Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy)

• Decision Date: 31 August 2017
• Docket Number: No. 16-6381.,16-6381.
• Citation: 870 F.3d 436
• Parties: IN RE: Lee H. PURDY, Debtor, Sunshine Heifers, LLC, Appellant, v. Citizens First Bank, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

870 F.3d 436

IN RE: Lee H. PURDY, Debtor,Sunshine Heifers, LLC, Appellant,

v.Citizens First Bank, Appellee.

No. 16-6381.

United States Court of Appeals, Sixth Circuit.

Argued: July 26, 2017

Decided and Filed: August 31, 2017

COUNSEL ARGUED: Michael D. Almassian, Keller & Almassian, Grand Rapids, Michigan, for Appellant. Scott A. Bachert, Kerrick Bachert PSC, Bowling Green, Kentucky, for Appellee. ON BRIEF: Michael D. Almassian, Nicholas S. Laue, Keller & Almassian, Grand Rapids, Michigan, for Appellant. Scott A. Bachert, Ashley D. Gerughty, Kerrick Bachert PSC, Bowling Green, Kentucky, for Appellee.

Before: COLE, Chief Judge; BATCHELDER and MOORE, Circuit Judges.

OPINION

KAREN NELSON MOORE, Circuit Judge.

On August 14, 2014, a panel of this court held that Citizens First Bank ("Citizens First" or "CFB") failed to demonstrate that the "Dairy Cow Leases" it had with farmer Lee Purdy ("Debtor") were actually security agreements in disguise. Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy) , 763 F.3d 513, 521 (6th Cir. 2014). The case was subsequently remanded to the United States Bankruptcy Court for the Western District of Kentucky "for further proceedings consistent with this opinion." Id. On remand, the bankruptcy court determined that "all cattle sold at the auction in April 2014 were subject to CFB's security interest. Therefore, the Court determines that all the proceeds of the [bankruptcy] auction, less the Trustee's fee, the costs of care and feeding of the cattle and expenses related to the sale, are the property of CFB." In Re Purdy , No. 12–11592(1)(12), 2015 WL 5176580, at *15 (Bankr. W.D. Ky. Sept. 2, 2015). Sunshine Heifers, LLC ("Sunshine") appealed to the district court, which "affirm[ed] the Bankruptcy Court's decision that ‘net sales proceeds, exclusive of all costs associated with the sale and care of the cattle sold, totaling $402,354.54 are awarded to Citizens First Bank.’ " Sunshine Heifers, LLC v. Purdy , No. 1:15-cv-00110-JHM, 2016 WL 4392815, at *5 (W.D. Ky. Aug. 15, 2016). Sunshine now appeals the district court's judgment and argues that the bankruptcy court deprived Sunshine of its right to a portion of the bankruptcy auction proceeds. Sunshine requests that we remand the case to the bankruptcy court and require the bankruptcy court to award to Sunshine $301,318.63 in proceeds from the bankruptcy auction. For the reasons stated below, we AFFIRM.

I. BACKGROUND

A. Factual History¹

Lee Purdy operated his dairy farm in Barren County, Kentucky. In 2008, he entered into a loan relationship with Citizens First, using his herd of dairy cattle as collateral. Purdy refinanced his loan on July 3, 2009, executing an "Agricultural Security Agreement" in exchange for additional principal in the amount of $417,570.

As part of the security agreement, Purdy granted Citizens First a purchase money security interest in "all ... Equipment, Farm Products, [and] Livestock (including all increase and supplies) ... currently owned [or] hereafter acquired ...." Three days later, Citizens First perfected this purchase money security interest by filing a financing statement with the Kentucky Secretary of State. Purdy and Citizens Bank executed two similar security agreements in August 2010 and May 2012. Citizens First perfected these purchase money security interests as well.

Shortly after refinancing his loan with Citizens First in 2009, Purdy decided to increase the size of his dairy-cattle herd. He contacted Jeff Blevins of Sunshine regarding the prospect of leasing additional cattle. Sunshine was amenable to the idea, and on August 7, 2009, Purdy and Sunshine entered into the first of five contracts, three of which are relevant here: (1) a July 21, 2011 agreement, involving fifty head of cattle; (2) a July 14, 2012 agreement, rolling up two prior agreements and involving 285 head of cattle; and (3) another July 14, 2012 agreement, involving 100 head of cattle.

Each of these agreements is titled a "Dairy Cow Lease," and under their terms, Purdy received a total of 435 cattle for fifty months in exchange for a monthly rent. The agreements prohibited Purdy from terminating the leases, and Purdy agreed to "return the Cows, at [his] expense, to such place as Sunshine designate[d]" at the end of the lease term. Additionally, Purdy guaranteed "the net sales proceeds from the sale of the Cows ... at the end of the Lease term [would] be [a set amount between $290 and $300] per head (the ‘Guaranteed Residual Value’)." Purdy further promised to maintain insurance on the cattle, to replace any cows that were culled from the herd, and to allow Sunshine the right to inspect the herd. When the parties signed these contracts, they also executed security agreements, and Sunshine filed financing statements with the Secretary of State.

In the dairy business, farmers must "cull" a portion of their herd every year, replacing older and less productive cows with younger, healthier ones. Many times, dairy farmers will replace the culled cows with their calves. Purdy, in contrast, sold off the calves of Sunshine's cows and purchased more mature replacements. See In re Purdy, 490 B.R. 530, 534 (Bankr. W. D. Ky. 2013). This practice contravened the terms of the leases, but Sunshine was aware of Purdy's behavior and acquiesced in it. Nonetheless, the terms of the lease required Purdy to apply Sunshine's brand and a yellow ear tag to the original cows and their replacements. In contrast, Purdy applied a white ear tag to the cattle covered by Citizens First's security interest. In re Purdy, 490 B.R. at 535. By July 2012, Purdy had approximately 750 head of cattle on his farm. Of those cattle, 435 should have carried Sunshine's brand according to the terms of the leases. In re Purdy , 763 F.3d at 516–17.

B. Procedural History

In the fall of 2012, the price of cattle feed rose, and milk production became less profitable. Purdy responded by selling off cattle, including many bearing Sunshine's brand, at a faster rate. Unfortunately, Purdy could not keep his operation above water, and on November 29, 2012, he filed a voluntary petition for Chapter 12 bankruptcy relief, and the bankruptcy court issued an automatic stay, preventing the removal of assets from the farm. A week later, representatives of Citizens First and Sunshine inspected the 389 cattle still on the farm. Of the cows on the property, 289 had white ear tags (indicating that they were covered by Citizens First's security interest) and Sunshine's brand, 99 had only white ear tags, and one cow had neither a tag nor a brand. A short time later, another farmer returned forty-three cattle that had been taken in violation of the bankruptcy court's stay. Sunshine claimed that thirty-nine of those cattle bore Sunshine's brand.

Citizens First argued that Purdy owned all of these cattle and, therefore, that they were covered by the bank's perfected purchase money security interest. Sunshine contended that it maintained ownership of the cattle, that Purdy had only a leasehold interest in the cattle, and therefore that the cattle fell outside of Citizens First's security interest. Both Citizens First and Sunshine filed motions in the bankruptcy court for relief from the stay preventing the removal of the livestock. 763 F.3d at 517.

On January 22, 2013, the bankruptcy court held a hearing on various motions. The dispute between Citizens First and Sunshine turned on whether the leases between Purdy and Sunshine were true leases or disguised security agreements. The bankruptcy court issued its decision on March 1, 2013, finding that

The original term of the Lease was for 50 months. Clearly, 50 months is longer than the economic life of the goods [the cows]. Uncontradicted testimony indicated that a dairy herd is culled annually at an approximate rate of 30 percent. Within three years an entire herd is extremely likely to have been entirely replaced and certainly before the end of 50 months. Because [Purdy] met this term of the statute, the transaction is a per se security agreement and the Court's analysis ends here.

In re Purdy, 490 B.R. at 536. Consequently, the bankruptcy court determined that Citizens First's "prior perfected liens attach[ed] to all cows on [Purdy's] farm on the date the Petition was filed," and it denied Sunshine's motion to lift the stay. Id. at 540. The bankruptcy court eventually granted Citizens First relief from the stay, however, and the bank foreclosed on the herd. Citizens First auctioned the cattle for $402,353.54, and the bankruptcy trustee awarded these proceeds to Citizens First, which applied them toward Purdy's outstanding debt. 763 F.3d at 517–18.

Sunshine appealed to the federal district court nine days after the auction sale. Because the cattle had already been auctioned, Sunshine requested a percentage of the sale proceeds equivalent to its share of the cattle sold. Ultimately, the district court affirmed the bankruptcy court's decision on September 25, 2013. 763 F.3d at 518.

In the first appeal to this court, we reversed and remanded to the bankruptcy court because Citizens First "failed to demonstrate that the ‘Dairy Cow Leases' were actually security agreements in disguise." In re Purdy , 763 F.3d at 521. Following a hearing, the bankruptcy court on remand concluded that "CFB's security interest attached to all of these cattle before Sunshine ever acquired any rights in the cattle" and "that all cattle sold at the auction in April 2014 were subject to CFB's security interest. Therefore, the Court determines that all the proceeds of the auction, less the Trustee's fee, the costs of care and feeding of the cattle and expenses related to the sale, are the property of CFB." In re Purdy , 2015 WL 5176580, at *14–15.

Sunshine appealed the bankruptcy court's final order to the United States District Court for the Western District of Kentucky. On appeal, the district court determined that: (1) the bankruptcy court did not violate this court's mandate by holding an...