Sweetwater Cattle Co. v. Murphy (In re Leonard), 16–6029

• Decision Date: 24 February 2017
• Docket Number: No. 16–6029,16–6029
• Parties: IN RE: Charles Donald LEONARD, doing business as Leonard Cattle Company; Margaret Rose Leonard, doing business as Leonard Cattle Company, Debtors Sweetwater Cattle Company, L.L.C.; Farm Credit Services of America, PCA, Plaintiffs–Appellees v. Leigh Murphy, doing business as Murphy Cattle Company, Defendant–Appellant
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

565 B.R. 137

IN RE: Charles Donald LEONARD, doing business as Leonard Cattle Company; Margaret Rose Leonard, doing business as Leonard Cattle Company, DebtorsSweetwater Cattle Company, L.L.C.; Farm Credit Services of America, PCA, Plaintiffs–Appellees

v.Leigh Murphy, doing business as Murphy Cattle Company, Defendant–Appellant

No. 16–6029

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: January 6, 2017

Filed: February 24, 2017

Counsel who presented argument on behalf of the appellant was David J. Skalka, of Omaha, NE. The following attorney(s) appeared on the appellant brief; Robert Michael Gonderinger, of Omaha, NE., David J. Skalka, of Omaha, NE.

Counsel who presented argument on behalf of the appellee Sweetwater Cattle Company was David Wayne Pederson, of North Platte, NE. Jim R. Titus, of Lincoln, NE, presented oral argument on behalf of appellee Farm Credit Services of America.

Before FEDERMAN, Chief Judge,¹ KRESSEL and SHODEEN, Bankruptcy Judges

FEDERMAN, Chief Judge

Leigh Murphy d/b/a Murphy Cattle Company appeals from the Bankruptcy Court's² Orders holding that Sweetwater Cattle Company, L.L.C.'s lien in certain cattle is superior to Murphy's rights as an unpaid seller of the cattle. For the reasons that follow, we AFFIRM.

INTRODUCTION

This is a dispute over the validity and priority of interests in cattle. To summarize, Leigh Murphy d/b/a Murphy Cattle Company sold cattle to Debtor Charles Leonard, who delivered them to Sweetwater Cattle Company for care and feeding. Sweetwater also financed Leonard's purchase of the cattle through a line of credit it has with Farm Credit Services of America, and asserted a lien against the cattle. However, although Sweetwater had advanced the funds to Leonard for the purchase of the cattle, Murphy only received partial payment for it. As a result, Murphy exercised his right to "reclaim" the cattle under the Uniform Commercial Code for nonpayment. The problem for Murphy is that the holder of a valid security interest takes priority over such a reclaiming unsecured creditor. Sweetwater claims that its security interest attached to the cattle the moment Leonard became the owner of them, even if Leonard's title was voidable due to Murphy's later assertion of reclamation rights. Murphy asserts (1) that Sweetwater's lien is not valid because title to the cattle did not properly transfer from Murphy to Leonard and, (2) even if it did, Sweetwater did not exercise good faith as required for a valid lien under the Uniform Commercial Code. Leonard filed a Chapter 11 bankruptcy case and the cattle were sold, with the proceeds being held pending the outcome of this litigation. The Bankruptcy Court concluded on cross motions for summary judgment that Sweetwater's lien and, in turn, Farm Credit's lien, were valid and that they were entitled to the proceeds of the cattle. Murphy appeals.

SUMMARY JUDGMENT STANDARD

The BAP reviews de novo the bankruptcy court's grant of summary judgment.³ Summary judgment is appropriate "only when all the evidence presented demonstrates that ‘there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.’ "⁴

STATEMENT OF FACTS

Although the parties do dispute certain statements of fact made by the Bankruptcy Court, the following facts are uncontroverted:

1. Sweetwater Cattle Company, L.L.C., is a Nebraska limited liability company with its headquarters in Buffalo County, Nebraska.

2. Charles Leonard, one of the debtors in this case, is an individual residing in Sarpy County, Nebraska, doing business as Leonard Cattle Company.

3. Leigh Murphy is an individual doing business as Murphy Cattle Company in Colorado and New Mexico.

4. For more than 20 years, Leonard has been in the business of buying and selling cattle as a bonded commission dealer as well as for his own account.

5. Leonard has had prior dealings with Sweetwater, and at the time the bankruptcy case was filed, other cattle owned by Leonard were in the Sweetwater lot.

6. Leonard and Murphy executed a written contract on July 10, 2015, for Leonard to purchase up to 400 head of cattle from Murphy, with delivery to be taken by loading trucks in Fraser, Colorado, between September 20, 2015, and October 5, 2015.

7. Leonard paid Murphy a $10,000 down payment when the contract was entered into. The balance of $802,910 was to be paid at delivery.

8. Leonard purchased the cattle from Murphy with five checks, four of which were later dishonored. One check, in the amount of $41,208.96, cleared the bank.

9. Leonard's dealings with Sweetwater were through Mike Twitchell, who is the managing member of Sweetwater.

10. Sweetwater's business model involved providing secured financing to its customers who needed it. Sweetwater made these loans from a line of credit it has with Farm Credit Services.

11. Leonard had a $2.5 million line of credit with Sweetwater which was secured by, inter alia , after-acquired cattle.

12. In broad terms, the arrangement between Leonard and Sweetwater was that Leonard would transfer possession of the cattle to Sweetwater, Sweetwater would finance Leonard's purchase and the feed and care of the cattle, with a deduction in the nature of a down payment. Thereafter, Sweetwater would continue to feed and care for the cattle, and ultimately market and sell those cattle. At the time of sale, the proceeds would be used first to repay Sweetwater for the amount financed, including feed and care, with the balance going to Leonard.

13. At the time of this transaction, Leonard had a line of credit with Sweetwater which allowed him to request funds to purchase cattle subject to Sweetwater's blanket security interest in all of Leonard's cattle. The deal between Leonard and Sweetwater on the cattle at issue here was made on or about September 23, 2015, at which time the cattle were transferred from Murphy's facility in Colorado to Sweetwater's lot north of Kearney, Nebraska.

14. Sweetwater loaned Leonard $598,402.16 to finance the purchase of this cattle.

15. The cattle had been in the Sweetwater lot for a little less than a month when Twitchell was contacted by Murphy, who inquired whether the cattle were located at the Sweetwater lot. Twitchell confirmed they were, and he became aware at that point that there was a dispute between Leonard and Murphy arising from the dishonor of Leonard's checks to Murphy.

16. Prior to that call from Murphy, no representative of Sweetwater had any knowledge of the Murphy–Leonard transaction, other than the fact that the cattle arrived at Sweetwater's lot with a bill of sale showing that Murphy had sold the cattle to Leonard.

17. Murphy filed a replevin action in Buffalo County District Court seeking to recover the cattle, and an order in replevin was entered by that court finding Murphy was entitled to reclaim the cattle for which he had not received payment.

18. The cattle were eventually sold and the gross proceeds totaled $883,073.25. Of that amount, Sweetwater has been paid $215,119.87 for feeding and caring for the animals. The balance is held in escrow pending the outcome of this litigation.

In addition, and of particular relevance to this appeal, it is uncontroverted (or uncontrovertable) that, on September 23, 2015, pursuant to the July 10 contract, Murphy sorted and loaded 395 head of his cattle onto trucks in Fraser, Colorado, to be transported to Sweetwater's lot in Nebraska. That same day, September 23, Murphy signed a Bill of Sale (which was part of a document which also included a Colorado State Board of Inspection Certificate) certifying that he, Murphy, had "sold and delivered" 395 mixed steer to Leonard. An inspector with the Colorado Department of Agriculture certified that he had inspected 395 mixed steer that same day, which were identified by a particular brand. The cattle, along with the Certificate / Bill of Sale document, were delivered to Sweetwater sometime on September 23 or in the early morning hours of September 24. Sweetwater had not reviewed the Certificate / Bill of Sale prior to the delivery of the cattle because that document was delivered along with the cattle.

The Bill of Sale is dated, identifies Murphy as the seller and Leonard as the buyer, and identifies the 395 mixed steer with a brand identifier and brand position. It is signed by Murphy and a witness, who was also the identified inspector on the Certificate. It is not signed by Leonard as the buyer, nor does it contain post office addresses for the seller, buyer, or witness.

What is disputed, factually, is the precise timing of the delivery of the cattle to Sweetwater vis a vis Sweetwater's review of the accompanying Bill of Sale vis a vis the movement of the money. For reasons to be given, resolution of that question is not necessary to determine (1) that ownership of the cattle passed to Leonard; and (2) Sweetwater's lien attached to the cattle when Leonard became their owner, even if that ownership was voidable due to Murphy's reclamation rights.

Because of the dishonored checks, Murphy was not paid for 371 of the steer which had been delivered to Sweetwater's lot. Leonard filed a bankruptcy case and Murphy, Sweetwater, and Farm Credit are fighting over the cattle's proceeds. Because Sweetwater and Farm Credit's interests are aligned in this appeal (and in fact, filed a joint brief), for purposes of discussion, we sometimes refer to them collectively as "Sweetwater."

DISCUSSION

Murphy properly exercised his right to reclaim the cattle after the checks were dishonored. Section 2–507 of the UCC (as applicable in both Colorado and Nebraska) allows a seller of goods to reclaim—take back the goods—when the buyer fails to pay for the goods.⁵ However, the Bankruptcy Court found that, in the meantime, such cattle had been impressed with Sweetwater's security interest, and that security interest held priority over Murphy's interest as a reclaiming seller.⁶ Murphy raises eighteen points on appeal, but his argument is essentially...