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Auburndale State Bank v. Dairy Farm Leasing Corp.

decided: November 17, 1989.


Appeal from the United States District Court for the Western District of Wisconsin. No. 87 C 900 C--Barbara B. Crabb, Chief Judge.

Bauer, Chief Judge, Cummings, Circuit Judge, and Hubert L. Will, Senior District Judge.*fn*

Author: Will

WILL, Senior District Judge

This case arises from a dispute over the proceeds from the sale of Kenneth and Koreen Brock's milk cows. The Brocks were unsuccessful with the cows, they declared bankruptcy and their creditors were left to figure out who owned the cows. The cow dispute pitted a cow lessor against the bank, which held a security interest in some of the Brocks' property. The parties stipulated before trial that the leasing company owned at least four of the sixteen cows left from the failed dairy venture. The trial court awarded the sale proceeds of those four to the leasing company and the proceeds of the remaining twelve cows to the bank. We reverse in part and remand.

I. Background.

The leasing company, Dairy Farm Leasing Corporation ("Dairy Farm"), is based principally in Minneapolis, Minnesota although it also has a facility outside of Menomonie, Wisconsin. Auburndale State Bank ("the Bank") was the Auburndale, Wisconsin bank which held a security interest in some of the Brocks' property. Although Mr. Brock also worked full time at a paper mill in July 1976, the Brocks started dairy farming part time, using Mr. Brock's retirement money from the paper mill and taking out a loan on July 30, 1976 to buy cows and farm equipment. The Bank took a non-purchase money security interest in the Brocks' dairy cattle and filed on August 2, 1976 a financing statement covering "all livestock now owned or hereafter acquired by debtor and the young of all livestock." Plaintiff's ("Plf.") Exhibit ("Ex.") 1. A continuation statement was filed on February 23, 1981. Id.

On April 28, 1981, the Brocks acquired even more cows by leasing twelve from Dairy Farm.*fn1 They filed a credit application with Dairy Farm showing their indebtedness to the Bank and the Bank's security interest in the Brocks' three cows, their real estate and their tractor. Dairy Farm leased ten more cows to the Brocks on March 29, 1982, and they also entered into a security agreement which granted Dairy Farm a security interest in "all livestock now owned or hereafter acquired by Debtor, and the young of all livestock" along with other property of the Brocks. Defendant ("Def.") Ex. 2. Shortly before October 19, 1983, the Brocks signed a reaffirmation of the leases. Def. Ex. 3 (document undated, envelope stamped received by Dairy Farm on October 19).

Dairy Farm filed a UCC Financing Statement on April 5, 1982 to give notice of the leases and to perfect its security interest in the Brocks' property, including the progeny of the cattle. Def. Ex. 12; Trial Transcript ("Tr.") at B 59 (i.e., volume B, p. 59). Bank representatives knew of Dairy Farm's right to the leased cattle at least by April 21, 1983, as shown by the Bank's Farm Personal Property Inventory and Appraisal form on which Thomas Henseler, a loan officer at the Bank, had written "20 head leased." Plf. Ex. 5; Tr. at A 19 (Mr. Henseler's testimony as to the date when he wrote "20 head leased" is not clear, although he testified that the document was reviewed on April 21, 1983). The Brocks also purchased cattle from Mid State Livestock on credit. Mid State retrieved the cattle in which it asserted a purchase money security interest on October 9, 1987, mem. op. at 7, but no claims are raised by or against that entity in this suit.

On approximately October 8, 1986, the Bank filed an action in Wood County Circuit Court for replevin of the Brocks' dairy herd and mortgage foreclosure. The Brocks' two leases with Dairy Farm were to expire in 1985, but were renegotiated on October 30, 1986, and backdated to December 29, 1985. On December 1, 1986, the Wood County Circuit Court awarded the Bank legal right to all livestock owned by the Brocks (which, of course, would exclude those leased to them by Dairy Farm). On that same day, the Brocks filed for bankruptcy protection under Chapter 7 and stopped making rental payments to Dairy Farm. The bankruptcy court entered an order pursuant to 11 U.S.C. ยง 522(f)(2) (1982) (which exempts certain property for "household use" from creditors' claims) avoiding the Bank's non-purchase money security interest in two of the Brocks' dairy cows.

The Brocks kept no written records of the number of cattle they owned, what happened to them, or which cows calved or how many calves the cows had. Brock Deposition ("Br.") Tr. at 35. Mr. Brock testified that he was "familiar with" his cows. Br. Tr. at 8. He said he knew which calf came from which cow, id. at 35, and which were subject to the claims of Dairy Farm and Mid State Livestock. Id. at 36-37. However, Mr. Brock did not rely on the numbering system used by Dairy Farm and the Bank to identify cows. Br. Tr. at 10-11 ("Those numbers don't mean a thing to me").

The Bank and Dairy Farm, at various points, took steps to identify their cows, since they apparently knew of the probability of conflicting claims. On October 30, 1985, the same day on which Dairy Farm representatives renegotiated leases with the Brocks, the representatives also photographed and ear tagged what they allege were Dairy Farm-owned cattle on the Brocks' farm. Tr. at B 98. However, the Dairy Farm personnel relied for their tagging solely on Mr. Brock's memory rather than any other records. Tr. at B 105-06. On February 21, 1987, the Bank and a cow appraiser, Lyle Schwann, took inventory and appraised the cattle. Plf. Ex. 8; Tr. at A 32-34. On October 20, 1987, the last day the cattle were on the Brock farm, Dairy Farm representatives again photographed and tagged the cows. Later that day the Bank removed all the cattle from the farm, which included sixteen cows and five heifers.

Thomas Henseler from the Bank and Alfred H. Keith, the President of Dairy Farm, testified that they each had made unsuccessful attempts to work out the cow ownership problem. Although the Bank represents in its brief that its representatives spoke to Dairy Farm "repeatedly" about the necessity of resolving the cow ownership issues, Brief of Plaintiff-Appellant at 4, the record does not fully support that characterization of the parties' attempts to negotiate. Henseler testified that he spoke to Steve Freeley in 1986 and Al Keith in September or October 1987, Tr. at A 37, and that he had "several discussions" with representatives of Dairy Farm trying to resolve their conflicting claims in the bankruptcy proceeding. Id. at 39.

On October 16, 1987, Henseler spoke to Keith regarding Dairy Farm's offer to move the cattle to its Menomonie facility and "to meet and settle the dispute there." Tr. at A 51-52. Henseler also testified that the Bank, between October 20 and 22, notified Dairy Farm that it had picked up the cattle and also gave notice "that we have got the animals, let's meet and talk this thing over." Tr. at A 52. According to Henseler, Dairy Farm's response was "they weren't coming over." Id. The trial

record includes Henseler's notes recorded after his telephone conversations with Dairy Farm representatives, Plf. Ex. 9, but he admitted that he "recorded all of them on that Friday [Oct. 22]." Tr. at A 63. Henseler also admitted that, as far as he knew, the Bank gave no written notice to Dairy Farm of its intention to sell the cows, Tr. at A 76-77, and that, after the cows were removed, he made no calls to Dairy Farm. However, according to Henseler, the Bank's attorney made calls after the cows were moved. Plf. Ex. 9.

Mr. Keith testified that on October 16, 1987, he spoke to Mr. Henseler at the Bank and set up a meeting for the following Tuesday, October 20, to sort out cow ownership. He testified, in addition, that he offered to care for the cows at no cost until the issue of ownership could be resolved, but the Bank refused. Tr. at B 50. (Henseler, on the other hand, said that he remembered no such offer. Tr. at A 62). On October 19, 1987, Keith testified that he called the Bank to confirm their meeting for the following day. However, "at around 5:00 that evening I received a call from Tom [Henseler]. He said they had a meeting ...

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