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MetaBank v. Interstate Commodities, Inc.

United States District Court, D. South Dakota, Central Division

November 21, 2017

METABANK, Plaintiff,
v.
INTERSTATE COMMODITIES, INC., Defendant.

          OPINION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

          ROBERTO A. LANGE, UNITED STATES 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.

         I. Material Facts Not Subject to Genuine Dispute

         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:

As communicated verbally in April, MetaBank agrees to release/subordinate 2015 crop proceeds to your current finance provider upon receipt/reimbursement of 2015 crop expenses funded by MetaBank's existing line of credit to C&B Farms LLC.
I am enclosing the amount we determined by reviewing the 12/13/14 Financial Statement and review of accounts after that date and funded by the line of credit.
That amount comes to: $920, 000 Let this letter serve as notice that MetaBank will release/subordinate 2015 crop proceeds upon receipt of this amount.
Please provide additional information if you feel this amount is not accurate.

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[1] dated May 21, 2015-the critical subordination agreement to this dispute-stating:

As communicated verbally in April, MetaBank agrees to release/subordinate 2015 crop proceeds to your current finance provider upon receipt/reimbursement of 2015 crop expenses funded by MetaBank's existing line of credit to C&B Farms LLC.
I am enclosing the amount we determined by reviewing the 12/13/14 Financial Statement, review of accounts after that date and funded by the line of credit, and quick book transactions provided.
That amount comes to: $825, 784.57
Let this letter serve as notice that MetaBank will release/subordinate 2015 crop proceeds upon receipt of this amount.
Please provide additional information if you feel this amount is not accurate.

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 ...


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