## Facts

- Farm Credit Bank of St. Paul (the Bank) loaned John and Barbara Bonneprise $300,000 for their dairy farm and obtained and perfected a security interest in their milk and in all accounts arising from the sale or other disposition of their milk and milk products.
- While the Bonneprises sold milk to Land O’ Lakes Dairy, the Bonneprises, Land O’ Lakes, and the Bank entered an assignment agreement under which Land O’ Lakes paid $4,333 of the monthly milk proceeds directly to the Bank.
- In August 1988, the Bonneprises switched buyers and began selling milk to F & A Dairy (the Dairy).
- The Bonneprises refused to sign a new assignment directing the Dairy to pay the Bank.
- After learning of the change, the Bank notified the Dairy of its security interest and requested that milk checks be made jointly payable to the Bonneprises and the Bank; the Bank also provided evidence of its perfected security interest.
- Despite the Bank’s notification and request, the Dairy purchased milk from the Bonneprises in August, September, October, and November 1988 and issued checks solely in the Bonneprises’ names.
- The Bank sued the Dairy for conversion of secured farm property (milk proceeds).
- The trial court entered judgment for the Bank, reasoning that the Dairy bought the milk subject to the Bank’s security interest and awarding damages for the proceeds from August through November 1988.
- The Dairy appealed.

## Issues

1. Does 7 U.S.C. § 1631 (Food Security Act) preempt Wisconsin’s Article 9 rule that a buyer of farm products takes subject to a perfected security interest?
2. In a state without a certified central filing system, did the Dairy take the milk free of the Bank’s security interest because the Bank failed to satisfy § 1631’s direct-notice requirements for some or all of the milk purchases?
3. Could the Bank maintain an action for conversion against the Dairy even though the Bank was not in physical possession of the milk or proceeds?
4. Was the trial court’s result unfair or inconsistent with the policy of § 1631?

## Decision

- The Wisconsin Court of Appeals held that the Food Security Act, 7 U.S.C. § 1631, preempts inconsistent Wisconsin law governing whether buyers of farm products take subject to a security interest.
- Because Wisconsin did not have a certified central filing system, the Bank could preserve its security interest against the Dairy only by giving the Dairy an effective written notice that satisfied § 1631.
- The court held the Bank’s notice was effective as to the September, October, and November 1988 milk sales; therefore, for those months, the Dairy did not take free of the Bank’s security interest and was liable for conversion damages based on the diverted proceeds.
- The court held the Dairy purchased the August 1988 milk free of the Bank’s security interest because the Bank’s § 1631 notice had not been given before the August milk sales; the Dairy therefore was not liable for conversion damages tied to August proceeds.
- The court rejected the Dairy’s argument that the Bank could not sue for conversion, concluding the Bank was entitled to immediate possession of the secured property (or its proceeds) once the Dairy had received effective notice and nonetheless paid the Bonneprises alone.
- The judgment was affirmed in part, reversed in part, and remanded with directions to modify the judgment consistent with the court’s month-by-month notice ruling.

## Legal Principles

- Under 7 U.S.C. § 1631, a buyer in the ordinary course who buys a farm product from a seller engaged in farming operations generally takes free of a security interest created by the seller, even if the security interest is perfected, unless the secured party satisfies the statute’s filing-or-notice conditions.
- Section 1631 preempts state commercial law rules that would otherwise allow a secured party to enforce its interest against a buyer of farm products without the federal statute’s protections for buyers.
- In a state without a certified central filing system, a secured creditor must protect its interest against a particular buyer by sending that buyer an effective written notice that meets § 1631’s requirements; absent timely effective notice, the buyer takes free for the covered purchase(s).
- Compliance with § 1631 can be purchase-specific in practice: a buyer may take free for transactions occurring before effective notice, but take subject to the security interest for transactions after effective notice.
- Under Wisconsin conversion law, a plaintiff may recover if it had possession or an immediate right to possession of the property; a secured party with a right to the collateral or identifiable proceeds may sue a buyer who, after effective § 1631 notice, pays the debtor in a manner that defeats that right.

## Conclusion

The Wisconsin Court of Appeals ruled that the Food Security Act governs and displaces Wisconsin law on farm-product purchases, and it limited the Bank’s recovery by holding that F & A Dairy took the August 1988 milk free of the security interest due to lack of prior effective notice, but remained liable in conversion for September through November 1988 because the Bank’s notice satisfied § 1631 for those later sales.


Farm Credit Bank of St. Paul v. F & A Dairy, 477 N.W.2d 357 (1991)