MEMORANDUM OPINION
FACTUAL BACKGROUND
In connection with loans Donald M. Markuson (hereinafter Markuson) received from the Farmers Home Administration (FmHA) in the late 1970’s and early 1980’s, Markuson executed a series of security agreements with the FmHA. Each of these agreements, which were dated April 24, 1978; May 27, 1980'; November 13,
In December, 1981, Markuson proposed to plaintiff that Markuson knew of fifty “Black Baldy” cattle that Markuson would buy with plaintiffs money, then re-sell at a higher price. Plaintiff would then recover the purchase price, and plaintiff and Markuson would split the profit. On or about December 24, 1981, plaintiff mailed a check for $20,000 to Markuson. Markuson put the check in his account, and bought the fifty cattle, none of which ever carried a brand. Plaintiff never filed a financing statement on the cattle or made any attempt to put notice of this transaction in the public records.
In January, 1982, plaintiff went to Markuson’s ranch, near Ipswich, South Dakota, and viewed the cattle which were in a lot separate from other cattle in Markuson’s possession. Plaintiff then went on a trip to California, and apparently had nothing more to do with the cattle. Markuson testified that shortly after plaintiff’s visit, the occurrence of a blizzard required that he put the fifty cattle in a field with his other cattle. Although Markuson’s recollection at trial was hazy at best, it appears that some of plaintiff’s cows were then given to a third party in Mobridge, South Dakota, who had also been keeping cattle on Markuson’s ranch. The rest of the cattle on Markuson’s property, including all of plaintiff’s cows, were sold in February, 1982, apparently at the urging of an FmHA official who, after a visit to Markuson’s ranch on February 17, 1982, sought to liquidate Markuson’s cattle operation. Markuson never told FmHA of the arrangement with plaintiff, and gave FmHA the checks from the sale of the cattle, totalling $34,298.54.
When plaintiff returned to South Dakota in March, 1982, he discovered the sale of the fifty cattle, and eventually contacted FmHA, seeking a return of the $20,000. FmHA refused, and plaintiff thereafter commenced this action under the Federal Tort Claims Act, 28 U.S.C. § 1346(b), alleging conversion.
Initially, this court entered judgment for the defendant but vacated its order in consideration of the Eighth Circuit’s decision in
Rohweder v. Aberdeen Production Credit Ass’n.,
DISCUSSION
I.
The issue is whether the fifty cattle became subject to the FmHA security agreements by operation of SDCL 57A-9-203(l) (1984 Supp.). This statute provides that a security agreement attaches when (1) there is an agreement that it attach; (2) value is given by the secured party; and (3) the debtor has rights in the collateral. Here there were agreements between FmHA and Markuson providing for the attachment of the security interest to after-acquired livestock, and value has been given by FmHA, the secured party. The question before this court is whether Markuson had adequate rights in the fifty cattle for the security interest to attach.
In
Rohweder,
the court held that a debtor would not have sufficient rights in the collateral for attachment of a security interest “if the parties intended to create a bailment, with [the bailor] retaining complete ownership of the [property] and relinquishing only possession.” 765 F.2d at
Due to the lack of evidence of delivery of the cattle to Markuson, this court concludes there was no bailment as to preclude attachment of the security interest. Delivery necessary to establish the existence of bailment turns on whether possession and control is retained by the owner or delivered to the bailee.
Nelson v. Schroeder Aerosports, Inc.,
The plaintiff offered testimony by both plaintiff and Markuson that plaintiff was to “own the cattle.” Such testimony is nevertheless outweighed by evidence of almost unbridled discretion allowed and exercised by Markuson in the purchase and sale of the cattle. In
Rohweder,
II.
Even if the plaintiff had established ownership of the cattle, the court is unconvinced that a third party’s ownership interest in collateral bears any substantial weight in determining a debtor’s “rights in collateral” for purposes of attachment of a security interest. The official comment to § 9-202 states unequivocally that “[t]he rights and duties of parties to a security transaction and of third parties are stated
It is the task of this court, therefore, to determine whether Markuson had sufficient “rights” in the cattle for FmHA’s security interest to attach under the after-acquired property clause. While the UCC provides no definition of “rights in the collateral” under § 9-203, the “mere possession of collateral or an unexercised option to purchase does not give the debtor sufficient rights for a security interest to attach.”
Rohweder v. Aberdeen Production Credit Ass’n.,
The debtor must have some ownership interest in the collateral before a security interest arises.
Northwestern Bank v. First Virginia Bank of Damascus,
Thus, it is clear that for a security interest to attach, a debtor must have some degree of control or authority over collateral placed in the debtor’s possession. The Oklahoma Supreme Court, in a case factually similar to the case before us, has said that the requisite authority exists “where a debtor gains possession of collateral pursuant to an agreement endowing him with any interest other than naked possession.” Morton Booth Co. v. Tiara Furniture, Inc.,564 P.2d 210 , 214 (Okl.1977).
In the present case, the evidence is clear that Markuson’s interests and authority over the fifty cattle significantly exceed the “naked possession” standard as stated in
Kenetics.
Plaintiff and Markuson entered into an oral agreement whereby plaintiff was to advance the price of the cattle and Markuson was to select, purchase, feed, shelter and sell the cattle at a profit, at which time the purchase price and one-half the profit was to be returned to plaintiff. Although apparently approval was needed on the purchase, plaintiff never saw the cattle before they were purchased. Evidence also indicates that Markuson was given complete discretion on the sale of the cattle, as plaintiff was out of state at the
The cattle in controversy were kept on Markuson’s ranch. Although they were initially kept separate from Markuson’s herd, there was no agreement that the cattle not be commingled. (T.44). Markuson testified that the purpose of the separation was to facilitate the sale of the cattle. (T.43). At no time did plaintiff call attention to any objection, or assert his interest in the cattle to any third party. (T.19). The first time FmHA had knowledge of plaintiff’s interest was after the sale. Since the cattle acquired by Markuson fit the description of the cattle under the security agreements, FmHA had no reason to know of any outside interest in the collateral.
This court has no difficulty in finding that, under the prevailing case law, Markuson had sufficient rights in the cattle to allow attachment of FmHA’s security interests. The discretion given Markuson by the plaintiff allowed Markuson to treat the cattle as if they belonged to him. It is significant that while the cattle were in his possession, Markuson allowed some of them to be used to satisfy a personal debt to a third party. Such authority clearly goes beyond a “naked possession” of the cattle. FmHA was therefore well within its rights to appropriate the proceeds from the sale of the cattle and plaintiff has no claim against defendant.
While such a result may appear harsh, the reason for the rule is clear. As explained by the court in Kenetics:
if a debtor received collateral from a third party under an agreement giving the debtor authority to exercise any outward indicia or manifestations of ownership or control, a would-be creditor could easily be misled into making a loan under an ineffective security agreement____ [A] buyer-lender could easily protect itself from after-acquired property creditors ... by filing an Article Nine purchase money security interest in the goods____ Requiring buyers ... to take this additional step — done easily and at minimal cost — thoroughly advances the Code policy of providing notice and certainly to inventory lenders.
Accordingly, judgment is rendered for the defendant.
This opinion constitutes the findings of fact and conclusions of law of this Court.
Notes
. The court cited
In re Sitkin Smelting & Refining, Inc.,