Knowing and Intentional Waivers Required for Appeals and Security Interests

July 2, 2012 | Erika Eckley

In this case, two banks (the plaintiff and defendant in this case) battled over priority to the proceeds from the sale of cattle. The debtor had dealings with both banks at different times, but all loans were for his cattle operation. From 2003 through 2005, the debtor, a feeder cattle and cow/calf operator, borrowed substantial funds from the plaintiff. He pledged his “farm products” as security for the loan, which included “livestock” and “cattle.” Financing statements were filed with the Iowa Secretary of State for the loans. By 2007, the plaintiff had concerns with the debtor’s financial condition and refused to provide additional financing to him.

The debtor then obtained financing from the defendant with the help of a friend who was a cattle purchaser. The defendant put conditions on the loans that required the debtor and the cattle purchaser to co-sign for the loan. An agreement was reached where the purchaser would buy cattle for the debtor and receive a commission on those purchased. All invoices for the cattle would be sent to the debtor. The defendant would provide funding for the costs of the purchase and care of the cattle from an account held by the debtor. The purchaser would then sell the cattle when finished. 

The plaintiff was unaware of the debtor’s arrangement with the defendant until a 2008 search of financing statements revealed the new arrangement. The plaintiff sent notices to the buyers and the debtor regarding its security interest in the debtor’s cattle. The debtor sold the cattle and paid the proceeds to the defendant. The plaintiff then sued the defendant for conversion.

The trial court, in ruling on a motion for summary judgment, held that the plaintiff was entitled to the proceeds and awarded judgment in favor of the plaintiff in the amount of $299,353.94. The defendant appealed the judgment. While the appeal was pending, the plaintiff started garnishment proceedings against the defendant to collect its judgment. Fearing the bad publicity of being on the wrong end of garnishment proceedings, the defendant paid the judgment.

After receiving payment, the plaintiff moved to dismiss the defendant’s legal appeal claiming that by voluntarily paying the judgment, the defendant waived its right to appeal. The court of appeals considered the motion to dismiss the appeal with the underlying appeal. The court of appeals deemed the appeal waived and dismissed the appeal.

On further review, the Iowa Supreme Court held that an appellant does not waive its right to appeal by paying a judgment in response to post-judgment garnishment proceedings. The court determined that in the “modern economic and business environment” a party should be able to avoid unnecessary costs and expenses by simply paying a judgment to avoid the hassles resulting from execution without waiving a right to appeal the judgment. The Court reasoned that paying the judgment when faced with legal execution is not a voluntary choice. This holding is in line with the Court’s trend in moving away from rigid application of the appellate waiver doctrine.

Upon reviewing the merits of the underlying judgment, however, the Court found there were no questions of fact precluding entry of summary judgment. The defendant argued that the cattle from which it received the proceeds from the sale were co-owned by the debtor and the purchaser. The plaintiff’s financing statement did not reference any jointly held property as collateral. The Court held, however, that the facts did not establish that a joint venture existed. The purchaser’s role as co-signor of the loan with the defendant did not evidence intent to co-own the cattle. Instead the facts established that the debtor was the sole owner of the cattle and the purchaser receiving a commission for his role in acquiring he cattle for the debtor and selling the cattle upon their finishing. The fact that the purchaser was a co-signer on the loan was irrelevant to the ownership issue. The fact that the plaintiff’s financing statement did not reference jointly held property was not relevant to the plaintiff’s claim.

The court also rejected the defendant’s argument that the plaintiff waived its security interest in the proceeds of the cattle because the bank had to have known the debtor was still selling cattle after 2007. Because it had to know about continued sales, the plaintiff waived its rights to the proceeds of these sales from its inaction. The Court determined, however, that a secured party that authorizes disposition of the collateral free of the security interest does not waive a security interest in the identifiable proceeds of the collateral unless the party relinquishes those rights as well. The Court also held that a waiver requires showing that the creditor “knowingly and intentionally” waived its rights to the proceeds of the sale of the collateral. The Court held that the plaintiff’s actions may have not have been “a model of diligence” and the plaintiff may have been “gullible,” but there was no knowing and intentional waiver. Negligence is not sufficient to establish proof of a waiver. Therefore, the trial court’s summary judgment opinion and award was affirmed. Peoples Trust & Savings Bank v. Security Savings Bank, No. 10-1291, 2012 Iowa Sup. LEXIS 70 (Iowa Sup. Ct. Jun. 22, 2012).