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Rolling Hills Bank v. Mossy Creek Farms Limited Partnership and Ernest M. Reeves

January 9, 2013

ROLLING HILLS BANK & TRUST, AN IOWA BANKING CORPORATION, PLAINTIFF-APPELLANT,
v.
MOSSY CREEK FARMS LIMITED PARTNERSHIP AND ERNEST M. REEVES, DEFENDANTS-APPELLEES.



Appeal from the Iowa District Court for Pottawattamie County, James M. Richardson, Judge.

The opinion of the court was delivered by: Mullins, J.

Rolling Hills Bank & Trust appeals from the district court's decision finding Mossy Creek Farms, L.P. discharged its obligations under five promissory notes prior to receiving notice of assignment to the bank, and finding its general partner not liable for the alleged debt. AFFIRMED.

Heard by Doyle, P.J., and Mullins and Bower, JJ.

Rolling Hills Bank & Trust (the Bank) brought a breach of contract action against Mossy Creek Farms, L.P. (Mossy Creek) for failure to repay five promissory notes. Mossy Creek executed five promissory notes in favor of Southwest Iowa Cattle Feeders, L.L.C. (Southwest), and Southwest then assigned the promissory notes to the Bank. It is undisputed that the Bank never received payment on the five promissory notes. However, Mossy Creek asserts it paid Southwest prior to receiving notice of assignment to the Bank, thus discharging its obligation. We affirm.

I. Background Facts

Southwest is a custom cattle feeding operation. Southwest was in the business of financing the purchase of cattle for its customers. Southwest fed and cared for its customers' cattle until the cattle reached market weight. After the cattle reached market weight, Southwest sold the cattle to meat packing operations, and Southwest sent the profit, if any, back to its customers.

To finance its operation, Southwest reached an agreement with the Bank. Pursuant to the agreement, the Bank financed Southwest's feedyard operation and provided capital for Southwest to lend to its customers. To accomplish this end, the Bank created blank promissory notes, security agreements, and endorsement and assignment agreements for Southwest. The Bank structured its transactions with Southwest to ensure it dealt only with Southwest, rather than Southwest's customers.

Mossy Creek, a Virginia-based limited partnership, executed a series of twenty-seven promissory notes in favor of Southwest for the purchase, care, and feed of its cattle at Southwest's facilities in Iowa. Southwest calculated the estimated cost of these services and filled in the blanks on the promissory notes accordingly. Southwest then mailed the promissory notes to Mossy Creek in Virginia. After Mossy Creek executed the notes, Southwest endorsed and assigned the notes to the Bank. The Bank then advanced money to Southwest as it incurred costs, up to the value of the note.

Southwest cared for and fed Mossy Creek's cattle, with the Bank advancing funds as previously described. After the cattle reached market weight, Southwest sold the cattle to various packers, who in turn issued checks to Southwest. Southwest then deposited the proceeds into its general demand checking account at the Bank. Other customers engaged in business with Southwest in a similar manner. The proceeds from the sale of Mossy Creek's cattle were commingled with the proceeds from the sale of other customers' cattle in the same account. It was not uncommon for Southwest to combine and sell cattle from different customers' lots to facilitate full shipments to market.

After the sale of a particular cattle lot, the Bank relied on Southwest to direct it to pay down the associated note. To determine Mossy Creek's profit or loss on a particular cattle lot, Southwest issued closeout statements to Mossy Creek and the Bank, detailing the purchase, care, feed, and marketing costs of each lot. After deducting the principal and interest due on the promissory note, Southwest sent the profit to Mossy Creek along with the closeout statement.

In the summer of 2009, Southwest's manager, Richard Cody, fell behind in issuing closeout statements to customers. As a result, more than a million dollars accumulated in Southwest's general demand account at the Bank. At that time, several notes were outstanding.

John Foley, the Bank's loan officer, was responsible for conducting regular inspections at Southwest and monitoring payments on the notes. Foley contacted Cody and informed him that Southwest needed to pay down the outstanding notes. Cody had not yet calculated closeout statements for these notes. Without preparing closeout statements, Foley and Cody agreed to use the funds in Southwest's general demand account to pay off the outstanding notes.

Five notes are at issue in this case. Each note is associated with a particular cattle lot number. The parties referred to the lots at issue as MC 25, MC 26, MC 27, MC 28, and MC 29. For the twenty-two notes Mossy Creek executed in favor of Southwest prior to the notes at issue, Southwest sold Mossy Creek's cattle, deposited the proceeds into its account at the Bank, issued closeout statements to Mossy Creek and the Bank, and directed the Bank to pay off the note associated with the respective lot.

For the notes at issue (the Notes), Southwest sold the cattle in lots MC 25 through MC 29 to various packers. The packers issued checks to Southwest. Southwest deposited the proceeds into its general demand account at the Bank. In late May or early June of 2009, Southwest prepared closeout statements for lots MC 25 through MC 29. Cody deducted the principal and interest due on each note from the proceeds identified in the closeout statements. On June 12, 2009, Cody issued closeout statements to Mossy Creek and the Bank for lots MC 25 through MC 29. Along with the closeout statement, Cody sent Mossy Creek profits ...


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