Pub. 8 2013-2014 Issue 1

www.nebankers.org 16 Extraordinary Service for Extraordinary Members. feeder that the assignment had occurred. Legally speaking, an authenticated notice of assignment had not occurred, and the feeder/account debtor could satisfy the chattel paper by paying either the feedlot or the bank. The Payment The feeder in the Iowa case paid the amounts due on the notes in question by having the feedlot deduct the principal and interest due from the revenue generated by the sale of the corresponding lot of cattle. After the cattle were fed, marketed, and sold, the feedlot provided the feeder with the profit, if any, and a closeout statement, which reflected the final account settlement between the two parties. In legal terms, the feeder/account debtor had paid the assignor in full, satisfying the feeder’s full obligation to both the feedlot and the bank under the notes because, again, the feeder had not received an authenticated notice of assignment prior discharging its obligation. Consequences to the Bank The Nebraska Statutes state that if an account debtor does not receive an authenticated notice of assignment, the rights of an assignee are subject to: [A]ll terms of the agreement between the account debtor and the assignor and any defense or claim in recoupment arising from the transaction that gave rise to the contract; and any defense or claim of the account debtor against the assignor which accrues before the account debtor receives a notification of the assignment authenticated by the assignor or the assignee. 6 This statutory provision gives an account debtor (like the feeder) two separate strategies that he may use in responding to a claimby the assignee (like the bank). In the Iowa case, the cattle feeder used both. Because the feeder/account debtor had not received a notice of assignment of the note, the bank/ assignee was subject to any of the affirmative defenses that the feeder had at its disposal. Payment to the assignor is one such affirmative defense. Since the feeder had satisfied its full payment obligations by making payment to the feedlot, the bank had no recourse against the account debtor. Addition- ally, the feeder could assert any other claims that the feeder had against the feedlot (even claims that were unrelated to the specific notes being sued on) as a “setoff” against any amount potentially due on the notes. Here, the feeder sent two other pens of cattle to the feedlot that were not subject to a promis- sory note. When the feedlot sold these cattle, the feedlot failed to send the sale proceeds to the feeder. Therefore, the feeder could assert that to the extent the feeder owed anything on the promissory notes, the feeder was entitled to a credit for the amount the feedlot owed the feeder for these two lots of non-financed cattle. In retrospect, the bank’s options, from a legal standpoint, were severely stunted by failing to: (a) draft a standard- form negotiable instrument; and (b) failing to send a timely authenticated notice of assignment to the account debtor. As a result of these missteps, the bank could only pursue legal action against the feedlot, which was mired in financial disarray and insolvent. Put simply, the bank was up a creek without a paddle. Managing Risk: A Preview In the next issue of Nebraska Banker, be on the lookout for the third and final installment of this series, which will highlight various ways in which banks can better manage the inherent risks involved in custom feeder relationships. Z 1 Rolling Hills Bank & Trust v. Mossy Creek Farms Ltd. P’ship , No. 2-909/12-0489 (Iowa Ct. App., Jan. 9, 2013) available at www.iowacourts.gov/court_of_appeals/Recent_ Opinions/20130109/2-909.pdf (last visited Feb. 28, 2013). 2 Neb. Rev. Stat. § 3-106 (2001). This series cites to the relevant portions of the Nebraska Uniform Commercial Code, rather than the Iowa provisions cited in Rolling Hills . 3 Neb. Rev. Stat. § 3-104(a) (2001). 4 Neb. Rev. Stat. § 9-102(11) (2001). 5 Neb. Rev. Stat. § 9-406(a) (2001). 6 Neb. Rev. Stat. § 9-404(a)(1), et. seq ., (2001). For more information, contact Gene Summerlin at Husch Blackwell LLP at (402) 964-5014 or gene.summerlin@ huschblackwell.com. Summerlin is a partner in Husch Blackwell’s Food and Agribusiness Industry group, where he concentrates his practice on civil litigation. In addition to serving as counsel inmultiple litigationmatters involving agricultural clients, Summerlin is general counsel for cattle breeding and crop associations. Kevin Savory can be contacted at (402) 964-5092 or kevin. savory@huschblackwell.com. Savory concentrates his practice on tax credit finance and provides support to Husch Blackwell’s Corporate, Mergers and Acquisitions, and Securities Practice Specialty Center. Q Negotiability — continued visit us online! www.nebankers.org www.nebankers.org