First Dakota Nat'l Bank v. Gregg
| Decision Date | 15 September 2021 |
| Docket Number | 29354-a-PJD,29340 |
| Parties | FIRST DAKOTA NATIONAL BANK, Plaintiff and Appellant, v. ARTHUR L. GREGG and JERILYN L. GREGG, Defendants and Appellees. |
| Court | South Dakota Supreme Court |
CONSIDERED ON BRIEFS JANUARY 11, 2021
APPEAL FROM THE CIRCUIT COURT OF THE FIRST JUDICIAL CIRCUIT MCCOOK COUNTY, SOUTH DAKOTA THE HONORABLE CHRIS GILES Judge
SHEILA S. WOODWARD STEVEN K. HUFF NICHOLAS G. MOSER of Marlow Woodward & Huff, Prof. LLC Yankton, South Dakota Attorneys for plaintiff and appellant.
VINCE M. ROCHE of Davenport, Evans, Hurwitz & Smith, LLP Sioux Falls, South Dakota Attorneys for defendants and appellees.
[¶1.] Arthur and Jerilyn Gregg entered into an oral agreement with their son-in-law, Tyler McGregor, whereby Tyler would feed the Greggs' cattle to finish in return for payment based on the weight gained by the cattle while in Tyler's care. Tyler did not inform his lender, First Dakota National Bank (First Dakota), that the Gregg cattle were in his possession. Instead, Tyler represented to the bank that the cattle were his. When Tyler's fraudulent conduct was uncovered, a dispute arose over whether First Dakota's security interest in Tyler's collateral attached to the Greggs' cattle. After a court trial, the circuit court determined that the Greggs were not estopped from asserting that Tyler had no rights in their cattle, and therefore First Dakota did not have a security interest in the Greggs' cattle. We affirm.
[¶2.] Tyler and Rebecca McGregor operated a cattle feedlot in McCook County, South Dakota, and First Dakota has been their lender since approximately 2006. This case concerns the years 2015 and 2016. At that time, Jeremy Grady was the bank officer primarily responsible for the McGregors' financial relationship with First Dakota. He testified that First Dakota utilized a type of financing for the McGregors called "floor-plan financing" for the purchase of cattle. Under this type of lending program, First Dakota would loan the McGregors money annually on a line of credit evidenced by a single promissory note as opposed to separate notes for each group of cattle purchased by the McGregors. When Tyler wanted to purchase a group of cattle, he would inform First Dakota and First Dakota would advance Tyler money from the line of credit. Grady further testified that to renew their loan each year, the McGregors were required to provide loan presentations to the bank in which the McGregors represented the collateral they owned and the financial outlook of their business.
[¶3.] Grady also testified about the McGregors' cattle operation. He explained that Tyler had in prior years engaged in a business of custom feeding cattle for third parties, but according to Grady, Tyler decided to cease his custom feeding operation beginning in 2015 so he could buy, feed, and sell his own cattle. Grady testified that Tyler purchased his first group of cattle in 2014. In the fall of 2015, Tyler sought to purchase a group of cattle designated as Group 21. Tyler told Grady that the Group 21 cattle would be black feeder cattle. First Dakota financed the purchase of Group 21 prior to seeing the cattle and honored nine checks written by Tyler over three months with the notation "Group 21" on the memo line of each check.
[¶4.] Unbeknownst to First Dakota, Tyler did not completely cease custom feeding for third parties. In November 2015, he agreed to feed 289 head of cattle owned by his in-laws, Arthur and Jerilyn Gregg, who were getting older and were looking to slow down their cattle operation.[1] They raised exclusively Simmental cattle, a distinctive breed identifiable by its larger frame, larger ears, and uniquely shaped head. The Gregg cattle were branded with the Greggs' exclusive brand and had orange ear tags. According to the Greggs, they entered into an oral agreement whereby Tyler would feed the cattle to finish, and in return, the Greggs would pay him $0.70 per pound of weight gained during their time at the McGregor feedlot. Prior to delivering the cattle to Tyler the Greggs informed their lender, Dakota Prairie Bank, of their plan to place their cattle with a third party for feeding, and on November 28, 2015, the Greggs transported their cattle to the McGregor feedlot. Dakota Prairie never advised the Greggs to file a livestock caretaker UCC financing statement with the Secretary of State. See SDCL 57A-9-505 ().
[¶5.] In December 2015, First Dakota conducted an inspection of the McGregors' cattle operation. During the inspection, Tyler did not inform First Dakota that he was custom feeding the Gregg cattle or that some of the cattle present in his feedlot belonged to the Greggs. Rather, he misled First Dakota into believing he and his wife owned the cattle and specifically included the Gregg cattle in Group 21 on his monthly inventory reports to the bank. As a result of Tyler's fraudulent conduct, First Dakota counted the Gregg cattle in its December 2015 inspection.
[¶6.] In February 2016, the McGregors submitted their annual loan documentation and requested additional financing to restructure their existing debt and to fund the purchase of additional land. At the time, First Dakota believed the McGregors owned approximately 1, 800 head of cattle. All the requests under the operating loan were cross-collateralized thus, the previously purchased Group 21 cattle continued to be listed as collateral on the 2016 operating loan. Prior to approving the McGregors' 2016 financing request, First Dakota performed a UCC search on January 19, 2016, and found that no other party had filed a caretaking or other UCC filing against the McGregors' cattle. Ultimately, First Dakota decided to renew the McGregors' operating loan, and on February 19, 2016, it advanced the McGregors $954, 453 in new money.
[¶7.] On April 7, 2016, Grady performed an inspection of the McGregor property and noticed that the number of cattle in one pen appeared inadequate. He then performed a spot count of the cattle in this pen, which ended up approximately 140 head short. Grady ordered a pen-by-pen count to be conducted the next day; however, prior to Grady's return on April 8, Tyler called him and admitted he did not own as many cattle as he had represented. Tyler later explained to Grady that he had dispersed Group 21 cattle in multiple pens in order to make other groups appear larger for First Dakota's inspections, and that he had falsified reports to the bank.
[¶8.] On April 8, Grady and a fellow First Dakota credit officer, Wayne Williamson, returned to the McGregor property to conduct a further inspection. During the inspection, First Dakota discovered a huge discrepancy between its head count and the 1, 860 head of cattle reported to First Dakota in the McGregors' April 1, 2016 inventory report. In particular, First Dakota counted 855 head of cattle at the McGregor feedlot, and of those, the McGregors owned only approximately 285 head. Tyler told Grady that the cattle with orange ear tags belonged to the Greggs.
[¶9.] After its inspection, First Dakota did not let the Greggs take their cattle from the McGregor feedlot. The Greggs retained counsel, and on May 4, 2016, the McGregors, First Dakota, the Greggs, and Dakota Prairie (the Greggs' lender) entered into a settlement agreement for the disposition of the Gregg cattle. Relevant here, the agreement provided that the Greggs would be permitted to retake possession of their cattle and that if any indebtedness remained after First Dakota liquidated the McGregors' assets, First Dakota would have the right to bring suit against the Greggs and Dakota Prairie to determine First Dakota's interest in these cattle.
[¶10.] In December 2017, First Dakota filed this declaratory judgment action against the Greggs and Dakota Prairie seeking a judgment against them for the value of the cattle returned to the Greggs. First Dakota asserted that the Greggs' title, right, and interest in these cattle was subject to First Dakota's priority lien. First Dakota further claimed that it had an equitable interest in the cattle because of the McGregors' apparent ownership of the cattle, First Dakota's exercise of reasonable and appropriate care when attempting to ascertain the number of cattle located at the McGregor feedlot, and the failure of either the Greggs or Dakota Prairie to file a UCC caretaker statement or otherwise give notice to First Dakota.[2]
[¶11.] The Greggs answered and moved for summary judgment, asserting that the undisputed facts established that First Dakota's security interest did not attach to the Gregg cattle because the relationship between Tyler and the Greggs was a mere bailment and naked possession by a debtor is insufficient to allow a security interest to attach. After a hearing, the court denied summary judgment, indicating that although many facts were undisputed, there were material facts in dispute related to the conduct of the parties.
[¶12.] A trial to the court was held on January 15 and 16, 2020. Multiple witnesses from First Dakota testified, including Grady and Williamson. The court also heard testimony from Arthur and Jerilyn Gregg. Neither Tyler nor Rebecca McGregor testified. Following the trial, the parties submitted briefs summarizing the evidence presented and the pertinent legal questions. Thereafter, the circuit court issued a memorandum decision, which it incorporated in its findings of fact and conclusions of law.
[¶13.] The court noted that "First Dakota's claim in this case depends on establishing that the Greggs are estopped from asserting McGregor did not have rights in the collateral[.]" The court then applied...
To continue reading
Request your trial