ROBERTO A. LANGE, District Judge.
Plaintiff MetaBank sued Defendant Interstate Commodities, Inc., (ICI) for conversion, breach of subordination agreement and declaratory judgment. Doc. 1. After the discovery deadline passed, both MetaBank and ICI filed motions for summary judgment. Docs. 23, 30. MetaBank also filed a motion to compel answers to discovery requests, Doc. 45. The cross motions for summary judgment present a legal question—the construction of a written subordination agreement between MetaBank and ICI. This Court held oral argument on the cross motions for summary judgment on October 26, 2017. For the reasons explained, this Court grants MetaBank's Motion for Summary Judgment, denies ICI's Motion for Summary Judgment, and denies MetaBank's Motion to Compel as moot.
MetaBank is a federally chartered thrift with places of business in South Dakota and elsewhere. Doc. 25 at ¶ 1; Doc. 40 at ¶ 1. ICI is a New York corporation with sufficient minimum contacts to the state of South Dakota through ownership during the relevant time of grain elevators in South Dakota and with certain business arrangements with South Dakota farmers, including with the MetaBank customer whose loan defaults led to this lawsuit. Doc. 25 at ¶¶ 2-3; Doc. 40 at ¶¶ 2-3. This Court has diversity jurisdiction under 28 U.S.C. § 1332, because the parties are from different states and more than the requisite jurisdictional amount is at issue.
MetaBank provides personal, mortgage, business and agricultural loans and lines of credit as a part of its banking business. Doc. 32 at ¶ 5; Doc. 37 at ¶ 5. MetaBank extended agricultural financing to a Minnesota entity called C&B Farms, LLC (C&B Farms) during 2014 and into early 2015. Doc. 25 at ¶¶ 5, 13; Doc. 40 at ¶¶ 5, 13. C&B Farms was a large farming operation, raising crops in South Dakota and Minnesota in 2014 and 2015. Doc. 25 at 8; Doc. 40 at ¶ 8. MetaBank's loans to C&B Farms were secured by a blanket lien on all of the personal property of that entity, including farm products. Doc. 25 at ¶ 9; Doc. 40 at ¶ 9. In order to perfect its security interest, MetaBank filed a UCC-1 financing statement with the Minnesota Secretary of State and also filed an effective financing statement in Minnesota and South Dakota to place buyers of farm products from C&B Farms on notice of MetaBank's lien. Doc. 25 at ¶ 10; Doc. 40 at ¶ 10. Accordingly, MetaBank had a perfected first position lien in C&B Farms' 2014 and 2015 crops. Doc. 25 at ¶ 11; Doc. 40 at ¶ 11.
Following completion of the 2014 farming season, C&B Farms failed to repay the indebtedness owed to MetaBank in full when it was due. Doc. 25 at ¶ 12; Doc. 40 at ¶ 12. In late 2014 and early 2015, MetaBank advanced funds for C&B Farms to pay for expenses for the 2015 crop-year; such advances ended in March of 2015. Doc. 25 at ¶ 13; Doc. 40 at ¶ 13. In early 2015, MetaBank informed C&B Farms that it would need to provide additional collateral in order to obtain additional funding from MetaBank to cover C&B Farms' remaining input financing needs for the 2015 crop year, but C&B Farms declined to do so and pursued alternative financing. Doc. 25 at ¶ 14; Doc. 40 at ¶ 14.
For help with its 2015 operations and financing, C&B Farms turned to Travis Sitter, an agricultural consultant based in South Dakota who assists farming entities like C&B Farms with budgeting, grain marketing and obtaining crop insurance and financing. Doc. 25 at ¶ 18; Doc. 40 at ¶ 18. Sitter on behalf of other agricultural clients had worked with ICI on what ICI calls "advance purchase contracts," under which farmers receive advances of funds from ICI in exchange for ICI later receiving the farmer's crops under grain purchase contracts together with a percentage of the farmer's profits. Doc. 40 at ¶ 15-20; Doc. 25 at ¶ 15-20. Sitter spoke with ICI about funding C&B Farms for crop year 2015 under the advance purchase contracts program.
ICI performed a UCC search on C&B Farms and determined that MetaBank had a lien on crops grown by C&B Farms and proceeds therefrom. Doc. 25 at ¶ 21; Doc. 26-1 at 5. Having identified MetaBank's lien filings, ICI determined that it should obtain a subordination agreement from MetaBank before any further advances to C&B Farms. Doc. 25 at ¶ 22; Doc. 26-1 at 5; Doc. 26-2 at 3; Doc. 40 at ¶¶ 21-22. ICI told Sitter, who was working as C&B Farms' consultant, that a subordination from MetaBank was necessary if ICI was going to advance further funds to C&B Farms. Doc. 25 at ¶ 23; Doc. 40 at ¶ 23.
Sitter approached MetaBank to seek a subordination agreement in favor of ICI. Doc. 25 at ¶ 24; Doc. 26-2 at 3; Doc. 40 at ¶ 24. MetaBank reviewed a draft of C&B Farms' December 31, 2014 financial statement showing prepaid expenses of $543,000, and an account history from January to March 15, 2015, showing transactions in C&B Farms' MetaBank account of $377,000. Doc. 25 at ¶ 25; Doc. 40 at ¶ 25. Based on these figures, which did not necessarily reflect actual prepaid expenses in the 2015 crop year, MetaBank issued a letter dated May 11, 2015, stating the following:
Doc. 26-4; Doc. 40 at ¶¶ 25-26. Communications occurred between Sitter and MetaBank where Sitter requested that MetaBank issue a subordination letter with an amount of "$326K ish." Doc. 39-10; Doc. 40 at ¶ 27. MetaBank's correspondence indicated that it lacked confidence that $920,000 was the right number, but was concerned that Sitter proposed an amount $600,000 less than what MetaBank expected C&B Farms to have invested in the 2015 growing season. Doc. 39-9; Doc. 40 at ¶ 27.
Sitter then provided MetaBank with information from C&B Farms' bookkeeper Holly Schmitz that C&B Farms had paid $501,000 for land rent for 2015, and from C&B Farms' outside accountant who believed that C&B Farms had paid $324,784.57 toward 2015 expenses. Doc. 25 at ¶ 28. MetaBank relied on and combined these figures to revise the $920,000 number in the May 11 letter down to $825,784.57. MetaBank issued a subordination letter
Doc. 26-5.
ICI received the subordination letter and relied on it to advance additional funds to C&B Farms thereafter. Doc. 25 at ¶¶ 40-41; Doc. 40 at ¶¶ 40-41. ICI has received payments from C&B Farms or from the sale of its 2015 crops, but has not been repaid by C&B Farms for all that it advanced to C&B Farms. During the summer and fall of 2015, MetaBank received four payments from C&B Farms' 2015 crop proceeds totaling $345,270.32. Doc. 25 at 142; Doc. 40 at ¶ 42.
ICI initially contemplated that MetaBank would receive the first $825,784.57 from crop sales as set forth in the May 21 subordination letter, and initially had no reason to question that C&B Farms had spent that amount from MetaBank loans for its 2015 expenses. Doc. 25 at ¶ 45; Doc. 26-1 at 7; Doc. 26-7; Doc. 40 at ¶45. The budget upon which ICI was working to determine what it would be willing to advance to C&B Farms in 2015 included the full amount of $825,784.57 contained in the subordination letter. Doc. 25 at ¶ 45; Doc. 26-7; Doc. 40 at ¶ 45. C&B Farms sought to obtain additional advances from ICI late in the 2015 crop year, but ICI determined that C&B Farms had reached the maximum amount that ICI was willing to advance. Doc. ¶ at ¶ 44; Doc. 26-7; Doc. 40 at ¶ 44. While attempting to obtain more money from ICI, C&B Farms in August of 2015 told ICI that the money C&B Farms paid for its 2015 expenses out of MetaBank loans was less than the $825,784.57 contained in the MetaBank subordination agreement. Doc. 25 at ¶ 46; Doc. 40 at ¶ 46. After learning that C&B Farms had apparently used a lesser amount of MetaBank's money for its 2015 expenses, ICI did not initially take a different position on how much MetaBank should receive; certain communications by ICI appear to affirm the subordination letter and an ICI representative affirmed during a September 28, 2015 call with MetaBank's counsel that ICI would pay the full amount listed in the subordination letter before ICI took any proceeds from C&B Farms' 2015 crop. Doc. 25 at ¶¶ 47-48; Doc. 26-1 at 8; Doc. 26-6.
C&B Farms' 2015 crop year was not a financial success. Doc. 25 at ¶ 49; Doc. 40 at ¶ 49. ICI purchased grain from C&B Farms that was worth in excess of $825,784.57, but is taking the position that it is not required to submit any additional proceeds to MetaBank from the 2015 crop. Doc. 25 at ¶ 51; Doc. 40 at ¶ 51. MetaBank's loans to C&B Farms exceeded $825,784.57, and indeed MetaBank has obtained judgment against C&B Farms in the amount of $2
MetaBank has sued ICI for $480,514.25, which is calculated as the difference between $825,784.57 (the number contained in the May 21 subordination agreement) and the actual amount Metabank received from C&B Farms' 2015 crop year of $345,270.32. Doc. 1. MetaBank seeks prejudgment interest as well. Doc. 1. ICI, relying on C&B Farms' accountant's analysis, maintains that only $324,213.80 of MetaBank's financing to C&B Farms went toward 2015 expenses, and contends that MetaBank is entitled to no further funds. ICI separately has sued C&B Farms and others for the amounts that C&B Farms failed to repay to ICI.
Summary judgment is appropriate under Rule 56(c) of the Federal Rules of Civil Procedure "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."
The parties agreed that the MetaBank letter dated May 21, 2015, is a subordination agreement binding on these parties. MetaBank was in a first secured lien position, with a security interest in the 2015 growing crops of C&B Farms. ICI had notice of MetaBank's position, sought out through C&B Farms' consultant Sitter a subordination agreement before ICI would extend further financing to C&B Farms, received the subordination agreement, and relied upon it in advancing further funds to C&B Farms.
A secured creditor of course has a claim for conversion against a third party with an inferior interest in collateral who takes or sells that collateral. SDCL § 57A-9-315, see UCC § 9-315, comment 2;
Both MetaBank and ICI assert that the May 21 subordination agreement is unambiguous and seek summary judgment based on the letter. However, MetaBank and ICI have very differing interpretations of the letter. ICI concentrates on the first sentence of the letter only, to argue that MetaBank is restricted to receive only those portions of MetaBank's loans that C&B Farms actually used for 2015 crop expenses. MetaBank, by contrast, points to the number of $825,784.57 recorded in the body of the letter and the sentence immediately thereafter that "MetaBank will release/subordinate 2015 crop proceeds upon receipt of this amount."
Both parties recognize that South Dakota law governs this diversity jurisdiction case. Contract interpretation is a question of law for the court.
To interpret a written contract, the Court must consider the contract as a whole.
Please provided additional information if you feel this amount is not accurate. Doc. 26-5. The first sentence of the letter confirms a communication during April of 2015 about the willingness of MetaBank to subordinate part of its first priority position upon fulfillment of conditions. The rest of the letter describes the conditions. The letter expressly states that the amount MetaBank calculated as 2015 crop expenses of C&B Farms funded by MetaBank's line of credit to be $825,784.57, and then states that "MetaBank will release/subordinate 2015 crop proceeds upon receipt of this amount." Doc. 26-5. There is no ambiguity in the text of the letter. ICI's interpretation of the letter would read out of existence not only the amount of $825,784.57, but also the next sentence stating that MetaBank would "release/subordinate 2015 crop proceeds upon receipt of this amount." Doc. 26-5 (italics added). The letter, when considered as a whole, cannot be read to mean that the amount to be paid to MetaBank would be negotiated later or hinge upon what ICI and C&B Farms later determined to be the actual amount that C&B Farms spent from MetaBank's money for 2015 crop expenses.
ICI then argues that there was a mutual mistake of fact, in that $825,784.57 was not in fact the actual amount that C&B Farms had applied to 2015 crop expenses out of MetaBank's loans. Construing the facts in the light most favorable to ICI, C&B Farms did not in fact expend $825,784.57 of MetaBank's loans to pay for 2015 crop expenses, but perhaps expended as little as approximately $324,000 of that amount, notwithstanding the information or misinformation supplied by C&B Farms' bookkeeper and accountant in May of 2015. ICI's argument thus has some factual appeal, but no legal support for the outcome ICI urges.
The Supreme Court of South Dakota has recognized mutual mistake of fact as a legal basis for rescission of a contract.
SDCL § 53-4-9. The Supreme Court of South Dakota has interpreted this definition as follows:
South Dakota authority recognizes rescission of a contract for mutual mistake of fact, and the Restatement (Second) of Contracts from which South Dakota courts have drawn guidance on the doctrine of mistake likewise recognizes that a material mistake of fact renders the contract voidable. Restatement (Second) of Contracts § 152;
Indeed doing so would be unjust. MetaBank has a deficiency judgment against C&B Farms for over $2 million, so there is no question or mistake that MetaBank had loaned well in excess of $825,784.57 to C&B Farms by March of 2015. MetaBank itself in May of 2015 had calculated, albeit without confidence, that $920,000 of what it had loaned to C&B Farms may have been applied to the 2015 crop expenses. Doc. 26-4. When Sitter on behalf of-C&B Farms countered proposing subordination upon receipt of "$326K ish," MetaBank responded that such a number was as much as $600,000 too low.
Moreover, ICI seeks a remedy which mutual mistake cannot offer. Mutual mistake of fact results in contract rescission because the parties failed to reach a "meeting of the minds," thus no contract was formed in the first place.
Because ICI breached the subordination agreement, MetaBank can recover for breach of contract.
ICI argues that it remains entitled to summary judgment and that MetaBank may not recover anything from ICI based on SDCL § 57A-9-609.1. That statute, unique to South Dakota, states:
SDCL §57A-9-609.1. MetaBank certainly qualifies as a "secured creditor," and MetaBank did not offer to file against the debtor (C&B Farms) a criminal complaint, which is what is referenced in SDCL § 23A-2-1. ICI argues that it is either "an innocent third-party purchaser of farm products" or a "grain dealer" under the statute, such that it is insulated from any cause of action by MetaBank "for recovery of security or its value."
Under South Dakota law, a court engaged in statutory interpretation is to "give words their plain meaning and effect, and read statutes as a whole."
SDCL § 57A-9-609.1 is a curiously worded statute that has been the subject of just one prior published decision,
Second, the statute itself, in requiring a secured creditor to offer to file a criminal complaint against the debtor before holding entities like "innocent third-party purchases of farm products" responsible, indicates that the statute is meant to apply to situations where debtors are acting criminally. C&B Farms did not act criminally in providing its 2015 crops for sale through ICI. Indeed, if MetaBank had filed some sort of criminal complaint or threatened one against C&B Farms, MetaBank could potentially be liable for malicious prosecution. The statute simply was not meant to apply to the situation presented in this case. Giving the words in the statute "their plain meaning and effect" precludes ICI's interpretation, and thus SDCL § 57A-9-609.1 does not bar MetaBank's conversion claim.
For the reasons explained herein, it is hereby
ORDERED that MetaBank's Motion for Summary Judgment, Doc. 23, is granted and summary judgment for MetaBank and against ICI for $480,514.24, plus prejudgment interest,
ORDERED that ICI's Motion for Summary Judgment, Doc. 30, is denied. It is finally
ORDERED that MetaBank's Motion to Compel Answers to Discovery Requests, Doc. 45, is denied as moot.