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Fin Ag, Inc. v. Hufnagle, Inc.

720 N.W.2d 579 (2006)

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Fin Ag, Inc. v. Hufnagle, Inc.

Minnesota Supreme Court

720 N.W.2d 579 (2006)

Facts

Fin Ag, Inc. (Fin Ag) (plaintiff) provided Buck Farms (Buck) with a loan and took an interest in Buck’s corn crop for 1999. Fin Ag perfected its security interest by filing both a Uniform Commercial Code financing statement and an effective financing statement, which was entered into Minnesota’s central filing system. A dealer of farm products, Kent Meschke Poultry Farms, Inc. (Meschke) (defendant), purchased corn from Buck. Meschke was aware of Fin Ag’s security interest, so Meschke included Fin Ag’s name on its checks to Buck except for two occasions. However, Buck also used third parties—two of its employees and two of the owner’s minor children (collectively, the Tookers)—to sell the corn in the employees’ names. This practice of using a third party to sell securitized collateral in the third party’s name is known as fronting. No security interests were listed in the name of the Tookers in Minnesota’s central filing system. Therefore, when Meschke purchased corn from the Tookers on seven different occasions, Meschke did not list Fin Ag’s name on the checks, which were deposited into Buck’s accounts. Buck did not allocate any of the money from these sales to Fin Ag and later defaulted on the loan. Fin Ag then brought suit against Meschke for conversion in relation to the two sales from Buck mentioned above, which Meschke did not dispute, and the seven sales from the Tookers. Meschke argued that for a buyer in a fronting situation to learn of an undisclosed party’s security interest was very difficult, and that Meschke had the right to take the corn purchased from the Tookers free of Fin Ag’s security interest pursuant to 7 U.S.C. § 1631. This federal rule provided that a buyer who purchased farm products in the ordinary course of business will take title free of a security interest created by the seller unless notice of the seller’s security interest has been provided using any of three options, one of which is filing an effective financing statement with a state’s central filing system. Section 1631 also provided that if the security interest was created by someone who was not the seller, then the buyer will take subject to the other party’s security interest. Fin Ag sought summary judgment. The district court ruled in favor of Fin Ag. The appellate court affirmed, and the Minnesota Supreme Court granted review.

Rule of Law

Issue

Holding and Reasoning (Hanson, J.)

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