No. 08-

Supreme Court, U.S.FILED

OFFICE OF THE G~ERK

IN THE

SUPREME COURT OF THE UNITED STATES

FIN-AG, INC.,

Vo

Petitioner,

PIPESTONE LIVESTOCK AUCTION MARKET,INC.; SOUTH DAKOTA LIVESTOCK SALES OF

WATERTOWN, INC.; WATERTOWN LIVESTOCKAUCTION, INC.; and CIMPL’S, INC.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF THE STATE OF SOUTH DAKOTA

PETITION FOR A WRIT OF CERTIORARI

JASON W. SHANKS

Counsel of RecordMAY & JOHNSON, PC6805 S. Minnesota Ave.Suite 100P.O. Box 88738Sioux Falls, SD 57109(605) 336-2565

Attorneys for Petitioner

JONATHAN K. VAN PATTEN

VAN PATTEN LAW OFFICE

P.O. Box 471Vermillion, SD 57069(605) 677-5361

QUESTION PRESENTED

A federal statute, the Food Security Act of 1985("FSA"), 7 U.S.C. §1631, established uniformprovisions for the protection of security interests infarm products sold through commission merchants aswell as the protection of purchasers of farm productswho comply with the FSA. In states that haveestablished central filing systems, such as SouthDakota and Minnesota, agricultural lenders haverelied upon the FSA and expect that their name willbe listed as co-payees on proceeds checks from sales offarm products collateral. The balance established bythe FSA between the competing interests of lendersand purchasers who wish to take free and clear ofsecurity interests has proven to be workable for overtwenty years. This balance, however, will likely comeundone if the South Dakota Supreme Court’sinterpretation of the federal statute, which is inconflict with the language of the FSA and the recentdecision of the Minnesota Supreme Court, is allowedto stand.

The question presented is whether acommission merchant or other purchaser of farmproducts is protected by the FSA when the debtor sellssecured farm products using a fictitious name that isneither registered nor listed in the UCC/EFS filingwith the state.

PARTIES TO THE PROCEEDING

All of the parties to the proceeding arecontained in the caption. The Respondents shall becollectively referred to as "Sale Barns".

CORPORATE DISCLOSURE STATEMENT

Fin-Ag, Inc. is a wholly-owned subsidiary of itsparent corporation, CHS, Inc. There are no publiclyheld corporations that own 10% or more of corporatestock.

TABLE OF CONTENTS

QUESTION PRESENTED ......................i

PARTIES TO THE PROCEEDING ...............ii

CORPORATE DISCLOSURE STATEMENT .......ii

OPININONS BELOW ..........................

JURISDICTION .............................. 1

PERTINENT STATUTORY PROVISIONS ........2

STATEMENT OF THE CASE

A. Factual Background1. The Food Security Act ...........22. Application of the Food Security

Act to this Case ................5B. Proceedings Below

1. The Trial Court Proceedings ......6

ii

2. The Appeal to the South DakotaSupreme Court .................7

REASONS FOR GRANTING THE WRIT

I. The Court Should Grant ReviewTo Resolve the Conflict Between Two StateSupreme Courts Regarding "Fronting"Sales Under the FSA ...................10

A. Minnesota’s Interpretation andApplication of the FSA .........12

B. South Dakota’s Interpretationand Application of the FSA .....151. The Fronting Entity as a

Separate and Distinct"Seller" .................. 16

2. The Fronting Entity as the"Alter Ego" of the Debtor ....17

II. The Court Should Grant Review ToCorrect the South Dakota Supreme Court’sErroneous Recognition of a Fronting Entityas a "Seller" Under the FSA ..............21

III. The Court Should Grant Review toClarify That a Sale by a Fronting EntityDoes Not Allow a Purchaser to Take Freeand Clear of a Security Interest Created bythe Debtor ............................. 22

CONCLUSION .............................. 23

111

TABLE OF AUTHORITIES

CASES:

Agriliance, LLC v. Runnells Grain Elevator, Inc.,272 F.Supp.2d 800 (S.D. Iowa 2003) ..... 20, 21

Atlantic Cleaners & Dyers, Inc. v. United States,

286 U.S. 427 (1932) ......................19

Brooke Group Ltd. v. Brown & WilliamsonTobacco Corp.,

509 U.S. 209 (1993) ......................19

Department of Revenue of Ore. v. ACFIndustries, Inc.,

510 U.S. 332 (1994) ...................18, 19

Fin-Ag, Inc. v. Cimpl’s, Inc.,54 N.W.2d 1 (S.D. 2008) ..............passim

Fin-Ag, Inc. v. Hufnagle, Inc., f/k/a P & HTrucking, et al.,

720 N.W.2d 579 (MN 2006) ...........passim

Fin-Ag, Inc. v. Pipestone Livestock Auction Agency,Inc. and South Dakota Livestock Sales ofWatertown, Inc.,

754 N.W.2d 29 (S.D. 2008) ...............1, 7

Fin-Ag, Inc. v. Watertown Livestock Auction, Inc.,754 N.W.2d 23 (S.D. 2008) ...............1, 7

Gustafson v. Alloyd Company, Inc.,513 U.S. 561 (1995) ......................18

iv

Cited Authorities

Martin v. Hunter’s Lessee,I Wheat. 304 (1816) .....................11

McKesson Corp. v. Div. of Alcoholic Beverages andTobacco, Dept. of Business Regulation of Florida,

496 US. 18 (1990) ....................... 11

Merchantile Bank of Springfield v. Joplin Reg.Stockyards, Inc.,

870 F.Supp. 278 (W.D. Mo. 1994) ...........9

Reed v. Farley,512 U.S. 339 (1994) ......................11

STATUTES:

28 U.S.C. § 1257 ............................... 1

7 U.S.C. § 1631 ........................... passim

LEGISLATIVE HISTORY:

H.R. Rep. 99-271(I) ............................. 3

V

OTHER AUTHORITY:

Charles W. Wolfe, Section 1324 of the Food Security

Act of 1985: Congress Preempts the "Farm Products

Exception" of Section 9-307(1) of the Uniform

Commercial Code,

55 UMKC L.Rev. 454, 457 (1987) ...........3

UCC § 9-307 ........................... 2, 4, 9, 22

White & Summers, Uniform CommercialCode § 33-13 (4th ed 1995 & Supp. 2007) .........9-10

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TABLE OF APPENDICES

APPENDIX A

Fin-Ag, Inc. v. Cimpl’s, Inc.,754 N.W.2d I (S.D. 2008) ..............A-2- A-47

Fin-Ag, Inc. v. Watertown Livestock Auction, Inc.,754 N.W.2d 23 (S.D. 2008) ........... A-48- A-60

Fin-Ag, Inc. v. Pipestone Livestock Auction Agency,Inc. and South Dakota Livestock Sales ofWatertown, Inc.,

754 N.W.2d 29 (S.D. 2008) ........... A-61- A-112

APPENDIX B

Fin-Ag, Inc. v. Hufnagle, Inc., f/k/a P & HTrucking, et al.,

720 N.W.2d 579 (MN 2006) ........ A-113 - A-134

APPENDIX C

Orders Denying Petitions for Rehearing ....A-135-A-140

APPENDIX D

7 U.S.C.A. § 1631 Food Security Act... A-141 - A-157

vii

Blank Page

Petitioners pray for a writ of certiorari to reviewthree interrelated decisions of the Supreme Court ofSouth Dakota.

OPINIONS BELOW

The opinions of the Supreme Court of SouthDakota are reported at: 754 N.W.2d 1 (Fin-Ag, Inc. v.Cimpl’s, Inc.); 754 N.W.2d 23 (Fin-Ag, Inc. v.Watertown Livestock Auction, Inc.); and 754 N.W.2d 29(Fin-Ag, Inc. v. Pipestone Livestock Auction Agency,Inc. and South Dakota Livestock Sales of Watertown,Inc.). The cited opinions are set forth in the Appendix.App. A-2- A-112.

The opinion of the Supreme Court of Minnesotais reported at 720 N.W.2d 579 (Fin-Ag, Inc. v.Hufnagle, Inc., f/k/a P & H Trucking, et al.). Thecited opinion is set forth in the Appendix. App. A-113 -A-134.

JURISDICTION

The final judgments by the Supreme Court ofSouth Dakota were entered on June 18, 2008. UnderSouth Dakota law, the filing of the opinion of theSupreme Court of South Dakota constitutes entry ofjudgment. Petitioner timely filed petitions forrehearing on their claims against the defendantsregarding the Court’s interpretation and application ofthe FSA. The petitions for rehearing were denied July29, 2008. App. A-135 - A-140. The jurisdiction of thisCourt is invoked under 28 U.S.C. § 1257.

PERTINENT STATUTORY PROVISIONS

The pertinent statute is the Food Security Actof 1985, Pub. L. 99-198, Title XIII, § 1324, 99 Stat.1535, as amended at 7 U.S.C. § 1631. The relevantprovisions are reproduced in the Appendix. App. A-141 - A-157.

STATEMENT OF THE CASE

A. Factual Background

1. The Food Security Act

One of the principal purposes of the FoodSecurity Act was to modify the "farm products"exception codified in the Uniform Commercial Code("UCC"). 7 U.S.C. § 1631(a)-(b). The general rule ofUCC § 9-307 was that a ’%uyer in the ordinary courseof business" would take goods free of a valid securityinterest, f the security interest was created by theseller of the goods. So, for example, f one purchased ahammer from the hardware store, any securityinterest (if the store had inventory financing) wouldnot follow the hammer, but would attach only to theproceeds of the sale and the buyer would take thehammer free and clear. This general rule, however,did not apply to buyers of farm products. Id. "Thus,the UCC protected buyers in the ordinary course ofbusiness only from security interests created by thebuyer’s seller; and buyers of farm products wereexcluded from even this narrow protection." Fin-Ag,Inc. v. Hufnagle, Inc., App. A-115.

The justification for this perhaps unduly strongprotection of agricultural liens rested, in part, on theasserted unique nature of agricultural financing.

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Charles W. Wolfe, Section 1324 of the Food SecurityAct of 1985: Congress Preempts the "Farm ProductsException" of Section 9-307(1) of the UniformCommercial Code, 55 UMKC L.Rev. 454, 457 (1987).1Some states attempted to ameliorate the perceivedunfairness the farm products exception. Oneconsequence of this, however, was an inconsistentapplication of the UCC. Congress recognized thisproblem in the FSA House Report:

These consideration[s] have led 20 statesto "opt out" of the Farm ProductsException and establish their owncentral filing or notice systems. Undersuch conditions, the Uniform Commer-cial Code is hardly "unform" anymore inthis particular field. And with theincreasingly interstate nature ofagricultural marketing, this patchworkof rules and regulations has becomeintolerable for buyers and sellers of farmproducts alike. Application of thecurrent myriad of state laws has createda substantial burden on interstatecommerce in agricultural products. Asingle federal rule is needed to restoreconsistency to this area of the law, andremove that burden.H.R. Rep. 99-271(I), p. 109 (emphasis).

It may also be related to the fungibility of farm products,which makes the existence of liens harder to detect. Unlikemotor vehicles, for example, that have VIN numbers, mostagricultural products are not readily identifiable as to theowner, except in some areas of the country where cattle arebranded, which was not the case here.

Congress enacted the Food Security Act toaddress the problem of inconsistent rules and theresulting burden that the farm products exception hadcreated for interstate commerce in agriculturalproducts. In so doing, Congress did not leaveagricultural lenders without protection of theirinterests. Commission merchants, also known in theMidwest as "sale barns", are subject to the securityinterests created by the seller if the lender has filed aneffective financing statement with the Secretary ofState and the lender has not waived or released itssecurity interest. 7 U.S.C. § 1631(g)(2)(D). Inaddition, the FSA retained an important provisionfrom UCC 9-307 in that the protection for the farmproducts purchaser was limited to security interests"created by the seller":

Except as provided in subsection (e) ofthis section [describing purchases subjectto a security interest] and notwithstand-ing any other provision of Federal State,or local law, a buyer who in the ordinarycourse of business buys a farm productfrom a seller engaged in farmingoperations shall take free of a securityinterest created by the seller; eventhough the security interest is perfected;and the buyer knows of the existence ofsuch interest.7 U.S.C. § 1631(d).

In striking a balance between lenders and third partypurchasers of secured collateral, Congress did notprovide that purchasers would take free of, or beprotected from, all security interests. Hufnagle, App.

A-117 ("But the protection actually provided by section1631 was not as sweeping as the statement of intentmight suggest.").

It is fair to say that this balance has proven tobe workable for over twenty years, as evidenced by thecontinuation of agricultural lending post-FSA and therelative lack of litigation under the new provisions.The question, however, is whether this balance willcontinue to hold as the courts deal with the problem ofa debtor who seeks to avoid the strictures of a validsecurity interest by selling secured collateral underanother name in order to evade the co-payeerequirement for the proceeds check.

Application of the Food Security Actto this Case

Fin-Ag, Inc. ("Fin-Ag") made cattle andoperating loans exceeding four million dollars to theBerwalds.2 The loans were secured by cattle owned bythe Berwalds. Fin-Ag duly filed a Financing State-ment with the Secretary of State of South Dakota inorder to give notice of Fin-Ag’s secured interest in thecattle.

In August of 2004, Fin-Ag learned thatcollateral cattle had been sold by the Berwalds, usingthe name of C&M Dairy, to or through the SaleBarns. C&M Dairy was not listed on any of thefinancial statements or income tax returns submitted

The loans were made to certain individuals and entities,namely, Calvin Berwald, Michael Berwald, Kimberly Berwald,Berwald Brothers, Berwald Partnership, and Sokota Dairy,LLC (collectively referred to as "Berwalds").

to Fin-Ag. There were no fictitious name filings inthe State of South Dakota under the name of C&MDairy. For those sales made in the name of C&MDairy, the Sale Barns did not list Fin-Ag as a co-payee on the proceeds checks. This practice wasrepeated many times, with several different salebarns, including the four sale barns involved in thislitigation. The deception allowed the Berwalds toreceive over one million dollars in proceeds free andclear. It did not, however, prevent their financialcollapse and they eventually filed a Chapter 11bankruptcy petition.

B. Proceedings Below

1. The Trial Court Proceedings

Fin-Ag brought actions in state court againstthe Sale Barns for conversion, seeking damages equalto the amount of the payments tendered for the sale ofthe Berwalds’ collateral cattle.3 The Sale Barnsclaimed C&M Dairy was not listed in South Dakota’smaster list of the filed financial statements andtherefore they were not obligated to list Fin-Ag as a co-payee. Fin-Ag and the Sale Barns brought cross-motions for summary judgment in each of the

3 One of the defenses offered by the Sale Barns was that Fin-Ag suffered no damage because the Berwalds’ bankruptcyreorganization plan provided for full payment of its claim.Unfortunately, the "promise" of full payment is diminished bythe reality that it will occur, if at all, only when the Berwaldsare able, despite their history of financial distress anddishonesty, to convince another lender to re-finance theiroperation before the balloon payment deadline. In any event,any recovery in the state actions would be offset against Fin-Ag’s bankruptcy claim against the Berwalds.

underlying actions. Summary judgment was grantedin Fin-Ag’s favor in two of the cases and in favor of oneof the Sale Barns in another, and there was a "split"decision in the remaining case.4 All decisions wereappealed to the Supreme Court of South Dakota.

2. The Appeal to the South DakotaSupreme Court

Under the FSA, there are two ways in which asecurity interest will survive a sale to a third partypurchaser. First, a purchaser does not take free froma security interest if the "seller" is a debtor whosename appears to the UCC/EFS filing with theSecretary of State. Thus, Fin-Ag argued that, if theBerwalds were considered the "seller," the Sale Barnswould be subject to the security interest because theBerwalds were identified in South Dakota’s masterlist. 7 U.S.C. § 1631(g)(2)(D). Second, a purchaseronly takes free of security "created by the seller." 7U.S.C. § 1631(d). Thus, if C&M Dairy was consideredthe "seller," the Sale Barns were only protected underthe FSA for the security interests created by C&MDairy. See also 7 U.S.C. § 1631(g)(1). Because C&MDairy did not create any of the security interests inthe cattle sold, the FSA did not provide the Sale Barnswith protection and they were still subject to Fin-Ag’ssecurity interests in the cattle.

As further support of its position, Fin-Ag citedto the Supreme Court of Minnesota’s decision in Fin-

4 In Pipestone Livestock and South Dakota Livestock, thetrial court ruled in favor of the sale barns, except to the extentthat the sale barn had acted as a lender in crediting salesproceeds against a previous open account.

Ag, Inc. v. Hufnagle, Inc., 720 N.W.2d 579 (Minn.2006); App. A-113 A-134. In Hufnagle, theMinnesota Supreme Court addressed a similar"fronting’ situation and held that the FSA did notprovide protection to the farm products dealer andupheld Fin-Ag’s conversion claim. Fin-Ag argued tothe Supreme Court of South Dakota that the onlydifference between Hufnagle and the present SaleBarn cases was that the Berwalds used a d/b/a to fronttheir sales as opposed to the use of employees’ orchildren’s names in Hufnagle.

In holding that the FSA provided protection tothe Sale Barns, the Supreme Court of South Dakota,in a 3 to 2 decision, concluded that the "seller", forpurposes of written notice under § 1631(e)(3) and(g)(2)(D), was C&M Dairy. App. A-22. However, whenaddressing the FSA’s limitation of protection to onlythose interests "created by the seller" under § 1631(d)and (g)(1), the Supreme Court of South Dakotaconcluded that the "seller" was not C&M Dairy, butinstead was the Berwalds. App. A-34.

Justices Sabers and Konenkamp issued avigorous dissent, stating that the majoritymisinterpreted and misapplied the FSA as evidencedby it defining "seller" two different ways within thesame statute. The dissenting justices observed:

The opinion can call it anything itwants, but it cannot hide what is plainand obvious. In its attempt to decide thiscase in favor of the Sale Barns, it arrivesat some conflicting conclusions. Forexample, the opinion concludes thatC&M Dairy is a ’%usiness entity" and

therefore separate from Calvin andMichael Berwald and can be a sellerunder the statute, thus the FSA protectsSales Barns. Then, in the next portion ofanalysis, C&M Dairy is merely a d.b.a.and cannot be separated from theBerwalds, therefore C&M Dairy createdthe security interest and again, SaleBarns win. In reality, C&M Dairy is anillegal fiction and definitely a frontingsituation. It is not an entity or an alterego - and certainly not both the "seller"and the "seller who created the securityinterest.App. A-41.

Underlying the majority’s reading of the FSAwas its belief that Congress intended to "shift theburden of potential loss from the buyers andcommission merchants to the lenders who financefarm operations." App. A-11 (quoting MerchantileBank of Springfield v. Joplin Reg. Stockyards, Inc.,870 F.Supp, 278, 282 (W.D. Mo. 1994)). The dissentobjected, however, that this was in conflict with the"created by the seller" limitation that Congress hadexpressly incorporated from UCC 9-307.5 In other

The dissenting justices specifically stated:Significantly, despite its criticism, Congressincluded this clause ["created by the seller"] insection 1631 of the FSA when attempting tocorrect some of the other problems of buyingfood products under the UCC. [Citationomitted].

White and Summers have discussed thedifficulties with the "created by the seller"language. See 4 White& Summers, Uniform

words, the asserted "polic~?’ of Congress was allowedto contravene the express provisions of the FSA.

REASONS FOR GRANTING THE WRIT

The South Dakota Supreme Court has in effectcreated an approved roadmap for dishonest debtors tobypass UCC/EFS regulations and to wrongfully obtainproceeds from the sale of secured farm collateral. Byinterpreting the term "seller" differently within theFSA, it allows "fronting’ sales and thereby hasreduced the protections afforded to agriculturallenders. Such decision is contrary to the language ofthe FSA and is also in direct conflict with the SupremeCourt of Minnesota’s decision in Fin-Ag, Inc. v.Hufnagle.

I. The Court Should Grant Review ToResolve the Conflict Between Two StateSupreme Courts Regarding "Fronting"Sales Under the FSA.

In the absence of exclusive federal jurisdiction,state courts have the power to interpret federal law,

Commercial Code § 33-13 (4th ed 1995 & Supp.2007) (discussing the problems produced by thecreated by the seller language in former UCC §9-307). Importantly, they theorize that:"Perhaps the drafters intended that as betweentwo innocent parties the ultimate loss shouldfall on the party who dealt most closely with the’bad guy."’ Id. Although this may conflict withthe FSA policy, we have to presume thatCongress knew what it was doing when itborrowed this language from the UCC.App. A-42-43.

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but their interpretations are subject to review in thisCourt. Reed v. Farley, 512 U.S. 339, 361 (1994) (thereis an interest in promoting "uniformity in the statecourts’ interpretation and application of federal law");McKesson Corp. v. Div. of Alcoholic Beverages andTobacco, Dept. of Business Regulation of Florida, 496US. 18, 29 (1990) ("State courts must interpret andenforce faithfully ’the Supreme Law of the Land,’ andtheir decisions are subject to review by this Court.");Martin v. Hunter’s Lessee, 1 Wheat. 304, 307-08 (1816)(Congress recognized "the importance, and evennecessity of uniformity of decisions throughout thewhole United States, upon all subjects within thepurview of the constitution.") (emphasis in original);Rules of the Supreme Court of the United States, Rule10(b).

The interpretation and application of the FSA isan important federal question that has a nationwideimpact. The fact that South Dakota and Minnesotahave interpreted and applied this federal statutedifferently on a matter that is now likely to recurfrequently supports review by this Court. Moreover,South Dakota and Minnesota are neighboring statesand farm producers may sell their products acrossstate lines (as did happen in one of the cases here) andagricultural lenders may make loans across state linesand thus the conflicting opinions regarding theinterpretation and application of the FSA must beresolved.

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no Minnesota’s Interpretation and Applica-tion of the FSA.

In Fin-Ag, Inc. v. Hufnagle, Inc., 720 N.W.2d579 (Minn. 2006) (App. A-113 - A-134), the SupremeCourt of Minnesota held that the FSA did not protectthe purchaser in a "fronting" sale. Fronting salesoccur when "a seller of farm products that are subjectto a security interest has a third party sell them underthe third party’s name." App. A-122. The debtors,Larry and Ronda Buck, sold collateral corn undertheir employees’ and minor children’s names to KentMeschke Poultry Farms. Meschke was a registeredfarm products dealer who had received Minnesota’smaster list of sellers and thereby had notice of thosedebtors who were subject to security interests.Meschke defended against Fin-Ag’s conversion claim,arguing that he was entitled to protection under theFSA because the corn was sold by parties who werenot on the master list.

In addressing the grain purchaser’s claims, theHufnagle court carefully considered the history of theFSA, including what Congress had changed and whatit had not changed through the legislation, andexplicated the federal protection as follows:

To summarize, under 7 U.S.C. §1631 a buyer of farm products in theordinary course of business (1) takes freeof security interests created by the seller,unless notice of the seller-createdsecurity interest has been given by one ofthree specific notice procedures, whichinclude the Minnesota central filing

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system provided under chapter 336A; but(2) takes subject to security interestscreated by someone other than the seller.App. A-119.

The Hufnagle court affirmed the granting ofsummary judgment in favor of Fin-Ag. It noted theambiguity of who was the "seller" under the FSA, butconcluded that the same result would be reachedregardless of whether the debtors treated as the selleror the "fronting’ persons were treated as the seller:

If we view Buck [the debtors] asthe seller, assuming that the Tookers[the fronting individuals] sold the corn asagents for Buck as an undisclosedprincipal, the exception in section 1631(e)for a security interest as to which noticehas been given would apply becauseMeschke [the purchaser] received noticeof Fin Ag’s interest against Buck, andMeschke did not secure a waiver of theinterest from Fin Ag. See 7 U.S.C. §1631(e)(3). Accordingly, Meschke’sinterest in the corn would be subject toFin Ag’s security interest.App. A-126.

If, on the other hand, the fronting persons areto be regarded as the "seller," then other provisions ofthe FSA become applicable. If the fronting persons"sold" the collateral as "commission merchants" or"selling agents," they are subject to the securityinterest if they have failed to register with theSecretary of State and the secured lender has filed aneffective financing statement. 7 U.S.C. 1631(g)(2)(C).

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If the fronting persons "sold" the corn on their ownbehalf, the sale to the purchasers would only be free ofany security interest created by the "sellers," i.e., thefronting persons, and thus would be subject to thesecurity interest created by the debtor, who is not theseller. 7 U.S.C. § 1631(d). The Hufnagle courtconcluded that under all possible factual scenarios, thepurchaser in a fronting situation takes subject to thesecurity interest. App. A-126-128.

The inclusion of the "created bythe seller" clause in section 1631 meansthat the statute does not provideprotection for buyers in a frontingsituation where the security interestfrom which protection is sought was notcreated by the fronting parties. Underthe facts of this case, no matter whatfactual assumptions we make, there arenone under which Meschke could takethe corn free of Fin Ag’s security interest.This is because if we view Buck as theseller, we must conclude that Meschke’srights are subject to Fin Ag,s securityinterest under section 1631 because FinAg filed an "effective financingstatement" that put Meschke on notice ofFin Ag’s security interest in Buck’sproducts. And, if we view the Tookers asthe sellers, we must conclude thatMeschke’s rights are subject to Fin Ag’ssecurity interest, under either section1631 or Minnesota’s UCC, because bothstatutes only protect a buyer from asecurity interest created by the seller

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and not from a security interest createdby an undisclosed owner, whichcontinues in the product despite the sale.App. A-125.

The Minnesota Supreme Court’s ruling wasfaithful to the language of the FSA and was consistentwith the balance the FSA had established to protectboth lenders’ and purchasers’ interests. The decisionimplicitly recognizes that the balance comes undone,rather easily, if a dishonest debtor may circumvent therules simply by selling through a fronting person.

B. South Dakota’s Interpretation andApplication of the FSA.

Subsequent to Hufnagle, the Supreme Court ofSouth Dakota was presented with cases that werevirtually identical on their facts. The only differencewas that the Berwalds used a d/b/a, "C&M Dairy," tofront their sales rather than using employees’ orfamily members’ names. Instead of following theHufnagle’s analysis of the FSA, the majority posed thematter this way:

Because C&M Dairy was the onlyidentified seller in the sales at issue,there are two "seller" questions thatmust be resolved to determine whetherthe FSA protected [the Sale Barn]: (1)was C&M Dairy the seller of the cattlewithin the meaning of the written noticeexception of the FSA; and (2) shouldC&M Dairy be regarded as the seller who

15

created Fin-Ag’s security interest withinthe meaning of the FSA limitation.App. A-14.

The majority concluded that C&M Dairy was the"seller" under the FSA and not the Berwalds. App. A-22. As a consequence, Fin-Ag could not prevail under7 U.S.C. § 1631(e) because C&M Dairy was not listedon the state master list. The court, however, alsoconcluded that the Berwalds were the "seller" whenapplying the "created by the seller" exception to theprotection. App. A-34.

The Fronting Entity as a Separate andDistinct "Seller."

The majority concluded that C&M Dairy, aseither an informal partnership, joint venture, or otherassociation, came within the FSA definition of "seller"that included "any other business entity." App. A-16-17. 7 U.S.C. § 1631(c)(10). It noted that the SouthDakota Administrative Rules for implementing theFSA central filing system provided that the "use ofdoing business as is considered an additional debtorand shall be listed as such .... " App. A-19-20. Thus,it was the lender’s burden to discover whether thedebtor was using a d/b/a "entity"~ as part of afraudulent scheme to defeat the lender’s securityinterest. App. A-20-21o

In this case, the d/b/a was not registered even thoughthis was a requirement of South Dakota law. S.DoC.L. 37-11-1.The "C&M" of C&M Dairy corresponded to the initials of thetwo principal debtors, Calvin and Michael Berwald.

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¸.The Fronting Entity as the "Alter Ego" ofthe Debtor.

Having decided that the "seller" for purposes ofthe notice provision was C&M Dairy, the majorityturned to the second question, whether the Sale Barnswould take free of a security interest "created by theseller." C&M Dairy, of course, created no securityinterest in any cattle, much less the cattle involved inany of the underlying transactions. The securityinterest of Fin-Ag was created by the Berwalds andthe majority had just concluded that the Berwaldswere not the seller.

In order to deal with this difficulty, the majorityconcluded that "as the alter ego of Berwalds, C&MDairy should be regarded as the seller who created thesecurity interest within the meaning of 7 U.S.C. §1631(d)." App. A-31. In other words, even thoughC&M Dairy did not create the security interest, theBerwalds did and C&M Dairy is so close to theBerwalds as to be their "alter ego" and should beregarded as having created the security interest.

The dissent strongly criticized this approach:"In reality, C&M Dairy is an illegal fiction anddefinitely a fronting situation. It is not an entity or analter ego -- and certainly not both the ’seller’ and the’seller who created the security interest."’ App. A-41.The dissenting justices agreed with the Hufnagle courtand identified the majority’s inconsistent interpreta-tions of the term "seller" under the FSA:

There are two different interpreta-tions of a supposed entity, yet the same

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strained outcome. When defining"seller," it is inconsistent to say that inone instance C&M Dairy is an entitydistinct from the Berwalds, so C&MDairy can be the seller and claim SaleBarns did not receive notice of Fin-Ag’ssecurity interest, and then to say theBerwalds and C&M Dairy are "one andthe same" in order to find C&M Dairy isthe "seller who created the securityinterest." In Hufnagle, the MinnesotaSupreme Court specifically refused to"define seller two different ways in thesame analysis without a significantindication that this was the legislature’sintent. No such indication [of legislativeintent] exists here." 720 NW2d at 588-89. We should not interpret seller twodifferent ways.App. A-41-42.

Consistency in the interpretation and theapplication of a single term appearing more than oncein a federal statute is the "normal rule of statutoryconstruction." As this Court stated in Gustafson v.Alloyd Company, Inc., 513 U.S. 561, 570 (1995):

The 1933 Act, like every Act of Congress,should not be read as a series ofunrelated and isolated provisions. Onlylast Term we adhered to the "normal ruleof statutory construction" that "identicalwords used in different parts of the sameact are intended to have the samemeaning." Department of Revenue of Ore.

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v. ACF Industries, Inc., 510 U.S. 332,342, 114 S.Ct. 843, 849, 127 L.Ed.2d 165(1994) (internal marks and citationsomitted); see also Brooke Group Ltd. v.Brown & Williamson Tobacco Corp., 509U.S. 209, 230, 113 S.Ct. 2578, 2591, 125L.Ed.2d 168 (1993); Atlantic Cleaners &Dyers, Inc. v. United States, 286 U.S. 427,433, 52 S.Ct. 607, 609, 76 L.Ed. 1204(1932). That principle applies here. If thecontract before us is not a prospectus forpurposes of § 10 -- as all must and doconcede -- it is not a prospectus forpurposes of § 12 either.

As a policy matter, the dissenting justicescharged that the majority’s approach effectivelysanctioned the Berwald’s fraudulent scheme:

The opinion’s analysis of this issuesends the message to deceitful debtorsthat they can avoid the security interestif they use their initials as a fictitiousname to sell their collateral to sale barns.The opinion blindly accepts the answer ofthe driver of the cattle truck to theyardman that the seller is "C&M Dairy,"even if the driver of the truck is CalvinBerwald, Michael Berwald or theirFather, Arlen Berwald. Interpreting thestatutes in this manner produces theexact result we should prohibit - absurd.The opinion claims the burden should beon the lender, the party who is morecapable of policing this problem.

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However, it seems it would be next toimpossible for a lender to prevent itsdebtor from creating a fictitious name,with no fictitious name filing, and sellingcattle under that name, while it would berelatively easy for the Sale Barn to digpast the fictitious name and inquire as tothe proper owner and seller of the cattle.

App. A-44-45.

There is a direct conflict between Minnesota’sand South Dakota’s interpretation of the FoodSecurity Act and only this Court can authoritativelyclarify the interpretation and application of the FSA.Because farm products are sold nationally and acrossstate lines, the protections afforded under the FSAneed to be clarified so that there can be unformityamongst the states in regard to farm products salesand the protection of security interests. The conflictwill have an immediate affect on interstate lendingand the sale of farm products due to the inconsistentapplication of the FSA between the states.7

7 Although not directly on point, the decision inAgriliance, LLC vo Runnells Grain Elevator, Inc., 272 F.Supp.2d800 (S.D. Iowa 2003), suggests that Iowa may fall on theMinnesota side of this conflict. In that case, the federal districtcourt noted the grain elevator’s failure to properly inquire andprotect secured lender’s interest in the crops and stated:

It appears that grain elevators, in the businessof purchasing grain, rely primarily on the wordof the seller or representative delivering thegrain to distinguish and identify the crops theyare purchasing. But even assuming that thebusiness of grain brokerage is conducted on thesame informal basis as Runnells’ operations, the

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II. The Court Should Grant Review toCorrect the South Dakota SupremeCourt’s Erroneous Recognition of aFronting Entity as a "Seller" Under theFSA.

The prospect that dishonest farm debtors mayescape the strictures of valid security interests simplyby creating a fictional name and selling under that

Court does not believe that Runnells’ lack ofactual knowledge that the crops were the onessubject to the Agriliance interest shields it fromliability. Having received a Food Security Actnotice, Runnells was obligated to maintain amechanism that would properly protect theinterests of the secured party. Here, Runnellsknew that the Mitchells’ 2001 crops weresubject to Agriliance’s security interest. MarvinMitchell was also the party who delivered thecrops and with whom they had directlynegotiated the purchase. On these facts,Runnells should have known that the cropswere quite possibly 2001 crops owned by theMitchells and could therefore be subject toAgriliance’s interest .... Thus, Runnells’ failureto determine whether the crops delivered by theMitchells were subject to Agriliance’s interestevidences a reckless disregard for Agriliance’sclaim to the crops, which constitutes a wrongfulintent to exercise control over the crops andtheir proceeds to the detriment of Agriliance.272 F.Supp.2d at 806-07.

The Agriliance court’s interpretation and application of theFood Security Act regarding the delivery and sale of crops ismore closely aligned with the Hufnagle decision because itrecognizes that lack of knowledge of the security interest doesnot necessarily shield the elevator from liability for conversion.

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name will become a self-fulfilling prophecy if thedecision of the South Dakota Supreme Court isallowed to stand. The problem, as identified by thedissenting justices below, lies in the recognition of andgranting "seller" status to a fictional entity that doesnot own the collateral. Whenever there is frontingperson or entity, used solely for the purpose of filteringoff the security interest, the balance established byCongress, with its rules to protect both lenders andfarm products purchasers, is jeopardized. This Courtshould grant review to correct the erroneousinterpretation of the FSA by the South DakotaSupreme Court.

III. The Court Should Grant Review toClarify That a Sale by a Fronting EntityDoes Not Allow a Purchaser To Take Freeand Clear of a Security Interest CreatedBy the Debtor.

Congress incorporated the "created by theseller" language of 7 U.S.C. § 1631(d) directly fromUCC § 9-307. In order to retain the viability of thisrequirement, this Court should grant review to clarifythat a term in a federal statute, here "seller," musthave a consistent meaning throughout the FSA.Without such a clarification, the dishonest debtor caneasily circumvent any co-payee requirement through afronting sale. Under the South Dakota SupremeCourt’s interpretation of the FSA, the dishonest debtorgets the benefit of hiding the true identity of the seller,while enjoying the advantage selling collateral freeand clear of all security interests.

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CONCLUSION

For the foregoing reasons, this Court shouldgrant the Petition for a Writ of Certiorari.

Respectfully submitted,

JASON W. SHANKSCounsel of Record

MAY & JOHNSON, PC6805 S. Minnesota Ave.Suite 100P.O. Box 88738Sioux Falls, SD 57109(605) 336-2565

Attorneys for Petitioner

JONATHAN K. VAN PATTEN

VAN PATTEN LAW OFFICE

P.O. Box 471Vermillion, SD 57069(605) 677-5361

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