Kunkel v. Sprague National Bank

128 F.3d 636 (1997)

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Nature of the Case

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Facts

D made a number of loans to Morken pursuant to certain loan agreements and promissory notes. The Morkens executed a security agreement in favor of D covering their inventory, farm products, equipment, and accounts receivable presently owned or thereafter acquired. D filed a UCC-1 financing statement regarding the collateral. Morkens' debt to D currently exceeds $1.9 million. Hoxie (D) is in the business of financing and selling cattle and operating a feedlot. In five transactions between February and April 1994, Morken purchased interests in approximately 1900 head of cattle From Hoxie (D). Morken executed a loan agreement and promissory note in favor of Hoxie (D) and a security agreement granting Hoxie a purchase money security interest (PMSI) in the cattle. Hoxie (D) did not file a UCC-1 but instead perfected its security interest by taking possession of the cattle pursuant to feedlot agreements between Morken and Hoxie (D). Morken never had physical possession of the cattle. The cattle were to remain on Hoxie's (D) feedlot for purposes of care and feeding. Hoxie (D) had authority to sell the cattle in its own name for slaughter, to receive direct payment from the packing house, and to deduct the feeding and purchase expenses from the sale proceeds and then remit the balance to Morken. Hoxie's (D) acknowledged that it needed Morken's authority to sell the cattle and that Morken determined at what price the cattle would be sold. Morken bore all risk as to the profit or loss generated by feeding and selling the cattle. On June 10, 1994, Morken filed a Chapter 11 bankruptcy. Hoxie (D) then sold the cattle to Iowa Beef Processors for slaughter. Approximately $550,000 in sale proceeds remained. Morkens' bankruptcy trustee commenced an adversary proceeding in the bankruptcy court to determine which party -- D or Hoxie (D) --was entitled to the net sale proceeds. The bankruptcy court granted Hoxie's (D) motion for summary judgment and denied D's motion. It held that both Sprague and Hoxie had perfected security interests in the cattle, but Hoxie's (D) interest had first priority. UCC 9-312(3) gives 'super priority' to a creditor with a PMSI in inventory if certain conditions are met, including the requirement that the creditor must send a specified notification to any competing secured party. The competing secured party must receive the notification within five years before the debtor receives possession of the inventory. D appealed to the district court, which affirmed the bankruptcy court's summary judgment in favor of Hoxie (D). The district court held that a creditor that has perfected its security interest in inventory through possession, rather than by filing, is not required to provide notification of its PMSI to competing secured creditors to attain 'super priority.' The district court ruled that D did not even have a security interest in the cattle because delivery of the cattle to Morken had not been completed and, therefore, no 'present sale' had occurred. P appealed.