity and good
conscience should pay. ServiceMaster of St. Cloud v. GAB Bus. Servs., Inc., 544 N.W.2d 302,
306 (Minn. 1996). For the reasons stated above, the record, viewed in the light most favorable to
Border State Bank, reveals that Defendants neither received nor obtained something of value for
which they should pay Border State Bank. The Court therefore grants Defendants motion on
this claim.
4 Paragraph 19 of the Amended Complaint states: At the time of [Dutch Friendship
Farms] default, the security interests in the Property held by Defendants were senior in position
to Plaintiffs security interest in the same Property.
9
4. Minn. Stat. 336.9-611
Border State Bank alleges that Defendants violated Minn. Stat. 336.9-611 by failing to
give notice of disposition of Dutch Friendship Farms assets. After default, a secured party may
sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or
following any commercially reasonable preparation or processing. Minn. Stat. 336.9-610(a)
(2006). Under certain circumstances, a secured party that disposes of collateral under section
336.9-610 shall send to other secured parties a reasonable authenticated notification of
disposition. Id. 336.9-611(b).
Defendants assert that they had no obligation to give notice of the sale of Dutch
Friendship Farms assets because Border State Bank did not have a security interest in the
equipment of Dutch Friendship Farms and because Defendants neither took possession of nor
sold Dutch Friendship Farms livestock. In his affidavit, Beyer states: The liquidation of Dutch
Friendships equipment and livestock was handled by Dutch Friendship. [Defendants] never
foreclosed against these assets or took possession of the same for purposes of sale. Border State
Bank responds that Defendants were actively involved in the disposition of Dutch Friendship
Farms assets. In support, Border State Bank directs the Court to notes of conversations between
representatives of Defendants and Dutch Friendship Farms. The notes indicate that Dutch
Friendship Farms and Defendants discussed options contemplated by Dutch Friendship Farms
for the sale of its livestock, but the notes do not raise a genuine issue of material fact as to
whether Defendants disposed of Dutch Friendship Farms collateral under section 336.9-610.
Thus, the record, viewed in the light most favorable to Border State Bank, reveals that
Defendants had no obligation to give notice to Border State Bank under section 336.9-611. The
Court therefore grants Defendants motion on this claim.
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5. Accounting
Border State Bank also requests an accounting. Defendants assert that Border State Bank
has obtained during this action a full accounting of all of the collateral proceeds received by
Defendants from Dutch Friendship Farms sale. Border State Bank has not directed the Court to
any evidence that disputes Defendants assertion. Nor has Border State Bank explained why
discovery proved inadequate to obtain the information sought. Accordingly, the Court declines
to order an accounting. See Lefkowitz v. Citi-Equity Group, Inc., 146 F.3d 609, 611 (8th Cir.
1998).
B. Border State Banks motion
Border State Bank moves for summary judgment on the issue of Defendants liability for
violation of section 336.9-608, conversion, and unjust enrichment. Having granted summary
judgment to Defendants, the Court denies Border State Banks motion.
III. CONCLUSION
Based on the files, records, and proceedings herein, and for the reasons stated above, IT
IS ORDERED THAT:
1. Defendants Motion for Summary Judgment [Docket No. 18] is
GRANTED.
2. Border State Banks Motion for Partial Summary Judgment [Docket
No. 23] is DENIED.
3. The Amended Complaint [Docket No. 13] is DISMISSED WITH
PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: August 10, 2007
s/ Joan N. Ericksen
JOAN N. ERICKSEN
United States District Judge
 

 
 
 

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