Northwest Bank v. McKee Family Farms, LLC et al

Filing 252

OPINION AND ORDER: For the foregoing reasons, as well as the reasons I articulated at oral argument, I DENY Integrated Seed Growers' Motion for Summary Judgment 173 and Northwest Bank's Motion for Summary Judgment Against Group 1 Defenda nts 174 . I GRANT in part and DENY in part Creekside Valley Farms' and KCK Farms' Motion for Summary Judgment 176 . I agree with Defendants' argument in their supplemental briefing that the notice provisions for extending grain produ cer liens requires only that growers send notice to those who have filed with Oregon's Secretary of State. Based on this, I GRANT in part Creekside's Motion and find Creekside has a priority lien for the seed on which it had timely filed a proper extension even though it did not provide notice to Northwest Bank. I DENY Northwest Bank's Motion for Summary Judgment against Group 2 and Group 3 Defendants 182 . While I find that Yellow Manufacturing applies to this case, the agency role of the warehouses and the validity of the Bank's security interest remain to be considered at trial. I also rule that the trial is to be a bench trial. Signed on 5/12/16 by Chief Judge Michael W. Mosman. (dls)

UNITED STATES DISTRICT COURT
DISTRICT OF OREGON
PORTLAND DIVISION

NORTHWEST BANK f/k/a NORTHWEST
SAVINGS BANK, a Pennsylvania state-chartered
savings association,
Plaintiff,

3:15-cv-01576-MO

OPINION AND ORDER

v.
MCKEE FAMILY FARMS, INC. et al.,
Defendants.
MOSMAN, J.,
Plaintiff filed two Motions for Summary Judgment [174, 182]. Defendant Integrated
Seed Growers [173] and Creekside Valley Farms and KCK Farms [176] filed Cross Motions for
Summary Judgment. On April 20, 2016, I heard oral argument from the parties on the motions.
I requested supplemental briefing on three issue: 1) whether Northwest Bank was entitled to
notice of the extensions of the growers’ grain producer liens; 2) whether the rule for possessory
liens articulated in Yellow Manufacturng. Acceptance Corp. v. Bristol, 193 Or. 24, 236 P.2d 939
(1951). applies to this case; and 3) whether this case should proceed to a bench trial or a jury
trial. I write now to clarify my positions on these three issues.
For the reasons I articulated at oral argument and outline below, I DENY Integrated Seed
Growers’ Motion for Summary Judgment [173] and Northwest Bank’s Motion for Summary
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Judgment Against Group 1 Defendants [174]. I GRANT in part and DENY in part Creekside
Valley Farms’ and KCK Farms’ Motion for Summary Judgment [176]. I agree with Defendants’
argument in their supplemental briefing that the notice provisions for extending grain producer
liens requires only that growers send notice to those who have filed with Oregon’s Secretary of
State. Based on this, I GRANT in part Creekside’s Motion and find Creekside has a priority lien
for the seed on which it had timely filed a proper extension even though it did not provide notice
to Northwest Bank. I DENY Northwest Bank’s Motion for Summary Judgment against Group 2
and Group 3 Defendants [182]. While I find that Yellow Manufacturing applies to this case, the
agency role of the warehouses and the validity of the Bank’s security interest remain to be
considered at trial. I also rule that the trial is to be a bench trial.
Discussion
A. Notice of Extension on Grain Producer Lien
Plaintiff argues Defendants’ grain producer liens (“GPLs”) cannot have priority over
Plaintiff’s security interest because Defendants did not properly notify Plaintiff when the
Defendants extended their GPLs. Defendants argue the notice provisions of ORS § 87.762 and
ORS § 87.252 only apply to entities which have to register with the Secretary of State. Since the
parties agree the Bank did not have to register, it follows that it is not entitled to notice. I agree
with Defendants that to properly extend their liens, the growers need only have notified those
registered with the Oregon Secretary of State.
There are two different ways of filing proper extensions with two slightly different
requirements of notice. One notice requirement states “the lien claimant shall send a copy of the
notice to all holders of security interests in the chattel to be charged with the lien who duly
perfected such security interests by filing notice thereof with the Secretary of State.” OR. REV.

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STAT. ANN. § 87.252 (West) (emphasis added). Under this language, the Bank was not entitled
to notice from the growers since it had not filed with the Secretary of State.
The other notice statute says “[i]f an agricultural producer files a notice of lien under this
section, the producer shall send notice to all persons that have filed a financing statement under
ORS chapter 79 that perfects a security interest in all or part of the inventory of the purchaser or
the proceeds from the sale of the inventory.” OR. REV. STAT. ANN. § 87.762(3) (West) (emphasis
added). Plaintiff could argue Chapter 79 includes the choice of law provisions which directs
Plaintiff to file in Pennsylvania and because the Bank did so, it would be an entity “that filed a
financing statement under ORS Chapter 79.”
However, this interpretation is significantly more strained than the one Defendants
advance. For the most part, Chapter 79 explains how to file a financing statement in Oregon
with the Oregon Secretary of State. The central topic of Chapter 79 is how to file in Oregon and
suggests the notice provision by saying “persons that have filed a financing statement under ORS
chapter 79” meant persons that have filed a financing statement in Oregon. This interpretation is
further supported by a later part of the code which references the notice provision for GPLs and
states “if the Secretary of State receives notice of a lien created under the [grain producer’s lien
statute], the Secretary of State, upon request, shall furnish the person who filed the lien with a list
of persons who have filed a financing statement under ORS 79.0501 that perfects a security
interest in the inventory, proceeds or accounts receivable of the lien debtor or purchaser.” OR.
REV. STAT. ANN. § 87.930 (West). This statute, when read in conjunction with the statute on
notice provision, adds context to “filed a financing statement under Chapter 79” which suggests
the notice provision may apply only to those who have filed in Oregon.

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Finally, the existence of a parallel notice provision of ORS § 87.252 requiring notice only
to those who have filed with the Oregon Secretary of State suggests ORS § 87.762(3) should be
similarly restricted. It would make little sense for one statute to require growers to pursue
financing statements in every state while another statute requires growers only to consider
financing statements filed in Oregon. Because of the text, the surrounding statutes, and the
alternative notice provision, I find the growers were only required to notify those who had filed a
financing statement with the Oregon Secretary of State.
B. Possessory Liens and Relinquishment of Possession
At oral argument, the parties disagreed about whether relinquishment of actual
possession of the radish seeds fatally compromised the Defendants’ possessory liens. In
particular, I asked the parties to reconcile the approach of Yellow Manufacturing. Acceptance
Corp. v. Bristol, 193 Or. 24, 236 P.2d 939 (1951) and McGregor Co. v. Heritage, 291 Or. 420,
631 P.2d 1355 (1981).
Our case straddles the issues presented in McGregor and Yellow Manufacturing. The
question in McGregor was whether the assignment of a claim rooted in a possessory lien,
together with a transfer of possession of the collateral that supported the claim, destroyed the
priority of the possessory lien. The question in Yellow Manufacturing was whether a lienholder
returning possession of the collateral to the debtor destroyed the priority of the lienholder’s lien.
If at trial I determine McKee is CCS’s agent, our case will be a mirror to Yellow Manufacturing
because the lienholder will have delivered the collateral to the debtor and the growers will likely
have forfeited their possessory lien. However, if at trial it becomes clear that McKee is neither
an agent of CCS nor of the growers, then the question is whether a creditor’s transfer of the
collateral to a third party destroys that creditor’s priority status with respect to other creditors.

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Yellow Manufacturing is clear that “the common-law lien . . . on a chattel can be asserted
against a third person only when the property is retained in the actual and continuous possession
of the lien claimant, his agent or servant.” Yellow Manufacturing, 193 Or. at 40 (quoting Rahm v.
Viall, 185 Ill. App. 425 (1914)). However, the ultimate question before the Yellow
Manufacturing court was whether transferring the collateral to the owner destroyed priority with
respect to a third party.
Defendants argue McGregor addresses the question at issue in our case: whether transfer
to a third party (rather than to the debtor) also destroys the initial lienholder’s priority. The
McGregor court distinguishes Yellow Manufacturing based on to whom the collateral was
transferred. McGregor noted that in Yellow Manufacturing “the claimant of the lien returned the
collateral to the debtor, whereas in this case at the same time that the claim was assigned, the
security in the possession of the assignor was transferred to the assignee along with it and was
not returned to the debtor.” McGregor, 291 Or. at 426. However, relying on this dicta to
establish McGregor as the baseline rule for the relationship between third party transfers and
possessory liens is to ignore the importance of the language “at the same time that the claim was
assigned.” Id. The assignment of the creditor’s claim is vitally important to the logic of
McGregor. In McGregor the creditor both transferred possession of the collateral and assigned
its interest in the lien to the same third-party. Id. The appellate court in McGregor
acknowledges this difference when it states “[t]his is not a case where the security in which the
claimant asserts a possessory lien is transferred to a third party and separated from the claim.”
McGregor Co. v. Heritage, 49 Or. App. 489, 502, 620 P.2d 488, 495 (1980), modified, 291 Or.

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420, 631 P.2d 1355 (1981). By contrast, in our case the growers have only transferred
possession and are still claiming rights in the lien.1
Indeed, the law applied by the Oregon Supreme Court in McGregor suggests the Court
focused its analysis on the assignment rather than the transfer of possession. The Court noted
“as for reliance . . . upon the rule as stated in [Corpus Juris Secundum], we prefer the reasoning
of the Court of Appeals . . . which . . . adopted in substance . . . the rule as stated in Restatement
of Security.” McGregor, 291 Or. at 426. The CJS language directly contemplated only transfer
of possession of the collateral; in contrast the Restatement of Security looked only at the
assignment of claims secured by possessory liens. Id. Since there is no assignment of claim in
our case, the logical underpinnings that lead the McGregor court to its holding that “the lien was
not lost by the assignment of that claim, together with a transfer of possession of the funds” is
limited, at best. Id. at 426-27. I do not consider it binding precedent on the question of whether
a transfer of collateral to a third party destroys a creditor’s possessory lien.
Defendants try to distinguish Yellow Manufacturing on four other grounds. First, by
arguing that possession had not been relinquished because it was “only for the limited purposes
of cleaning or testing.” Possession had been relinquished when the growers gave up the seed,
whatever the reasons. Defendants argue relinquishment of possession did not occur; they do not
make, and I do not address, the argument that possession has only been conditionally
relinquished.
Second, Defendants argue Yellow Manufacturing was based on a statute that was more
protective toward possessory liens than the common law. In actuality, Yellow Manufacturing
relied extensively on the common law. See Yellow Mfg. at 40 (“the common-law lien . . . on a

1

One could argue that for Group 2 defendants, the claim and the possession have been reunited. No party has
argued that, once extinguished, combining the claim and the possession of collateral will re-establish priority.

6 – Opinion and Order

chattel can be asserted against a third person only when the property is retained in the actual and
continuous possession of the lien claimant, his agent or servant.”). However, even without the
statements in Yellow Manufacturing, the common law does not support the idea of constructive
possession (as would be necessary to succeed on this argument). See 53 C.J.S. Liens, s 17d(3)
(1948) (a “lien dependent on possession is waived or lost by the lienholder voluntarily and
unconditionally parting with possession or control of the property to which it attaches; and such
lien cannot be restored thereafter by resumption of possession”).
Third, Defendants argue Yellow Manufacturing looked at a possessory lien in conjunction
with a chattel mortgage which, they argue, has heightened protections. Looking exclusively at
possessory common law liens it is still true that “there is no doctrine of constructive possession
that will support a common-law, possessory lien, except when actual possession has been
involuntarily relinquished.” 53 C.J.S. Liens § 12.
Finally, Defendants argue I should give their liens priority because they “substantially
complied” with the statutes as did the lienholder in McGregor. In McGregor, the lienholder put
down the individual’s name “doing business as” the corporation rather than just naming the
corporation. McGregor Co., 291 Or. at 424. All parties were aware of whom the lienholder was
referencing. The court found it was a de minimus violation and found the lienholder should
retain priority because of substantial compliance with the requirements. Id. Failure to retain
possession is more than a de minimus violation of a possessory lien. I find that Yellow
Manufacturing applies and Defendants have forfeited their possessory liens unless they can show
McKee is their agent.

7 – Opinion and Order

C. Bench Trial
Declaratory judgment actions are inherently neither equitable nor legal; the nature of the
underlying dispute determines whether a jury trial is available. See Beacon Theatres, Inc. v.
Westover, 359 U.S. 500 (1959). Therefore, this case will be a bench trial if the priority of liens is
an equitable question, but a jury trial if it is a legal question.
Defendants first argue this case should be defined as one for the recovery of personal or
real property. This argument ignores the long history of examining actions involving liens as
something other than simply the recovery of personal properly. Perera Co. v. Goldstone, 491
F.2d 386, 387 (9th Cir. 1974) (“the enforcement of liens is a long established and well
recognized function of the courts of equity”); Exact Software N. Am., Inc. v. DeMoisey, 718 F.3d
535, 546 (6th Cir. 2013) (“actions to enforce liens remain equitable actions, even when the
dispute that led to the lien implicates the meaning of the underlying contract.”); Damsky v.
Zavatt, 289 F.2d 46, 53 (2d Cir. 1961) (“foreclosure of the mortgagor’s equity of redemption was
an established head of equity jurisdiction well before 1791”).
The Ninth Circuit has declared an enforcement action of a lien is an equitable action.
Perera Co., 491 F.2d at 387. Other district courts have specifically found determining the
priority of liens to be an equitable question. See In re Plaza Resort at Palmas, Inc., 488 B.R. 50,
56 (D.P.R. 2013) (“determining priority of [a] lien is still equitable even though it is influenced
by state law”); In re Glen Eagle Square, Inc., 132 B.R. 106, 114 (Bankr. E.D. Pa.), aff’d sub
nom. Matter of Glen Eagle Square, Inc., 132 B.R. 115 (E.D. Pa. 1991) (noting the “clearlyequitable issue of the priority of liens”); In re Fox Bros., Inc., 142 B.R. 320, 322 (Bankr. E.D.
Ark. 1992) (holding the case as a whole required a jury trial “despite the fact that the intervenor
also requests equitable subordination and determination of lien priority”). I find that the

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underlying dispute is determining the validity and priority of different liens and, as such, presents
an equitable question to be resolved by a bench trial.
Conclusion
For the foregoing reasons, as well as the reasons I articulated at oral argument, I DENY
Integrated Seed Growers’ Motion for Summary Judgment [173] and Northwest Bank’s Motion
for Summary Judgment Against Group 1 Defendants [174]. I GRANT in part and DENY in part
Creekside Valley Farms’ and KCK Farms’ Motion for Summary Judgment [176]. I agree with
Defendants’ argument in their supplemental briefing that the notice provisions for extending
grain producer liens requires only that growers send notice to those who have filed with
Oregon’s Secretary of State. Based on this, I GRANT in part Creekside’s Motion and find
Creekside has a priority lien for the seed on which it had timely filed a proper extension even
though it did not provide notice to Northwest Bank. I DENY Northwest Bank’s Motion for
Summary Judgment against Group 2 and Group 3 Defendants [182]. While I find that Yellow
Manufacturing applies to this case, the agency role of the warehouses and the validity of the
Bank’s security interest remain to be considered at trial. I also rule that the trial is to be a bench
trial.

DATED this 12

day of May, 2016.
/s/ Michael W. Mosman
MICHAEL W. MOSMAN
Chief United States District Judge

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