July 16, 2019

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

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.

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