## Facts

- A cattle seller (Murphy) contracted to sell a large group of cattle to a buyer (Leonard), with a small down payment and the balance (about $802,910) due at or near delivery.
- Leonard maintained a line-of-credit relationship with a feedlot/financier (Sweetwater), which advanced funds for cattle purchases, fed and cared for cattle, and held a broad, previously perfected security interest covering Leonard’s property, including after-acquired cattle.
- For this purchase, Sweetwater advanced nearly $600,000. Murphy executed a bill of sale and delivered the cattle; the bill of sale lacked Leonard’s signature and omitted mailing addresses.
- Leonard tendered five checks to Murphy; four were dishonored.
- Murphy asserted U.C.C. seller reclamation rights, obtained a court order permitting reclamation, retook and sold the cattle for about $883,073.25, paid Sweetwater about $215,119.87 for feed/care, and placed remaining net proceeds into escrow pending a priority ruling.
- After Leonard filed bankruptcy, Sweetwater and its lender (Farm Credit) brought an adversary proceeding seeking a declaration that Sweetwater’s lien had priority over Murphy’s reclamation claim to the cattle and proceeds.
- The bankruptcy court granted summary judgment to Sweetwater; Murphy appealed.

## Issues

1. Whether Leonard acquired sufficient rights in the cattle for Sweetwater’s previously perfected, after-acquired security interest to attach, despite alleged statutory defects in the bill of sale and Murphy’s reclamation efforts.
2. Whether Sweetwater qualified as a good-faith purchaser/secured party for value for priority purposes under applicable U.C.C. standards.
3. Whether an unpaid seller’s U.C.C. reclamation right can defeat a pre-existing perfected security interest in the same goods and their proceeds.

## Decision

- The Bankruptcy Appellate Panel affirmed summary judgment for Sweetwater.
- Leonard obtained rights in the cattle upon delivery under the transaction of purchase; the alleged bill-of-sale defects did not prevent passage of rights sufficient for attachment.
- Sweetwater gave value and held a security agreement covering after-acquired cattle; its security interest attached when Leonard obtained rights in the cattle.
- Murphy’s reclamation remedy left Leonard with at least voidable title and did not prevent attachment of Sweetwater’s lien.
- Sweetwater was a good-faith purchaser/secured party for value; Murphy’s reclamation right was subordinate to Sweetwater’s perfected security interest.
- Sweetwater’s lien was superior to Murphy’s claim to the cattle and the escrowed sale proceeds.

## Legal Principles

- A security interest attaches when value is given, the debtor has rights in the collateral, and the debtor has authenticated a security agreement describing the collateral, including after-acquired property where applicable.
- Delivery under a transaction of purchase can give the buyer sufficient rights (at least voidable title) for a secured party’s previously perfected after-acquired property lien to attach, even if the buyer fails to pay.
- An unpaid seller’s U.C.C. reclamation right is a limited remedy and is subordinate to the rights of a good-faith purchaser for value and to a properly perfected secured creditor’s lien in the goods and identifiable proceeds.
- Good faith for a secured creditor in this setting is satisfied by honest conduct and ordinary-course lending/monitoring practices absent collusion or bad faith.

## Conclusion

The appellate court held that delivery of the cattle gave the debtor sufficient rights for the feedlot’s previously perfected after-acquired security interest to attach, and that the unpaid seller’s reclamation remedy did not displace the secured creditor’s superior lien in the cattle and resulting sale proceeds.


Sweetwater Cattle Co. v. Murphy (In re Leonard), 565 B.R. 137 (B.A.P. 8th Cir. 2017)