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- by Erika Eckley
January 31, 2013
Rolling Hills Bank brought a breach of contract action against Mossy Creek Farms for nonpayment of five promissory notes. The notes were executed in favor of a custom cattle feeding operation that had since gone out of business. The feeding operation assigned the notes to Rolling Hills. Rolling Hills failed to notify Mossy Creek regarding the assignment until after Mossy Creek discharged its obligation by paying the feeding operation. Mossy Creek worked with the cattle feeding operation to finance the purchase of cattle, feed and care for the cattle, and sell the cattle once they reached market weight to meat packing operations. The feeding operation did this for several clients. It would send any profit made from the cattle back to its clients. The cattle operation acquired its financing from Rolling Hills. Rolling Hills provided forms for the cattle operation to use to ensure the transactions were between the feeding operation and Rolling Hills rather than dealing individually with the operation’s clients.
All of the promissory notes at issue were between the feeding operation and Mossy Creek. After Mossy Creek executed the notes, the feeding operation assigned the notes to Rolling Hills. The operation cared for and fed Mossy Creek’s cattle and sold them to packing plants. All proceeds from the sales were deposited into the operation’s general checking account at Rolling Hills. Rolling Hills relied on the operation to direct it to pay down the associated note. After the sale, the operation would issue closeout statements to its clients and Rolling Hills and issue a check for any profit after the principal and interest on the note was deducted. The feeding operation fell behind on issuing closeout statements to its clients and money continued to accumulate in its account at Rolling Hills. Rolling Hills notified the feeding operation that it needed to pay off outstanding notes. This was done without preparing closeout statements to clients. Later, Mossy Creek received closeout statements for the notes at issue indicating that principal and interest on the notes was deducted before a check was issued to Mossy Creek. The operation, however, failed to notify the bank to pay down the notes associated with Mossy Creek. Eventually, Rolling Hills realized that the feeding operation’s listed inventory did not match its actual inventory and financing stopped. Rolling Hills hired an accountant to reconstruct the feeding operations financial records, but due to the disorder, it was not possible. Rolling Hills sent letters to Mossy Creek regarding the process it was going through to bring order to the accounts. Mossy Creek notified Rolling Hills that its loans had been paid. In response, Rolling Hills sent a demand letter and eventually filed suit against Mossy Creek for the balance of the loans assigned.
The trial court ruled that the closeout statements from the feeding operation served as the final settlement between Rolling Hills and Mossy Creek and that notification of the assignment of the note to Rolling Hills was not sent to Mossy Creek until after the closeout statements were sent. The court held that Mossy Creek had discharged its duties under the notes to the feeding operation, so Mossy Creek was not liable to Rolling Hills.
On appeal, Rolling Hills argued that the feeding operation’s obligation to direct Rolling Hills as to which accounts to repay was based on the fact that the feeding operation was acting as Mossy Creek’s agent in dealing with Rolling Hills. The court disagreed, however, because the financing arrangement was made solely between Rolling Hills and the feeding operation. The agreement between the feeding operation and Mossy Creek was a separate arms-length agreement. Mossy Creek did not in any way lead Rolling Hills to believe that an agency relationship existed that would make Mossy Creek liable for any failure on the part of the feeding operation to repay Rolling Hills.
The Court also referenced a provision of Article 9 of the Uniform Commercial Code, which specifies that if no notice of assignment is made to the debtor, the debtor may discharge its obligation by paying either the original lender or the assignee. In this case, Mossy Creek had no notice of the feeding operation’s assignment of the notes to Rolling Hills, so Mossy Creek satisfied its obligation through completion of the transaction with the feeding operation. This satisfaction was clearly evidenced by the closeout statements issued by the feeding operation.
The Court also rejected Rolling Hills’ argument that the court should invoke equitable estoppel principles to prevent Mossy Creek from asserting that its payment to the feeding operation satisfied its obligation regarding the notes. The court rejected the equitable argument because Rolling Hills did not send notice of its assignment to Mossy Creek which would have adequately protected the bank. Without taking measures to protect itself, the court was not inclined to find equity was in the bank’s favor. Rolling Hills Bank & Trust v. Mossy Creek Farms L.P., No. 2-909, 2013 Iowa App. LEXIS 76 (Iowa Ct. App. Jan. 9, 2013).