Title: Bank of Beaver City v. Barretts' Livestock, Inc.
Citation: 2012 OK 89
Docket Number: 
State: Oklahoma
Issuer: Oklahoma Supreme Court
Date: October 30, 2012

Bank of Beaver City v. Barretts' Livestock, Inc. Annotate this Case Justia Opinion Summary The issue before the Supreme Court in this case was whether the good faith requirement of 12A O.S. 2011 section 2-403 extended to third parties and requires that the third party be notified of a debtor's financial condition. The trial court found the interest of Plaintiff-Appellee Bank of Beaver City (Bank) in the livestock of cattle operation and debtor Lucky Moon Land and Livestock, Inc. (Lucky Moon) to be superior to that of another creditor of Lucky Moon, Defendant-Appellant Barretts' Livestock, Inc. (Barretts). The Bank alleged that in 2004 it perfected a security interest in all of Lucky Moon's livestock, including all after-acquired livestock, giving it a superior claim to cattle purchased by Lucky Moon from Barretts to satisfy the debt owed by Lucky Moon to the Bank. Barretts asserted that the Bank did not have priority over it because the Bank was not a good faith secured creditor. The trial court granted the Bank's motion for summary judgment, finding that the Bank's perfected security interest had preference over Barretts' unperfected security interest. Barretts appealed, contending that Bank did not have a superior security interest because: 1) the Bank's security interest never attached; and 2) the Bank had not acted in good faith. The Court of Civil appeals affirmed the judgment of the trial court. The Bank sought certiorari, contending that: 1) the case presents an issue of first impression as to when good faith under 12A O.S. 2011 section 2-403 should be determined; 2) Bank's security interest never attached; and 3) the Court of Civil Appeals' decision was inconsistent with a different decision of the Court of Civil Appeals on which the court relied. Upon review, the Supreme Court held that 12A O.S. 2011 section 2-403 did not extend to third parties nor require that the third party be notified of a debtor's financial condition. Read more Want to stay in the know about new opinions from the Oklahoma Supreme Court? Sign up for free summaries delivered directly to your inbox. Learn More › You already receive new opinion summaries from Oklahoma Supreme Court. Did you know we offer summary newsletters for even more practice areas and jurisdictions? Explore them here . BANK OF BEAVER CITY v. BARRETTS' LIVESTOCK, INC. 2012 OK 89 Case Number: 109190 Decided: 10/30/2012 THE SUPREME COURT OF THE STATE OF OKLAHOMA NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL. THE BANK OF BEAVER CITY, Plaintiff/Appellee, v. BARRETTS' LIVESTOCK, INC., Defendant/Appellant, And TRI-STATE FEEDERS, INC., Defendant/Third-Party Plaintiff, v. JON DANE MORRIS Third-Party Defendant. CERTIORARI TO THE COURT OF CIVIL APPEALS DIVISION IV Honorable Greg A. Zigler, Trial Judge ¶0 The trial court found the interest of plaintiff/appellee Bank of Beaver City (Bank) in the livestock of cattle operation and debtor Lucky Moon Land and Livestock, Inc. (Lucky Moon) to be superior to that of another creditor of Lucky Moon, defendant/appellant Barretts' Livestock, Inc. (Barretts). We granted certiorari to address a case of first impression. We hold, as did the Court of Civil Appeals, that the trial court should be affirmed because Bank's interest is superior to that of Barretts. CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS OPINION VACATED; TRIAL COURT AFFIRMED. Douglas L. Jackson, Julia C. Rieman, Enid, Oklahoma, for Defendant/Appellant. Michael C. Bigheart, W. Blake Hulse, Enid, Oklahoma, for Plaintiff/Appellee. KAUGER, J.: ¶1 The dispositive issue presented is whether the good faith requirement of 12A O.S. 2011 §2-403 extends to third parties--in this case an unpaid seller of cattle--and requires that the third party be notified of a debtor's financial condition.1 We hold that it does not. ¶2 Bank alleges that on August 9, 2004, it perfected a security interest in all of Lucky Moon's livestock, including all after-acquired livestock, giving it a superior claim to cattle purchased by Lucky Moon from Barretts to satisfy the debt owed by Lucky Moon to Bank of approximately $2,000,000 as of May 20, 2010. Barretts asserts that Bank does not have priority over it because Bank was not a good faith secured creditor. The trial court granted Bank's motion for summary judgment, finding that Bank's perfected security interest had preference over Barretts' unperfected security interest. ¶3 Barretts appealed, contending that Bank did not have a superior security interest because: 1) Bank's security interest never attached; and 2) Bank had not acted in good faith. The Court of Civil appeals affirmed the judgment of the trial court. Bank seeks certiorari, contending that: 1) the case presents an issue of first impression as to when good faith under 12A O.S. 2011 §2-403 should be determined; 2) Bank's security interest never attached; and 3) the Court of Civil Appeals' decision was inconsistent with a different decision of the Court of Civil Appeals on which the court relied. We granted certiorari on February 21, 2012, to address the novel issue of whether the good faith requirement of 12A O.S. 2011 §2-403 extends to third parties and requires that they be notified of a debtor's financial condition. FACTS ¶4 Barretts had been selling cattle to Lucky Moon for several years. Typically, it would deliver the cattle, submit an invoice, and then give Lucky Moon a few weeks to pay. Barretts did not file a financing statement or perfect any security interest in the cattle. Between August 28, 2009, and December 11, 2009, Barretts made sales and deliveries totaling 903 head of cattle to Lucky Moon. Lucky Moon made two separate payments towards the total amount, one by wire transfer from Bank on October 13, 2009, and one by check paid by Bank on October 29, 2010. The remaining balance after payment was $214,533.52, representing 393 head of cattle. At this point, Lucky Moon wrote four separate checks totaling $176,234 in partial payment of the remaining debt which were dishonored by Bank for insufficient funds. Both Bank and Barretts claimed an interest in the cattle. On or about January 13, 2010, the parties agreed to auction the cattle and deposit the payments into escrow pending a determination of which claim was superior. ¶5 Bank filed a petition seeking declaratory relief arguing that it possessed priority over the sale proceeds based in its perfected security interest. Barretts, which had no perfected security interest, asserted that the Bank's conduct deprived it of a superior security interest because it had not acted in good faith by continuing to cover Lucky Moon's overdrafts despite knowledge of its deteriorating financial condition; and that one of the co-owners lied about the cattle transactions. Barretts also argued that it would not have delivered the cattle had it known that Bank was not going to honor Lucky Moon's checks. THE GOOD FAITH OBLIGATION OF 12A O.S. 2011 §2-403 DOES NOT EXTEND TO THIRD PARTIES A.Bank of Beaver City's Security Interest ¶6 The Uniform Commercial Code, 12A O.S. 2011 §1-9-322(a)(2), provides that a perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien.2 A perfected security interest in after-acquired property takes precedence over an unperfected security interest. We must determine whether the Bank perfected a security interest in 2004, which applied to all of the livestock including all after-acquired cattle. ¶7 Barretts does not dispute the creation of Bank's security interest in all of Lucky Moon's after acquired cattle, but it asserts that Bank's security interest was never perfected because Bank was not a good faith purchaser for value and therefore could not acquire rights to the collateral sufficient to permit attachment. Pursuant to 12A O.S. 2011 §1-9-308, a security interest is perfected if it has attached and all the applicable requirements for perfection in Sections 1-9-310 through 1-9-316 of Title 12A have been satisfied.3 Barrett's contends that Bank's security interest was never perfected pursuant to 12A O.S. 2011 §1-9-308 because it never attached. Pursuant to 12A §1-9-203, a security interest attaches to collateral when it becomes enforceable against the debtor with respect to that collateral.4 A security interest becomes enforceable against the debtor and third parties only if: 1) value has been given; 2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and 3) certain formalities regarding the security agreement are satisfied.5 ¶8 Barretts argues that even if Lucky Moon had possession of the cattle it did not pay for them. Therefore, it could not transfer rights to the cattle pursuant to 12A O.S. 2011 §1-9-203(b)(2), making perfection of Bank's security interest in the cattle impossible. This situation is anticipated by the language of 12A O.S. 2011 §2-403(1), which provides that a person with voidable title has the power to transfer good title to a good faith purchaser for value even if the delivery was in exchange for a check which was later dishonored.6 Barretts delivered 393 cows to Lucky Moon and Lucky Moon paid for those cattle with checks which were later dishonored. Under these facts, Lucky Moon had voidable title, allowing the bank's security interest to attach if the bank were a good faith purchaser for value.7 ¶9 Pursuant to 12A O.S. 2011 §2-403(1), for a security interest to attach to after-acquired property, the purchaser must have acquired its interest as a good faith purchaser for value to have priority over an unpaid seller. The bank is a purchaser, because it possesses a security interest.8 Whether the Bank acted in good faith as a purchaser hinges on the definition of good faith and whether the good faith requirement extends to a third party such as Barretts. Good faith is defined in Title 12A O.S. § 1-201(20) as honesty in fact and the observance of reasonable commercial standards of fair dealing.9 B.Duty of Good Faith ¶10 Barretts asserts that the Bank became intimately involved in Lucky Moon's operations and spoke with Lucky Moon at least weekly about its deteriorating financial condition.10 The duty of good faith exists between the lender and debtor, and one court has found a lender not to be a good faith purchaser due to its conduct, regardless of whether that duty is extended to third parties. In Monsanto Co. v. Heller, 449 N.E.2d 993 (Ill. App. 1983), Heller had a deep relationship with its debtor, Ilikon, and exercised considerable control over its business practices.11 Heller continued to cover Ilikon's checks to Monsanto Co. despite detailed knowledge of Ilikon's insolvency.12 However, Barretts does not allege that Bank exercised the kind of detailed control over Lucky Moon's business for its own profit that the court in Monsanto Co. found to be in bad faith.13 ¶11 Here, the dispositive issue is whether Bank owed any duty to Barretts, a third party. The Court of Appeals held that it knew of no controlling authority to support the proposition that the Bank owed a duty of good-faith under 12A O.S. 2011 §2-403 to Barretts, a third party. We agree. Although this is a case of first impression in Oklahoma, our holding is consistent with the Court of Civil Appeals and the case law of other states interpreting the application of their versions of U.C.C. §2-403 to disputes between unpaid sellers and lenders with a perfected security interest in a debtor's inventory. ¶12 A decision of the Fifth Circuit Court of Appeals, Shell Oil Co. v. Mills Oil Co., Inc., 717 F.2d 208 (5th Cir. 1983), is on point. In a diversity action interpreting Mississippi's version of U.C.C. §2-403, the court held that: 1) knowledge of the existence of an unpaid seller does not impair a lender's good faith; and 2) no agreement, express or implied, obligated the lender to disclose its debtor's financial condition to an unpaid seller.14 ¶13 Other cases do not state the second proposition directly. They do, however, bolster the argument that knowledge of outstanding third-party claims which have not been paid does not prevent a lien creditor from being a good faith purchaser within the meaning of U.C.C. §2-403. For example, in Matter of Samuels & Co., Inc., 526 F.2d 1238, 1243-44 (5th Cir. 1976), the court held that lack of knowledge of outstanding claims was necessary to acquire status as a bona fide purchaser under the common law and was required in many U.C.C. provisions, but the Code's definition of an Article Two good faith purchaser did not expressly or impliedly include lack of knowledge of third-party claims as an element.15 ¶14 The court in Maryott v. Oconto Cattle Co., 607 N.W.2d 820 , 828 (Neb. 2000), another case concerning rights to cattle, agreed with that analysis, holding that a lender's duty of good faith did not require that the lender be ignorant of third party claims. In Maryott, the lender did not notify any other parties of its actions before cancelling the cattle company's line of credit, and like this case, prevented payment for the cattle by dishonoring drafts.16 In Cooperative Finance Ass'n v. B & J Cattle Co., 937 P.2d 915 (Colo. App. 1997), the court determined that a secured party may prevail over an unpaid seller even when the secured party terminates advances on a line of credit without notice and then dishonors drafts drawn in reliance on that line of credit.17 ¶15 Good faith does not require a lender go out of its way to finance a troubled debtor purely for the benefit of affected third parties. The Code's good faith provision requires honesty in fact, but it does not require a secured party to continue financing a doomed business enterprise.18 These cases collectively imply that under similar circumstances and facts, the secured party lender will prevail despite knowledge of its debtor's negative financial condition and the competing claims of third parties. As long as the decision concerning the funding was commercially reasonable, the secured creditor with a floating lien remains a good faith purchaser even if it terminates funding with the knowledge that sums are owed to third parties.19 CONCLUSION ¶16 Summary judgment comes to this court as a de novo review when it involves only legal questions.20 Inferences and conclusions are to be drawn from the underlying facts contained in the record and are to be considered most favorably to the party opposing summary judgment.21 Granting a motion for summary judgment is only proper when one party is entitled to judgment as a matter of law because there are no material disputed factual questions.22 The underlying facts are not in dispute in this appeal. ¶17 Under the facts, pursuant to 12A O.S. 2011 §2-403, Bank is a secured party which qualifies as a good faith purchaser for value. It is entitled to priority over an unpaid credit seller.23 The good faith requirement does not extend to unpaid sellers such as Barretts. The Bank did not violate such a duty by deciding to terminate its funding of Lucky Moon, and to dishonor its checks without notifying Barretts of Lucky Moon's shaky financial situation. CERTIORARI PREVIOUSLY GRANTED; COURT OF CIVIL APPEALS OPINION VACATED; TRIAL COURT AFFIRMED. Taylor, C.J., Kauger, Winchester, Edmondson and Combs, JJ., concur; Colbert, V.C.J., Watt, Reif and Gurich, JJ., dissent. FOOT