Summary of a Recent
Judicial Development in
Finance and Credit

Knowledge of Security Interest Required
to Prove Wrongful Possession

Lynn Cox
National AgLaw Center Research Assistant

The Montana Supreme Court has upheld a district court's ruling that a farmer who purchased a tractor from a bankruptcy debtor obtained the tractor lawfully, did not violate a court order when it did not deliver the tractor to a bank claiming an interest in the tractor, and did not interfere with those who were directed to recover the tractor. 1st Bank v. Winderl, 60 P.3d 998, 1001-02 (Mont. 2002). The court ruled that the buyer did not wrongfully possess the tractor because he did not have knowledge that the tractor was purchased from identifiable insurance proceeds. See id. at 1001.

Gerald Deines, a cattle broker in Dawson County, Montana, owned a Ford New Holland Model 9030 bi-directional tractor that was financed by Ford Motor Credit. See id. at 999. Deines received financing from 1st Bank for his agricultural operations "and 1st Bank perfected a security interest in 'all machinery and equipment . . . now owned or hereafter acquired,' and their proceeds or replacements with two financial statements filed in 1990 and 1994."

On May 17, 1996, Deines filed a Chapter 7 bankruptcy petition. See id. On June 9, 1996, a fire destroyed the tractor, and the tractor's insurer, Traveler's Insurance, paid off Ford's loan and issued a check to Deines for $57,754.00. See id. On June 29, 1996, Deines used the insurance proceeds to purchase a newer model 9030 tractor from Malta Auto Company for approximately $47,000.00. See id. There were no new financing statements filed to reflect that there was a security interest in this new tractor. See id. Deines's debts were discharged in bankruptcy court on September 24, 1996. See id.

On November 22, 1996, 1st Bank "brought an action against Deines to foreclose its interest in the tractor that Deines purchased with the insurance proceeds." Id. In March, 1997, prior to the trial concerning 1st Bank's claim, Deines asked Robert Winderl to provide feed for his cattle. See id. In return for Winderl's services, Deines sold his tractor to Winderl. See id. He gave possession of the tractor to Winderl and provided Winderl with a bill of sale for the tractor. See id.

On August 5, 1998, the district court held that "1st Bank's perfected security interest extended to the insurance proceeds and [the] tractor [that was] subsequently purchased with those proceeds." Id. It also determined that "the security interest had been perfected prior to the bankruptcy proceeding and ordered a judicial sale of the replacement tractor." Id.

On August 11, 1998, 1st Bank requested that Winderl return the tractor. See id. When Winderl did not return the tractor, 1st Bank brought suit against Winderl for claim and delivery of the tractor on June 1, 1999. See id. Specifically, 1st Bank sought possession of the tractor and damages that it incurred due to Winderl's alleged wrongful detention of the tractor. See id. The district court ordered the sheriff to "'seize and take into his possession'" the tractor in question. Id.

On June 2, 1999, an undersheriff and deputy went to Winderl's property to recover the tractor. See id. The officers identified a model 9030 tractor but could not locate a vehicle identification number on the tractor. See id. Winderl told the officers that he had purchased a model 9030 tractor from Deines and that he had a bill of sale but did not admit or deny that he owned the tractor for which the officers were searching. See id. Winderl also attempted to find the VIN but was unable to do so. See id. The officers concluded that they could not seize the tractor in Winderl's possession and left Winderl's property. See id. 1st Bank did not make another attempt to seize the tractor, and the district court did not order that Winderl deliver the tractor to 1st Bank. See id. at 1000.

Winderl filed a counterclaim against 1st Bank, claiming that he was the "legal owner of the tractor in his possession" and sought "a declaratory judgment on the proceeds issue." Id. He filed a motion for summary judgment and on November 3, 1999, the district court determined that 1st Bank had a superior security interest in the tractor. See id. Following this order, "Winderl contacted Deines and told him that the tractor was not sufficient consideration and returned the tractor to Deines shortly thereafter." Id. Deines returned the tractor for sale around November 12, 2000. See id.

On April 11, 2000, Winderl "moved to dismiss the action to obtain possession of the tractor." Id. Five days later he filed a motion to dismiss 1st Bank's claim for damages for the detention of the tractor. See id. The district court granted both of Winderl's motions on September 18, 2001. See id. 1st Bank appealed the district court's decision to the Montana Supreme Court. See id.

The court stated that although Winderl's motions were labeled as motions to dismiss, they were essentially motions for summary judgment. See id. Thus, it treated Winderl's motions as motions for summary judgment. See id.

The court first examined 1st Bank's argument that the district court's determination to grant Winderl's motions was incorrect because there were remaining genuine issues of material fact. See id. Specifically, 1st Bank argued that there were genuine issues of material fact concerning whether Winderl possessed the tractor during the time of the suit, whether Winderl knew or should have known of 1st Bank's prior lien against the tractor and its right to sell it, and "whether the value of the tractor diminished while in Winderl's possession." Id.

Winderl argued that the district court's judgment was correct because "1st Bank failed to specifically identify the tractor to be seized and because Winderl was under no affirmative duty to deliver the tractor." Id. Winderl also asserted that "no court order required him to turn over the tractor, that his retention of the tractor was not 'wrongful' within the meaning of the claim and delivery statutes, and that the [d]istrict [c]ourt's order only determined that 1st Bank had a prior security interest." Id.

The court first noted that since 1st Bank had obtained possession of the tractor that was the subject of its claim for delivery, its claim for delivery was moot. Therefore, the court did not discuss this part of 1st Bank's claim. See id.

The court explained that claim and delivery requires that the claimant prove that "'the property is wrongfully detained by the defendant.'" Id. at 1001. It also explained that a plaintiff must establish by the preponderance of the evidence "'the right to the immediate possession in himself at the time the action is brought, and that the defendant is wrongfully in possession." Id. Finally, the court explained that "a plaintiff must show that the defendant did something 'wrongful' such that the defendant would be 'wrongfully in possession' of the claimed property." Id.

The court ruled that the facts in this case were not sufficient to conclude that Winderl "'wrongfully detained'" the tractor. See id. It noted that Winderl had never been in "any contractual relationship with 1st Bank with respect to the tractor and owed no contractual duty to return the tractor to 1st Bank." Id. It also noted that no evidence suggested that "Winderl had knowledge that the tractor he purchased from Deines was purchased with identifiable insurance proceeds traceable to a secured tractor." Id. In addition, the court noted that there was no evidence suggesting that Winderl interfered with 1st Bank's attempts to lawfully recover the tractor. See id.

The court concluded that

Winderl lawfully obtained the tractor, violated no court order by not producing the tractor, and did not interfere with those who were directed to recover it. Furthermore, when Winderl's declaratory judgment claim was decided in favor of 1st Bank, he returned the tractor to Deines, who delivered it to 1st Bank. There is insufficient evidence to conclude that Winderl wrongfully detained the tractor from 1st Bank. Therefore, we conclude that the District Court did not err when it held that there was not basis for recovery of damages from Winderl for wrongful detention of the tractor.

Id. at 1001-1002.

The dissent stated that there were material issues of fact that the majority should have permitted to be resolved at trial. See id. at 1002. It stated that a review of the entire record in this case

leads inescapably to the conclusions: (a) that Winderl knew at least as early as November 1998, that 1st Bank claimed a security interest in the Ford New Holland bi-directional tractor he had received from Deines; (b) that Winderl knew precisely which tractor the deputies were looking for-i.e., the one he received from Deines- when they attempted to recover the tractor on June 2, 1999; (c) that Winderl took the position that he was entitled to retain the tractor because his interest was superior to 1st Bank's; and (d) that on the advice of his counsel, Winderl re-delivered the tractor to Deines rather than turn it over to 1st Bank.

Id.

The dissent added that

[t]he issue before us in this appeal is whether Judge Cybulski erred in granting summary judgment to Winderl and in dismissing 1st Bank's claims for damages arising from Winderl's wrongful detention of the tractor. At the very least there are genuine issues of material fact as to Winderl's knowledge of which tractor the deputies were looking for; as to whether his retention of possession of the tractor from and after November 1998, was wrongful; and as to whether 1st Bank suffered compensable damages as a result of Winder's conduct. After reviewing the record de novo, I would hold that summary judgment was improperly granted.

Id. at 1003-04.

The case was decided on May 15, 2002; this summary was posted June, 2003