Phillip Kunkel, Trustee of the Bankruptcy Estate of John D. Morken and Dorothy M. Morken, Plaintiff - Appellee, v. Sprague National Bank, Defendant - Appellant, First National Bank of Hoxie, Kansas, Defendant - Appellee, Hoxie Feeders, Inc., Defendant - Appellee, Charles W. Ries, Trustee of the Bankruptcy Estate of Spring Grove Livestock Exchange, Inc., Defendant, Firstar Bank Milwaukee, N.A., Defendant, and Firstar Bank Sioux City, N.A., Defendant.
No. 96-3254
United States Court of Appeals FOR THE EIGHTH CIRCUIT
Submitted: March 10, 1997 Filed: October 20, 1997
Appeal from the United States District Court for the District of Minnesota.
Before MURPHY, JOHN R. GIBSON, and MAGILL, Circuit Judges.
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 security interest had priority over Sprague‘s earlier security interest in the cattle. Kunkel v. Sprague Nat‘l Bank, 198 B.R. 734, 735 (D. Minn. 1996). As an alternative holding for Hoxie, the district court held that Sprague did not have a security interest in the cattle because the debtor lacked “rights in the collateral,” as required by the Uniform Commercial Code. Id. at 739. On appeal, Sprague alleges that the district court erred in interpreting and applying various provisions of the UCC governing sales and secured transactions. We reverse the district court‘s holding that Sprague did not
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
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
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
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
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
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.
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.
By analogy here, delivery of the cattle to Morken occurred, even though he was still obligated to pay Hoxie for the cattle, and even though Hoxie retained possession of the cattle on Morken‘s behalf. Thus, the sales were complete. The district court erred in holding that the sale arrangements were executory contracts just because Morken had not paid Hoxie. “An executory contract is one the obligation of which relates to the future.” Wagstaff v. Peters, 453 P.2d 120, 124 (Kan. 1969). “However, a contract is not executory merely because it has not been fully performed by payment, if all the acts necessary to give rise to the obligation to pay have been performed.” Id. Thus, the fact that Morken had not fulfilled his payment obligations did not make the agreements executory.
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., 675 P.2d 864, 868 (Kan. 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
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, 765 P.2d 1165, 1168-69 (N.M. 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
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
See B. Clark, The Law of Secured Transactions ¶ 3.09[1], at 3-100 (“the purchase money priority . . . breaks up what would otherwise be a complete monopoly on the debtor‘s collateral“). Thus, the UCC, as it stands today, does not reflect any intent to penalize a PMSI creditor by depriving it of the opportunity to attain “superpriority” simply because of its means of perfection.
We believe that there is a more logical explanation for
Having concluded that it was possible for Hoxie to use Section 84-9-312(3) to attain “superpriority,” we must now decide whether it did so by fulfilling the statutory requirements. The only requirement at issue here is the timing of Hoxie‘s PMSI notice, which was received after the cattle were sold and slaughtered and this litigation was commenced. We believe that this issue turns on the meaning of “possession” in the
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 ¶ 1.01[2][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
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)
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
The answer is found in the
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.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.