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Church Crop Insurance Services, Inc. v. Gemcap Lending I, LLC

Court of Appeals of Iowa

March 6, 2019

CHURCH CROP INSURANCE SERVICES, INC., Plaintiff-Appellee,
v.
GEMCAP LENDING I, LLC, Third-Party Interpleader Defendant-Appellant.

          Appeal from the Iowa District Court for Polk County, Robert B. Hanson (motion for summary judgment) and Eliza J. Ovrom (trial), Judges.

         A third-party creditor appeals the grant of declaratory judgment in favor of the plaintiff in this interpleader action.

          Larry J. Brock of Brock Law Office, Washington, for appellant.

          Sarah K. Franklin and Sarah E. Crane (until withdrawal) of Davis, Brown, Koehn, Shors & Roberts, PC, Des Moines, for appellee.

          Heard by Tabor, P.J., Bower, J., and Carr, S.J. [*]

          CARR, Senior Judge.

         GemCap Lending I, LLC (GemCap) appeals the district court's grant of declaratory judgment in favor of Church Crop Insurance Services, Inc. (Church Crop). The district court found Crop USA Insurance Agency, Inc. (Crop USA), as a debtor of GemCap, could not pledge as security funds representing commissions it owed to Church Crop. The court ordered the release of the disputed funds to Church Crop. Although we do not fault Church Crop for feeling proprietary about the funds, we think the relevant contracts and Article 9 jurisprudence compel a different result. We find Crop USA had rights in the disputed funds and could legally pledge the funds as security. Therefore, we reverse and remand for further proceedings.

         I. Background Facts and Proceedings

         Church Crop sells federal crop insurance[1] and other crop insurance products. In order to sell crop insurance, Church Crop entered into an "Independent Agent Contract" with Crop USA in 2010.[2] Under the "Independent Agent Contract," Church Crop is authorized to solicit applications for insurance coverage for certain insurers contracted with Crop USA. Crop USA in turn is obligated to pay commissions to Church Crop based on premiums generated when these applications result in placement of a policy. Thereafter, Crop USA entered into a "Sales Agent-Company Agreement" with Diversified Crop Insurance Services (Diversified). As a result of these agreements, Church Crop was authorized to write crop insurance policies with Diversified through Crop USA, Diversified was required to pay compensation to Crop USA for these policies, and Crop USA was required to pay the appropriate commissions to Church Crop. Angela Church, president of Church Crop, testified Crop USA paid all commissions due to Church Crop for 2011 and 2012 and part of the commissions due for 2013.

         GemCap makes asset-based loans to small-to-medium-sized businesses. In 2011, GemCap and Crop USA entered into a "Loan and Security Agreement."[3] Under the agreement, GemCap agreed to lend money to Crop USA. As collateral, Crop USA agreed to convey to GemCap "a first priority continuing security interest in and Lien upon all now owned and hereafter acquired property and assets of [Crop USA] and the Proceeds and products thereof." GemCap and Crop USA subsequently entered into an "Amended and Restated Loan and Security Agreement," which granted GemCap a security interest in the same property. Crop USA also authorized GemCap to withdraw funds from all of its deposit accounts. As part of their agreements, Diversified paid commissions and certain subsidies into an account-called a "blocked account"-under the control of Gemcap. To this end, Crop USA executed a "BLOCKED ACCOUNT CONTROL AGREEMENT," instructing the depository bank that GemCap has a security interest in and "sole dominion and control" of the blocked account.

         At trial, Ray Johnson Taylor, president of Crop USA, testified sales of crop insurance policies "occur long before the receipt of the commissions," and Crop USA entered into the agreements with GemCap as "a financing arrangement for that interim period." Taylor explained between that, as Crop USA had done with previous lenders, Crop USA would draw from its line of credit with GemCap to pay its obligations: "Pay bills, pay commissions, pay salaries," including its contractual obligations with Church Crop and its other sales agents. He agreed with counsel that the blocked-account agreement meant "monies that were due from Diversified to Crop USA under its contract were paid by wire transfer by Diversified into a controlled account, controlled by GemCap," and "GemCap was entitled to take all funds that were wire-transferred into the blocked accounts."

         In 2013, GemCap issued a notice of default to Crop USA, claiming Crop USA had violated several of its obligations under the loan, including failing to make required payments, using loan funds for unauthorized purposes, and misrepresenting material facts. After providing notice of its right to accelerate the loan, GemCap filed suit against Crop USA and several other defendants in California federal district court asserting breach of the loan agreement and other claims. See Gemcap Lending I LLC v. Crop USA Ins. Agency Inc., CV 13-05504 SJO (MANx), 2015 WL 12746212, at *2 (C.D. Cal. Aug. 17, 2015). The court soon issued a temporary restraining order followed by a preliminary injunction, both barring Diversified from distributing any proceeds potentially owed to Crop USA or its agents or subagents during the action. See id. In 2014, GemCap reached a confidential settlement with some of the defendants. See id. at 3. GemCap then sought release of the enjoined funds, which the court denied on multiple occasions. See id. On August 17, 2015, the court determined it could not identify the lawful recipients of the enjoined funds in the action before it, and it dissolved the preliminary injunction without ordering Diversified to release the enjoined funds. See id. at *7-8.

         On October 3, 2014, during the California litigation, Church Crop filed a petition in Iowa district court against Crop USA and Diversified seeking a temporary injunction-which the court granted-preventing the defendants from transferring any funds representing the commissions owed to it. Church Crop then filed a petition for declaratory judgment, asking the court to determine its unpaid commissions are neither the property of Crop USA nor subject to any encumbrances by GemCap. Diversified filed a counterclaim, cross-claim, and third-party interpleader petition naming Chuch Crop, GemCap, and Crop USA and requesting a determination of the rights of the parties with respect to certain funds in its possession. Diversified later filed a motion for leave seeking to place with the court "$545, 767.31 in commissions and underwriting gains, after accounting for all premium and other contractually permitted or required offsets, payable to Crop USA as a result of policies placed through Crop USA by [Church Crop] for crop year 2013" (the Diversified funds). The court granted Diversified's motion to deposit the funds, and trial was held May 3 and 4, 2017. On June 21, the court issued its "Ruling and Order" finding Crop USA had no rights in the Diversified funds. Therefore, the court found GemCap could not encumber the commissions, and it released the Diversified funds to Church Crop. GemCap now appeals.

         II. ...


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