National Livestock Credit Corp. v. G.W. Schultz

Beginning in 1964, Schultz Cattle Company (defendant) obtained loans from the National Livestock Credit Corporation (National) (plaintiff). In July 1973, G.W. Schultz (defendant), Schultz Cattle, and National executed a $586,639 promissory note payable the following year. Schultz and Schultz Cattle executed a security agreement giving National a security interest in Schultz Cattle’s herd of cattle. The security agreement provided that Schultz and Schultz Cattle would retain possession of the cattle and could sell the cattle for fair market value, as long as payment for the cattle was made jointly to Schultz Cattle and National. Over the years, Schultz had sold some of the cattle without National’s prior knowledge or consent. In accordance with cattle-industry standards, the buyers had typically made their checks payable solely to Schultz Cattle, and Schultz had then either forwarded the checks to National or deposited the checks into Schultz Cattle’s bank account and issued a new check to National. National never objected to that payment method. In 1974, National renegotiated repayment of the Schultz Cattle loan and authorized Schultz to liquidate the herd over several months. Schultz then sold over 400 cattle to Wilson and Company (Wilson) (defendant) and Iowa Beef Processors (IBP) (defendant). Wilson and IBP paid by checks made payable to Schultz Cattle or another Schultz entity. However, instead of paying National, Schultz transmitted the sale proceeds to Schultz’s other suppliers. When National learned what had happened, National demanded payment for the cattle from Wilson and IBP. Wilson and IBP refused to pay, and National sued Wilson, IBP, Schultz, and Schultz Cattle for conversion. Wilson argued that National’s practice of allowing Schultz to keep the cattle, sell the cattle without National’s knowledge, and then remit the proceeds to National constituted a waiver of the sale-restriction terms in the security agreement and a relinquishment of National’s security interest in the cattle. The trial court granted summary judgment for Wilson and IBP, finding that National’s course of performance constituted a waiver of the sale-restriction terms that allowed Wilson and IBP to take title to the cattle free and clear of National’s security interest. National appealed, asserting that the trial court had erroneously applied the concepts of waiver and course of performance from Article 2 of the Uniform Commercial Code (UCC) to the security agreement. National claimed that security agreements were governed only by Articles 1 and 9 of the UCC.