## Facts

- In September 2002, Texana Rice, Inc. borrowed about \$2.65 million from Stearns Bank National Association, granting Stearns a security interest in, among other things, fixtures, equipment, and general intangibles (excluding inventory and accounts receivable).
- The 2002 security agreement also covered “all proceeds,” including “sums due from a third party who has damaged or destroyed the Collateral … whether due to judgment, settlement or other process.”
- Stearns perfected its security interest by filing a UCC financing statement in Texas.
- In February 2006, Texana borrowed \$2 million from Amegy Bank National Association and later defaulted.
- In November 2006, Texana sued Bayer CropScience, LLC in Texas state court over contamination of the U.S. rice supply, alleging damage to Texana’s property (including rice and its plant, equipment, and improvements). The lawsuit was a commercial tort claim under Texas’s enactment of UCC Article 9.
- In June 2007, Texana and Amegy entered a forbearance agreement under which Amegy received a security interest specifically covering sums due or paid to Texana in connection with the Bayer litigation and any settlement rights related to the contamination claims.
- Amegy perfected that security interest by filing a UCC financing statement in June 2007.
- In January 2010, Stearns obtained a final Texas judgment against Texana on the Stearns loan.
- In June 2010, Stearns foreclosed on its deed of trust and security agreement and purchased the collateral at the foreclosure sale; Texana still owed Stearns a substantial unpaid balance.
- Texana and Bayer settled in September 2012 for \$2,137,500. After certain uncontested disbursements, \$933,697.90 remained, which was insufficient to satisfy Texana’s combined debt to Stearns and Amegy.
- In November 2013, Bayer filed an interpleader action in the U.S. District Court for the Eastern District of Missouri to determine whether Stearns or Amegy had priority to the remaining settlement funds.
- The district court granted summary judgment to Amegy, holding Stearns’s foreclosure terminated Stearns’s security interest in any proceeds due to Texana. Stearns appealed.

## Issues

1. Under Texas UCC § 9.617(a), did Stearns’s foreclosure and purchase of the collateral discharge Stearns’s security interest not only in the disposed collateral, but also in proceeds payable because a third party damaged that collateral?
2. Even though Stearns did not specifically describe Texana’s Bayer commercial tort claim in its 2002 security agreement, could Stearns still claim a perfected security interest in the portion of the Bayer settlement that constitutes proceeds of Stearns’s original collateral (fixtures/equipment) that was allegedly damaged?
3. If both lenders had security interests reaching some part of the settlement, how should priority be determined as between Stearns’s earlier security interest in collateral-and-proceeds and Amegy’s later, specifically described security interest in the Bayer claim and its proceeds?

## Decision

- The Eighth Circuit reversed the district court’s judgment for Amegy and remanded.
- The court agreed that Stearns’s “general intangibles” language did not create (attach) a security interest in Texana’s Bayer commercial tort claim as original collateral because commercial tort claims require a description that reasonably identifies the claim; a generic category description is not enough.
- The court held that Stearns’s security agreement and Texas UCC Article 9 still permitted Stearns’s perfected lien to attach to settlement amounts that qualify as “proceeds” of Stearns’s original collateral—specifically, sums paid because a third party damaged or destroyed Stearns-encumbered fixtures and equipment.
- The court held Stearns’s foreclosure did not eliminate Stearns’s rights to proceeds. Section 9.617(a) discharges the security interest in the disposed collateral, but it does not wipe out the secured party’s separate rights in proceeds; Texas UCC § 9.601(c) permits cumulative remedies.
- The court concluded Stearns has priority over Amegy to the extent the interpleaded settlement funds represent proceeds of Stearns’s collateral, while Amegy’s claim could control as to any settlement amounts not traceable to damage to Stearns-encumbered collateral.
- Because the record did not allocate the settlement between damage to Stearns’s collateral and other components of Texana’s loss, the court remanded for further proceedings to allocate the remaining settlement proceeds.

## Legal Principles

- A security interest in a commercial tort claim requires a description that reasonably identifies the claim; “supergeneric” terms such as “all general intangibles” do not suffice for attachment to the claim itself. (Texas UCC §§ 9.108, 9.109.)
- The inability to take a security interest in an unspecified commercial tort claim as original collateral does not prevent a previously perfected security interest in other collateral from extending to “proceeds” paid because that collateral was damaged. (Texas UCC § 9.102(a)(64).)
- Disposition/foreclosure under Texas UCC § 9.617(a) discharges the security interest in the collateral that is sold, but it does not automatically terminate a secured party’s rights in proceeds; Article 9 permits cumulative enforcement rights. (Texas UCC § 9.601(c).)
- When settlement money is subject to competing security interests, priority can differ by category of funds: a lender with an earlier perfected lien on collateral and its proceeds may take first as to amounts that are proceeds of that collateral, while another lender with a later, specifically described lien on the tort claim may take the balance, subject to tracing and allocation.

## Conclusion

In Bayer CropScience, LLC v. Stearns Bank National Association, the Eighth Circuit held that Stearns’s foreclosure did not end its perfected security interest in settlement proceeds paid due to third-party damage to Stearns-encumbered collateral, even though Stearns lacked a direct security interest in the commercial tort claim itself because its agreement did not specifically identify the claim; the court reversed summary judgment for Amegy and remanded for allocation of the interpleaded settlement funds between proceeds of Stearns’s collateral and other settlement amounts.


Bayer CropScience, LLC v. Stearns Bank National Association, 837 F.3d 911 (2016)