Cooperative Finance Ass'n v. B & J Cattle Co.
1997 Colo. App. LEXIS 95, 937 P.2d 915, 32 U.C.C. Rep. Serv. 2d (West) 808 (1997)
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Rule of Law:
A creditor's perfected security interest in a debtor's after-acquired property has priority over an unpaid cash seller's right to reclaim the goods once the debtor obtains possession of them.
Facts:
- The Cooperative Finance Association, Inc. (Cooperative) held a promissory note from MRC-Sheaf Corporation (MRC), secured by a perfected security interest in all of MRC's current and future-acquired livestock.
- MRC defaulted on its promissory note with Cooperative.
- After the default, MRC purchased 203 holstein heifers from B & J Cattle Co. (B & J) in what was intended to be a cash sale.
- B & J delivered the heifers to a feedlot designated by MRC, and MRC acknowledged receipt.
- MRC failed to complete its planned immediate resale of the heifers and thus could not pay B & J.
- MRC issued two checks to B & J for the purchase price but subsequently stopped payment on both checks.
Procedural Posture:
- Cooperative Finance Association, Inc. sued MRC-Sheaf Corporation in a state trial court for replevin after MRC defaulted on a loan.
- The trial court appointed a receiver.
- Cooperative amended its complaint to include the 203 heifers and named B & J Cattle Co. as a defendant.
- The parties agreed to sell the heifers and place the proceeds in an interest-bearing account pending the court's decision.
- Cooperative and B & J filed cross-motions for summary judgment in the trial court.
- The trial court granted summary judgment for Cooperative, finding its security interest had priority.
- B & J Cattle Co. (appellant) appealed the trial court's judgment to the Colorado Court of Appeals.
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Issue:
Does a creditor's perfected security interest in a debtor's after-acquired property have priority over an unpaid cash seller's right to reclaim the goods after the debtor takes possession but fails to pay?
Opinions:
Majority - Judge Roy
Yes. A creditor's perfected security interest in after-acquired property takes priority over the interest of an unpaid cash seller. Under the Uniform Commercial Code, when B & J delivered the heifers, MRC acquired sufficient 'rights in the collateral' for Cooperative's pre-existing and perfected security interest to attach. Although an unpaid cash seller like B & J has a right to reclaim goods under UCC § 2-507, this right is subordinate to the rights of a good faith purchaser for value, which includes a creditor with a perfected security interest. The court follows the reasoning in cases like In re Samuels & Co. which establish that the secured creditor prevails, even if it results in a 'windfall.' B & J could have protected its interest by perfecting a purchase money security interest (PMSI) but failed to do so.
Analysis:
This decision reinforces the significant power of an after-acquired property clause within a perfected security agreement under the UCC. It clarifies that a buyer's mere physical possession of goods, even if payment fails and title was intended to pass later, constitutes sufficient 'rights in the collateral' for a third-party creditor's floating lien to attach. This outcome establishes that the rights of a secured creditor are superior to the reclamation rights of an unpaid seller. The case serves as a crucial reminder for sellers to utilize UCC protections, such as perfecting a purchase money security interest, to maintain priority over a buyer's existing secured lenders.
