Kunkel v. Sprague National BankKunkel v. Sprague National Bank
Steven T. Waterman, Salt Lake City, UT, argued (John W. Mackay, Douglas B. Greenswag, Thomas P. Melloy, Phillip L. Kunkel and Thomas E. Johnson, on the brief), for appellee.
Before MURPHY, JOHN R. GIBSON, and
JOHN R. GIBSON, Circuit Judge.
In this appeal two creditors, Hoxie Feeders, Inc. and Sprague National Bank, both claim first priority security interests in the same cattle. The district court affirmed the bankruptcy court‘s summary judgment for Hoxie holding that Hoxie‘s purchase money
Beginning in 1990, Sprague made a number of loans to John and Dorothy Morken pursuant to certain loan agreements and promissory notes. The Morkens executed a security agreement in favor of Sprague covering their inventory, farm products, equipment, and accounts receivable presently owned or thereafter acquired. Sprague filed with the Kansas Secretary of State a UCC-1 financing statement regarding the collateral located in Kansas.2 Sprague contends that the Morkens’ debt to Sprague currently exceeds $1.9 million.
Hoxie is in the business of financing and selling cattle and operating a feedlot near Hoxie, Kansas. In five transactions between February and April 1994, John Morken purchased interests in approximately 1900 head of cattle from Hoxie. Hoxie financed Morken‘s cattle purchases. For each transaction, Morken executed a loan agreement and promissory note in favor of Hoxie and a security agreement granting Hoxie a purchase money security interest3 (PMSI) in the cattle, which were identified by lot number when the documents were executed. In addition, Hoxie was paid $100 per head by either Morken or a company in which he owned an interest. The invoices for the cattle transactions recited that the cattle were shipped to Morken, Hoxie, or both.
Hoxie did not file a UCC-1 financing statement with the Kansas Secretary of State but instead perfected its security interest by taking possession of the cattle pursuant to feedlot agreements between Morken and Hoxie.4 The feedlot agreements stated that the cattle belonged to “the Party of the First Part,” meaning Morken, and acknowledged that Morken had delivered the cattle to Hoxie, although Morken never had physical possession of the cattle. Under the feedlot agreements, the cattle were to remain on Hoxie‘s feedlot for purposes of care and feeding. The feedlot and loan agreements authorized Hoxie to sell the cattle in its own name for slaughter, to receive direct payment from the packing house, and to deduct the feeding and purchase expenses from the sale proceeds and then remit the balance to Morken. Hoxie‘s general manager acknowledged, however, that he needed Morken‘s authority to sell the cattle, and that Morken determined at what price the cattle would be sold. The loan agreements recited that Morken bore all risk as to the profit or loss generated by feeding and selling the cattle.
On June 10, 1994, Morken and his wife filed a Chapter 11 bankruptcy case under Title 11 of the United States Bankruptcy Code. After the bankruptcy case was commenced, Hoxie sold the cattle to Iowa Beef Processors for slaughter. After deducting amounts owed to Hoxie for the care and
After the cattle sales, the Morkens’ bankruptcy trustee commenced an adversary proceeding in the bankruptcy court to determine which party—Sprague or Hoxie—was entitled to the net sale proceeds. Hoxie and the trustee subsequently reached a settlement. Hoxie and Sprague filed cross-motions for summary judgment regarding entitlement to the funds.
The bankruptcy court granted Hoxie‘s motion for summary judgment and denied Sprague‘s motion. It held that both Sprague and Hoxie had perfected security interests in the cattle but Hoxie‘s interest had first priority under the Kansas UCC,
Sprague appealed to the district court, which affirmed the bankruptcy court‘s summary judgment in favor of Hoxie. The district court held that a creditor that has perfected its security interest in inventory through possession, rather than by filing, is not required to provide notification of its PMSI to competing secured creditors to attain “superpriority.” According to the district court, the “superpriority” provision presumes that the creditor perfected by filing and that the debtor has possession of the inventory. The court concluded that this presumption was strong evidence that the notification requirement did not apply to a PMSI creditor that perfects by possession. 198 B.R. at 737-38.
As an alternative holding, the district court ruled that Sprague did not even have a security interest in the cattle because delivery of the cattle to Morken had not been completed and, therefore, no “present sale” had occurred. The court explained:
Under Kansas law, a delivery may be completed although the goods remain in the possession of the seller if the seller‘s possession “is as an agent or at the request of the buyer under an agreement to store or care for the property, and nothing further remains to be done by either party to complete the sale.” Lakeview Gardens, Inc. v. Kansas, 221 Kan. 211, 557 P.2d 1286, 1290-91 (1976) (emphasis added). Here, something further was required, payment to Hoxie under the loan agreement.
Id. at 739. Because the transactions were not a “present sale,” the court reasoned that Morken did not have “rights in the collateral,” as required by the Kansas UCC,
I.
On appeal, the district court‘s grant of summary judgment is reviewed under a de novo standard. See Miller v. Citizens Sec. Group, Inc., 116 F.3d 343, 345 (8th Cir.1997). Summary judgment is proper if there are no genuine issues of material fact and Hoxie is entitled to judgment as a matter of law. See
We also apply a de novo standard of review to the questions of law raised by the parties, including the interpretation and application of the UCC. See Affeldt v. Westbrooke Condominium Ass‘n (In re Affeldt), 60 F.3d 1292, 1294 (8th Cir.1995).
The issues on appeal are: (a) did Sprague have a perfected security interest in the cattle?; (b) did Hoxie have a “superpriority” purchase money security interest which had priority over Sprague‘s interest in the cattle?; and (c) was Hoxie entitled to the proceeds from the sale of the cattle to IBP?
II.
The district court held that Sprague did not have a security interest in the cattle because Morken did not have “rights in the collateral” sufficient for a security interest to attach. We reverse on this issue.
Under the UCC, a security interest is not enforceable against the debtor or third parties, and does not attach, unless and until the following three requirements are met: (a) either the secured party has possession of the collateral by agreement with the debtor (as is the case here) or the debtor has signed a security agreement; (b) value has been given; and (c) “the debtor has rights in the collateral.”
The phrase “rights in the collateral” is not defined in the UCC. “If the debtor owns the collateral outright, it is obvious that the security interest may attach....” B. Clark, The Law of Secured Transactions Under the Uniform Commercial Code p 2.04, at 2-43 (Rev. ed.1993). It is also well-settled, however, that “rights in the collateral” may be an interest less than outright ownership, but must be more than the mere right of possession. See id.; see also 4 J. White & R. Summers, Uniform Commercial Code 126 (4th ed. 1995) (“It follows that almost any ‘rights in the collateral’ will suffice under 9-203.“). The concept of “title” is not determinative. See
The district court looked to Article 2 of the UCC, which governs sales, to determine whether Morken had “rights in the collateral.” It was appropriate to consider Article 2 principles. “In many cases the secured creditor may turn to Article 2 of the UCC to measure the debtor‘s ‘rights’ with respect to collateral.”
A “sale” is the passing of title from buyer to seller for a price.
In this case, the cattle were identified in the invoices and other transaction documents, and the parties agreed that delivery would be made to Morken by delivering the cattle to Hoxie at its feedlot. The feedlot agreements recited that the cattle belonged to Morken. Morken solely bore the risk that the venture would not generate a profit. Hoxie became a bailee of the cattle because it took “delivery of property for some particular purpose on an express or implied contract that after the purpose has been fulfilled the property will be returned to the bailor, or dealt with as he directs.” M. Bruenger & Co., Inc. v. Dodge City Truck Stop, Inc., 234 Kan. 682, 675 P.2d 864, 868 (1984) (quoting 8 C.J.S. Bailments § 1). Even though Hoxie had the right to deduct the costs of purchasing and caring for the cattle from the sale proceeds, the parties viewed Morken as owner of the cattle,8 and Morken determined when cattle would be sold and at what price. In sum, Morken became the owner of an interest in the cattle, and Hoxie‘s interest in the cattle was therefore limited to that of a bailee and secured party.9
In similar circumstances, other courts have held that the debtor acquired “rights in the collateral” even though the debtor received only constructive delivery of the cattle to a feedlot. See, e.g., The Cooperative Fin. Ass‘n, Inc. v. B & J Cattle Co., 937 P.2d 915, 917, 920-21 (Colo.Ct.App.1997) (debtor acquired rights when cattle were delivered to a third party feedlot; secured creditor prevailed over unpaid cattle seller); O‘Brien v. Chandler, 107 N.M. 797, 765 P.2d 1165, 1168-69 (1988) (same); see also The Hong Kong & Shanghai Banking Corp. v. HFH USA Corp., 805 F.Supp. 133, 142-43 (W.D.N.Y.1992) (physical possession of the collateral is not necessary for the debtor to have rights).
Hoxie contends that the sale transactions were not completed because it had the right to stop delivery of the cattle upon discovering Morken‘s insolvency. See
Moreover, in some circumstances, the debtor can transfer greater rights in the collateral to a third party than the debtor himself holds. Thus, “[a] person with voidable title has power to transfer a good title to a good faith purchaser for value.”
The existence of an Article Nine interest presupposes the debtor‘s having rights in the collateral sufficient to permit attachment, § 9-204(a). Therefore, since a defaulting cash buyer has the power to transfer a security interest to a lien creditor, including an Article Nine secured party, the buyer‘s rights in the property, however marginal, must be sufficient to allow attachment of a lien.
Id. at 1243.11 Thus, the debtor had “rights in the collateral,” even though it had not paid the seller for those cattle.12
In summary, when the dust had settled after each of the five cattle transactions: (a) a sale had occurred; (b) Hoxie had constructively delivered the cattle to Morken and had possession of the cattle on Morken‘s behalf;
III.
Having determined that Sprague held a perfected security interest in the cattle, we now turn to the priority dispute between the two secured creditors, Sprague and Hoxie. We hold that Hoxie attained purchase money security interest “superpriority” under the Kansas UCC,
Section 9-312 of the UCC sets forth rules for determining priorities among conflicting security interests in the same collateral. See
Sprague contends that the Section 84-9-312(3)‘s “superpriority” status cannot be attained by a creditor that has perfected its security interest in inventory by possession, rather than by filing a UCC-1 financing statement. It emphasizes language in this UCC section and its commentary that refers to perfection by filing and the debtor receiving possession of the inventory. See
We believe that there is a more logical explanation for
Professor Grant Gilmore, the primary drafter of UCC Article 9, provides guidance on the meaning of “receives possession” in Section 84-9-312(3). Professor Gilmore‘s treatise Security Interests in Personal Property has been described as “an invaluable source of legislative intent because he is the fountainhead in this area.” B. Clark, The Law of Secured Transactions p 1.01[c], at 1-8. In that treatise, Professor Gilmore states that ” ‘[r]eceives possession’ is evidently meant to refer to the moment when the goods are physically delivered at the debtor‘s place of business—not to the possibility of the debtor‘s acquiring rights in the goods at an earlier point by identification or appropriation to the contract or by shipment under a term under which the debtor bears the risk.” II G. Gilmore, Security Interests in Personal Property § 29.3, at 787 (1965). In light of Professor Gilmore‘s comments, we interpret
Sprague complains that the purpose of Section 84-9-312(3) is frustrated by granting “superpriority” to a PMSI without requiring pre-perfection notification to prior filed secured creditors. It contends that debtors on the brink of insolvency will now have the motive to create “secret liens” to the detriment of prior-perfected secured creditors. The notification requirement, however, was not intended to allow other secured creditors veto power over the extension of new credit because the notification does not have to be given before the PMSI is acquired. The notification is required to state “that the person giving the notice has or expects to acquire a purchase money security interest in inventory of the debtor, describing such inventory by item or type.”
Our holding is consistent with this purpose in the context of this case. Sprague did not extend further credit in reliance on the cattle serving as its collateral; in fact, Sprague had not made any loans to Morken since at least a year before Morken acquired an interest in these particular cattle. We stop short, however, of holding, as did the district court, that a PMSI creditor that perfects by possession of inventory does not ever have to send a statutory notification. It is not necessary to reach that issue because Hoxie timely sent its statutory notification. A different fact pattern in another case might justify a different conclusion. See Scallop Petroleum Co. v. Banque Trad-Credit Lyonnais, 690 F.Supp. 184, 192 (S.D.N.Y.1988) (PMSI creditor was required to send notification even though
IV.
The “superpriority” of the purchase money security interest extends to inventory and “identifiable cash proceeds received on or before the delivery of the inventory to a buyer.”
The “on or before delivery” language in this UCC provision was discussed by the Fourth Circuit in Sony Corp. of America v. Bank One, West Virginia, Huntington NA, 85 F.3d 131 (4th Cir.1996). The court explained that this language “was meant to distinguish between cash proceeds and accounts proceeds.” Id. at 136 (citing UCC § 9-312 Official UCC cmt. 3). The court concluded that “[t]he drafters of the U.C.C. decided to protect accounts financers over inventory financers, and they limited the priority of purchase money secured creditors to the cash proceeds of inventory collateral.” Id. at 137 (citing UCC § 9-312 Official UCC cmt. 8); see also B. Clark, The Law of Secured Transactions p 3.09[c], at 3-121 (describing the drafters’ favorable treatment of the account lender over the PMSI creditor). Thus, the issue here turns on whether cattle sales generated an account receivable or cash proceeds.
The answer is found in the Packers and Stockyards Act, 1921,
Even if these were cash sales, Sprague argues that PMSI “superpriority” does not extend to the sale proceeds because Hoxie did not receive them “on or before the delivery of the inventory to the buyer.” The Fourth Circuit faced a similar issue in Sony Corp., in which payment was received one day after delivery. 85 F.3d at 136. The court refused to construe
When cattle are sold on a “weigh and grade” basis, the purchase price is determined after the cattle are slaughtered and the meat is graded and weighed. This explains the delay between delivery and payment. See In re Gotham Provision Co., 669 F.2d at 1005 n. 3 (discussing the difference between “grade and yield” and “live weight” purchases). We follow the reasoning of the Fourth Circuit in Sony Corp. and hold that, in the circumstances of the sales here, Hoxie‘s receipt of the cash proceeds was reasonably contemporaneous with delivery. Accordingly, Hoxie‘s “superpriority” extends to those proceeds.
In conclusion, we reverse the district court‘s holding that Sprague did not have a security interest in the cattle, but affirm its judgment that Hoxie‘s security interest has priority over Sprague‘s security interest.