Wednesday, August 3, 2016

Feedlot Has Superior Rights to Cattle Sale Proceeds

A common arrangement between cattlemen and feedlots generated a court case recently involving the rights to the proceeds of the sale of the cattle.  Under the facts of the case, a cattle feedlot financed the debtor’s purchase of cattle from a third party (cattle seller) through a lender. The debtor placed the cattle in the feedlot where the cattle would be feed and care for the cattle until selling them. The sale proceeds would then be first used to repay the feedlot for the amount financed, with the balance going to the debtor. After checking public records, the feedlot confirmed that the cattle were free and clear of liens and encumbrances and no records showed that the seller had any interest in the cattle. The feedlot loaned the debtor almost $600,000 for finance the purchase of the cattle. The promissory notes and security agreements that the parties executed were assigned to the lender, and the lender wired the funds directly to the debtor. Unfortunately, several of the debtor’s checks for the purchase of the cattle were not honored, resulting in the seller receiving only partial payment for the cattle. The debtor filed Chapter 11 bankruptcy, and the feedlot, cattle seller and lender battled over priority rights in the proceeds of the sale of the cattle. In a prior proceeding, the court found that the cattle seller had reclaimed the cattle for which he had not been paid via a replevin action that was unaffected by the debtor’s bankruptcy. The remaining cattle were eventually sold for a gross proceeds amount of $883,073.25. $215,119.87 of that amount was paid to the feedlot for its care and feeding of the cattle. The balance was placed in escrow pending the outcome of the litigation.

The feedlot claimed that it had superior rights to the proceeds of the cattle sale because the seller gave up possession to the feedlot and the feedlot was a purchaser in good faith in that title had been transferred to the buyer who then transferred it to the feedlot. The seller claimed it had prior rights because title to the cattle didn’t transfer to the feedlot, and because the feedlot’s interest in the cattle didn’t attach due to the feedlot not being a good faith purchaser because the feedlot should have first determined that it had a valid bill of sale showing that the debtor owned the cattle. The court agreed with the feedlot based on U.C.C. §2-401 which deals with title transfer and does not provide for a revesting of title in the seller when the buyer fails to pay for the goods. The court noted that the seller could have protected himself rather than simply relying on the buyer’s word. Accordingly, the feedlot was a good faith purchaser of the cattle that relied on the legal documents of ownership that were presented with the cattle. The court noted that cattlemen generally consider the bill of sale and brand inspection report (which the feedlot relied on) to be valid documentation of ownership.

So, industry custom played a key role in determining the priority rights to the sale proceeds of the cattle.  Also, unfortunately, simply relying on another party's word often isn't good enough to protect your rights.  

The case is In re Leonard, No. BK15-82016, 2016 Bankr. LEXIS 2681 (Bankr. D. Neb. Jul. 22, 2016).

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