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Cornerstone Bank and Trust, N.A v. Grain and Barge Company

June 27, 2011

CORNERSTONE BANK AND TRUST, N.A.,
PLAINTIFF-APPELLANT AND CROSS-APPELLEE,
v.
GRAIN AND BARGE COMPANY, A MISSOURI CORPORATION; CARGILL, INC., A DELAWARE CORPORATION; CARROLLTON FARMERS ELEVATOR, A CORPORATION; TRI COUNTY FS, INC., A CORPORATION; PHI FINANCIAL SERVICES, INC., A CORPORATION; AND ) COMMODITY CREDITCORPORATION, A CORPORATION ACTING THROUGH THE UNITED STATES DEPARTMENT OF AGRICULTURE,
DEFENDANTS-APPELLEES AND CROSS-APPELLANTS.



Appeal from Circuit Court of Greene CountyNo. 10L5 Honorable ) James W. Day,Judge Presiding.

The opinion of the court was delivered by: Justice Steigmann

JUSTICE STEIGMANN delivered the judgment of the court, with opinion. Presiding Justice Knecht and Justice McCullough concurred in the judgment and opinion.

OPINION

¶ 1 This case presents the question of whether section 1631 of the Food

Security Act of 1985 (7 U.S.C. § 1631 (2006)), which seeks to remove burdens and obstructions to interstate commerce in farm products, preempts the pertinent portions of the Uniform Commercial Code (UCC) (810 ILCS 5/1--103 through 13--101 (West 2008)) that conflict with the expressed purpose of the Act. We conclude that in this case, the Act preempts the UCC.

¶ 2 Following a July 2010 hearing, the trial court entered an order that (1) denied the summary-judgment motion of plaintiff, Cornerstone Bank and Trust, N.A. (the Bank), as to count I and (2) granted the summary-judgment motion of defendant, Consolidated Grain and Barge Company (Consolidated), with regard to the competing interests the Bank and Consolidated had in certain farm products. Specifically, the court found that (1) section 1631 of the Act did not preempt the application of Illinois law to resolve the parties' dispute and (2) by failing to comply with the notice requirements of section 9--320(f) of the UCC (810 ILCS 5/9--320(f) (West 2008)), the Bank did not "perfect its security interest" and, thus, Consolidated's protected interest as a purchaser of farm products prevailed. In August 2010, the Bank filed a motion for leave to file an amended count I, which the trial court later denied.

¶ 3 The Bank appeals, arguing that the trial court erred by (1) denying its summary-judgment motion, (2) granting summary judgment in Consolidated's favor, and

(3) denying its motion for leave to file an amended count I. Consolidated cross-appeals, arguing that the court erred by finding that section 1631 of the Act did not preempt the pertinent portions of the UCC that conflict with the expressed purpose of the Act.

¶ 4 Because we conclude that the Bank failed to protect its perfected security interest under the expressed terms of section 1631(e) of the Act (7 U.S.C. § 1631(e) (2006)), we affirm.

¶ 5 I. BACKGROUND

¶ 6 The following facts were gleaned from the parties' pleadings and other supporting documents filed in the trial court.

¶ 7 At five different times between May 2001 and May 2007, the Bank loaned Rick Beiermann, a farmer, and his wife (collectively, the Beiermanns) a total of $985,143 to finance their farm operations. In exchange, the Beiermanns executed five promissory notes that were each secured, in part, by the following farm products: "All crops [and] equipment now owned or hereafter acquired." To perfect its continuing security interest in the farm products, the Bank filed the appropriate financing statements pursuant to section 9--310(a) of the UCC (810 ILCS 5/9--310(a) (West 2006)).

¶ 8 In 2005 and 2006, Rick entered into six separate contracts to sell a total of

55,000 bushels of corn to Consolidated for delivery between December 2005 and December 2007. In exchange, Consolidated, which was engaged in the business of buying farm products from local farmers, agreed to purchase the corn from Rick at a predetermined price.

¶ 9 At the start of the 2008 crop year, Rick planted soybeans on farmland he rented. In August 2008--after defaulting on their promissory notes to the Bank--a confession of judgment in the amount of $748,779 was filed against the Beiermanns and in favor of the Bank. During the time that the Beiermanns were addressing their financial problems with the Bank, Consolidated was taking various actions to accommodate Rick's failure to deliver the 55,000 bushels of corn by first orally extending and modifying the existing grain contracts and then canceling and implementing new grain contracts.

¶ 10 In July 2008, the Bank sent Consolidated a "Notice of Security Interest" by certified mail. In particular, the Bank's notice contained the following information: (1) the Bank, identified by name and address, as the secured party; and (2) the Beiermanns, identified by individual name, address, and a single social-security number, as debtors to the Bank. In addition, the notice stated the following:

"The Debtor has named you as a potential buyer, commission merchant or selling agent of farm products. You are hereby given notice pursuant to the Food Security Act of 1985 that the Debtor has given a security interest to the secured party in (1) the farm products described below and (2) any proceeds from the sale of such farm products. This is effective for 1 year from the date you receive it."

Thereafter, the notice identified the farm products subject to the Bank's perfected security interest as "all" the "corn, soybeans, and wheat" from the 2008 crop year.

¶ 11 In December 2008, Rick delivered 953 bushels of corn and 6,082 bushels of soybeans to Consolidated, which it later sold for $2,370 and $59,392, respectively. After paying Rick's farmland-rental lien, Consolidated credited (1) $2,370 to Rick's existing contracts and (2) $45,266 to the contracts Rick had previously defaulted on.

¶ 12 In April 2010, Cornerstone filed a four-count complaint, suing (1)

Consolidated; (2) Cargill, Inc.; (3) Carrollton Farmers Elevator; and (4) Tri County FS, Inc., Phi Financial Services, and Commodity Credit Corporation. Count I sought to enforce the Bank's perfected security interest in the Beiermanns' farm products over Consolidated's contracted right to those farm products. (The remaining counts concerned the Bank's competing interest in the Beiermanns' farm products among other grain companies and the priority of its security interest among other lending institutions, which are not the subject of this appeal.)

¶ 13 In June 2010, Consolidated filed an amended answer and affirmative defense. With regard to its affirmative defense, Consolidated claimed, in pertinent part, that it "took the Beiermanns' grain free and clear of [the Bank's] security interest" because the Bank failed to comply with the written notice requirements of section 1631(e) of the Act. In particular, Consolidated noted that the Bank's July 2008 notice of security interest did not "specify the county or counties in which the farm products were produced or located." Shortly thereafter, Consolidated filed a motion for summary judgment pursuant to section 2--1005(b) of the Code of Civil Procedure (Civil Code) (735 ILCS 5/2--1005(b) (West 2008)), alleging that as a "buyer in the ordinary course of business," as defined by section 1631(c)(1) of the Act, it took the Beiermanns' farm products free of the Bank's perfected security interest pursuant to section 1631(d) of the Act (7 U.S.C. §§ 1631(c)(1),

(d) (2006)).

¶ 14 In July 2010, the Bank filed a motion for summary judgment on count I of its complaint, claiming that section 1631 of the Act was not applicable because Consolidated was not a buyer in the ordinary course of business as defined by section 1--201(b)(9) of the UCC (810 ILCS 5/1--201(b)(9) (West 2008)) but, instead, merely "exercised its right of offset against the grain to satisfy [Rick's] indebtedness." The Bank asserted that as "a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt," Consolidated was expressly excluded from the UCC definition of a buyer in the ordinary course of business. 810 ILCS 5/1--201(b)(9) (West 2008).

¶ 15 At a July 2010 hearing on the parties' respective motions for summaryjudgment, the trial court considered, in part, (1) Consolidated's arguments that section 1631 of the Act preempts the UCC with regard to protections for purchasers of farm products and (2) the Bank's argument that the farm-product protections are governed by section 9--320 of the UCC (810 ILCS 5/9--320 (West 2008)). In August 2009, the court entered a written order that (1) denied the Bank's summary-judgment motion and (2) granted summary judgment in favor of Consolidated. Specifically, the court found that

(1) "resolution of this matter under Illinois law has not been preempted under section 1631 of the [Act]" and (2) because the Bank did not "perfect its security interest" by failing to "specify the county and a reasonable description of the property" as required by section 9--320(f) of the UCC, Consolidated's financial interest in the farm products prevailed.

¶ 16 In August 2010, the Bank filed a motion for leave to file an amended count

I. In September 2010, the trial court entered a docket entry, denying ...


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