May 24, 2013

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HB 13-1284: Allowing Debtors Without Driver’s Licenses to be Identified via State-Issued ID Cards for UCC Purposes

April 24, 2013 by Leave a Comment

On March 27, 2013, Rep. Bob Gardner and Sen. Ellen Roberts introduced HB 13-1284 - Concerning Documents that can be Filed Regarding Security Interests under the “Uniform Commercial Code.” This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

CBA sponsored legislation by the Business Law Section

Article 9 of the “Uniform Commercial Code” regulates the creation of security interests. Revisions adopted in H.B. 12-1262 specify that the form of the debtor’s name that should be entered when filing a financing statement is the name that appears on the debtor’s driver’s license. The bill specifies that if the debtor does not have a driver’s license, the form of the debtor’s name to enter on a financing statement is the name that appears on the debtor’s identification card.

Colorado has adopted nonuniform provisions that regulate who can file an information statement about a security interest and the effect of such a filing. H.B. 12-1262 rendered these provisions obsolete, but they were not repealed in that bill. The bill repeals these provisions.

On April 18 the bill passed 3rd and final reading in the House and is scheduled for Senate Judiciary Committee review on Monday, April 29 at 1:30 p.m.

Filed Under: Legislation Tagged With: , , , ,

Tenth Circuit: Securities Fraud Conviction and Sentence Affirmed; Forfeiture Orders Upheld

March 22, 2013 by Leave a Comment

The Tenth Circuit published its opinion in United States v. Gordon on Friday, March 15, 2013.

Defendant-Appellant George David Gordon is a former securities attorney convicted of multiple criminal charges relating to his alleged participation in a “pump-and-dump” scheme where he, along with others, violated the federal securities laws by artificially inflating the value of various stocks, and then turning around and selling them for a substantial profit. He was sentenced to 188 months in prison and was ordered to pay $6,150,136 in restitution. The government also restrained some of his property before the indictment was handed down and ultimately obtained criminal forfeiture of that property.

Gordon raised numerous arguments on appeal. He argued that the he was deprived of the Sixth Amendment right to counsel because the government placed restraints on various property, including two of his law firm accounts, so he lacked the funds to pay for counsel of his choice. In deciding against Gordon on this issue, the Tenth Circuit refused to consider trial brief arguments he attempted to incorporate into his appellate brief by reference as that is disapproved. After reviewing his appellate arguments, the court agreed with the trial court that Gordon failed to show he was denied access to funds to pay for his defense in any substantial sense. He paid his defense counsel over $900,000 and “counsel remained fully and actively engaged in the case throughout the entire trial court proceedings.”

Next, Gordon challenged the sufficiency of the evidence. In connection with misleading promotional material sent or paid for by the conspirators, Gordon contended that under Rule 10b-5 he had no liability because he had no duty to disclose. Once a party elects to disclose material facts, however, the party has a duty to speak truthfully and correct misstatements. The Tenth Circuit found “substantial evidence that many aspects of the information disseminated in the promotional campaigns were false and misleading, and that misleading statements went uncorrected by numerous material omissions.” The court also found sufficient evidence that Gordon prepared or endorsed false opinion letters and that he violated 18 U.S.C. § 1512(c)(2) when he had a friend sign backdated documents to present to the government in an attempt to prevent the forfeiture of his home.

Gordon complained that the district court erred in permitting the government to insinuate guilt by introducing evidence that infringed upon his Fifth Amendment right to remain silent. At trial, the government offered the testimony of Lindberg to establish that he and Gordon had discussed who should be permitted to testify in the proceedings before the SEC. Two additional witnesses testified that Gordon advised them to take the Fifth Amendment. The testimony was offered to corroborate Lindberg’s testimony that he and Gordon had essentially calculated a cover-up strategy. The Tenth Circuit rejected Gordon’s claim that this tactic tainted the invocation of his own Fifth Amendment right not to testify at trial because it did not refer to his right.

The court rejected Gordon’s argument that the district court erred by excusing a juror without adequate cause. The juror had informed court staff that her continued presence on the jury could affect the outcome of the case. The district court determined the juror had not contaminated the rest of the jury and dismissed her for potential bias. The court did not address whether the trial court abused its discretion because even if it had, the juror’s dismissal did not cause any prejudice to Gordon.

The court also rejected Gordon’s claim that the trial court violated the Speedy Trial Act. The trial court properly identified the complex nature of the case and the voluminous records that would take additional time for the parties to organize and analyze when it granted an ends-of-justice continuance. Gordon’s interlocutory appeal and pending trial court motions created additional periods of delay that were excludable from the Act.

Gordon’s challenges to his sentencing also failed. In fraud cases where loss cannot be accurately calculated, a sentence may be based on gain. The court found no error in the trial court’s calculations, but even if it had, the error would be harmless because of the court’s downward variance from the sentencing guidelines. The court also properly included Gordon’s co-conspirators gains in making sentencing calculations.

Finally, the district court did not err in making its forfeiture orders. The defendant’s conviction and sentence were affirmed.

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SB 13-171: Sunset Review of Licensing of Money Transmitters

March 15, 2013 by Leave a Comment

On Friday, February 8, 2013, Sen. Andy Kerr introduced SB 13-171 – Concerning the Continuation of the Licensing of Money Transmitters, and, in Connection Therewith, Continuing the Authority of the Banking Board and the State Bank Commissioner over Money Transmitters. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The bill implements the recommendations of the sunset review and report on the licensing of money transmitters by the banking board and the state bank commissioner by:

  • Extending the repeal date of the licensing of money transmitters until Sept. 1, 2024;
  • Specifying that the board may investigate any person believed to be engaging in money transmission without a license;
  • Extending the amount of time money transmitters have to notify the board of any increase in the number of locations at which they conduct business from 10 days to the next regularly scheduled periodic report;
  • Adopting some language from the “Uniform Money Services Act;”
  • Requiring securities that are used in lieu of a surety bond to be rated in one of the highest grades as defined by a nationally recognized organization that rates securities;
  • Requiring money transmitters to notify, and obtain written approval from, the commissioner to exchange securities used in lieu of a surety bond;
  • Requiring applicants to pay for prelicense on-site investigations;
  • Expanding the deadline to post a surety bond and pay the licensing fee from 90 days after approval of the application to 6 months after approval; and
  • Directing the board to hold a hearing after denial of a license application only if the applicant requests it.

    • On March 6, the Business, Labor, & Technology Committee approved the bill and sent if to the full Senate for consideration on 2nd Reading.

    Since this summary, the bill passed the Senate on Second and Third Readings.

    Filed Under: Legislation Tagged With: , , , ,

    Split Decision in the U.S. Supreme Court

    March 13, 2013 by Leave a Comment

    BNHoffmanBy Brian Neil Hoffman

    The U.S. Supreme Court recently issued two much-anticipated decisions on securities law matters: One on the statute of limitations applicable in SEC enforcement matters in Gabelli et al. v. Securities and Exchange Commission, No. 11-1274 (Feb. 27, 2013) and another on class certification standards in private securities class actions in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013). The rulings together present a “you win some, you lose some” outcome for securities law litigants.

    In the Gabelli case, the Supreme Court unanimously ruled that the SEC’s five-year time limit to recover civil penalties (contained in 28 U.S.C. § 2462) begins to run when the alleged fraud occurs, not when it is later discovered. The Court rejected the SEC’s attempt to graft a “discovery rule” onto the statutory limitations period. Unlike private plaintiffs, the Court reasoned, part of the SEC’s very mission is to ferret out potential securities law violations. The SEC has a plethora of tools available to aid in the effort — including examination and subpoena powers, the ability to pay whistleblower incentive awards, and cooperation agreements. As such, the Court found that the agency should not benefit from a presumption allowing further delays.

    The ruling is bound to set the SEC scrambling to assess its current case load and prioritizations. Indeed, we may see a push to bring, or close, more dated cases, and a new urgency in cases approaching the five year mark. Importantly, the decision leaves untouched the SEC’s authority to seek a civil injunction, cease-and-desist order, and disgorgement at any point – even more than five years after the misconduct. Yet the staff may be reluctant to seek these remedies unaccompanied by claims for a civil penalty. Moreover, the Court did not address whether the SEC could rely on equitable tolling (that is, when a defendant takes steps – independent from the fraud itself – to conceal his or her actions) to seek penalties after the five year period. Nor did the Court address whether the ruling applies to other punishments that the SEC could seek: officer-and-director or securities industry collateral bars. Despite these uncertainties, registered entities, public companies, auditors, and other market participants can breathe a small, brief sigh of relief that there is now at least some certainty about how long a potential SEC enforcement action may be afoot.

    The Amgen decision, however, is less defendant-friendly. In this 6-3 ruling, the majority held that private securities class action plaintiffs do not need to prove that the alleged misrepresentations or omissions were material at the class certification stage. Class action plaintiffs seeking class certification frequently rely on the “fraud-on-the-market” presumption to overcome a need to prove reliance by each individual class member. The presumption allows a court to presume that the price of a security in an efficient market reflects all publicly-available material information, which a buyer presumptively relied upon when purchasing the security. Although the efficiency of the market for Amgen’s securities was not in question, Amgen challenged the materiality of the challenged misrepresentations or omissions and, thus, the appropriateness of using the fraud-on-the-market presumption to overcome individual reliance issues. The Supreme Court majority rejected this argument. Rather, it held that materiality is evaluated on an objective standard, and thus raised a question common to all class members.

    The Amgen decision is a disappointment to entities and individuals named as defendants in securities class actions. Rulings on class certification are important mileposts in a private securities lawsuit, often significantly affecting damages and sometimes dictating whether a case even proceeds at all. Yet decreasing plaintiffs’ burden at this stage, as the Amgen decision does, only increases the pressure on defendants to try and resolve or narrow claims at other stages of the case. The Amgen case is not a total loss for defendants, though. Justice Alito’s short concurrence noted that “more recent evidence suggests that the [entire fraud-on-the-market] presumption may rest on a faulty economic premise.” Time will tell the uses to which lower courts and the defense bar put this missive.

    For litigants, the effects of the Supreme Court’s decisions in Gabelli and Amgen are both immediate and concrete. Both decisions, albeit in different contexts, ultimately address whether and how a securities case will proceed. And both decisions significantly affect the remedies that may be awarded in those cases. Yet perhaps most importantly, both decisions — whether viewed favorably or unfavorably — provide some degree of certainty in a previously uncertain area.

    Brian Neil Hoffman is Of Counsel in Morrison & Foerster’s Securities Litigation, Enforcement, and White-Collar Defense Group. He recently served as a Senior Attorney in the SEC’s Division of Enforcement. He now represents entities and individuals in government and self-regulatory organization investigations and proceedings; conducts corporate internal investigations; and defends shareholder class action and derivative lawsuits. He can be contacted at bhoffman@mofo.com and (303) 592-2227.

    The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

    Filed Under: Practice Management Tagged With: , , , ,

    Colorado Supreme Court: Colorado Securities Act Does Not Express Strong Public Policy Implication Voiding Choice of Forum Clauses

    February 5, 2013 by Leave a Comment

    The Colorado Supreme Court issued its opinion in Cagle v. Mathers Family Trust on Monday, February 4, 2013.

    Forum Selection Clauses in Contracts—Colorado Securities Act—Anti-Waiver Provisions.

    The Supreme Court held enforceable the forum selection clause in the sales contract in this securities case, requiring the parties to litigate in Texas. The clause is not voided by Colorado public policy as expressed in the Colorado Securities Act (CSA) or by the CSA’s anti-waiver provision, which bars agreements that waive compliance with the substantive provisions of the CSA. The court of appeals’ judgment was reversed, and the case was remanded to the court of appeals with instructions to return it to the trial court for reinstatement of the trial court’s grant of the motion to dismiss based on the forum selection clause in the parties’ sales contract.

    Summary and full case available here.

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    Tenth Circuit: Prisoner’s Application for Habeas Corpus Relief Denied Due to Untimeliness and Failure to Exhaust State Court Remedies

    November 8, 2012 by Leave a Comment

    The Tenth Circuit issued its opinion in Prendergast v. Clements on Tuesday, November 6, 2012.

    Brian Prendergast was convicted of securities fraud. He appealed his conviction and was sentenced to ten years of probation. In 2003, his conviction was affirmed on appeal. Prendergast violated the terms of his probation and was accordingly resentenced in 2009. His resentencing was affirmed on appeal in April 2011. In December 2011, Prendergast filed in federal district court an application for federal habeas relief. His application presented five claims. Two attacked the constitutionality of his resentencing. The other three attacked the basis of his original conviction. The district court dismissed the two claims related to the resentencing for failure to exhaust state-court remedies. The court dismissed as untimely the three claims related to the original conviction.

    The Tenth Circuit reviewed these two bases for dismissal.

    Exhaustion of State Court Remedies. For a federal court to consider a federal constitutional claim in an application for habeas, the claim must be “fairly presented to the state courts” in order to give state courts the “opportunity to pass upon and correct alleged violations of its prisoners’ federal rights.” Since there was nothing in Prendergast’s briefing to alert the state court about a federal constitutional claim, the district court correctly concluded Prendergast did not exhaust state-court remedies as to either claim.

    Untimeliness. At the district court level, Prendergast presented three claims challenging the constitutionality of his 2003 conviction. Applying the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA), the district court concluded all three of these claims were time barred. Because AEDPA sets a one-year limitations period for filing a COA application, and because Prendergast did not raise claims attacking the original conviction until over seven years later, these claims clearly exceeded the one-year limitations period for filing a COA application.

    Accordingly, Petitioner’s application for a certificate of appealability was DENIED, the matter was DISMISSED, and his motion to proceed in forma pauperis was DENIED.

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    Crowdfunding and the Jumpstart Our Business Startups Act

    October 28, 2012 by 1 Comment

    On April 5, 2012, President Barack Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. The JOBS Act was intended to increase the ability of small businesses to raise capital.

    The legislation makes several changes to existing laws for small businesses. It enlarges the time from two to five years for certain small companies to begin compliance with some regulations, including provisions of the Sarbanes-Oxley Act. It allows certain small businesses to have more shareholders before registering with the SEC and becoming a public company. It also creates a new exemption from public filings with the SEC, and gives wider latitude to “emerging growth companies.”

    The JOBS Act makes direct mention of “crowdfunding.” Crowdfunding refers to the funding of a company by selling small amounts of equity to many investors. Title III of the JOBS Act amends Section 4 of the Securities Act to allow “crowdfunding” by exempting issuers from the requirements of Section 5 of the Securities Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act. The SEC has been tasked with developing regulations for crowdfunding; these are being developed and implemented. Until the regulations are implemented, however, the SEC cautions that “any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.”

    Chapter 26 of The Practitioner’s Guide to Colorado Business Organizations discusses the JOBS Act and other securities issues for small businesses.

    CLE Book: The Practitioner’s Guide to Colorado Business Organizations

    The 2012 Supplement to The Practitioner’s Guide to Colorado Business Organizations is now available. Click here to purchase the supplement online, or call (303) 860-0608.
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    Tenth Circuit: In Bankruptcy Case, Debtor Permitted to Grant Security Interest to Creditor in Economic Value of Broadcasting License, Regardless of When Sale of License is Contemplated

    October 17, 2012 by Leave a Comment

    The Tenth Circuit Court of Appeals issued its opinion in In re Tracy Broadcasting Corporation on Monday, October 16, 2012.

    Tracy Broadcasting filed for bankruptcy under Chapter 11. Its primary creditors were Valley Bank and Spectrum Scan, which was unsecured. The most valuable asset was Tracy’s broadcasting license. The schedules stated that the “proceeds” of the license were secured to Valley Bank. Spectrum Scan brought an action to determine the extent of Valley Bank’s security interest. The bankruptcy court ruled that Valley Bank had no priority in the proceeds of the sale of the license. According to the bankruptcy court, Tracy Broadcasting lacked a sufficient prepetition property interest in the license because the Federal Communications Act (FCA) barred its transfer without FCC permission. The United States District Court for the District of Colorado affirmed.

    The Tenth Circuit’s analysis on appeal involved two steps. First, it determined what, if any, interest Tracy Broadcasting could convey in its license before it filed its bankruptcy petition. The Tenth Circuit concluded that Tracy Broadcasting could grant a security interest in its right to the proceeds of the sale of the license. Under the FCA, a licensee has no ownership rights in a radio channel or frequency; the use of the channel is within the regulatory power of the FCC. But the FCA does not prohibit a licensee from making money from its license—say, when a licensee sells a license (albeit only with FCC approval) and realizes a profit because of the value of listener loyalty to the frequency. Accordingly, the Court held that federal law permitted Tracy Broadcasting to grant a security interest in the economic value of its license to Valley Bank.

    Second, The Tenth Circuit determined whether such a security interest is a property interest that can attach before a sale of the license is contemplated.  Under the Bankruptcy Code, property-rights issues of this sort are a matter of state law. The Tenth Circuit held that Nebraska law recognizes that a security interest in the proceeds of a license sale attaches when the licensee enters into the security agreement, regardless of whether a sale is contemplated at that time. REVERSED.

    Filed Under: Case Law Tagged With: , , , , ,

    Colorado Supreme Court: Disgorgement of Commissions Is Not an Available Remedy Against Seller of Securities

    May 29, 2012 by Leave a Comment

    The Colorado Supreme Court issued its opinion in Capital Securities of America, Inc. v. Griffin, Treasurer of Jefferson County on May 29, 2012.

    Purchase of Unlawful Securities—CRS § 24-75-601.1—Common Law Disgorgement as a Remedy.

    In 2006, Jefferson County purchased securities through Capital Securities of America, Inc. The county later determined the purchase was unlawful under CRS § 24-75-601.1. The county sued Capital Securities and, among other things, sought to disgorge the commissions earned by Capital Securities under a theory of common law restitution. Both the trial court and the court of appeals concluded that restitution was appropriate and ordered Capital Securities to disgorge their commissions.

    The Supreme Court held that disgorgement is not an available remedy against Capital Securities. Although the Colorado Legislature expressly provided a damages remedy (and specified how damages were to be calculated), an equitable remedy (repurchase), and a regulatory remedy (license revocation), it did not provide a disgorgement remedy under a theory of common law restitution. Under these circumstances, the Court concluded that the addition of disgorgement would impermissibly alter the extensive and detailed remedial scheme adopted by the legislature. Accordingly, the judgment was reversed.

    Summary and full case available here.

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    Colorado Court of Appeals: Sale of Shares of Joint Venture Constituted Investment Contract Under the Colorado Securities Act and Thus Were Required to be Registered with Division of Securities

    May 15, 2012 by Leave a Comment

    The Colorado Court of Appeals issued its opinion in Joseph, Colorado Securities Commissioner v. Meika Corporation on May 10, 2012.

    Colorado Securities Act—Cease and Desist Order.

    Respondents Mieka Corporation, Daro Blankenship, and Stephen Romo appealed the order prohibiting them from committing any violation of the Colorado Securities Act (CSA), CRS §§ 11-51-101 to -908, in connection with the offer and sale of any security in or from the State of Colorado. The judgment was affirmed.

    The Colorado Division of Securities (Division) issued an order directing respondents to show cause why a final order should not be entered against them in conjunction with the alleged sale of securities. The order alleged respondents had violated provisions of the CSA by offering for sale interests in a joint venture to develop an oil and gas lease in Pennsylvania (Joint Venture).

    The Division, through a hearing panel (Panel), issued a detailed opinion concluding that the presented evidence established that the interests in the Joint Venture were securities under the CSA and that there had been an offer and sale of such security interests. Because those securities had not been registered with the Division, the Panel recommended that the Colorado Securities Commissioner (Commissioner) issue a cease and desist order against respondents to enjoin them from violating the CSA.

    In April 2011, the Commissioner affirmed the decision of the Panel and made two additional conclusions of law: (1) that “the strong presumption that general partnerships are not securities as found in the Williamson case [Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981)] is not the law under the Colorado Securities Act”; and (2) that respondent Romo had acted as an unlicensed broker-dealer or sales representative, in violation of CRS § 11-51-401(2). These additional conclusions were appealed by respondents.

    Respondents argued that the conclusion of the Panel and the Commissioner that the Joint Venture interests were unregistered securities because they were interests in an investment contract was based on an erroneous view of the law or was unsupported by substantial evidence in the record. The Court of Appeals declined to address the first contention, because the Panel and the Commissioner found that the Joint Venture interests were securities on grounds that did not turn on the legal argument made by respondents. The Court then found that there was substantial evidence in the record to support the decision of the Panel and the Commissioner. The judgment was affirmed.

    Summary and full case available here.

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    Tenth Circuit: Petitioner Used Fifth Amendment Privilege to Manipulate Securities Fraud Litigation Process; Not Abuse of Discretion to Deny Leave to Withdraw Assertion

    April 30, 2012 by Leave a Comment

    The Tenth Circuit Court of Appeals published its opinion in SEC v. Smart on Friday, April 27, 2012.

    The Tenth Circuit affirmed the district court’s decision. In 2009, the SEC began investigating Petitioner, who was the sole owner of Smart Assets, for securities fraud. Petitioner appeared before the agency to provide testimony, but his counsel instructed him “to take the Fifth Amendment,” and the proceeding ended. The next day, the SEC sued Petitioner and Smart Assets, claiming Petitioner “had defrauded multiple investors because he had represented that investors’ money would be placed in low-risk financial instruments, but he then used their money to cover his and his wife’s personal expenses, pay prior investors, and engage in high-risk ventures, like hard-money lending. In the process, he commingled investor funds, fabricated account statements, refused investors’ inquiries about their money, misled investors about his affiliation with a financial-planning firm, gave promissory notes as collateral for investment funds, and gave investors bogus financial product-information sheets.” The SEC moved for summary judgment and asked the district court to draw an adverse inference against Petitioner in regard to his Fifth Amendment invocations. Petitioner sought a continuance. The district court granted summary judgment, citing Petitioner’s “failure to raise a genuine issue of fact, and it inferred from his Fifth Amendment invocation that ‘he knowingly and purposely defrauded investors.’”

    On appeal, Petitioner contends that he should have been permitted to withdraw his assertion of the Fifth Amendment and have his declarations considered in opposing summary judgment. The Court disagreed, stating that the circuit has “not yet defined the parameters in a civil case for withdrawing an invocation of the Fifth Amendment privilege against self-incrimination.” However, the “circumstances of [Petitioner]’s invocation of the Fifth Amendment reveal that he was using the privilege to manipulate the litigation process. . . . Further, [Petitioner] took the Fifth during the deposition of Smart Assets after conferring with the company’s counsel. . . . Given the circumstances of this case, [the Court concluded] that the district court did not abuse its discretion in denying [Petitioner] leave to withdraw his assertion of the Fifth Amendment privilege against self-incrimination and in striking his declarations.” Additionally, Petitioner failed to provide evidence to contradict the SEC’s evidence of his frauds.

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    Colorado Court of Appeals: Cattle Who Were “Produced In” Oklahoma and Shipped to Colorado From Missouri Were Considered Securities

    April 17, 2012 by Leave a Comment

    The Colorado Court of Appeals issued its opinion in Great Plains National Bank, N.A. v. Mount on April 12, 2012.

    Summary Judgment—Food Security Act—Security Interests in Cattle—Uniform Commercial Code.

    In this consolidated appeal, defendants Jamie Mount and Cattle Consultants, LLC appealed the district court’s summary judgment in favor of plaintiff Great Plains National Bank, N.A. (Great Plains) on their separate motions for summary judgment. The judgment was affirmed.

    This consolidated case involved two disputes. Mount claimed under the Food Security Act of 1985 (FSA) that he purchased 206 head of cattle free of a security interest claimed by Great Plains. Cattle Consultants and Great Plains each claimed a superior security interest in the 206 head of cattle.

    In October 2009, Fred Smith obtained a loan from Great Plains and granted a security interest covering “[a]ll cattle” that he owned at the time or would acquire in the future. On November 19, 2009, Great Plains filed a Uniform Commercial Code (UCC) financing statement with the Oklahoma Secretary of State’s office reflecting this interest. Great Plains also filed an effective financing statement (EFS) in Oklahoma, as required by the FSA, on December 17, 2009.

    On February 15, 2010, Mount agreed to purchase 206 head of cattle from Smith. That same day, Cattle Consultants financed Mount’s purchase, and Mount granted Cattle Consultants a security interest in the 206 head of cattle. Cattle Consultants filed a UCC financing statement with the Colorado Secretary of State on March 8, 2010.

    Mount believed he was buying 206 head of cattle located in Oklahoma, but Smith actually fulfilled the purchase with cattle he had just bought on February 14, 2010 from a broker in Missouri. On February 18, 2010, Smith received a shipment of 231 head of cattle from the Missouri cattle broker. The next day, he loaded 206 of them onto trucks bound for Colorado. Mount paid for the shipping.

    Smith paid the Missouri cattle broker with a check with insufficient funds, but Great Plains covered it. Great Plains couldn’t recoup the money from Smith. In April 2010, Great Plains sought to enforce its security interest in the 206 head of cattle purchased by Mount and filed a UCC financing statement against Smith in Colorado.

    All parties moved for summary judgment, and the district court ruled in favor of Great Plains. The court concluded that the cattle were “produced in” Oklahoma, such that under the FSA, Mount’s purchase was subject to Great Plains’ financing statement filed in that state. The court further found that Cattle Consultants’ security interest in the cattle was junior to Great Plains’ security interest. Mount and Cattle Consultants appealed.

    Mount argued the trial court misinterpreted the phrase “produced in” under the FSA. The Court had to determine whether Mount’s cattle were “produced in” Oklahoma. If so, they were subject to Great Plains’ security interest. If not, they were free and clear of that security interest. Under the FSA, buyers of farm products generally take free of a security interest created by the seller; however, there is an exception under 7 U.S.C. § 1631(e) that applies where (1) the farm product was produced in a state that has a central filing system; (2) the buyer has failed to register with that state’s secretary of state; and (3) the secured party has filed an effective financing statement covering the farm products being sold.

    Mount challenged the district court finding that the cattle were produced in Oklahoma, arguing they were produced in Missouri, which has no central filing system. The phrase “produced in” is undefined in the FSA and no case law was found in this regard. The Court of Appeals therefore looked to the plain and ordinary meaning of the phrase, which it found ambiguous and, as a consequence, turned to legislative history. It noted that Mount’s argument could result in buyers purchasing farm products subject to security interests they had no practical method of discovering (Mount himself believed he was buying cattle from Oklahoma). Based on the purposes of the FSA as stated in its legislative history, the Court held that “produced in” means the location where farm products are furnished or made available for commerce. Therefore, it affirmed the district court’s decision that Mount purchased the cattle subject to the perfected security interest claimed by Great Plains.

    Cattle Consultants argued it had a senior security interest in Great Plains because Mount, not Smith, owned the cattle when they entered Oklahoma; therefore, Great Plains did not have a security interest in them and its purchase money security interest (PMSI) had priority over any competing security interest. The Court disagreed. Under the UCC, a security interest is enforceable against a debtor and third parties with respect to the collateral when (1) value is given; (2) the debtor has rights in the collateral; and (3) the debtor has signed a security agreement that provides a description of the collateral. Here, it was undisputed that Great Plains gave value to Smith; Smith had an ownership interest in the cattle; and Smith gave Great Plains a security agreement with an interest in all cattle owned or later acquired.

    The Court also disagreed that the PMSI had priority. Great Plains filed its financing statement on November 19, 2009. This filing was done before Smith acquired rights in the cattle and thus was perfected at the moment of attachment. Cattle Consultants did not file their financing statement until March 2010. Great Plains was the first to file, and therefore had priority.

    Summary and full case available here.

    Filed Under: Case Law Tagged With: , , , , , ,
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