Sweetwater Cattle Company, L.L.C. v. Murphy (In re Leonard)
Docket: No. 16-6029
Court: United States Bankruptcy Appellate Panel for the Eighth Circuit; February 24, 2017; Us Bankruptcy; United States Bankruptcy Court
Leigh Murphy, operating as Murphy Cattle Company, appeals a Bankruptcy Court ruling that Sweetwater Cattle Company, L.L.C. holds a superior lien on certain cattle compared to Murphy's rights as an unpaid seller. The dispute centers on the validity and priority of claims to the cattle sold by Murphy to Charles Leonard, who subsequently delivered the cattle to Sweetwater for care and feeding while financing the purchase through a line of credit with Farm Credit Services. Murphy received only partial payment and, citing nonpayment, sought to reclaim the cattle under the Uniform Commercial Code (UCC). However, Sweetwater argues that its security interest became effective upon Leonard's acquisition of the cattle, regardless of Murphy's reclamation rights. Murphy contends Sweetwater's lien is invalid due to improper title transfer and lack of good faith.
The Bankruptcy Court granted summary judgment, validating Sweetwater's lien and entitled it to the proceeds from the cattle's sale following Leonard's Chapter 11 bankruptcy filing. The BAP reviews this decision de novo, focusing on the absence of material fact disputes. Key uncontroverted facts include: Sweetwater's establishment as a Nebraska LLC; Leonard's history as a bonded cattle dealer; a contract between Leonard and Murphy for the purchase of cattle; a significant down payment made by Leonard; and Sweetwater's business model involving secured financing for cattle purchases. Leonard had a $2.5 million secured line of credit with Sweetwater, which included after-acquired cattle.
Sweetwater agreed to care for and sell cattle purchased by Leonard, using sale proceeds first to repay Sweetwater for financing costs and then distributing any remaining balance to Leonard. Leonard had a line of credit with Sweetwater secured by a blanket security interest in all his cattle. The transaction occurred on September 23, 2015, when Sweetwater loaned Leonard $598,402.16 for the cattle, which were transported from Murphy's facility in Colorado to Sweetwater's lot in Nebraska.
Shortly after the transfer, Murphy contacted Sweetwater to confirm the cattle's location, revealing a dispute over Leonard's dishonored checks to Murphy. Sweetwater had no prior knowledge of the transaction between Leonard and Murphy, apart from the bill of sale indicating Murphy sold the cattle to Leonard. Murphy subsequently filed a replevin action to recover the cattle, and the court ruled in his favor, allowing him to reclaim the cattle due to non-payment.
The cattle were sold for $883,073.25, with Sweetwater receiving $215,119.87 for care and feeding, and the remaining funds are held in escrow pending litigation. On the transaction date, Murphy loaded 395 head of cattle for transport to Sweetwater and completed a Bill of Sale certifying the sale to Leonard, which included details of the cattle and was signed by Murphy and an inspector. However, Leonard did not sign the Bill of Sale, and it lacked complete addresses for the parties involved.
The timing of the cattle's delivery to Sweetwater and the review of the Bill of Sale remains disputed, but is deemed unnecessary for determining that ownership passed to Leonard and that Sweetwater's lien attached at that point, despite Murphy's reclamation rights. Due to the dishonored checks, Murphy was unpaid for 371 of the steers. Leonard's bankruptcy has led to disputes over the proceeds among Murphy, Sweetwater, and Farm Credit, with Sweetwater and Farm Credit aligned in their interests for the appeal.
Murphy exercised his right to reclaim cattle after receiving dishonored checks, as permitted under Section 2-507 of the UCC applicable in Colorado and Nebraska. However, the Bankruptcy Court determined that Sweetwater's security interest in the cattle took precedence over Murphy's claim as a reclaiming seller. Murphy’s appeal presents two main arguments: first, he claims that title to the cattle never transferred to Leonard under Colorado law, thus Sweetwater's lien could not attach; second, he argues that even if title did transfer, Sweetwater lacked the good faith required to establish a lien under the UCC.
The choice of law issue arises since Leonard resides and conducts business in Nebraska, while the cattle were transferred in Colorado and later moved to Nebraska. A federal court typically applies the substantive law of its jurisdiction. Nebraska law requires identifying an actual conflict between states' legal rules, but in this case, the relevant UCC provisions are consistent across both states, leading to the conclusion that outcomes would remain the same regardless of the governing jurisdiction.
On the title transfer issue, the Bankruptcy Court found that Leonard obtained title under the UCC. Murphy contends that the Colorado livestock bill of sale statute governs title transfer and asserts that the bill of sale in this instance did not meet statutory requirements, thereby asserting that the UCC is not relevant. The Colorado Revised Statutes require a written bill of sale for livestock transactions, with non-compliance resulting in misdemeanor charges. However, since Murphy was the actual owner of the cattle, the statute does not apply to him. The statute specifies the conditions for a valid livestock bill of sale, including the legal owner’s transfer of title and a guarantee against lawful claims.
The legal document outlines specific requirements for a Bill of Sale involving the sale or transfer of cattle in Colorado. It mandates a detailed description of the animal, including registration details, sex, age, breed, and any identifying marks or brands. Both the seller and buyer must sign the Bill of Sale in the presence of a witness, who must also provide their address and signature, and the document must be dated on the transaction day. Colorado courts have recognized these laws as a means to prevent cattle rustling through criminal penalties.
In this case, while Murphy provided a Bill of Sale that identified him as the seller and Leonard as the buyer and sufficiently described the cattle, it failed to include Leonard's signature and the parties' post-office addresses. Consequently, the Bill of Sale did not comply with the statutory requirements of 35-54-103(2). Murphy argued that this non-compliance meant he did not transfer ownership of the cattle to Leonard, which would also mean Leonard could not grant a security interest in the cattle to Sweetwater. However, the Bankruptcy Court was said to have erred by not halting the analysis at this point and instead turning to the UCC.
A precedent case, Cugnini v. Reynolds Cattle Co., illustrates a similar situation where a failure to comply with the livestock Bill of Sale laws resulted in a dispute over ownership of cattle. Initially, the court held that title to cattle only passes with a compliant Bill of Sale. However, later, the Colorado Court of Appeals determined that when neither party could claim valid title under the livestock Bill of Sale laws, the UCC's merchant laws should be applied, allowing title to pass based on physical delivery. The Colorado Supreme Court affirmed this decision, granting ownership and entitlement to proceeds under the UCC. Murphy attempted to differentiate his case from Cugnini by pointing out that in Cugnini, the seller also lacked a valid Bill of Sale prior to the transfer.
Murphy argues that he raised the cattle from birth and maintains that, as the seller, he did not receive a defective bill of sale unlike Cugnini. He references the Court of Appeals’ decision in Cugnini I, which was based on the lack of compliance with bill of sale laws by both parties. However, the Colorado Supreme Court in Cugnini II affirmed the Court of Appeals' ruling but clarified that noncompliance with livestock bill of sale requirements does not inherently prevent the transfer of title. The Supreme Court highlighted that valid ownership is not solely dependent on having a compliant bill of sale and pointed to Colorado's livestock bill of sale statutes, which state that the seller must prove actual ownership to avoid theft charges. Consequently, the Court concluded that the passage of title should be governed by the Uniform Commercial Code (UCC), as statutes on the same topic should be harmoniously construed. It ruled that since Cugnini held title before the transaction with Russell, UCC 2-403 applied, and noncompliance with the bill of sale laws did not obstruct the transfer of title in this case. Murphy's claim that the bill of sale laws control the passage of title is challenged, especially since he signed and delivered the bill of sale, albeit with minor defects. The Supreme Court noted that these defects do not negate the ownership transfer, allowing Leonard to reasonably claim ownership. Murphy cites Moffat County State Bank v. Producers Livestock Marketing Association to support his position that livestock bill of sale laws govern title passage and supersede any inconsistent UCC provisions, despite the Supreme Court's holding in Cugnini II.
Murphy misinterprets the context of a case involving Moffat County State Bank and Seewald regarding a security interest in cattle. Seewald had sent cattle to Producers Livestock Marketing for sale, but the proceeds were sent to him instead of the Bank, which then sued Producers to recover them. The primary legal questions were whether the Bank had perfected its security interest in the cattle and whether it had authorized the sale, which would void its lien under Article 9 of the UCC. The case clarified that title to the cattle was held by Seewald, and the focus was on the perfection of the Bank's lien. Producers argued that the Bank's security agreement failed to "reasonably identify" the cattle as per the livestock bill of sale laws, suggesting the lien was unperfected due to vagueness. The court rejected this claim, stating that the specificity required under livestock laws was not necessary under Article 9. It clarified that while livestock bill of sale laws govern title transfers, they do not conflict with Article 9 regarding security interests, nor are they the only means for title transfer in Colorado, as supported by Cugnini II. The Bankruptcy Court determined that title passed to Leonard under UCC § 2-401, which outlines that title cannot transfer until goods are identified in the contract, and generally passes upon the seller's performance unless otherwise agreed. This reaffirms that title can pass despite any security interest reservations.
Murphy transferred possession and title of the cattle to Leonard during shipment in Colorado, with no reservation of title or security interest in the contract. Under UCC § 2-401, title passed to Leonard at shipment, which was voidable but still sufficient to grant a security interest. Despite the cattle being accompanied by a bill of sale that did not fully comply with livestock sale laws, title would pass regardless of when or where a document of title was delivered. UCC § 2-401 does not allow for the revesting of title due to nonpayment unless specified in the contract, which it was not in this case; thus, Murphy's rights were limited to reclamation rights.
UCC § 2-403 states that a purchaser acquires all title that their transferor had, including voidable titles. Leonard received voidable title from Murphy, granting him the power to transfer good title to a good faith purchaser, despite the transaction involving a dishonored check or claims of fraud. Colorado's UCC § 2-403 includes a provision allowing sellers to denote non-payment on brand inspection certificates, which Murphy could have utilized to protect his interests. In contrast, Nebraska case law, specifically Maryott v. Oconto Cattle Co., supports that a buyer who has not paid can still transfer greater title to a good faith purchaser than they possess. Therefore, a secured creditor of the buyer qualifies as a good faith purchaser and holds priority over an unpaid seller. Murphy contends that the Bankruptcy Court erred in relying on Maryott v. Oconto to determine that Sweetwater’s lien attached to the cattle, referencing the habitual payment delays by Oconto to Maryott.
Maryott delivered cattle to Oconto, but payment drafts were dishonored, leading Oconto's lender to claim a security interest under an after-acquired collateral provision. In a related replevin action, Maryott argued that title to the cattle remained with the seller until payment was made, and the Court assumed that title was expressly reserved, limited to a security interest under Article 9 of the UCC. Key issues included whether the lender’s security interest attached to the cattle and if it had priority over Maryott's unperfected security interest as an unpaid seller. The Court concluded that the lender's lien attached because it was a good faith purchaser under UCC § 2-403, thus prevailing over Maryott's interest.
Murphy distinguished his own situation, claiming his interest is a reclamation right rather than an unperfected security interest. Although it was agreed that Murphy's title passed to Leonard at shipping, the critical issues mirrored those in Maryott's case: whether Sweetwater was a good faith purchaser and if its lien had priority over Murphy's reclamation rights. Murphy contended that the Bankruptcy Court wrongly assessed Sweetwater's good faith by not recognizing Leonard as a 'merchant' under the UCC. A merchant, defined as someone who deals in goods of the kind, must demonstrate honesty and adherence to reasonable commercial standards.
While the Bankruptcy Court did not explicitly label Sweetwater as a merchant, it appeared to function as one. Murphy did not claim Sweetwater acted dishonestly but questioned if it met reasonable commercial standards by releasing funds to Leonard without verifying cattle ownership. He alleged the Court made unsupported findings about the validity of the Certificate and Bill of Sale and their review by Sweetwater prior to fund release. The summary judgment standard requires the moving party to show no genuine dispute on material facts, while the non-moving party must present specific facts indicating a genuine issue for trial. A material fact could influence the suit's outcome, and disputes are genuine if reasonable evidence could lead to a verdict for either side. Courts must view facts favorably to the non-moving party and infer all reasonable conclusions from those facts.
The bankruptcy court’s role is limited to determining if there is a genuine issue of fact for trial, without weighing evidence or making credibility assessments. Sweetwater submitted an affidavit from Gerald Timmerman, a seasoned rancher, indicating that he considers a Certificate, Bill of Sale valid if it includes the seller and buyer's names, transaction date, cattle description, and seller's signature. He stated that he would accept the Certificate, Bill of Sale in question as valid. John Schroeder, with a decade of experience in cattle transactions, noted that industry practice does not typically involve checking state laws for compliance with brand inspection when a brand officer has authorized the cattle transfer. Mike Twitchell, Sweetwater’s managing member, also claimed that he has never encountered a situation where a buyer signs a Bill of Sale in cattle sales across states with brand laws. Murphy did not provide any affidavits to contest Sweetwater’s evidence regarding standard documentation for cattle ownership transfer. The legal principle established is that the imperfections in the Colorado Bill of Sale did not impede the transfer of title, as Murphy rightfully owned the cattle and could transfer ownership under mutually agreed terms. The signed bill of sale, witnessed by a state inspector, constituted a valid transfer of ownership. Murphy's referenced case, Rudiger Charolais Ranches v. Van De Graaf Ranches, illustrated that despite statutory documentation requirements, industry practices might deviate, which the court found commercially unreasonable. Murphy's claim that not fully complying with Colorado's livestock bill of sale is commercially unreasonable does not hold weight against the established practices and law.
The case of Van De Graaf Ranches is distinguishable because the merchant conceded it received no documentation for four of five cattle loads at delivery. The court noted that the documentation statute aimed to address the transfer of branded livestock without the rightful owner's consent. In contrast, Sweetwater received the cattle with a bill of sale and inspection certificate signed by Murphy and a witness, providing reasonable evidence that Murphy sold the cattle to Leonard, who was the rightful owner. Additionally, Van De Graaf Ranches applied Washington law, while Murphy did not cite any similar Colorado or Nebraska cases. Colorado law allows for title transfer without meeting all technical requirements of livestock bill of sale laws.
Murphy referenced Huffman Livestock, LP v. M5 Consulting, LLC, where a buyer was not deemed to have acted in good faith due to knowledge of the seller's financial troubles and involvement in a scheme to benefit himself at the seller's expense. The court found that good faith requires adherence to reasonable commercial standards and fair dealing in the specific industry context. In contrast, Leonard and Sweetwater’s previous business relationship does not suggest any conspiracy to put Murphy at risk of loss, making Huffman inapplicable. The Bankruptcy Court correctly concluded that Sweetwater acted commercially reasonable under the circumstances, with the facts of Cugnini supporting this conclusion.
Murphy provided Leonard with a defective bill of sale and possession of cattle, while Leonard issued bad checks in return. Murphy contends that Sweetwater advanced funds based on this defective bill or without inspecting it. This situation mirrors a prior case involving Cugnini, where payments were made without a proper bill of sale. The trial court in Cugnini noted that brand inspection certificates, which are advisable in cattle sales, may be received after the cattle are delivered. Sweetwater’s actions, whether it advanced funds before seeing the bill of sale or not, do not indicate a lack of commercial reasonableness. Moreover, since Murphy passed title to Leonard, Sweetwater’s lien on the cattle was established regardless of the timing of fund disbursement. Thus, the timing of Sweetwater's funding in relation to the bill of sale is not a material fact affecting the case outcome.
Murphy's position is further complicated by the hypothetical scenario where he insisted on payment in good funds at delivery, which would require lenders to advance funds without confirming ownership, contrary to the UCC's purpose of facilitating commerce.
Additionally, Sweetwater requested to strike an electronic record submitted by Murphy from a separate adversary proceeding, which was denied. Sweetwater also sought sanctions against Murphy for a allegedly frivolous appeal; however, this request was denied because it lacked a formal motion and opportunity for Murphy to respond. Consequently, the Bankruptcy Court’s Orders have been affirmed, including the denial of Sweetwater’s requests to strike the document and for sanctions.
Payment for goods or documents of title is contingent on the buyer making the required payment to the seller. If payment is made via check, it is conditional and invalidated if the check is dishonored upon presentment. Sellers are entitled to reclaim goods, such as cattle, if they discover the buyer's check has been dishonored, as established by various statutes and case law. The seller's right to reclaim is limited by the rights of good faith purchasers or lien creditors. Colorado's livestock sale laws aim to prevent cattle theft and also regulate private sales, highlighting the importance of brand inspection certificates in asserting payment status. The UCC defines 'purchaser' broadly, including those taking by mortgage or lien. The reclamation right under UCC 2-507(2) is primarily a right to reverse a sale, not a means to secure payment, which distinguishes it from a security interest.
The non-movant in a legal proceeding cannot rely solely on allegations or denials in pleadings to counter a motion for summary judgment; they must present sufficient admissible evidence to establish a genuine issue of material fact. Referenced cases (U.S. Bank Nat'l Assoc. v. U.S. Rent a Car, Anderson v. Liberty Lobby, Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp.) support this standard. Gerald Timmerman, in his affidavit, indicated he had previously signed an affidavit prepared by Murphy's attorney, which required a valid bill of sale for a livestock transaction, but later clarified that he would not verify the applicable laws of the transaction's state. Nebraska Revised Statute U.C.C. § 2-401 and case law emphasize that "good faith" involves both subjective honesty and objective fair dealing standards. The rule under Section 2-403 allows a buyer who pays with a dishonored check to convey greater title to a good faith purchaser, reflecting a policy aimed at facilitating commercial transactions. Timmerman’s original affidavit indicated a reliance on industry trust, noting that a bill of sale, while typically expected shortly after funding, may not be required immediately.
