## Facts

- Marvin and Marlene Mitchell farmed in Iowa and Louisiana.
- On March 5, 2001, Agriliance, LLC loaned the Mitchells $950,231 for 2001 crop-input expenses.
- The Mitchells signed a promissory note and security agreement granting Agriliance a security interest in (among other things) all 2001 crops (growing and harvested) and cash and noncash proceeds from the sale of the collateral.
- Agriliance perfected its security interest by filing a financing statement.
- Farmpro Services, Inc. had made other large loans to the Mitchells, with some debt still unpaid.
- As a condition of making the 2001 loan, Agriliance required Farmpro to subordinate its interest in the Mitchells’ 2001 crops and crop proceeds to Agriliance’s interest, and Farmpro executed a subordination agreement.
- In early 2002, Agriliance learned the Mitchells had sold crops to Maurice Mitchell, Sr. (Marvin’s father) and were unwilling to turn over a $520,808.24 check payable jointly to Agriliance, the Mitchells, and another entity.
- The Mitchells later sold their 2001 grain crop to ABC Grain.
- Citizens Bank received the grain-sale proceeds and issued a cashier’s check for $468,546.86 payable to Farmpro and drawn on Citizens Bank.
- The Mitchells delivered the Citizens Bank cashier’s check to Farmpro, along with a smaller cashier’s check from Maurice Mitchell, Sr.; Farmpro took the checks in full satisfaction of the Mitchells’ debt to Farmpro.
- Before depositing the checks, Farmpro’s CEO called a Central Bank officer (Farmpro’s bank) to ask if the Citizens Bank cashier’s check was “good.” The officer said Maurice had been meeting with Citizens Bank’s president for two days and that the check was good.
- Farmpro deposited the checks at Central Bank and released its mortgages on the Mitchells’ property.
- Agriliance sued Farmpro for breach of the subordination agreement and sued Farmpro and Central Bank for conversion, claiming the funds were proceeds of Agriliance’s collateral and should have been paid to Agriliance under the subordination arrangement.
- Farmpro denied actual knowledge of the funds’ source and asserted a holder-in-due-course defense; defendants also raised mitigation and negligence defenses against Agriliance.

## Issues

1. Whether the subordination agreement gave Agriliance priority to the 2001 crop proceeds received by Farmpro, making Farmpro’s acceptance and retention of the proceeds a breach of contract.
2. Whether Agriliance could pursue conversion against Farmpro and Central Bank for exercising control over identifiable proceeds subject to Agriliance’s perfected security interest.
3. Whether Farmpro and/or Central Bank were entitled to summary judgment on the theory that Farmpro was a holder in due course of the cashier’s check (and thus took free of Agriliance’s claim to the proceeds).
4. Whether defendants were entitled to summary judgment based on affirmative defenses that Agriliance failed to mitigate damages or acted negligently.

## Decision

- The court ruled on cross-motions for summary judgment.
- The court granted Agriliance’s motion for summary judgment in part and denied it in part.
- The court denied Farmpro’s and Central Bank’s motion for summary judgment in full.
- The court treated the subordination agreement as controlling on priority between Agriliance and Farmpro as to the Mitchells’ 2001 crops and proceeds, and it rejected Farmpro’s attempt to avoid the agreement through summary judgment.
- The court allowed Agriliance’s conversion theory to proceed against Farmpro and Central Bank based on Agriliance’s perfected security interest in collateral and identifiable proceeds.
- The court held defendants were not entitled to summary judgment on holder-in-due-course grounds because the defense was not established as a matter of law on the summary-judgment record.
- The court declined to grant defendants summary judgment based on mitigation or negligence defenses.

## Legal Principles

- A written subordination agreement that subordinates a creditor’s interest in specified collateral and proceeds is generally enforced according to its terms to determine priority among creditors.
- Under UCC Article 9, a perfected security interest in collateral continues in identifiable proceeds, and priority in proceeds may be enforced against parties who take and retain those proceeds in a manner inconsistent with the secured party’s rights.
- Conversion may be available when a party exercises dominion over property (including identifiable proceeds) that another has the right to possess under a valid, perfected security interest.
- Holder-in-due-course status under UCC Article 3 requires taking an instrument for value, in good faith, and without notice of competing claims or defenses; if the record does not establish those elements conclusively, summary judgment on that defense is improper.
- On summary judgment, the moving party must show no genuine dispute of material fact and entitlement to judgment as a matter of law; affirmative defenses that depend on disputed facts ordinarily do not warrant summary judgment.

## Conclusion

Agriliance’s perfected security interest in the Mitchells’ 2001 crops and proceeds, together with Farmpro’s written subordination agreement, supported Agriliance’s priority claim to crop-sale proceeds that were routed to Farmpro by cashier’s check, and the court granted Agriliance partial summary judgment while denying defendants summary judgment, including their holder-in-due-course and other affirmative defenses, leaving remaining factual and remedial questions for further proceedings.


Agriliance, LLC v. Farmpro Services, Inc., 328 F. Supp. 2d 958 (2003)