Magazine article The RMA Journal

Dairy Cattle Leases Were True Leases, Not Security Agreements for UCC Purposes

Magazine article The RMA Journal

Dairy Cattle Leases Were True Leases, Not Security Agreements for UCC Purposes

Article excerpt

DAIRY CATTLE LEASES were the focus of the court's attention in In re Lee H. Purdy. (1) The court held that they were true leases, not disguised security interests.

The debtor, Purdy, operated a dairy farm in Barren County, Kentucky. He obtained a loan from Citizens First Bank in 2008 using his dairy cattle as collateral. The loan was refinanced on July 3, 2009, when Purdy executed an agricultural security agreement and obtained additional funds.

Under the security agreement, the bank was granted a security interest in "all ... equipment, farm products, [and] livestock (including all increases and supplies currently owned [or] thereafter acquired...." The bank filed a UCC-1 Financing Statement with the Kentucky Secretary of State.

Two similar agreements were signed in 2010 and 2012 with financing statements filed in support of each.

In 2011 and 2012, Purdy entered into five dairy cow leases with Sunshine Heifers LLC. He received 435 cattle for 50 months, paying a monthly rental fee. Purdy could not terminate the leases. He agreed to return the cows to a place designated by Sunshine at the end of the lease's term, and he provided a guaranty that the net sales proceeds at the end of the term would not be less than $290 to $300 per head. In addition, he was to maintain insurance on the cattle, allow Sunshine to inspect the herd, and replace any cows that were culled from the herd. Security agreements were signed and financing statements were filed.

Purdy was required to apply Sunshine's brand and a yellow ear-tag to the Sunshine cattle and a white ear-tag to the bank's cattle. In July 2012, Purdy had 750 head of cattle, 435 of them carrying Sunshine's brand.

In the fall of 2012, Purdy began selling off cattle, including many with Sunshine's brand. On November 29, 2012, he filed for bankruptcy relief. There were 389 cattle at the farm, 289 of them with the bank's white ear-tag and Sunshine's brand, 99 with only the white ear-tag, and one with no markings. Later a nearby farmer returned 43 cattle taken in violation of the automatic stay. Sunshine claimed those cattle.

The bank's position was that the entire herd was subject to the bank's security interest. Sunshine argued it owned the cattle with Purdy having only a leasehold interest--which meant they were not subject to the bank's security interest. The bankruptcy court allowed the cattle to be sold with the sales proceeds going to the bank. Sunshine appealed and prevailed.

There was only one issue on appeal: Were the Sunshine documents true leases? …

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