Sunshine Heifers, LLC v. Citizens First Bank (In Re Purdy)
763 F.3d 513
| 6th Cir. | 2014Background
- Purdy entered a 2009 Agricultural Security Agreement with Citizens First securing a PMSI in livestock and other farm assets, perfected by filing the financing statement.
- Sunshine and Purdy executed three Dairy Cow Lease agreements (50, 285, and 100 cattle) totaling 435 cows for 50 months, with Sunshine retaining ownership and enforcing branding, insurance, and replacement provisions.
- Purdy culled cattle and replaced with replacements, selling calves contrary to lease terms, while Sunshine monitored and insured the herd under the leases.
- After Purdy filed for Chapter 12, the bankruptcy stay and inspections showed cattle with white tags (Citizens First) and branded cattle (Sunshine), creating competing claims of ownership.
- Bankruptcy court ruled the leases were per se security agreements under the Bright-Line Test, granting Citizens First priority; the district court affirmed; the Sixth Circuit reverses, holding the leases are true leases and remands.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are the Dairy Cow Leases true leases or disguised security agreements? | Sunshine argues the leases govern a leasehold and the herd remains Sunshine’s property. | Citizens First contends the leases are security interests securing Purdy’s debt. | True leases; not per se security agreements. |
| Application of the Bright-Line Test under Arizona law | Bright-Line shows term longer than economic life; the herd’s life exceeds 50 months. | Bright-Line indicates per se security if term exceeds economic life of goods. | Bright-Line not satisfied; leases do not fail per se; economics support leases. |
| Economics-of-the-Transaction analysis and reversionary interest | Sunshine retains meaningful reversionary interest in herd; no nominal purchase option; ownership remains with Sunshine. | Transaction structure and reimbursement show financing; economics indicate security interest. | Sunshine retains reversionary interest; no disguised security. |
Key Cases Cited
- In re Pillowtex, Inc., 349 F.3d 711 (3d Cir. 2003) (established the Bright-Line approach for lease vs security determination under UCC jargon)
- In re QDS Components, Inc., 292 B.R. 313 (Bankr. S.D. Ohio 2002) (two-step test for true lease vs security interest; economic life and residual value considered)
- In re WorldCom, Inc., 339 B.R. 56 (S.D.N.Y. 2006) (bankruptcy court treating lease vs security with evidentiary burden on lender)
- In re Beuhne Farms, Inc., 321 B.R. 239 (Bankr. S.D.Ill. 2005) (relevant to economics of tenancy and purchase options in agriculture leases)