The Clovis National Bank v. Harold Thomas
425 P.2d 726 (1967)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A secured party that, through its course of dealing, allows a debtor to retain possession of and sell collateral without prior written consent and relies on the debtor to remit the proceeds, impliedly consents to the sales and waives its security interest in the collateral.
Facts:
- On March 27, 1963, Clovis National Bank loaned $8,800 to W. D. Bunch, taking a security interest in 46 head of cattle branded 'W D Bar' under an agreement that required the Bank's prior written consent for any sale of the collateral.
- On July 29, 1963, Bunch sold 35 head of the secured cattle and deposited the proceeds with the Bank, which the Bank accepted and applied to his loan.
- On October 29, 1963, Bunch sold another 56 head of secured cattle through Clovis Cattle Commission Company and deposited the proceeds with the Bank, which again accepted the funds and applied them to the loan.
- On November 12, 1963, Bunch executed a new note for $21,500 and a new security agreement covering 283 head of cattle, which also included the clause prohibiting sale of collateral without the Bank's prior written consent.
- Bank officers testified that it was their custom and practice to permit debtors who gave cattle as collateral to sell the cattle without obtaining prior written consent, relying on the debtor's honesty to remit the proceeds.
- Between February and May 1964, Bunch consigned 173 head of cattle covered by the November 12 agreement to Clovis Cattle Commission Company, which sold them at public auction.
- Bunch did not have express consent for these sales and did not remit any of the proceeds, valued at $16,450.34, to the Bank.
- Later, when cattle branded 'Swastika K' were sold, the Bank informed the commission house it had 'some interest' but did not demand payment or forbid payment to Bunch's son, who was the brand's registered owner.
Procedural Posture:
- Clovis National Bank filed suit against Clovis Cattle Commission Company for conversion in a New Mexico trial court.
- The trial court found in favor of the defendant, Clovis Cattle Commission Company, and entered judgment accordingly.
- The plaintiff, Clovis National Bank, appealed the trial court's judgment to the New Mexico Court of Appeals.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a secured party, by its course of dealing in which it implicitly allows a debtor to sell collateral and remit the proceeds contrary to the terms of a security agreement, waive its security interest in that collateral, thereby precluding a claim of conversion against the commission house that sold the collateral on the debtor's behalf?
Opinions:
Majority - Oman, J.
Yes, the secured party waived its security interest through its course of dealing. Although the security agreement required prior written consent for any sale, the Bank's established practice of allowing Bunch and other debtors to sell cattle and remit the proceeds constituted an implied consent and waiver of this requirement. Waiver is the intentional relinquishment of a known right, and the Bank, by its conduct, elected to waive its right to require written consent, instead relying on the debtor's honesty. When the Bank consented to the sales, it lost its security interest in the collateral itself and could only look to the debtor personally for payment. The Uniform Commercial Code does not alter this outcome, as its provisions are supplemented by pre-code principles like waiver by implied acquiescence or consent under § 1-103. Regarding the 'Swastika K' cattle, the Bank failed to prove it had a perfected security interest in them as identifiable proceeds.
Dissenting - Carmody, J.
No, the secured party did not waive its security interest where it had no knowledge of the specific sales that violated the security agreement. Waiver requires the intentional relinquishment of a known right, and since the Bank did not know Bunch was making the 1964 sales, it could not have intentionally waived its right to require written consent. The majority's decision improperly allows a 'course of dealing' or 'usage of trade' to override the explicit terms of a contract. This directly contravenes the Uniform Commercial Code § 1-205(4), which states that express terms of an agreement control over a conflicting course of dealing. By allowing implied consent to defeat an express contractual provision, the majority carves out an unjustified exception for farm products and undermines the certainty and predictability the UCC was designed to provide.
Analysis:
This case is significant for its interpretation of the early Uniform Commercial Code, establishing that common law principles like waiver through course of conduct supplement the Code's provisions. The decision creates a tension between the UCC's goal of legal certainty through written agreements and the reality of commercial practices. It places a greater burden on lenders, suggesting they cannot rely solely on the express terms of a security agreement but must also actively police their collateral to avoid inadvertently waiving their rights through acquiescence. While the holding protects auctioneers acting in good faith, many jurisdictions and subsequent UCC amendments have adopted the dissenting view that express contract terms should control over implied course of dealing, highlighting the ongoing debate about the balance between textualism and commercial practice.
Unlock the full brief for The Clovis National Bank v. Harold Thomas