Iowa Supreme Court Rules Secured Creditor Entitled to Refund for Co-op Storage and Drying Costs

Iowa Supreme Court Rules Secured Creditor Entitled to Refund for Co-op Storage and Drying Costs

Posted on 04/17/2020 at 01:46 PM by Emily Staudacher

On April 17, 2020, the Iowa Supreme Court issued a ruling in MidWestOne Bank v. Heartland Co-op regarding competing claims by a secured lender and a grain elevator for the costs of storing and drying grain. The Court affirmed the district court’s opinion in part and reversed in part. 

Background

The Harkers are row crop farmers who routinely sold and delivered grain to Heartland Co-op in Cambridge, Iowa. The Harkers had a contract with Heartland for the storage, drying, and sale of their grain. The Harkers were also customers of MidWestOne Bank and had a secured loan with the bank which identified their grain as collateral. MidWestOne properly obtained and perfected a security interest in the Harker’s grain and proceeds. The security agreement signed by the Harkers required them to update MidWestOne on the location of the collateral and prevented them from removing the collateral from its location without MidWestOne’s consent unless they did so in the ordinary course of business.

The agreement also required the Harkers to ensure that the crops were properly maintained at their expense without the attachment of liens by elevators. Additionally, the Harkers were required to provide MidWestOne with a Schedule of Buyers which listed the grain warehouse that they may use to store and sell their grain with the buyer’s checks to be payable jointly to MidWestOne and the Harkers. Pursuant to the Schedule of Buyers provided by the Harkers, MidWestOne sent notices to Heartland informing them that MidWestOne had a security interest in the Harkers’ grain and directed them to make a joint payment to the Harkers and MidWestOne for all proceeds from the sale of grain. 

Despite proper notice given by MidWestOne, Heartland deducted the costs of drying and storing grain from the sale proceeds before sending the balance in a joint check to the Harkers and MidWestOne. Heartland provided statements reflecting the withholdings to the Harkers, but neither the Harkers nor Heartland provided the statements to MidWestOne.

On March 16, 2018, MidWestOne Bank filed a lawsuit alleging that Heartland Co-op had converted $79,895.68 for the drying and storage charges that had been withheld between 2014 and 2017. MidWestOne asserted that Heartland had a junior interest to MidWestOne’s prior perfected security interest. Heartland, however, argued it was following standard industry practices and was entitled to the offset. Heartland also asserted that there was a two-year limitations period on MidWestOne’s claims, which limitations began at the time of the sale of the farm products.

The district court determined that MidWestOne did have a superior claim to the grain sale proceeds. The district court also ruled that the two-year statute of limitations did apply, but applied the discovery rule based on MidWestOne’s showing that it was unaware of Heartland’s offsets until 2017. In other words, because MidWestOne was not aware that Heartland was offsetting the costs of drying and storage, the statute of limitations did not begin to run until the bank became aware. 

Statute of Limitations and the Discovery Rule

MidWestOne argued its claims were subject to the general five-year statute of limitations for injuries to property as a conversion, but Heartland argued the provision for secured interest in farm products should apply, which is a two-year statute of limitations. The Supreme Court agreed with Heartland and ruled that the two-year statute of limitations should apply.

MidWestOne argued that even if the two-year statute of limitations applies, the bank should still be able to recover on transactions that occurred more than two years before it filed suit, because it did not discover that Heartland had deducted the cost of storing and drying grain until 2017.  The Iowa Supreme Court reversed the district court on this issue and ruled that the discovery rule was not applicable in this case. Applying the discovery rule would conflict with the plain language of the statute, which expressly provides that the date of sale starts the time clock.  Moreover, the fundamental policies underlying the UCC favored a strict application of the limitation period in order to provide predictability in commercial transactions. Accordingly, the Iowa Supreme Court reduced the judgment amount to those transactions occurring within two years of the date the lawsuit was filed by MidWestOne.

Unjust Enrichment

Heartland argued that grain elevators routinely deduct drying and storage costs from the sale of proceeds and that MidWestOne was unjustly enriched by the drying storage services provided by Heartland. The Iowa Supreme Court ruled that MidWestOne’s prior perfected security interest in the grain and proceeds defeats Heartland’s claims. The Court stated that it favors adhering to the UCC’s priority system to provide clarity, uniformity, and consistency in commercial transactions, and those objectives could be undermined by allowing unjust enrichment claims against secured creditors. However, the Court did leave the door open for potential future claims in which equitable principles may trump the UCC priority system.

Citing a Colorado case, the court states the “high water mark” for allowing an unsecured creditor to recover against a secured creditor under an unjust enrichment theory may occur if: 1) the secured creditor is benefitted by a transaction between its debtor and an unsecured creditor; 2) the value of the secured collateral is enhanced by the transaction; and 3) the secured creditor initiates or encourages the transaction. The Court did not rule whether a claim would be allowed in these limited circumstances, but did acknowledge that allowing these claims could be a possibility in the future.

Waiver

Heartland also argued that MidWestOne impliedly waived its lien rights through course of conduct and performance by cashing the checks from Heartland without objection, because MidWestOne should have been aware of the industry practice to deduct storage and drying costs form the proceeds of the sale of grain. The Court ruled there was no evidence MidWestOne was aware of the fact that Heartland was offsetting the costs and, therefore, MidWestOne did not waive its lien right. Waiver requires actual knowledge, and the record provided no evidence in support of the fact that MidWestOne had actual knowledge.

Conclusion

The Iowa Supreme Court’s ruling makes it clear that a grain elevator or co-op may not offset its costs of drying and storing grain against the sale of grain which is subject to a security interest.  If elevators want to continue the practice of offsetting costs, they will need take action such as obtaining a written waiver or following the standards prescribed by Iowa law for warehouse liens. Another option may be to enact legislation, similar to that which has already been introduced in the Iowa legislature, granting a “superpriority” to grain warehouses and co-ops.

The Court’s application of the statute of limitations also reinforces the need to closely monitor collateral. It is clear from this decision that the two-year statute of limitations will apply in all cases which are founded on a secured interest in farm products, even if the elevator had knowledge of a bank’s security interest.

 

 

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