## Facts

- A Kentucky dairy farmer financed operations through a bank that held a perfected purchase-money security interest in the farmer’s equipment, farm products, and livestock, including after-acquired livestock.
- The farmer separately entered multiple “Dairy Cow Leases” with a cattle lessor under which the lessor delivered hundreds of dairy cows.
- The agreements required monthly payments for a 50-month term and obligated the farmer to return cattle in resale condition at the end of the term.
- The agreements stated the lessor retained title and did not give the farmer an option to purchase the cattle.
- After the farmer filed bankruptcy, the lessor sought return of the cattle as owner; the bank contended the agreements were disguised secured transactions and that its prior lien had priority.
- The bankruptcy court, affirmed by the district court, treated the agreements as per se security agreements under Kentucky’s enactment of U.C.C. § 1-203 based largely on evidence that dairy herds are routinely “culled,” reasoning the lease term exceeded the cows’ economic life.

## Issues

1. Whether the “Dairy Cow Leases” created true leases or security interests under Kentucky’s enactment of U.C.C. § 1-203.
2. Whether herd culling practices established, for purposes of the statute’s per se test, that the lease term exceeded the economic life of the leased cows.
3. If the agreements were true leases, whether the bank’s perfected security interest in after-acquired livestock could attach to the leased cattle in bankruptcy.

## Decision

- The court of appeals reversed and remanded.
- It held the agreements were true leases, not disguised security agreements.
- It concluded the lower courts misapplied the statutory “economic life” inquiry by relying on generalized culling practices without showing the leased cows would have no meaningful remaining value or reversionary interest at lease end.
- Because the lessor retained a meaningful reversionary interest and the farmer lacked a purchase option, the cattle were not collateral the bank could claim under an after-acquired property clause.

## Legal Principles

- Under U.C.C. § 1-203 as enacted in Kentucky, a transaction styled as a lease is recharacterized as a security interest only if statutory conditions are satisfied; the inquiry centers on whether the lessor retains a meaningful reversionary (residual) interest.
- The per se “term greater than economic life” criterion requires an economic-life determination tied to the leased goods and supported by evidence that the lessor’s residual interest will be effectively eliminated by the end of the term.
- The absence of an option for the lessee to become owner, combined with contractual terms requiring return of goods in resale condition and reserving title to the lessor, strongly supports true-lease treatment.
- A secured lender’s lien on after-acquired property does not attach to property the debtor never owned; in bankruptcy, characterization of the transaction controls whether the goods are treated as debtor property subject to secured claims.

## Conclusion

The court held the dairy cow agreements were true leases under Kentucky’s U.C.C. § 1-203, rejected recharacterization based on generalized culling practices, and ruled that the bank’s after-acquired livestock security interest could not reach cattle the debtor leased rather than owned.


In re Purdy (Sunshine Heifers, LLC v. Citizens First Bank), 763 F.3d 513 (6th Cir. 2014)