Farmers Cooperative Elevator Company v. Union State Bank
409 N.W.2d 178 (1987)
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Rule of Law:
A perfected purchase money security interest (PMSI) in livestock feed does not extend to the livestock that consume the feed. The livestock are neither 'proceeds' of the feed under UCC § 9-306 nor a 'product or mass' in which the feed has been commingled under UCC § 9-315.
Facts:
- Rodger Cockrum operated a farm and hog confinement operation financed for several years by Union State Bank.
- In February 1981, Union State Bank loaned Cockrum money and took a perfected security interest in all his farm products, including existing and after-acquired livestock.
- In December 1983 and January 1984, Farmers Cooperative Elevator Company (CO-OP) sold livestock feed to Cockrum on credit.
- For each feed transaction, CO-OP took and perfected a purchase money security interest (PMSI) in the feed sold to Cockrum.
- CO-OP's financing statement also purported to cover all of Cockrum's feeder hogs.
- Cockrum's hogs consumed the feed supplied by CO-OP.
- Cockrum subsequently defaulted on his financial obligations to both Union State Bank and CO-OP.
Procedural Posture:
- Farmers Cooperative Elevator Company (CO-OP) initiated an action against Rodger Cockrum in an Iowa district court, seeking possession of collateral.
- Union State Bank intervened, filing a statement of indebtedness and requesting that its security interest in Cockrum's hogs be established as a first-priority lien.
- CO-OP amended its petition, adding Union State Bank as a defendant and alleging that its own security interest in the hogs was superior.
- On CO-OP's motion to adjudicate law points, the district court (trial court) ruled that Union State Bank's security interest was prior and superior to CO-OP's.
- CO-OP (as appellant) appealed the district court's decision to the Supreme Court of Iowa.
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Issue:
Does a perfected purchase money security interest in livestock feed have priority over a prior perfected security interest in the livestock that consume the feed?
Opinions:
Majority - Larson, Justice
No, a perfected purchase money security interest in livestock feed does not take priority over a prior perfected security interest in the livestock that consumes the feed. The court rejected CO-OP's arguments for three main reasons. First, CO-OP's PMSI was taken to secure the price of the feed, not the hogs, so by definition under UCC § 9-107, CO-OP did not have a PMSI in the hogs themselves. Second, the hogs are not 'proceeds' of the feed under UCC § 9-306. The court, citing First Nat'l Bank of Brush v. Bostron, reasoned that when livestock consume feed, the collateral is gone and there are no traceable proceeds, as ingestion is not a 'sale, exchange, collection or other disposition.' Finally, the security interest does not continue in the hogs as a 'product or mass' under UCC § 9-315 because the feed was not 'manufactured, processed, assembled or commingled' with the hogs; it simply ceased to exist after being eaten. Therefore, Union State Bank's prior perfected security interest in the livestock has priority.
Analysis:
This decision clarifies the narrow scope of a purchase money security interest in consumable collateral under the Uniform Commercial Code. It establishes that a PMSI in raw materials or supplies (like feed) does not survive the consumption process to attach to the finished 'product' (the livestock). This ruling protects creditors with broad, prior-perfected interests in assets like livestock from having their collateral priority eroded by subsequent suppliers of consumables. For suppliers of goods like feed, this case underscores that their super-priority is limited to the goods themselves and any identifiable proceeds from their sale or disposition, not from their consumption.
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