Court Opinion

ID: 9514343
Source: CourtListenerOpinion
Date Created: 2023-08-06 22:48:49.523467+00
Date Added: 2024-06-11T09:06:16.357355
License: Public Domain

KONENKAMP, Justice
(specially concurring).
[¶ 20] I write to expand upon the majority’s discussion of the material issues of fact and the governing legal principles in this tangled dispute. In the first place, two separate Article Nine priority battles are involved here: Continental versus Shasta and Continental versus Heritage Bank. Shasta claims an interest in 650 head of cattle delivered to *512Continental in April 1994, while Heritage Bank claims an interest in cattle delivered earlier. Therefore, Shasta’s and Heritage Bank’s security interests are not coexistent and must be examined separately.
[¶ 21] I. Continental versus Shasta
[¶ 22] Shasta contends Margery never acquired sufficient rights in the collateral for Continental’s security interest to attach, thus defeating any claim Continental asserts to the 650 head of cattle. See SDCL 57A-9-203. This argument is premised on the belief Shasta reserved title until the checks cleared, thus Bud was unable to transfer an interest in the cattle because his checks were dishonored and Shasta then had a right to reclaim the cattle. See SDCL 57A-2-401. Continental insists it acquired superior rights in the cattle when it advanced money in reliance upon its security agreements, precluding Shasta from reclaiming the cattle. The Uniform Commercial Code (UCC) furnishes a means to classify these competing interests.
[¶ 23] The commercial transaction between Shasta and Bud was a “cash sale.” Bud received delivery of the cattle upon payment to Shasta. Although the checks were later dishonored, this fact is of no consequence in deeming the transaction a “cash sale.” In such a transaction Shasta had an implied right to reclaim the cattle, subject to certain well recognized exceptions. See Szabo v. Vinton Motors, Inc., 630 F.2d 1, 3 (1st Cir.1980)(“Although the right of ... a cash seller to reclaim goods sold in a ‘bad check’ transaction is not specifically set forth in the Code provisions, such a reclamation right is inherent in 2-507(2) and 2-511(3) ... .”)(footnote omitted). SDCL 57A-2-507(2) provides:
Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.
The meaning of this statute is clarified by the official comments:
[S]ubsection (2) codifies the cash seller’s right of reclamation which is in the nature of a lien. There is no specific time limit for a cash seller to exercise the right of reclamation. However, the right will be defeated by delay causing prejudice to the buyer, waiver, estoppel, or ratification of the buyer’s right to retain possession.... If third parties are involved, Section 2-103(1) protects good faith purchasers.
UCC § 2-507, cmt 3 (1990)(emphasis added).1 SDCL 57A-2-403(l) states:
A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. ... even though ... (b) The delivery was in exchange for a check which is later dishonored [.]
“Title” in the context of the UCC is not always subject to formal transfer of documents. See First Nat. Bank v. Pleasant Hollow Farm, Inc., 532 N.W.2d 60, 63 (S.D.1995)(formal title not prerequisite for attachment of security interest, hence prevents avoiding UCC rules by manipulating locus of title). See also Jordan v. Butler, 182 Neb. 626, 156 N.W.2d 778, 783 (1968)(credi-tor obtained valid security interest in cattle, despite debtor’s voidable title, pursuant to 2-403(1)). In an oft cited Article Nine case, the Fifth Circuit explained:
Section [2-^103] gives certain transferors power to pass greater title than they can themselves claim. Section [2 — 403(1) ] gives good faith purchasers of even fraudulent buyers-transferors greater rights than the defrauded seller can assert. This harsh rule is designed to promote the greatest range of freedom possible to commercial vendors and purchasers.
*513In re Samuels & Co., Inc., 526 F.2d 1238, 1242 (5th Cir.1976), cert denied, 429 U.S. 834, 97 S.Ct. 98, 50 L.Ed.2d 99 (1976). See also O’Brien v. Chandler, 107 N.M. 797, 765 P.2d 1165, 1168 (1988) (2-403(1) allows certain transferors to pass greater title than they themselves claim).
[¶ 24] Because Bud2 had the authority to transfer voidable title, the emphasis shifts to determine whether Continental can claim refuge afforded a “good faith purchaser for value.” SDCL 57A-2-403G). The undisputed facts in this case clearly show Continental was a “purchaser for value.”3 The circuit court, however, was required to determine whether Continental acted in “good faith.” Continental is by definition a “merchant”4 for purposes of the UCC and hence, “good faith” equates to “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” SDCL 57A-2-103(l)(b). Deciding good faith is a question of fact. Kunkel v. United Security Ins. Co., 84 S.D. 116, 129, 168 N.W.2d 723, 730 (S.D.1969). Persons claiming actions were in bad faith or in violation of commercially reasonable standards have the burden of proof. See SDCL 57A-1-208 (“The burden of establishing lack of good faith is on the party against whom the power has been exercised.”).
[¶ 25] Shasta maintains South Dakota’s branding laws supersede the UCC and are dispositive of whether title was properly transferred. While I disagree the branding laws override the UCC, Continental’s knowledge of their existence, how they consummate the usage of trade in the cattle industry, and Continental’s compliance therewith, would be factors in the circuit court’s determination of good faith. ■
[¶ 26] In summary, I would remand for trial on whether Continental acted in good faith. If the circuit court finds Continental acted in good faith, its perfected security interest takes priority over Shasta’s unper-feeted interest. See SDCL 57A-9-301; 9-312. If it finds Continental was not a good faith purchaser, Continental cannot assert the protections provided by SDCL 57A-2-403(1) and Shasta would have priority.
[¶ 27] II. Continental versus Heritage Bank
[¶ 28] The circuit court concluded Heritage Bank had no security interest in the 650 cattle discussed in the Shasta transaction, but Heritage claimed no interest in these cattle. The court failed to ascertain whether Heritage Bank acquired an interest, via Welte, in other cattle Bud placed at the Continental feedlot before April 1994. The record clearly reflects there were other cattle in the feedlot, purportedly owned by Margery, before the Shasta transaction. See majority footnote 4. The circuit court must *514determine whether Welte had a sufficient ownership interest in any of these cattle for Heritage Bank’s security interest to attach.
[¶ 29] If the coui't finds Heritage Bank had an interest in identifiable cattle placed at the feedlot, then a decision on Continental’s status as a “good faith purchaser for value” must also be made, per the above analysis, to decide the priority status of the parties. Hence, I agree with the majority that further findings must be made before complete resolution of this issue can be made.
[¶ 30] III. Attorney Fees
[¶ 31] If the court finds Continental acted in good faith, it must then decide whether Continental is entitled to attorney fees and in what amount. The security agreement between Margery and Continental provided: “The security interest herein granted shall secure ... any and all costs of collection or enforcement thereof, including ... reasonable attorney’s fees[.]” It also stated “This Agreement, and all instruments executed pursuant hereto, shall be governed by and interpreted in accordance with the laws of the State of Illinois.” When the parties have agreed to be bound by the law of a specific place and the agreement is fair and reasonable, the law of their choice applies. Baldwin v. Heinold Commodities, Inc., 363 N.W.2d 191, 195 (S.D.1985). Generally, a security agreement is effective between the parties and as to third parties. See SDCL 57A-9-201.
[¶ 32] Illinois law provides:
A secured party after default may sell, lease or otherwise dispose of any or all of the collateral in its then condition or following any commercially reasonable preparation or processing.... The" proceeds of disposition shall be applied in the order following to
(a) the reasonable expenses of retaking, holding, preparing for sale or lease, selling, leasing and the like and, to the extent provided for in the agreement and not prohibited by law, the reasonable attorneys’ fees and legal expenses incurred by the secured party;
(b) the satisfaction of indebtedness secured by the security interest under which the disposition is made;
(c) the satisfaction of indebtedness secured by any subordinate security interest in the collateral ...
Ill.Ann.Stat. Ch. 810, par. 5/9-504(1) (Smith-Hurd 1993 & Supp 1995). Continental claimed attorney’s fees in excess of $96,000. Continental has not cited any persuasive authority to this Court authorizing the award of these attorney fees5 and therefore I would remand for further findings on whether Illinois law permits these fees. If the court finds Illinois law provides for an award, then it must make a finding on the reasonableness of the fees. If the fees are not authorized under Illinois law or the reasonable amount of fees do not surpass the excess funds available to pay subordinate creditors, then the cattle sales proceeds must be traced and apportioned to Shasta and Heritage Bank.
[¶ 33] MILLER, Chief Justice joins this writing and I am authorized to so state.

. Before a 1990 amendment to the official comments, the cash seller was subject to a ten day time limit to assert the right of reclamation. See PEB Commentary No. 1 dated March 10, 1990. The editorial board concluded “there is no justification for barring the cash seller’s right or remedy of reclamation before discovery of non-payment. There is no specific time limit for a cash seller to exercise the right of reclamation. The right may be exercised as long as there Has not been an excessive delay causing inequitable prejudice to the buyer.”

. Bud’s authority to transfer an interest in the cattle was present regardless of whether he was acting in an individual capacity, or as an agent for Western Cattle Inc., Welte or Margery. In this case the proper focus is upon Shasta releasing possession of the cattle and the potential for Bud to mislead third parties.

. " ‘Purchaser’ means a person who takes by purchase.” SDCL 57A-1-201(33). " ‘Purchase’ includes taking by sale, discount, negotiation, mortgage, pledge, lien, issue or re-issue, gift or any other voluntary transaction creating an interest in property.” SDCL 57A-1-20R32). "[A] person gives 'value' for rights if he acquires them ... (c) By accepting delivery pursuant to a preexisting contract for purchase; or (d) Generally, in return for any consideration sufficient to support a simple contract.” SDCL 57A-1-201(44). Here, Continental had a validly executed security agreement signed by Margery with an after acquired property clause. Further, pursuant to past course of dealings with Bud, Margery and Western Cattle Inc., Continental loaned Western Cattle Inc. $252,437.17, with its collateral for the loan being the cattle here in question. See also In re Samuels, 526 F.2d at 1242 (purchaser includes an Article Nine secured party); Jordan, 156 N.W.2d at 783 (secured creditor is a purchaser for purposes of UCC § 2-403); O'Brien, 765 P.2d at 1168-69 (creditor qualifies as purchaser for purposes of UCC § 2-403); Ronald A. Anderson, Uniform Commercial Code, 3rd Ed vol 1 § 1-201:169 (1981)("The term ‘purchaser’ is sufficiently broad to include a secured party under Article 9.”).

.SDCL 57A-2-104(l) defines “merchant” as:
[A] person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

. Continental refers us to Ill.Rev.Stat. Ch. 17, par. 6407 § 4.2(c) [our statutory compilation Ill. Ann.Stat.Ch. 815, par. 205/14.2(c)(Smith-Hurd 1993 & Supp 1995) ], which is part of the "Interest Act.” There is a question of whether Continental falls within the scope of this Act and the circuit court should make this determination on remand.